CVS
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 14, 1999
10:00 A.M.
CVS Corporation
One CVS Drive
Woonsocket, Rhode Island 02895
____________
To our stockholders:
We are pleased to invite you to attend our 1999 annual meeting of
stockholders to:
o Elect 12 directors;
o Approve the CVS 1999 Employee Stock Purchase Plan;
o Ratify the appointment of KPMG LLP as independent auditors for 1999;
o Act on one stockholder proposal to be presented; and
o Conduct other business properly brought before the meeting.
Stockholders of record at the close of business on February 22,
1999 may vote at the meeting.
Your vote is important. Whether or not you plan to attend the meeting,
please sign, date and return the enclosed proxy card in the envelope provided.
Instructions are included on your proxy card. You may change your vote by
sending in a signed proxy card with a later date or by attending the meeting and
voting in person.
By Order of the Board of Directors,
Stanley P. Goldstein
Chairman of the Board
PROXY STATEMENT TABLE OF CONTENTS
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Page
----
Information about the annual meeting and voting........................1
Item 1: Election of directors..........................................4
Biographies of our Board nominees..............................4
Committees of the Board of CVS.................................6
Director compensation..........................................7
Directors and officers liability insurance.....................8
Compensation committee interlocks and insider participation....8
Share ownership of directors and certain executive officers....8
Share ownership of principal stockholders.....................10
Compensation committee report on executive compensation.......10
Summary compensation table....................................14
Stock options.................................................16
Stock performance graph.......................................17
Certain executive arrangements................................18
Transactions with directors and officers......................21
Item 2: Approval of CVS 1999 Employee Stock Purchase Plan.............22
Item 3: Ratification of appointment of independent auditors...........25
Item 4: Stockholder proposal relating to fees paid to non-employee
directors for meeting attendance..............................26
Item 5: Other matters.................................................27
Section 16(a) beneficial ownership reporting compliance.......27
Proxy solicitation............................................27
Stockholder proposals for Annual Meeting in 2000..............27
Exhibit A - CVS Corporation 1999 Employee Stock Purchase Plan
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
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The Board of Directors of CVS Corporation is soliciting your proxy to vote at
our 1999 annual meeting of stockholders (or at any adjournment of the
meeting). This proxy statement summarizes the information you need to know to
vote at the meeting.
We began mailing this proxy statement and the enclosed proxy card on or about
March 4, 1999 to all stockholders entitled to vote. The CVS 1998 Annual
Report, which includes our financial statements, is being sent with this proxy
statement.
Date, time and place of meeting
Date: April 14, 1999
Time: 10:00 a.m.
Place: One CVS Drive
Woonsocket, Rhode Island
Shares entitled to vote
Stockholders entitled to vote are those who owned CVS common stock or
Series One ESOP Convertible ESOP preference stock (referred to throughout this
proxy statement as the "ESOP preference stock") at the close of business on the
record date, February 22, 1999. As of the record date, there were approximately
390.5 million shares of common stock and approximately 5.2 million shares of
ESOP preference stock outstanding. All ESOP preference stock is held by The Bank
of New York, as Trustee under the CVS Corporation and Subsidiaries Employee
Stock Ownership Plan (the "ESOP").
Each share of CVS common stock that you own entitles you to one vote. Each
share of ESOP preference stock is entitled to the number of votes equal to the
number of shares of common stock into which the share of ESOP preference stock
could be converted on the record date, rounded to the nearest tenth of a vote
(currently 2.3 votes). The ESOP preference stock is entitled to vote on all
matters submitted to a vote of holders of common stock, voting with the common
stock as a single class. Each participant in the ESOP instructs the Trustee of
the ESOP how to vote his or her shares. As to unallocated shares and shares with
respect to which the Trustee receives no timely voting instructions, the
Trustee, pursuant to the ESOP Trust Agreement, votes these shares in the same
proportion as it votes all the shares as to which it has received timely voting
instructions.
Voting your proxy
Whether or not you plan to attend the annual meeting, we urge you to
complete, sign and date the enclosed proxy card and return it promptly in the
envelope provided. Returning the proxy card will not affect your right to attend
the meeting and vote.
The enclosed proxy card indicates the number of shares that you own.
Voting instructions are included on your proxy card. If you properly fill
in your proxy card and send it to us in time to vote, one of the individuals
names on your proxy card (your "proxy") will vote your shares as you have
directed. If you sign the proxy card but do not make specific choices, your
proxy will follow the Board's recommendations and vote your shares:
o "FOR" the election of all 12 nominees for director (as described on
page 4);
o "FOR" the approval of the adoption of the CVS 1999 Employee Stock
Purchase Plan (as described on page 22);
o "FOR" the ratification of the appointment of KPMG LLP as the
Company's independent auditors for 1999 (as described on page 25);
and
o "AGAINST" the stockholder proposal to be presented (as described on
page 26).
If any other matter is presented at the meeting, your proxy will vote in
accordance with his or her best judgment. At the time this proxy statement went
to press, we knew of no other matters to be acted on at the meeting.
Revoking your proxy
You may revoke your proxy by:
o sending in another signed proxy card with a later date,
o notifying our Secretary in writing before the meeting that you have
revoked your proxy, or
o voting in person at the meeting.
Voting in person
If you plan to attend the meeting and vote in person, we will give you a
ballot when you arrive. However, if your shares are held in the name of your
broker, bank or other nominee, you must bring an account statement or letter
from the nominee indicating that you were the beneficial owner of the shares on
February 22, 1999, the record date for voting.
Appointing your own proxy
If you want to give your proxy to someone other than the individuals named
as proxies on the proxy card, you may cross out the names of those individuals
and insert the name of the individual you are authorizing to vote. Either you or
that authorized individual must present the proxy card at the meeting.
Quorum requirement
A quorum of stockholders is necessary to hold a valid meeting. The
presence in person or by proxy at the meeting of holders of shares representing
a majority of the votes of the common stock and the ESOP preference stock
entitled to vote constitutes a quorum. Abstentions and broker "non- votes" are
counted as present for establishing a quorum. A broker non-vote occurs on an
item when a broker is not permitted to vote on that item absent instruction from
the beneficial owner of the shares and no instruction is given.
Vote necessary to approve proposals
<TABLE>
<CAPTION>
Item Vote Necessary*
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<S> <C> <C>
Item 1: Election of directors Directors are elected by a plurality of the votes
represented by the shares of common stock and ESOP
preference stock present at the meeting in person or by
proxy, voting as a single class.
This means that the director nominee with the most
affirmative votes for a particular slot is elected for that
slot. Only the number of votes "for" affect the outcome.
Withheld votes and abstentions have no effect on the
vote.
Item 2: Approval of CVS 1999 Approval is by affirmative vote of a majority of the votes
Employee Stock Purchase represented by the common stock and the ESOP
Plan preference stock present at the meeting in person or by
proxy, voting as a single class. Abstentions are counted
and have the effect of a vote against.
Item 3: Ratification of appointment of Same as for Item 2.
independent auditors
Item 4: Stockholder proposal Same as for Item 2.
</TABLE>
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* Under New York Stock Exchange rules, if your broker holds your shares in its
name, your broker is permitted to vote your shares on Items 1, 2 and 3 even if
it does not receive voting instructions from you. Your broker may not vote
your shares on Item 4 absent instructions from you. Without your voting
instructions, a broker non-vote will occur on Item 4 and will have the effect
of a vote against that Item.
ITEM 1: ELECTION OF DIRECTORS
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Our Board of Directors has nominated 12 directors for election at the
annual meeting. Each nominee is currently serving as one of our directors. If
you re-elect them, they will hold office until the next annual meeting or until
their successors have been elected and qualified.
Your proxy will vote for each of the nominees unless you specifically
withhold authority to vote for a particular nominee. If any nominee is unable to
serve, your proxy may vote for another nominee proposed by the Board or the
Board may reduce the number of directors to be elected.
During 1998, there were seven meetings of the Board of Directors of CVS.
Each director attended at least 67% of the meetings of the Board and committees
of which he or she was a member.
The Board of Directors recommends the ELECTION of all nominees.
Biographies of our Board Nominees
Eugene Applebaum Director since 1998 Age 61
Mr. Applebaum is the President of Arbor Investments Group, L.L.C., a
consulting firm; from 1963 to 1998, President of Arbor Drugs, Inc. and its
predecessors; from 1985 until Arbor was acquired by CVS in March 1998, Arbor's
Chairman of the Board and Chief Executive Officer. Mr. Applebaum was first
elected to CVS' Board pursuant to an agreement to elect him undertaken in the
CVS/Arbor merger agreement.
Allan J. Bloostein Director since 1989 Age 69
Mr. Bloostein is the President of Allan J. Bloostein Associates, a consulting
firm; retired vice Chairman and director of May Department Stores; director of
Taubman Centers Inc.; trustee or director of various Salomon Smith Barney
investment portfolios.
W. Don Cornwell Director since 1994 Age 51
Mr. Cornwell is the Chairman of the Board and Chief Executive Officer of
Granite Broadcasting Corporation, a group broadcasting company; director of
Pfizer, Inc. and Hershey Trust Company.
Thomas P. Gerrity Director since 1995 Age 57
Mr. Gerrity is the Dean of The Wharton School of the University of
Pennsylvania; director of Fannie Mae, Reliance Group Holdings, Inc., Sunoco,
Inc., Knight-Ridder, Inc., IKON Office Solutions, Inc. and Fiserv, Inc.;
trustee of the MAS Funds.
Stanley P. Goldstein Director since 1984 Age 64
Mr. Goldstein has been the Chairman of the Board since January 1987; from 1987
to May 1998, Chief Executive Officer of the Company; director of Bell Atlantic
Corporation, Linens 'n Things, Inc. and Footstar, Inc. The Company recently
announced that Mr. Goldstein will be retiring as Chairman of the Board
effective at the time of the Annual Meeting. Assuming he is elected, Mr.
Goldstein will remain a director.
William H. Joyce Director since 1994 Age 63
Mr. Joyce is the Chairman of the Board and Chief Executive Officer of Union
Carbide Corporation, a leading producer of chemicals and polymers; from
January 1993 to January 1996, President, Chief Operating Officer and Director
of Union Carbide Corporation; director of Reynolds Metals Company.
Terry R. Lautenbach Director since 1991 Age 60
Mr. Lautenbach is a retired Senior Vice President of IBM Corporation, a
multinational advanced information technology company; director of Air
Products and Chemicals Inc., Varian Associates, Inc. and Footstar, Inc.
Terrence Murray Director since 1996 Age 59
Mr. Murray is the Chairman and Chief Executive Officer of Fleet Financial
Group; director of A.T. Cross Company and Allmerica Financial Corporation;
honorary trustee of The Rhode Island School of Design and trustee emeritus of
Brown University.
Sheli Z. Rosenberg Director since 1997 Age 57
Ms. Rosenberg is the President and Chief Executive Officer of Equity Group
Investments, Inc. and its subsidiary Equity Financial and Management Company,
both real estate investment firms; from 1980-1994, Ms. Rosenberg was General
Counsel to Equity Group Investments, Inc.; director of Anixter International,
Inc., Illinova Corporation, Jacor Communications, Inc., and Manufactured Home
Communities, Inc.; trustee of Equity Residential Properties Trust and Equity
Office Properties Trust. Ms. Rosenberg was a vice president of First Capital
Benefit Administrators, Inc., which filed a petition under the federal
bankruptcy laws on January 3, 1995, and was liquidated on November 15, 1995.
