CVS 2002 Annual Report Download - page 34

Employee Stock Ownership Plan
The Company sponsors a defined contribution Employee Stock
Ownership Plan (the “ESOP”) that covers full-time employees with
at least one year of service.
In 1989, the ESOP Trust issued and sold $357.5 million of 20-
year, 8.52% notes due December 31, 2008 (the “ESOP Notes”).
The proceeds from the ESOP Notes were used to purchase 6.7
million shares of Series One ESOP Convertible Preference Stock
(the “ESOP Preference Stock”) from the Company. Since the ESOP
Notes are guaranteed by the Company, the outstanding balance is
reflected as long-term debt and a corresponding guaranteed ESOP
obligation is reflected in shareholders’ equity in the accompanying
consolidated balance sheets.
Each share of ESOP Preference Stock has a guaranteed minimum
liquidation value of $53.45, is convertible into 2.314 shares of
common stock and is entitled to receive an annual dividend of
$3.90 per share. The ESOP Trust uses the dividends received and
contributions from the Company to repay the ESOP Notes. As the
ESOP Notes are repaid, ESOP Preference Stock is allocated to
participants based on: (i) the ratio of each year’s debt service
payment to total current and future debt service payments
multiplied by (ii) the number of unallocated shares of ESOP
Preference Stock in the plan. As of December 28, 2002, 4.7
million shares of ESOP Preference Stock were outstanding, of
which 2.5 million shares were allocated to participants and the
remaining 2.2 million shares were held in the ESOP Trust for future
allocations.
Annual ESOP expense recognized is equal to (i) the interest
incurred on the ESOP Notes plus (ii) the higher of (a) the
principal repayments or (b) the cost of the shares allocated, less
(iii) the dividends paid. Similarly, the guaranteed ESOP obligation
is reduced by the higher of (i) the principal payments or (ii) the
cost of shares allocated.
Following is a summary of the ESOP activity for the respective
years:
Pension Plans and Other
Postretirement Benefits
The Company sponsors a noncontributory defined benefit pension
plan that covers certain full-time employees of Revco, D.S., Inc.
who were not covered by collective bargaining agreements. On
September 20, 1997, the Company