Thomas M. Ryan Director since 1996 Age 46
Mr. Ryan has been President and Chief Executive Officer of CVS since May 1998
and President and Chief Executive Officer of CVS Pharmacy, Inc. since January
1994; from October 1996 to May 1998, Vice Chairman of the Board and Chief
Operating Officer of CVS; from January 1990 to January 1994, Executive Vice
President -- Stores of CVS Pharmacy, Inc.; director of Fleet Financial Group
and Reebok International Ltd. Additionally, the Company recently announced
that Mr. Ryan will assume the title of Chairman of the Board and will no
longer serve as President of CVS, effective at the time of the Annual Meeting.
Mr. Ryan will replace Mr. Goldstein as Chairman of the Board and Charles C.
Conaway, the Company's current Executive Vice President and Chief Financial
Officer, will become President and Chief Operating Officer.
Ivan G. Seidenberg Director since 1993 Age 52
Mr. Seidenberg is the Chairman and Chief Executive Officer of Bell Atlantic
Corporation, a worldwide communications company ("Bell Atlantic"); from June
1998 to December 1998, Vice Chairman and Chief Executive Officer of Bell
Atlantic; from August 1997 to June 1998, Vice Chairman, President and Chief
Operating Officer of Bell Atlantic; from April 1995 to August 1997, Chairman
and Chief Executive Officer of NYNEX Corporation ("NYNEX"); from January 1995
to April 1995, President, Chief Executive Officer and director of NYNEX; from
February 1994 to January 1995, President, Chief Operating Officer and Vice
Chairman of NYNEX; director of AlliedSignal Inc.; American Home Products
Corporation, Boston Properties, Inc. and Viacom Inc.
Thomas O. Thorsen Director since 1997 Age 67
Mr. Thorsen is a retired Vice Chairman of The Travelers Corporation
("Travelers") and a retired Senior Vice President of Finance of General
Electric Company; director of Iowa Select Farms, Inc. In May 1994, Travelers
and certain executive officers of Travelers, including Mr. Thorsen, consented,
without a hearing and without admitting or denying the matters set forth
therein, to the issuance of an administrative cease and desist order (the
"Order") of the Securities and Exchange Commission (the "SEC"). The Order
pertained to the allegedly improper implementation of a new FASB standard,
which implementation was made by Travelers after extensive consultation with,
and concurrence by, its independent public accountants. No willful or knowing
violations of the securities laws were alleged, and no monetary fines were
imposed or other disciplinary actions taken by the SEC.
Committees of the Board of CVS
Audit Committee
William H. Joyce, Chair
W. Don Cornwell
Thomas P. Gerrity
Thomas O. Thorsen
The Audit Committee met three times during 1998. The Audit Committee (i)
reviews the annual consolidated financial statements; (ii) considers the
adequacy of the accounting and internal control systems; (iii) recommends to the
Board the appointment of independent auditors; (iv) oversees the internal and
independent audit function; (v) reviews non-audit services provided by the
independent auditors; (vi) directs and supervises special investigations; (vii)
reviews the conflict of interest policy and compliance procedures; (viii)
reviews and oversees the Company's charitable contribution program; and (ix)
reports to the Board and makes such other recommendations and observations as it
sees fit.
Nominating Committee
Ivan G. Seidenberg, Chair
Allan J. Bloostein
William H. Joyce
Terry R. Lautenbach
The Nominating Committee met one time during 1998. It, together with the
Chairman of the Board, nominates directors for election by the Board. While
there are no formal procedures for stockholder recommendations, the Nominating
Committee will consider nominees recommended by stockholders.
Compensation Committee
Terry R. Lautenbach, Chair
Allan J. Bloostein
Sheli Z. Rosenberg
Terrence Murray
The Compensation Committee met four times during 1998. The Compensation
Committee (i) reviews and approves the salary, bonus and other compensation of
all officers and directors of CVS and of each executive of CVS or its
subsidiaries whose annual base salary is greater than $200,000; (ii) administers
the 1997 Incentive Compensation Plan and any outstanding awards under the
Omnibus Stock Incentive Plan, the 1973 and 1987 Melville Stock Option Plans and
the pre-merger Revco and Arbor Stock Option Plans, subject to the terms of such
plans; and (iii) administers any profit incentive plans for the benefit of CVS.
Director Compensation
We provide the following compensation to our non-employee directors for
their services as directors:
Annual fees
o Each non-employee director receives an annual retainer of $30,000
and attendance fees of $1,500 for each Board meeting attended,
$1,000 for each telephonic Board meeting attended and $1,000 for
each committee meeting attended.
o Each non-employee director who chairs a committee of the Board
receives an additional annual retainer of $2,500 for each committee
he or she chairs.
Director Stock Plan; Director Fees Payable in Stock
Under the 1996 Directors Stock Plan, non-employee directors receive an
annual award of 700 shares of common stock for their service during the
preceding year (pro rated for partial year service). One half of the annual
non-employee director retainer fee is paid in common stock. However, directors
may choose to receive all retainers and attendance fees in common stock. A
director may choose to defer receipt of such shares. Deferred shares are
credited annually with dividend equivalents.
As of December 31, 1998, the Company's directors had deferred receipt of
shares of common stock as follows: Mr. Applebaum, 1,053 shares; Mr. Bloostein,
10,564 shares; Mr. Cornwell, 5,092 shares; Mr. Gerrity, 1,842 shares; Mr. Joyce,
6,895 shares; Mr. Lautenbach, 7,362 shares; Mr. Murray, 3,333 shares; Ms.
Rosenberg, 3,105 shares; and Mr. Seidenberg, 6,581 shares.
Directors and Officers Liability Insurance
We have purchased directors and officers liability insurance with a limit
of $100,000,000 and pension trust liability insurance with a limit of
$50,000,000. The pension trust liability insurance covers the actions of
directors and officers as well as other employees with fiduciary
responsibilities under ERISA. All of these insurance policies expire on June 30,
2001. The aggregate premium for the directors and officers liability coverage is
$1,187,500 and for the pension trust liability coverage is $166,092. We expect
to renew or replace the liability insurance coverage when the policies expire.
Compensation Committee Interlocks and Insider Participation
Mr. Terrence Murray, Chairman and Chief Executive Officer of Fleet
Financial Group and a director of CVS, serves on CVS' Compensation Committee.
Mr. Thomas Ryan, President, Chief Executive Officer and a director of CVS,
serves on the Board of Directors of Fleet but does not serve on Fleet's
Compensation Committee.
Share Ownership of Directors and Certain Executive Officers
The table on the following page shows the share ownership, as of January
19, 1999, of each director, each executive officer named in the Summary
Compensation Table appearing on page 14, and all directors and executive
officers as a group, based on information provided by these individuals. Each
individual (except Mr. Applebaum, if shares relating to a forward purchase
contract are included in the calculation) beneficially owns less than 1% of our
common stock and, except as described in the footnotes to the table, each person
has sole investment and voting power over the shares.
<TABLE>
Ownership of Common Stock(1)
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Name Number Percent
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<S> <C> <C> <C>
Eugene Applebaum 7,323,530 (1)(5)(8) 1.87%
Allan J. Bloostein 20,174 (1)(5) *
Charles Conaway 532,931 (1)(2)(3)(4) *
W. Don Cornwell 7,130 (1)(5) *
Thomas P. Gerrity 9,250 (1)(5) *
Stanley P. Goldstein 1,758,080 (1)(3)(4)(6) *
William H. Joyce 8,941 (1)(5) *
Terry R. Lautenbach 21,460 (1)(5) *
Larry J. Merlo 187,784 (1)(2)(3)(4) *
Terrence Murray 2,618 (5)(7) *
Daniel C. Nelson 449,034 (1)(2)(3)(4) *
Sheli Z. Rosenberg 8,190 (1)(5) *
Thomas M. Ryan 916,404 (1)(2)(3)(4) *
Ivan G. Seidenberg 9,240 (1)(5) *
Thomas O. Thorsen 13,530 (9) *
All directors and executive officers (1)(2)(3)(4)(5)
(as a group 18 persons) 11,348,336 (6)(7)(8)(9) 2.88%
</TABLE>
* Less than 1%.
(1) Includes shares of common stock not currently owned, but subject to options
which were outstanding on January 19, 1999 and were exercisable within 60
days thereafter: Mr. Applebaum, 50,000; Mr. Bloostein, 18,480; Mr. Conaway,
402,664; Mr. Cornwell, 6,930; Mr. Gerrity, 4,620; Mr. Goldstein, 1,459,750;
Mr. Joyce, 6,930; Mr. Lautenbach, 13,860; Mr. Merlo, 141,126; Mr. Nelson,
371,256; Mr. Ryan, 704,466; Mr. Seidenberg, 9,240; and directors and
executive officers as a group, 3,249,486.
(2) Includes shares of common stock granted under the Company's Omnibus Stock
Incentive Plan or its Incentive Compensation Plan which remain subject to
certain restrictions as to continued employment and transfer as provided in
such plans: Mr. Ryan, 189,299; Mr. Conaway, 122,643; Mr. Nelson, 69,890;
Mr. Merlo, 40,324; and executive officers as a group, 442,032.
(3) Does not include shares of common stock receivable upon the lapse of
restrictions on restricted stock or the exercise of options but deferred
pursuant to the Company's Deferred Stock Compensation Plan: Mr. Goldstein,
44,300; Mr. Ryan 19,028 shares; Mr. Conaway 8,242 shares; Mr. Nelson, 1,400
shares; Mr. Merlo, 5,489 shares; all directors and executive officers as a
group, 78,459.
(4) Does not include 5,239,361 shares of ESOP preference stock held as of
January 19, 1999 by the ESOP, which was established in 1989. As of December
31, 1998, the last date on which an allocation was made, shares had been
allocated as follows: Mr. Goldstein, 989 shares; Mr. Ryan, 958 shares; Mr.
Conaway, 329 shares; Mr. Nelson, 264 shares; Mr. Merlo, 627 shares; and
executive officers as a group, 3,377 shares.
(5) Does not include the following shares of common stock constituting deferred
non-employee director compensation: Mr. Applebaum, 1,053 shares; Mr.
Bloostein, 10,564 shares; Mr. Cornwell, 5,092 shares; Mr. Gerrity, 1,842
shares; Mr. Joyce, 6,895 shares; Mr. Lautenbach, 7,362 shares; Mr. Murray,
3,333 shares; Ms. Rosenberg, 3,105 shares; Mr. Seidenberg, 6,581 shares;
and non-employee directors as a group, 45,827.
(6) Includes 40,000 shares held by Mr. Goldstein's wife and 10,000 shares held
by a family limited partnership. Mr. Goldstein disclaims beneficial
ownership of these shares.
(7) Includes 1,000 shares held by a charitable foundation. Mr. Murray disclaims
beneficial ownership of these shares.
(8) Includes 7,273,530 shares beneficially owned by Mr. Applebaum as Trustee
for the Eugene Applebaum Revocable Living Trust and pledged as security
relating to a forward purchase contract obligating the Trust to deliver
cash or up to that number of shares on or about May 15, 2001.
(9) Includes 9,366 shares held by the Thorsen Family Trust, the beneficiaries
of which are Mr. Thorsen's wife and adult children. Mr. Thorsen disclaims
beneficial ownership of these shares.
Share Ownership of Principal Stockholders
We have been notified by the persons in the following table that they are
the beneficial owners (as defined by the rules of the SEC) of more than five
percent of our voting securities as of January 19, 1999. According to the most
recent Schedule 13G filed by each owner (other than the ESOP) with the SEC,
these shares were acquired in the ordinary course of business, and were not
acquired for the purpose of, and do not have the effect of, changing or
influencing control over us.
<TABLE>
Name and Address of No. of shares Percent of
Title of Class Beneficial Owner beneficially owned Class owned(1)
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<S> <C> <C> <C>
Common stock FMR Corp.(2) 55,935,565 14.3%
82 Devonshire Street
Boston, MA 02109
Common stock Putnam Investments, Inc. (3) 46,929,618 12.0%
One Post Office Square
Boston, MA 02109
Series One ESOP CVS Corporation and Subsidiaries 5,239,361 100%
convertible Employee Stock Ownership Plan Trust
preference stock c/o Bank of New York, as Trustee
48 Wall Street
New York, NY 10005
</TABLE>
(1) This calculation is based on all outstanding shares of common stock and
ESOP preference stock as of January 19, 1999. FMR Corp., Putnam
Investments, Inc. and the ESOP own approximately 13.9%, 11.7% and 3.1%,
respectively, of the total votes represented by CVS' voting securities.
(2) Information based on Schedule 13G dated February 1, 1999. FMR Corp., a
parent holding company, and/or its subsidiaries have sole voting power
with respect to 1,746,104 of such shares and sole dispositive power over
all of these shares.
(3) Information based on Schedule 13G dated January 26, 1999. Putnam
Investments, Inc., a parent holding company, and/or its subsidiaries do
not have sole voting power or sole dispositive power with respect to any
of these shares.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors (for purposes of this
report, the "Committee") is composed of four independent outside directors, none
of whom is an officer or employee of CVS or its subsidiaries. The Committee is
responsible for the establishment of policies governing, and for the
implementation, administration and interpretation of, all aspects of executive
officer compensation. The Committee has prepared the following report on the
executive compensation program in which executive officers, including those
named in the Summary Compensation Table below, participate.
Compensation Policies
The Committee reviews the compensation of executive officers on an ongoing
basis, developing and implementing plans to serve the following objectives:
O Support, communicate and drive achievement of CVS' business
strategies and goals;
O Attract and retain the highest caliber executive officers by
providing compensation opportunities comparable to those offered by
other firms with whom CVS competes for business and talent;
0 Motivate high performance among executive officers in an
entrepreneurial incentive driven culture;
O Closely align the interests of executive officers with stockholders'
interests; and
O Reward results achieved short term and in the long term creation of
stockholder value.
The Committee intends that executive officer compensation be determined
and administered on the basis of total compensation, rather than on separate
free-standing components. The Committee has sought to create an integrated total
compensation program structured to balance appropriately the Company's short-
and long-term business and financial strategic goals. A significant amount of
total pay for executive officers is comprised of at-risk pay to align executive
interests with stockholder interests and directly tie compensation value to
performance.
In 1998, the Committee engaged a compensation consulting firm to assist it
in the ongoing administration of an executive compensation program for the key
CVS management group, based upon an analysis of market data and best practices
for the key management group, including Mr. Ryan and the other executive
officers named in the Summary Compensation Table. Their salaries and other
compensation awards were compared to industry standards in order to recommend
compensation programs and policies that would reflect and enhance CVS'
high-growth strategy. This comparison included compensation levels reported for
senior executives of 18 consumer goods companies, including 11 retailers (two of
which are drug chains) with sales ranging from approximately $5.4 billion to
$32.2 billion. Ten of the companies in this survey group are included in the S&P
Retail Stores Composite Index used in the stock performance graph on page 17.
The compensation program for CVS' executive officers named in the Summary
Compensation Table in 1998 resulted from the Committee's review of this
information.
For 1998, executive officer compensation consisted of base salaries, cash
bonuses based on annual performance and, in the case of senior executives other
than Mr. Goldstein, deferred restricted stock and stock options under the
long-term Partnership Equity Program. Total compensation levels for 1998
generally were targeted at the 50th to 75th percentile of compensation paid by
comparable companies in the survey group. In any one year or period of years,
however, actual total compensation levels of executive officers may range well
below or above a targeted level based on performance against annual and
long-term business objectives and total return to stockholders. In addition, as
discussed below, the Partnership Equity Program requires an investment by each
participant, which may provide compensation above the targeted levels during the
life of the program based in part on the return on such investment, together
with compensatory elements of the program.
Base Salaries
The Committee reviews base salaries periodically and considers increases
based on corporate profitability, competitive salaries, position responsibility
levels and individual qualifications and performance. In 1998, as part of the
overall review of the CVS compensation program, salaries of the executive
officers, other than Mr. Goldstein, were increased in light of market data, as
well as to provide merit increases and to reflect promotions and increased
responsibilities. The Committee generally sought, through these increases, to
place such salaries in the range between the 50th and 75th percentile of base
salaries in the comparable companies group. Mr. Goldstein's base salary has not
been increased since 1993. Upon his election as the Company's new Chief
Executive Officer, Mr. Ryan received a promotional salary increase of 24%
reflecting his new role and organizational responsibilities.
Annual Incentive Awards
CVS maintains an annual incentive plan that rewards corporate employees
based on performance relative to predetermined objectives established for the
year. The annual incentive paid to each participant under this program for 100%
performance relative to annual objectives is known as the "Normal Award." Normal
Awards payable in cash (subject to elective deferral) range up to 75% of base
salary for the Chief Executive Officer, and up to 65% of base salary for the
other executive officers. Certain senior executive officers, other than the
Chairman, are also eligible for restricted stock awards based on performance
relative to predetermined objectives established for the year. These
performance-based restricted stock awards generally vest after three years of
continued future employment. Normal stock awards range up to 50% of base salary
for the Chief Executive Officer, and up to 40% to 50% of base salary for the
other executive officers. The annual incentive plan provides for larger awards
if performance exceeds predetermined objectives, and smaller or no awards (both
cash and performance-based restricted stock) if performance falls below such
objectives.
For 1998, the Committee determined the Chief Executive Officer's incentive
award based on pre-established objectives for CVS' consolidated earnings before
federal income taxes ("EBIT") and return on net assets ("RONA"). Based on such
returns, and the Committee's conclusion that the objectives relating to such
strategic goals were met, the Chief Executive Officer's annual restricted stock
incentive was payable at 119% of his Normal Award for 1998. In addition to his
regular cash incentive determined based on the above EBIT and RONA objectives,
the Committee also made an incremental cash award to the Chief Executive Officer
in recognition of his contribution to the Company's 1998 earnings per share
performance. Consequently, the Chief Executive Officer's annual cash incentive
was payable at approximately 163% of his Normal Award for 1998. These amounts
are reflected in the bonus and restricted stock columns of the Summary
Compensation Table.
Annual incentive awards for 1998 payable to other executive officers were
based on the same EBIT and RONA objectives. Accordingly, annual incentives were
generally payable in a combination of cash and restricted stock at a rate of
119% of the Normal Award for 1998, which amounts are reflected in the bonus and
restricted stock columns of the Summary Compensation Table. In addition to his
regular cash incentive determined based on the above EBIT and RONA objectives,
the Committee also made an incremental cash award to Mr. Conaway in recognition
of his contribution to the acquisition and integration of Arbor. Consequently,
Mr. Conaway's annual cash incentive was payable at approximately 170% of his
Normal Award for 1998, as reflected in the bonus column of the Summary
Compensation Table.
Stock Options
The Compensation Committee has a general policy of making regular stock
option grants to executives and key employees every year. The Committee has made
exceptions to this policy in certain circumstances. For example, although
regular option grants would have been made to executives in 1998 in accordance
with this policy, in view of the awards under the Partnership Equity Program,
discussed below, the regular option grant for 1998 was omitted for these
executives. The Committee did, however, grant options to 247 key employees below
the executive officer level in 1998. The Committee expects to make annual option
grants after 1998.
Partnership Equity Program
As a major element in CVS' executive compensation program, in 1998 the
Committee utilized the Partnership Equity Program for key management of CVS,
which was first implemented in 1997. The Program is designed to ensure that
those executives with significant impact on the future success of CVS have a
substantial "at risk" personal equity investment in the Company's common stock.
The Committee believes that the Program, along with the newly-adopted stock
ownership guidelines for officers, will strongly link the economic interests of
key managers with each other and with CVS stockholders; provide future long-term
compensation opportunities that are competitive in the external marketplace and
that reflect internal responsibility levels; and assure key management
stability, retention, motivation, and long-term focus on corporate strategy.
Under the Program, more than 50 key managers of the Company, including its
executive officers other than Mr. Goldstein, were given the opportunity to
invest in common stock based on their position, responsibilities and potential
impact on the creation of long-term stockholder value. The purchase price of
shares (set at fair market value at the purchase date after adjusting for a
subsequent stock split) was payable from each participant's personal funds,
without loans or guarantees by the Company, including by application of certain
payouts from other compensation programs. For each share purchased (up to
certain individual dollar limits), the Committee made a matching grant of one
deferred share; such deferred shares will vest (become non-forfeitable) at the
end of five years if the participant both retains the purchased share for that
period and continues to be employed by CVS, subject to accelerated vesting in
certain events. Furthermore, the Committee granted stock options at a rate of up
to 15 shares subject to option for each share purchased under the Program. The
options have an exercise price equal to fair market value on the date of grant
and vest in equal installments at the end of three, four and five years
following the grant date, again based on continued employment and retention of
the purchased shares, subject to accelerated vesting in certain events.
The Committee believes that participation in the Partnership Equity
Program continues to evidence a strong personal commitment by key management --
both financially and through continued future employment -- to the growth of CVS
and creation of long-term stockholder value. Such a commitment, in the
Committee's view, enhances the long-term outlook for growth in stockholder
value, and the Program will provide commensurate long-term rewards and
compensation to participants if such growth materializes and can be sustained.
The Committee does not consider stock holdings, prior option or restricted stock
grants, or the appreciation thereon when making option, restricted stock and
Partnership Equity Program award determinations.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Code generally disallows a tax deduction to public
companies for compensation over $1 million paid to a company's chief executive
officer and the other four most highly compensated individuals who are executive
officers as of the end of the year. Qualifying performance-based compensation
will not be subject to the deduction limit if certain requirements are met.
The Committee's policy is to preserve corporate tax deductions by
qualifying compensation paid over $1 million to named executive officers as
performance based compensation. To this end, in 1997 the Board adopted and
stockholders approved the 1997 Incentive Compensation Plan, which permits annual
incentive awards and stock options (and certain other awards) to qualify as
performance based compensation not subject to the limitation on deductibility.
The Committee believes that stock options granted under prior plans also qualify
as performance based compensation under Section 162(m), and other steps, such as
deferral arrangements, can be used to avoid or minimize any loss of
deductibility. Nevertheless, maintaining tax deductibility is but one
consideration among many -- and is not the most important consideration -- in
the design of the compensation program for senior executives. The Committee may,
from time to time, conclude that compensation arrangements are in the best
interests of CVS and its stockholders despite the fact that such arrangements
might not, in whole or in part, qualify for tax deductibility.
Terry R. Lautenbach, Chair
Allan J. Bloostein
Terrence Murray
Sheli Z. Rosenberg
Summary Compensation Table
The following Summary Compensation Table shows information about the
compensation received by the Company's Chief Executive Officer and each of the
four other most highly compensated executive officers of the Company during the
1998 fiscal year for services rendered to the Company in all capacities during
the three fiscal years ended December 31, 1998.
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------------
Awards Payouts
-----------------------------------------
Annual Compensation Restricted All Other
------------------- Stock Securities Compen-
Awards Underlying sation
Name and Principal Position(s) Year Salary($) Bonus($) (1) ($)(2) Options(#) (3) ($)(4)
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas M. Ryan (5) 1998 900,000 1,103,250 3,485,438 795,660 12,148
President and Chief Executive 1997 700,000 1,052,950 1,710,000 391,320 7,072
Officer and Director of CVS; 1996 587,599 2,558,000 300,000 692,920 9,167
President and Chief Executive
Officer of CVS Pharmacy, Inc.
Stanley P. Goldstein (5) 1998 1,050,000 -- -- -- 24,097
Chairman of the Board and 1997 1,050,000 1,524,960 -- -- 7,578
Director of CVS 1996 1,050,000 1,000,000 -- -- 20,042
Charles C. Conaway 1998 600,000 664,100 2,199,500 352,190 11,210
Executive Vice President and 1997 500,000 670,310 1,146,900 304,360 7,050
Chief Financial Officer of CVS; 1996 387,500 2,037,000 230,000 461,948 9,167
Executive Vice President and
Chief Financial Officer of CVS
Pharmacy, Inc.
Daniel C. Nelson 1998 470,000 335,580 473,720 108,690 25,994
Vice President of CVS; 1997 425,000 603,280 902,200 217,400 7,094
Executive Vice President-- 1996 337,575 537,000 230,000 461,948 8,375
Marketing of CVS Pharmacy, Inc.
Larry J. Merlo 1998 450,000 321,200 737,325 165,220 11,887
Vice President of CVS; 1997 350,000 391,020 495,500 130,460 7,027
Executive Vice President--Stores 1996 266,250 358,000 153,000 173,230 9,000
of CVS Pharmacy, Inc.
</TABLE>
(1) 1996 bonus includes a deferred bonus of $1,500,000 payable to each of
Messrs. Ryan and Conaway in 1999 in recognition of their work in
successfully implementing the Company's strategic restructuring program.
In 1998, Messrs. Ryan and Conaway elected to defer receipt of these
bonuses beyond 1999.
(2) Recipients of restricted stock grants forfeit such stock if they cease to
be employees of the Company within five years from the date of grant,
subject to accelerated vesting in certain events. All disclosed restricted
stock awards currently outstanding are either (i) performance-based
restricted stock which is contingent upon meeting one year performance
objectives and subject to a three-year holding period from the date of
grant, (ii) restricted stock that vests over either a three or four
year-period based on continuing employment, or (iii) matching restricted
stock units that vest on the fifth anniversary of the date of the grant
based on continuing employment. Based on the number of shares of
restricted stock earned at the end of a period, dividends are paid at the
same rate as paid to all stockholders from the date of the award. On
December 31, 1998, the following persons had the right to receive
restricted stock with the specified market value based on the average of
the high and low sale prices of the common stock as reported by the New
York Stock Exchange on such date: Mr. Ryan, 189,299 restricted shares
having a market value of $10,352,289; Mr. Conaway, 122,643 restricted
shares having a market value of $6,707,039; Mr. Nelson, 69,890 restricted
shares having a market value of $3,822,109; and Mr. Merlo, 40,324
restricted shares having a market value of $2,205,219.
(3) Options outstanding have been adjusted to account for (i) the spin-off of
Footstar, Inc. on October 12, 1996 and (ii) the Company's two-for-one
stock split on June 15, 1998. Options granted in 1998 to Messrs. Ryan and
Merlo will become exercisable in three annual installments beginning on
the third anniversary of the grant; options granted to Mr. Conaway will
become exercisable in two annual installments on the third and fifth
anniversaries of the grant. Options granted in 1997 become exercisable in
three annual installments beginning on the third anniversary of the date
of grant. Options granted in 1996 become exercisable as follows: one-half
of the grant becomes exercisable in three annual installments beginning on
the second anniversary of the grant date; the remaining one-half of the
grant became exercisable in 1997 due to accelerated vesting following
achievement of certain target trading values of the Company's common
stock.
(4) For 1998, includes $1,560, $1,560, $4,655, $3,960, $4,760 contributed
under the Company's 401(k) Profit Sharing Plan for Messrs. Ryan,
Goldstein, Conaway, Nelson, Merlo; 25.287 ESOP shares based on a market
value of $54.6875 per share (total value of $3,200) contributed under the
ESOP for each of the named executives; and $2,137, $19,337, $1,200, $2,009
and $1,127 paid in life insurance premiums for Messrs. Ryan, Goldstein,
Conaway, Nelson and Merlo, respectively.
(5) On May 13, 1998, Mr. Ryan succeeded Mr. Goldstein as the Chief Executive
Officer of CVS.
Stock Options
Option Grants in Fiscal Year Ending December 31, 1998
The following table shows the stock options awarded to the named executive
officers in 1998.
<TABLE>
<CAPTION>
Individual Grants(1)
-------------------------------------------------------------------------------
Percentage of Present
No. of Securities Total Options Value on
Underlying Granted to Date of
Options Granted Employees in Exercise Grant(3)
Name (#) Fiscal Year(2) Price ($) Expiration Date $
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Thomas M. Ryan 195,660 6.27% 36.6953 2/27/2008 $2,025,839
600,000 19.23% 37.3125 3/12/2008 6,264,000
Stanley P. Goldstein 0 0.00% N/A N/A N/A
Charles C. Conaway 152,190 4.88% 36.6953 2/27/2008 1,575,756
200,000(4) 6.41% 37.3125 3/12/2008 2,088,000
Daniel C. Nelson 108,690 3.48% 36.6953 2/27/2008 1,125,362
Larry J. Merlo 65,220 2.09% 36.6953 2/27/2008 675,280
100,000 3.21% 37.3125 3/12/2008 1,044,000
</TABLE>
(1) Except as otherwise indicated, these options become exercisable as
follows: 33.3% on third, fourth and fifth anniversaries of the date of
grant.
(2) Based on options to purchase 3,119,410 shares granted to all employees
during 1998.
(3) The hypothetical present values on the grant date are calculated under the
modified Black-Scholes Model, which is a mathematical formula used to
value options traded on stock exchanges. The formula considers a number of
factors in hypothesizing an option's present value. Factors used to value
options granted which expire on 2/27/2008 include the stock's expected
volatility rate of 21.05%, a projected dividend yield of 0.62% and a
risk-free rate of return of 5.59%. Factors used to value options granted
which expire on 3/12/2008 include the stock's expected volatility rate of
20.81%, a projected dividend yield of 0.61% and a risk-free rate of return
of 5.53%. Both grants assume a projected time of exercise of 7 years and a
projected risk of forfeiture rate for vesting period of 5% per annum.
There is no assurance that the hypothetical present value of the stock
options reflected in this table will be realized.
(4) These options become exercisable as follows: 50% on third and fifth
anniversaries of the date of grant.
Aggregated Option Exercises in Fiscal Year Ending December 31, 1998 and
Year-end Option Values
The following table shows, for the named executive officers, the stock
options exercised during 1998 and the values of unexercised options as of
December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired Value Fiscal Year-End(#)(1) at Fiscal Year-End($)(2)
Name On Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Ryan 5,544 301,006 704,466/1,417,954 26,690,748/35,114,280
Stanley P. Goldstein 115,486 5,797,765 1,459,750/0 54,651,135/0
Charles C. Conaway 0 0 402,664/810,534 15,227,095/21,703,673
Daniel C. Nelson 0 0 371,256/480,074 14,129,061/14,690,468
Larry J. Merlo 0 0 141,126/353,424 5,342,847/9,237,165
</TABLE>
(1) Adjusted to account for the spin-off of Footstar on October 12, 1996 and
the Company's two-for-one stock split on June 15, 1998.
(2) The value of unexercised in-the-money options at fiscal year-end assumes a
fair market value of the common stock of $54.6875, the average of the high
and low sale prices of the common stock as reported by the New York Stock
Exchange on December 31, 1998. The actual before-tax amount, if any,
realized upon exercise will depend upon the market price of the common
stock at the time the option is exercised. There is no assurance that the
value of unexercised in-the-money stock options will be as shown in the
table.
Stock Performance Graph
Comparison of Five Year Cumulative Total Stockholders' Return Among CVS,
S&P Retail Stores Composite and S&P 500
The following graph shows changes over the past five-year period in the
value of $100 invested in: (1) our common stock; (2) Standard & Poor's 500
Index; and (3) Standard & Poor's Retail Stores Composite Index (which includes
37 retail companies).
[ Graphic Omitted ]
<TABLE>
<CAPTION>
Year End Compound
----------------------------------------------------------- Annual
1993 1994 1995 1996 1997 1998 Return Rate
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CVS Corporation $100.0 $79.6 $83.6 $131.8 $205.8 $355.5 28.9%
S&P 500* 100.0 101.3 139.3 171.3 228.5 293.7 24.0%
S&P Retail Stores Composite* 100.0 91.3 102.2 120.3 174.0 280.7 22.9%
</TABLE>
* Index includes CVS.
The year-end values of each investment shown in the preceding graph are
based on share price appreciation plus dividends, with the dividends reinvested
as of the last business day of the month during which such dividends were
ex-dividend. The calculations exclude trading commissions and taxes. Total
stockholder returns from each investment, whether measured in dollars or
percentages, can be calculated from the year-end investment values shown beneath
the graph.
Certain Executive Arrangements
Income Continuation Policy
The Income Continuation Policy for Select Senior Executives of the
Company, which was adopted in January 1987 and amended in May 1988, provides
that in the event of a change of control (as defined in the Income Continuation
Policy) and subsequent termination of employment by CVS other than for cause, or
by the executive with good reason (as defined in the Income Continuation Policy)
within 24 months of a change in control, the current executive officers listed
in the Summary Compensation Table on page 14 will be entitled to receive from
the Company a single sum payment equal to three times the sum of annual base
salary plus their full normal annual incentive compensation award immediately
prior to such termination of employment. In addition, upon such a termination of
employment, each covered executive will be entitled to remain a participant in
all employee welfare benefit plans maintained by the Company at the time of such
termination of employment for a period of 24 months after such termination of
employment (or if such participation is not possible under the terms of any such
plan, each such executive shall be provided with benefits which are comparable
to the coverage provided by such plan). The Income Continuation Policy also
provides that in the event of a change in control each covered executive shall
be fully vested in all shares previously awarded to the executive under the
Company's Omnibus Stock Incentive Plan and any successor plan thereto without
regard to any restrictions previously imposed under the terms of such plan and
entitled to exercise any stock options on common stock (whether or not otherwise
exercisable). In addition, upon termination of employment each outstanding
option shall remain exercisable until the earlier of six months after such
termination, provided such exercise does not violate the terms of the plan under
which such option was granted, or the expiration of the option period specified
in such plan. The Income Continuation Policy also provides that if payments
under such policy or the Supplemental Executive Retirement Plan described below
are subject to the "golden parachute" excise tax under Section 4999 of the Code
(which deals with certain payments contingent on a change in control), the
Company will make an additional payment to the covered executive in respect of
such tax.
Supplemental Executive Retirement Plan
The Company maintains a Supplemental Executive Retirement Plan for Select
Senior Management of the Company (the "Supplemental Retirement Plan"). The
Supplemental Executive Retirement Plan is designed to increase the retirement
benefits of selected executive employees. In connection with the Company's
restructuring during 1996, the Supplemental Retirement Plan was amended to
create a new benefit formula (the "New Benefit Formula"). Under the New Benefit
Formula, executives selected for participation (including Messrs. Ryan, Conaway,
Nelson and Merlo) will receive an annual benefit commencing on the later of age
55 or retirement, equal to 1.6% of a three-year average of final compensation
(as defined) for each year of service (including credited years of service under
the Supplemental Retirement Plan prior to amendment) up to 30 years, or a
maximum benefit of 48% of final compensation, with no offset for any amounts
provided by the Company's qualified plans, social security or other retirement
benefits. Except in the event of a change in control (as defined in the
Supplemental Retirement Plan) or as provided in the employment agreements
referred to below, no benefits are payable to an eligible executive unless he or
she terminates employment after attaining age 55 or after five years of credited
service under the plan.
The following table shows the approximate amounts of annual retirement
income that would be payable under the New Benefit Formula to executives covered
by it based on various assumptions as to compensation and years of service,
assuming benefits are computed under a straight life annuity formula and
retirement after attaining age 55 or with five years of service:
<TABLE>
<CAPTION>
Estimated Amount Retirement Benefits Based on Service
-------------------------------------------------------------
Compensation 5 Years 10 Years 15 Years 20 Years 30 Years
<S> <C> <C> <C> <C> <C>
$600,000 $48,000 $96,000 $144,000 $192,000 $288,000
800,000 64,000 128,000 192,000 256,000 384,000
1,000,000 80,000 160,000 240,000 320,000 480,000
1,300,000 104,000 208,000 312,000 416,000 624,000
1,600,000 128,000 256,000 384,000 512,000 768,000
1,900,000 152,000 304,000 456,000 608,000 912,000
2,200,000 176,000 352,000 528,000 704,000 1,056,000
</TABLE>
Final compensation for purposes of the New Benefit Formula is the average
of the executive's three highest years of annual salary and bonus out of the
last ten years of service. For this purpose, salary and bonus are the amounts
shown in the Salary and Bonus column of the Summary Compensation Table. The
estimated credited years of benefit service for Messrs. Ryan, Conaway, Nelson
and Merlo as of December 31, 1998 were 23, 6, 5 and 20 years, respectively.
Enhanced benefits are payable in a lump sum upon termination of employment
following a change of control.
The benefit formula in place prior to amendment of the Supplemental
Retirement Plan (the "Prior Benefit Formula") continues to apply to Mr.
Goldstein and certain other executives who have terminated employment with a
vested benefit. The Prior Benefit Formula provides that executive officers with
at least 10 years of credited service will receive upon retirement at or after
age 60 an annual benefit equal to 50% of final compensation less any amounts
provided by other retirement programs of the Company or programs of other
companies (but without deduction for social security). In the case of retirement
on or after age 55 but before age 60, a reduced benefit is provided. Except in
the event of a change in control (as defined in the plan) or as provided in the
employment agreements referred to below, no benefits are payable to an eligible
executive who terminates employment prior to age 55 or prior to completing 10
years of credited service.
Under the Prior Benefit Formula, Mr. Goldstein is currently entitled to
retire with an annual benefit of approximately $777,590, computed under a
straight life annuity formula. Final compensation for purposes of the Prior
Benefit Formula is the executive's final year of salary plus targeted annual
incentive bonus for his or her final year. In the event of a change in control,
benefits will be payable under the Prior Benefit Formula upon subsequent
termination of employment on a lump sum basis.
Benefits under the New Benefit Formula and the Prior Benefit Formula are
generally payable in annual installments for the life of the executive, but
joint and survivors forms of payment of equivalent actuarial value may be
elected.
Employment Agreements with Certain Named Executive Officers
The Company has entered into employment agreements with Messrs. Ryan,
Conaway, Nelson and Merlo. These employment agreements supersede the Income
Continuation Policy described above as it relates to such executives.
The employment agreements provide for an initial employment term of three
years, automatically renewed for a one-year term at the end of the initial term
and each one-year renewal term unless either party gives notice of non-renewal
at least 180 days prior to expiration of the then current term. The employment
agreements generally provide for payment of an annual base salary, subject to
review for increase at the discretion of the Compensation Committee. Base
salaries are currently $900,000, $600,000, $470,000 and $450,000 for Messrs.
Ryan, Conaway, Nelson and Merlo, respectively. The employment agreements also
generally provide for (i) continued payment of base salary, target cash bonuses,
and other benefits for 36 months in the case of Mr. Ryan and for 24 months in
the case of other named executive officers (or a lump sum equal to three times
salary plus target bonuses in the case of a change in control) in the event the
executive's employment is terminated by the company without "cause" or
voluntarily by the executive due to a "constructive termination without cause";
(ii) non-competition for a period of 18 months subsequent to a voluntary
termination of employment if CVS elects to continue paying 50% of the
executive's base salary during such period; (iii) other restrictive covenants
including nondisclosure, non-solicitation of employees and availability for
litigation support; (iv) participation in certain benefit plans and programs
(including life insurance and medical benefits); (v) annual and long term
incentive compensation opportunities; and (vi) deferred compensation
arrangements. Mr. Ryan's employment agreement provides that this target annual
incentive opportunity may not be less than 65% of his base salary, and the
employment agreements of Messrs. Conaway, Nelson and Merlo provide that their
target annual incentive opportunities may not be less than 60%, 60% and 50%,
respectively, of their base salaries.
A "change of control" is defined to include a variety of events, including
significant changes in the stock ownership of CVS or a significant subsidiary,
changes in CVS' board of directors, certain mergers and consolidations of CVS or
a significant subsidiary, and the sale or disposition of all or substantially
all the consolidated assets of CVS. "Constructive termination without cause" is
defined generally as demotion, reduction in compensation, unapproved relocation
in the case of Mr. Ryan (or, in the case of other named executive officers,
following a change in control), material breach of the employment agreement by
the Company, or, in the case of Mr. Ryan, failure to extend the term of the
employment agreement to his 60th birthday. "Cause" is defined generally as a
breach of the restrictive covenants, felony convictions, or willful gross
neglect or gross misconduct resulting in material harm to CVS.
If payments under the employment agreements following a change in control
are subject to the "golden parachute" excise tax, CVS will make a "gross-up"
payment sufficient to ensure that the net after-tax amount retained by the
executive (taking into account all taxes, including those on the gross- up
payment) is the same as if such excise tax had not applied. CVS will indemnify
the executives to the fullest extent permitted by law, including advancing
expenses, and will reimburse an executive for expenses incurred in seeking
enforcement of the employment agreement if he prevails or, after a change in
control, if the executive's assertion of rights is in good faith and not
frivolous.
The employment agreement with Mr. Ryan relates to his employment as
President and Chief Executive Officer of CVS Corporation, President and Chief
Executive Officer of CVS Pharmacy Inc., and his agreement to serve as a member
of the Board of Directors of CVS Corporation. The employment agreements with
Messrs. Conaway, Nelson and Merlo relate to their employment as executive
officers of CVS Corporation.
Transactions with directors and officers
In connection with the CVS/Arbor merger, CVS entered into a consulting
agreement with Mr. Eugene Applebaum, the former Chairman and Chief Executive
Officer of Arbor and a present director of CVS, relating to certain transitional
and real estate-related services to be provided by Mr. Applebaum following the
merger. The consulting agreement with Mr. Applebaum is described in CVS'
Registration Statement on Form S-4 filed under the Securities Act of 1933 in
connection with the Arbor merger and is filed as an exhibit to such Registration
Statement.
Upon completion of the CVS/Arbor merger, CVS succeeded to Arbor's
interests in three drugstores that lease space from a general partnership of
which Mr. Applebaum is the majority partner. During 1998, CVS lease payments to
this partnership amounted to $397,100. Also as a result of the CVS/Arbor merger,
CVS succeeded to Arbor's interests in two additional drugstores, one of which
leases space from a partnership of which Mr. Applebaum is a limited partner and
another of which leases space from a limited liability company in which Mr.
Applebaum's son-in-law owns a minority interest. During 1998, CVS lease payments
to the partnership amounted to $66,400. Occupancy under the lease from the
limited liability company, which provides for annual rent of $179,700, is
scheduled to commence in August 1999.
In addition, Messrs. Eugene and Larry Goldstein, the sons of Stanley
Goldstein, the retiring Chairman of the Company, each own minority interests in
entities involved in the development of four CVS drugstores. These interests are
described more fully in the paragraph below.
In November 1998, the Company entered into a single store lease (scheduled
to commence in June 1999) with a limited liability company of which Messrs.
Eugene and Larry Goldstein each own 30%. The lease provides for annual rent of
$179,550. CVS also expects to enter into a single-store lease in 1999 with a
company of which Messrs. Eugene and Larry Goldstein together own a 20% interest.
CVS estimates that annual rent under this lease will be approximately $490,000
and will commence in late 1999 or early 2000. In addition, two companies in
which Messrs. Eugene and Larry Goldstein own minority interests have each agreed
to develop a CVS store project for a fixed fee. The companies will not retain an
ownership interest in these store projects. The aggregate fees to be paid by CVS
to these two companies under these agreements are $450,000. All of the
transactions described in this paragraph were approved in the ordinary course of
business by the CVS real estate committee and were reviewed by the Audit
Committee of the CVS Board of Directors. Consequently, CVS believes that the
terms of these transactions were determined in an arms-length manner.
ITEM 2: APPROVAL OF CVS 1999 EMPLOYEE STOCK PURCHASE PLAN
- - --------------------------------------------------------------------------------
The Board of Directors has adopted the 1999 Employee Stock Purchase Plan
(the "Plan"), subject to approval by CVS' stockholders. The Plan provides a
means for CVS employees to authorize payroll deductions on a voluntary basis to
be used for the periodic purchase of CVS common stock. All employees
participating in the Plan will have equal rights and privileges. Under the Plan,
eligible participants will be able to purchase shares at a price not less than
the lesser of 85% of the fair market value of CVS common stock at the beginning
of an offering period or 85% of the fair market value of CVS common stock at the
end of the offering period. The Plan is intended to qualify as an "employee
stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code").
The Board of Directors believes that the Plan will encourage broader stock
ownership by employees of CVS and thereby provide an incentive for employees to
contribute to the continued profitability and success of CVS. In particular, the
Board intends that the Plan offer a convenient means for such employees who
might not otherwise own CVS common stock to purchase and hold common stock, and
that the discounted sale feature of the Plan provide a meaningful inducement to
participate. The Board believes that employees' continuing economic interest, as
stockholders, in the performance and success of CVS will enhance the
entrepreneurial spirit of CVS, which can greatly contribute to the long-term
growth and profitability of CVS.
Summary of the Plan
The Plan is set forth in full as Exhibit A to this proxy statement. The
following description of the material features of the Plan is qualified in its
entirety by reference to Exhibit A.
The maximum number of shares that may be purchased under the Plan is 7.4
million shares, subject to appropriate adjustment in the case of any stock split
or reverse stock split, stock dividend, combination, reclassification, or other
extraordinary corporate event affecting CVS common stock. Shares delivered under
the Plan will be either authorized but unissued shares or shares acquired by CVS
in the open market.
The Plan will be administered by a committee appointed by the Board of
Directors, except to the extent the Board elects to administer the Plan. The
Board or such committee will have authority to interpret the Plan, construe
terms, adopt rules and regulations, prescribe forms, and make all determinations
under the Plan.
Any full- or part-time employee of CVS or any designated subsidiary will
be eligible to participate in the Plan upon attaining one year of service,
excluding any employee who owns five percent or more of the total combined
voting power or value of all outstanding shares of all classes of securities of
CVS or any subsidiary. Part-time employees are employees whose customary
employment with CVS or any designated subsidiary is more than 20 hours per week
and more than five months per year. Approximately 42,500 CVS employees currently
would be eligible to participate in the Plan.
An eligible employee may enroll for an offering period by filing an
enrollment form with CVS at least 45 days before the commencement of the
offering period. However, new employees who have fulfilled the one-year service
requirement may enroll during an offering period by filing an enrollment form
with CVS at least 45 days in advance of the first day of the payroll period upon
which such enrollment is to commence. After initial enrollment in the Plan, the
employee will be automatically re-enrolled in the Plan for subsequent offering
periods unless he or she files a notice of withdrawal before such offering
period begins, terminates employment, or otherwise becomes ineligible to
participate.
Upon enrollment in the Plan, the employee must elect a rate at which he or
she will make payroll contributions for the purchase of CVS common stock. An
employee may elect to make contributions in an amount not less than 1% nor more
than 15% of such employee's gross earnings, although an employee's contributions
will be adjusted downward to the extent necessary to ensure that he or she will
not purchase during any calendar year CVS common stock that has a fair market
value, as of the beginning of the offering period, in excess of $25,000 per
annum. All employee contributions will be made by means of direct payroll
deduction. The contribution rate elected by a participant will continue in
effect until modified by the participant, except that an employee may not
increase his or her previously elected contribution rate during an offering
period and, unless otherwise authorized by the Committee, may elect to decrease
his or her previously elected contribution rate no more than once during a given
offering period. No additional contributions are permitted by a participant
during a given offering period if his or her contribution rate is reduced to
zero.
The contributions of an employee will be credited to an account maintained
on behalf of such employee. The Plan provides that each "offering period" means
the approximately one-year period commencing on the first trading day after
January 1 and terminating on the last trading day in the following December,
except that the initial offering period under the Plan will commence July 1,
1999 (or as soon as practicable thereafter) and terminate on December 31, 1999.
The committee may change the beginning date, ending date, and duration of
offering periods on a prospective basis, provided that offering periods will in
all cases comply with applicable limitations under Section 423 of the Code.
As described above, CVS will sell shares directly to the custodian for
employees' accounts at a price not less than the lesser of 85% of the fair
market value of CVS common stock at the beginning of the offering period or 85%
of the fair market value of CVS common stock at the end of the offering period.
Shares purchased under the Plan will be credited to the accounts maintained by
the custodian for each participant based upon the average cost of all shares
purchased. The custodian will initially be The Bank of New York. No interest
will be credited on payroll contributions pending investment in CVS common
stock. Dividends paid on CVS common stock credited to par ticipants' accounts
will be automatically reinvested in additional shares by the custodian, either
through purchases in the market or directly from CVS (no discounts will apply to
such dividend reinvestment purchases).
Participants will have the exclusive right to vote or direct the voting of
shares credited to their accounts, and will be permitted to withdraw, transfer,
or sell their shares without restriction, provided that no withdrawal of
certificates representing CVS shares is permitted during the first two years
after the first day of an offering period during which the shares were acquired
(i.e., during such period any transfers may occur only through the custodian on
behalf of the participant). Participants' rights under the Plan are
nontransferable except pursuant to the laws of descent and distribution.
A participant's enrollment in the Plan may be terminated at any time,
effective for payroll periods or offering periods beginning after the filing of
a notice of termination of enrollment. Enrollment will also terminate upon
termination of a participant's employment by CVS and its subsidiaries. The
custodian will continue to hold CVS common stock for the account of such a
participant until the participant sells or withdraws the common stock, but in no
event more than two years after the participant ceases to be employed by CVS and
its subsidiaries. No refunds from a participant's cash account are permitted
except upon termination of enrollment due to termination of employment.
CVS will pay costs and expenses incurred in the administration of the Plan
and maintenance of accounts, and will pay brokerage fees and commissions for
purchases. CVS will not pay brokerage fees and expenses relating to sales by
participants, and participants may be charged reasonable fees by the custodian
for withdrawals of share certificates and other specified services. The
custodian will be responsible for furnishing account statements to participants.
The Board of Directors may amend, alter, suspend, discontinue, or
terminate the Plan without further stockholder approval, except stockholder
approval must be obtained within one year after the effectiveness of such action
if required by law or regulation or under the rules of any automated quotation
system or securities exchange on which CVS common stock is then quoted or
listed, or if such stockholder approval is necessary in order for the Plan to
continue to meet the requirements of Section 423 of the Code. Thus, stockholder
approval will not necessarily be required for amendments that might increase the
cost of the Plan or broaden eligibility. The Plan will continue until terminated
by action of the Board, although as noted above the number of shares authorized
under the Plan is limited.
On February 22, 1999, the last reported sale price of CVS common stock on
the New York Stock Exchange was $54(1)/(4) per share.
Federal Income Tax Consequences
Rights to purchase shares under the Plan are intended to constitute
"options" issued pursuant to an "employee stock purchase plan" within the
meaning of Section 423 of the Code. CVS believes that under present law the
following Federal income tax consequences would generally result under the Plan:
(1) No taxable income results to the participant upon the grant of a right to
purchase or upon the purchase of shares for his or her account under the
Plan (although the amount of a participant's payroll contributions under
the Plan will be taxable as ordinary income to the participant).
(2) If the participant disposes of shares within two years after the first day
of an offering period with respect to which he or she purchased the shares
or within one year after the purchase date, then at that time the
participant will recognize ordinary income in an amount equal to the fair
market value of the shares on the date of purchase minus the amount of the
partici pant's payroll deductions used to purchase the shares. The
participant will be considered to have disposed of a share if the
participant sells, exchanges, makes a gift or transfers (except by death)
legal title to the share.
(3) If the participant disposes of shares more than two years after the first
day of an offering period with respect to which he or she purchased the
shares and more than one year after the purchase date, then at the time
the participant disposes of the shares he or she will recognize ordinary
income in an amount equal to the lesser of (i) the fair market value of
the shares on the first day of the offering period minus the amount of the
participant's payroll deductions used to purchase the shares, and (ii) the
fair market value of the shares on the date of disposition minus the
amount of the participant's payroll deductions used to purchase the
shares.
(4) In addition, the participant will recognize a long-term or short-term
capital gain or loss, as the case may be, in an amount equal to the
difference between the amount realized upon any sale of CVS common stock
and the participant's basis in the common stock (i.e., the purchase price
plus the amount, if any, taxed to the participant as ordinary income, as
described in (2) and (3) above).
(5) If the statutory holding periods described in (2) and (3) above are
satisfied, CVS will not receive any deduction for federal income tax
purposes with respect to any discount in the sale price of CVS common
stock applicable to such participant. If such statutory holding periods
are not satisfied, CVS generally should be entitled to a tax deduction in
an amount equal to the amount taxed to the participant as ordinary income.
(6) Dividends, if any, on shares purchased pursuant to the Plan will be
taxable as ordinary income in the year paid.
The foregoing provides only a general description of the application of
federal income tax laws to the Plan. The summary does not address the effects of
other federal taxes or taxes imposed under state, local, or foreign tax laws.
Because of the complexities of the tax laws, participants are encouraged to
consult a tax advisor as to their individual circumstances.
The Board of Directors recommends a vote FOR this proposal.
ITEM 3: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
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We have appointed KPMG LLP, independent public accountants, to audit the
financial statements of the Company for the year ending December 31, 1999. We
are submitting this selection to you for your ratification. KPMG audited the
Company's financial statements for the year ended December 31, 1998.
Representatives of KPMG will be at the Meeting to answer your questions.
If you do not ratify the appointment of KPMG, the Board of Directors will
reconsider its appointment.
The Board of Directors recommends a vote FOR this proposal.
ITEM 4: STOCKHOLDER PROPOSAL RELATING TO FEES PAID TO NON-EMPLOYEE DIRECTORS
FOR MEETING ATTENDANCE
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On or about December 2, 1998, the Company received the following proposal
from the Teamsters Affiliates Pension Plan (the "Teamsters"), 25 Louisiana
Avenue, N.W., Washington, D.C. 20001. In accordance with SEC rules, we are
reprinting the proposal and supporting statement (collectively, the "Teamsters
Proposal") in this proxy statement as they were submitted to us:
"That shareholders of CVS urge the board to adopt a policy eliminating
fees paid to directors for attending meetings, in person or by telephone,
received in addition to their annual compensation.
The non-employee directors at CVS receive not only compensation of
$30,000, but additional fees of $1,500 for each board meeting attended,
$1,000 for each committee meeting attended and $1,000 for each telephonic
board meeting.
Attending board meetings is what board members do. This is not an extra
task added to their job description for which they must be additionally
compensated. It seems unlikely that other employees of CVS receive a bonus
for showing up for work in the morning, and there is no reason that
directors need this bonus. Directors are presumably, and justifiably,
compensated for any costs associated with traveling to meetings, but
should not receive additional compensation for attending.
For the above reasons we urge you to vote FOR the proposal."
Statement of CVS Board Recommending a Vote Against the Teamsters Proposal
CVS' Board recommends that you vote AGAINST the Teamsters Proposal (which
is non-binding on the Board of Directors) for the following reasons:
CVS has achieved strong growth and favorable operating results in recent
years, which have been reflected in our returns to stockholders. We believe that
these achievements are attributable in large part to our organizational
strengths, including our Board and our executive management team appointed by
our Board.
We believe that our Board plays a critical role in guiding the overall
management, strategies and policies of our Company. To that end, our Nominating
Committee carefully selects as nominees individuals that we believe will make an
important contribution to the strategic direction and governance of the Company,
based on their background, skills, experience, and expertise.
We believe, and are advised by our outside compensation consulting firm,
that the payment of attendance fees to directors is in keeping with customary
practice for major U.S. corporations. We believe that it is in your best
interests that, in order to continue to attract and retain the most suitable
candidates for directors, we retain the discretion to determine the structure of
our director compensation (including fees for meeting attendance) that is
competitive with that of other major corporations.
We also note that Delaware law confers upon the Board the authority to
determine the compensation of directors, unless such authority is otherwise
limited by the corporation's charter or by-laws. Neither our charter nor our
by-laws contain a provision providing otherwise.
If adopted, this proposal (although being non-binding on the Board) would
have the effect of unnecessarily tying the Board's hands in the director
compensation area. We do not believe it is market practice to do so and, for the
reasons described above, we believe this proposal does not make good business
sense and does not serve your best interests.
The Board of Directors recommends a vote AGAINST this proposal.
ITEM 5: OTHER MATTERS
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We do not know of any matters to be acted upon at the meeting other than
those discussed in this proxy statement. If any other matter is presented, your
proxy will vote on the matter in his or her best judgment.
Section 16(a) beneficial ownership reporting compliance
Section 16(a) of the 1934 Act requires our executive officers and
directors and any persons who own more than 10 percent of our common stock
("reporting persons") to file reports of ownership and changes in ownership on
Forms 3, 4 and 5 with the SEC and the New York Stock Exchange. These reporting
persons are required by SEC regulation to furnish us with copies of all Forms 3,
4 and 5 that they file with the SEC and NYSE.
Mr. Applebaum filed a late Form 4 and an amended Form 3 in 1998. Both
filings were needed to correctly report minor transactions involving fewer than
400 shares of CVS stock formerly held in Mr. Applebaum's 401K and IRA accounts.
Proxy solicitation
We are soliciting this proxy on behalf of our Board of Directors and will
bear the solicitation expenses. We are making this solicitation by mail but we
may also solicit by telephone, telegraph or in person. We have hired Morrow &
Co., Inc. for a customary fee, plus out-of-pocket expenses, to assist in the
solicitation. We will reimburse banks, brokerage houses and other institutions,
nominees and fiduciaries, if they request, for their expenses in forwarding
proxy materials to beneficial owners.
Stockholder Proposals For Annual Meeting in 2000
If you want to submit a proposal for possible inclusion in our proxy
statement for the 2000 annual meeting of stockholders you must ensure your
proposal is received by us on or before November 5, 1999.
Stanley P. Goldstein
Chairman of the Board
March 4, 1999
Exhibit A
CVS CORPORATION
1999 Employee Stock Purchase Plan
CVS CORPORATION
1999 Employee Stock Purchase Plan
Page
1. Purpose.................................................... 1
2. Definitions................................................ 1
3. Eligibility................................................ 3
4. Offering Periods........................................... 3
5. Participation.............................................. 3
6. Payroll Deductions......................................... 4
7. Grant of Options........................................... 5
8. Exercise of Option......................................... 5
9. Delivery of Shares; Participant Accounts................... 5
10. Withdrawal of Payroll Deductions or Shares; Termination
of Employment.............................................. 6
11. Interest................................................... 7
12. Stock...................................................... 7
13. Administration............................................. 7
14. Designation of Beneficiary................................. 8
15. Transferability............................................ 8
16. Use of Funds............................................... 8
17. Reports.................................................... 8
18. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.......................... 8
19. Amendment or Termination................................... 9
20. Notices....................................................10
21. Conditions Upon Issuance of Shares.........................10
22. Plan Effective Date and Stockholder Approval...............10
CVS CORPORATION
1999 Employee Stock Purchase Plan
1. Purpose. The purpose of this 1999 Employee Stock Purchase Plan (the
"Plan") is to provide employees of CVS Corporation ( the "Company") and its
Designated Subsidiaries with an opportunity to purchase Stock of the Company
through accumulated payroll deductions, enabling such persons to acquire or
increase a proprietary interest in the Company in order to strengthen the
mutuality of interests between such persons and the Company's stockholders, and
to provide a benefit that will assist the Company in competing to attract and
retain employees of high quality. It is the intention of the Company that the
Plan qualify as an "employee stock purchase plan" under Section 423 of the Code.
Accordingly, the provisions of the Plan shall be construed in a manner
consistent with the requirements of that Section of the Code.
2. Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms as defined in Section 1
hereof:
(a) "Account" means the account maintained on behalf of the
participant by the Custodian for the purpose of investing in Stock and
engaging in other transactions permitted under the Plan.
(b) "Administrator" means the person or persons designated to
administer the Plan under Section 13(a).
(c) "Board" means the Company's Board of Directors.
(d) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, including regulations thereunder and successor provisions
and regulations thereto.
(e) "Committee" means a committee of two or more directors designated
by the Board to administer the Plan.
(f) "Compensation" means all gross earnings and commissions,
including payments for overtime, shift premium, incentive compensation,
incentive payments, bonuses and other compensation, but excluding
severance.
(g) "Custodian" means a custodian or any successor thereto as
appointed by the Board from time to time.
(h) "Designated Subsidiaries" means the Subsidiaries which have been
designated by the Board from time to time in its sole discretion as
eligible to have their Employees participate in the Plan.
(i) "Employee" means any individual who has been employed by the
Company or a Designated Subsidiary for at least one year and whose
customary employment with the Company or a Designated Subsidiary is more
than 20 hours per week and more than five months per year. To determine
whether an employee has achieved one year of service, the following shall
apply: (i) while an individual is on sick leave or other approved leave of
absence, the employment relationship shall be treated as continuing
intact, provided that if the period of leave exceeds 90 days and the
individual's right to reemployment is not guaranteed either by statute or
contract, the employment relationship shall be deemed to have terminated
on the 91(st) day of such leave; and (ii) if an individual is terminated
or takes an unauthorized leave of absence and is subsequently reemployed
with the Company or a Designated Subsidiary within one year of the date of
such termination or unauthorized leave, such individual shall be credited
with all service time accrued through the last day the individual was
employed prior to such termination or unauthorized leave of absence.
(j) "Enrollment Date" means (i) for any Employee who has never been
terminated or taken an unauthorized leave of absence from the Company or a
Designated Subsidiary, the first day of the next regularly scheduled
payroll period for the Company or a Designated Subsidiary, as applicable;
and (ii) for any Employee who has either previously been terminated by, or
taken an unauthorized leave of absence from, the Company or a Designated
Subsidiary, the first day of the next Offering Period.
(k) "Exercise Date" means the last day of each Offering Period.
(l) "Fair Market Value" means the fair market value of a share of
Stock as determined by the Committee or under procedures established by
the Committee. Unless otherwise determined by the Committee, the Fair
Market Value of Stock as of any given date shall be the average of the
highest and lowest sales prices of a share of Stock reported on a
consolidated basis for securities listed on the New York Stock Exchange
for trades on the date as of which such value is being determined or, if
that day is not a Trading Day, then on the latest previous Trading Day.
(m) "Offering Period" means the approximately one-year period
commencing on the first Trading Day on or after January 1 and terminating
on the last Trading Day in the following December; provided, however, that
the initial offering period under the Plan shall commence on July 1, 1999
(or as soon as practicable thereafter) and terminate on December 31, 1999.
The beginning and ending dates and duration of Offering Periods may be
changed pursuant to Section 4 of the Plan.
(n) "Purchase Price" means an amount equal to 85% of the Fair Market
Value of a share of Stock on the Enrollment Date or 85% of the Fair Market
Value of a share of Stock on the Exercise Date, whichever is lower.
(o) "Reserves" means the number of shares of Stock covered by all
options under the Plan which have not yet been exercised and the number of
shares of Stock which have been authorized for issuance under the Plan but
which have not yet become subject to options.
(p) "Stock" means the Company's Common Stock, and such other
securities as may be substituted (or resubstituted) for Stock pursuant to
Section 18 hereof.
(q) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns
stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
(r) "Trading Day" means a day on which the New York Stock Exchange is
open for trading.
3. Eligibility.
(a) All Employees (as determined in accordance with Section 2(i)
hereof) of the Company or a Designated Subsidiary on a given Enrollment
Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose
Stock would be attributed to such Employee pursuant to Section 424(d) of
the Code) would own capital stock and/or hold outstanding options to
purchase such stock possessing 5% or more of the total combined voting
power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase
stock under all employee stock purchase plans of the Company and its
Subsidiaries accrue at a rate which exceeds $25,000 worth of stock
(determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at
any time.
(c) All participants in the Plan shall have equal rights and
privileges (subject to the terms of the Plan) with respect to options
outstanding during any given Offering Period.
4. Offering Periods. The Plan shall be implemented by consecutive Offering
Periods with a new Offering Period commencing on the first Trading Day on or
after January 1 of each year following the initial Offering Period, or on such
other date as the Committee shall determine, and continuing thereafter until
terminated in accordance with Section 19 hereof. The Committee shall have the
power to change the beginning date, ending date, and duration of Offering
Periods with respect to future offerings without stockholder approval if such
change is announced at least five days prior to the scheduled beginning of the
first Offering Period to be affected thereafter, provided that Offering Periods
will in all cases comply with applicable limitations under Section 423(b)(7) of
the Code.
5. Participation.
(a) Any person who will be an eligible Employee on a given Enrollment
Date may become a participant in the Plan by completing a subscription
agreement authorizing payroll deductions and filing it with the
Administrator at least 45 days prior to such Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless
sooner terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each
pay day during the Offering Period in an amount from 1% to 15% of the
Compensation which he or she receives for each pay period during the
Offering Period.
(b) All payroll deductions made for a participant shall be credited
to his or her Account under the Plan. Payroll deductions shall be withheld
in whole percentages only, unless otherwise determined by the Committee. A
participant may not make any additional payments into such Account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may decrease the rate of his or
her payroll deductions during the Offering Period, by completing and
filing with the Administrator a new subscription agreement authorizing a
change in payroll deduction rate. Unless otherwise authorized by the
Committee, a participant may not change his or her payroll deduction rate
more than once during any Offering Period. The change in rate shall be
effective with the first payroll period following 30 business days after
the Administrator's receipt of the new subscription agreement unless the
Company elects to process a given change in participation more quickly. A
participant's subscription agreement shall remain in effect for successive
Offering Periods unless terminated as provided in Section 10 hereof.
(d) The foregoing notwithstanding, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be terminated at such time during any
Offering Period which is scheduled to end during the current calendar year
(the "Current Offering Period") that the aggregate of all payroll
deductions accumulated with respect to the Current Offering Period equal
$21,250 (or such other limit as may apply under Code Section 423(b)(8)).
Payroll deductions shall recommence at the rate provided in such
participant's subscription agreement (as previously on file or as changed
prior to the recommencement date in accordance with Section 6(c)) at the
beginning of the next Offering Period which is scheduled to end in the
following calendar year, unless terminated by the participant as provided
in Section 10 hereof.
(e) The Company or any Designated Subsidiary is authorized to
withhold from any payment to be made to a participant, including any
payroll and other payments not related to the Plan, amounts of withholding
and other taxes due in connection with any transaction under the Plan,
including any disposition of shares acquired under the Plan, and a
participant's enrollment in the Plan will be deemed to constitute his or
her consent to such withholding. At the time of a participant's exercise
of an option or disposition of shares acquired under the Plan, the Company
may require the participant to make other arrangements to meet tax
withholding obligations as a condition to exercise of rights or
distribution of shares or cash from the participant's Account. In
addition, a Participant may be required to advise the Company of sales and
other dispositions of Stock acquired under the Plan in order to permit the
Company to comply with tax laws and to claim any tax deductions to which
the Company may be entitled with respect to the Plan.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period, at the
applicable Purchase Price, up to a number of shares of Stock determined by
dividing such Employee's payroll deductions accumulated prior to such Exercise
Date and retained in the Participant's Account as of the Exercise Date by the
applicable Purchase Price; provided that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option
shall occur as provided in Section 8 hereof, unless the participant has
withdrawn pursuant to Section 10 hereof. To the extent not exercised, the option
shall expire on the last day of the Offering Period.
8. Exercise of Option. Participant's option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. Shares purchased shall include fractional shares calculated to at least
three decimal places, unless otherwise determined by the Committee. If
fractional shares are not to be purchased for a participant's Account, any
payroll deductions accumulated in a participant's account not sufficient to
purchase a full share shall be retained in the participant's account for the
subsequent Offering Period, subject to earlier withdrawal by the participant as
provided in Section 10 hereof. During a participant's lifetime, a participant's
option to purchase shares hereunder is exercisable only by him or her.
9. Delivery of Shares; Participant Accounts.
(a) At or as promptly as practicable after the Exercise Date for an
Offering Period, the Company will deliver the shares of Stock purchased to
the Custodian for deposit into the participant's Account.
(b) Cash dividends on any Stock credited to a participant's Account
will be automatically reinvested in additional shares of Stock; such
amounts will not be available in the form of cash to participants. All
cash dividends paid on Stock credited to participants' Accounts will be
paid over by the Company to the Custodian at the dividend payment date.
The Custodian will aggregate all purchases of Stock in connection with the
Plan for a given dividend payment date. Purchases of Stock for purposes of
dividend reinvestment will be made as promptly as practicable (but not
more than 30 days) after a dividend payment date. The Custodian will make
such purchases, as directed by the Committee, either (i) in transactions
on any securities exchange upon which Stock is traded, otherwise in the
over-the-counter market, or in negotiated transactions, or (ii) directly
from the Company at 100% of the Fair Market Value of a share of Stock on
the dividend payment date. Any shares of Stock distributed as a dividend
or distribution in respect of shares of Stock or in connection with a
split of the Stock credited to a participant's Account will be credited to
such Account. In the event of any other non-cash dividend or distribution
in respect of Stock credited to a participant's Account, the Custodian
will, if reasonably practicable and at the direction of the Committee,
sell any property received in such dividend or distribution as promptly as
practicable and use the proceeds to purchase additional shares of Common
Stock in the same manner as cash paid over to the Custodian for purposes
of dividend reinvestment.
(c) Each participant will be entitled to vote the number of shares of
Stock credited to his or her Account (including any fractional shares
credited to such Account) on any matter as to which the approval of the
Company's stockholders is sought. If a participant does not vote or grant
a valid proxy with respect to shares credited to his or her Account, such
shares will be voted by the Custodian in accordance with any stock
exchange or other rules governing the Custodian in the voting of shares
held for customer accounts. Similar procedures will apply in the case of
any consent solicitation of Company stockholders.
10. Withdrawal of Payroll Deductions or Shares; Termination of Employment.
(a) If a participant decreases his or her payroll deduction rate to
zero during an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant
delivers to the Administrator a new subscription agreement.
(b) Upon a participant's ceasing to be an Employee for any reason
(including upon the participant's death), he or she shall be deemed to
have elected to withdraw from the Plan and the payroll deductions credited
to such participant's Account during the Offering Period but not yet used
to exercise the option shall be returned to such participant or, in the
case of his or her death, to the person or persons entitled thereto under
Section 14 hereof, and such participant's option shall be automatically
terminated.
(c) Following the completion of two years from the first day of an
Offering Period, a participant may elect to withdraw shares of Stock
acquired during such Offering Period from his or her Account in
certificated form or to transfer such shares from his or her Account to an
account of the participant maintained with a broker-dealer or financial
institution. During the first two years from the first day of the Offering
Period, all sales and transfers shall only be effectuated by the Custodian
on the participant's behalf. If a participant elects to withdraw shares,
one or more certificates for whole shares shall be issued in the name of,
and delivered to, the participant, with such participant receiving cash in
lieu of fractional shares based on the Fair Market Value of a share of
Stock on the date of withdrawal. If shares of Stock are transferred from a
participant's Account to a broker-dealer or financial institution that
maintains an account for the participant, only whole shares shall be
transferred and cash in lieu of any fractional share shall be paid to such
participant based on the Fair Market Value of a share of Stock on the date
of transfer. A Participant seeking to withdraw or transfer shares of Stock
must give instructions to the Custodian in such manner and form as may be
prescribed by the Committee and the Custodian, which instructions will be
acted upon as promptly as practicable. Withdrawals and transfers will be
subject to any fees imposed in accordance with Section 10(e) hereof.
(d) Upon termination of employment of a participant for any reason,
the Custodian will continue to maintain the participant's Account until
the earlier of such time as the participant withdraws or transfers all
Stock in the Account or two years after the participant ceases to be
employed by the Company and its Subsidiaries. At the expiration of such
two-year period, the assets in Participant's account shall be withdrawn or
transferred as elected by the Participant or, in the absence of such
election, as determined by the Committee.
(e) Costs and expenses incurred in the administration of the Plan and
maintenance of Accounts will be paid by the Company, including annual fees
of the Custodian and any brokerage fees and commissions for the purchase
of Stock upon reinvestment of dividends and distributions. The foregoing
notwithstanding, the Custodian may impose or pass through a reasonable fee
for the withdrawal of Stock in the form of stock certificates (as
permitted under Section 10(c)), and reasonable fees for other services
unrelated to the purchase of Stock under the Plan, to the extent approved
in writing by the Company and communicated to participants. In no
circumstance shall the Company pay any brokerage fees and commissions for
the sale of Stock acquired under the Plan by a participant.
11. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan
12. Stock.
(a) The maximum number of shares of Stock which shall be made
available for sale under the Plan shall be 7.4 million shares, subject to
adjustment as provided in Section 18 hereof. If, on a given Exercise Date,
the number of shares with respect to which options are to be exercised
exceeds the number of shares then available under the Plan, the Company
shall make a pro rata allocation of the shares remaining available for
purchase in as uniform a manner as shall be practicable and as it shall
determine to be equitable. Any shares of Stock delivered by the Company
under the Plan may consist, in whole or in part, of authorized and
unissued shares or shares acquired by the Company in the open market.
Shares acquired in the open market through dividend reinvestment will not
count against the Reserves.
(b) The participant shall have no interest or voting right in shares
purchasable upon exercise of his or her option until such option has been
exercised.
13. Administration.
(a) The Plan shall be administered by the Committee except to the
extent the Board elects to administer the Plan, in which case references
herein to the "Committee" shall be deemed to include references to the
"Board." The Committee shall have full and final authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. The Committee may, in
its discretion, delegate authority to the Administrator. Every finding,
decision and determination made by the Committee or Administrator shall,
to the full extent permitted by law, be final and binding upon all parties
(except for any reserved right of the Committee to review a finding,
decision or determination of the Administrator). The Committee,
Administrator, and each member thereof shall be entitled to, in good
faith, rely or act upon any report or other information furnished to him
or her by any executive officer, other officer or employee of the Company
or any Designated Subsidiary, the Company's independent auditors,
consultants or any other agents assisting in the administration of the
Plan. Members of the Committee or Administrator and any officer or
employee of the Company or any Designated Subsidiary acting at the
direction or on behalf of the Committee shall not be personally liable for
any action or determination taken or made in good faith with respect to
the Plan, and shall, to the extent permitted by law, be fully indemnified
and protected by the Company with respect to any such action or
determination.
(b) The Custodian will act as custodian under the Plan, and will
perform such duties as are set forth in the Plan and in any agreement
between the Company and the Custodian. The Custodian will establish and
maintain, as agent for each Participant, an Account and any subaccounts as
may be necessary or desirable for the administration of the Plan.
14. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's Account
under the Plan in the event of (i) such participant's death subsequent to
an Exercise Date on which the option is exercised but prior to a
distribution to such participant of shares or cash then held in the
participant's Account or (ii) such participant's death prior to exercise
of the option. If a participant is married and the designated beneficiary
is not the spouse, spousal consent shall be required for such designation
to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant
and in the absence of a beneficiary validly designated under the Plan who
is living at the time of such participant's death, any shares or cash
otherwise deliverable under Section 14(a) shall be delivered to the
participant's estate.
15. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect.
16. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
17. Reports. An individual Account shall be maintained by the Custodian
for each participant in the Plan. Statements of Account shall be given to each
participant at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased, any
remaining cash balance, and other information deemed relevant by the Committee.
18. Adjustments Upon Changes in Capitalization, dissolution, Liquidation,
Merger or Asset Sale.
(a) Changes in Capitalization. The Committee shall proportionately
adjust the Reserves and the price per share and the number of shares of
Stock covered by each option under the Plan which has not yet been
exercised for any increase or decrease in the number of issued shares of
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Stock, or other extraordinary
corporate event which affects the Stock in order to prevent dilution or
enlargement of the rights of participants. The determination of the
Committee with respect to any such adjustment shall be final, binding and
conclusive.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period shall
terminate immediately prior to the consummation of such proposed action,
unless otherwise provided by the Committee.
(c) Asset Sale or Merger. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the Committee shall shorten the
Offering Period then in progress by setting a new Exercise Date (the "New
Exercise Date"). The New Exercise Date shall be before the date of the
Company's proposed asset sale or merger. The Committee shall notify each
participant in writing, at least ten business days prior to the New
Exercise Date, that the Exercise Date for the participant's option has
been changed to the New Exercise Date and that the participant's option
shall be exercised automatically on the New Exercise Date, unless prior to
such date the participant has withdrawn from the Offering Period as
provided in Section 10 hereof.
19. Amendment or Termination.
(a) The Board may at any time and for any reason terminate or amend
the Plan. Except as provided in Section 18 hereof, no such termination can
affect options previously granted, provided that an Offering Period may be
terminated by the Board of Directors by shortening the Offering Period and
accelerating the Exercise Date to a date not prior to the date of such
Board action if the Board determines that termination of the Plan is in
the best interests of the Company and its stockholders. Except as provided
in Section 18 and this Section 19, no amendment may make any change in any
option theretofore granted which materially adversely affects the rights
of any participant, and any amendment will be subject to the approval of
the Company's stockholders not later than one year after Board approval of
such amendment if such stockholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which the Stock may then be listed or quoted, or if
such stockholder approval is necessary in order for the Plan to continue
to meet the requirements of Section 423 of the Code, and the Board may
otherwise, in its discretion, determine to submit any amendment to
stockholders for approval.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected,"
the Committee shall be entitled to change the Offering Periods, limit the
frequency and/or number of changes in the amount withheld during an
Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding
in excess of the amount designated by a participant in order to adjust for
delays or mistakes in the Company's processing of properly completed
withholding elections, establish reasonable waiting and adjustment periods
and/or accounting and crediting procedures to ensure that amounts applied
toward the purchase of Stock for each participant properly correspond with
amounts withheld from the participant's Compensation, and establish such
other limitations or procedures as the Committee determines in its sole
discretion are advisable and consistent with the Plan.
20. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. The Company shall not be obligated
to issue shares with respect to an option unless the exercise of such option and
the issuance and delivery of such shares pursuant thereto shall comply with all
applicable provisions of law, domestic or foreign, including, without
limitation, the Securities Act of 1933, as amended, the Securities Exchange Act
of 1934, as amended, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange or automated quotation system upon which the
shares may then be listed or quoted, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
22. Plan Effective Date and Stockholder Approval. The Plan has been
adopted by the Board on November 17, 1998, but shall become effective upon
approval by the Company's stockholders by a vote sufficient to meet the
requirements of Section 423(b)(2) of the Code within 12 months after the date
the Plan was adopted and prior to the first Exercise Date. In the event
stockholders fail to so approve the Plan, all options granted under the Plan
shall be canceled, all payroll deductions shall be refunded, and the Plan shall
be terminated.
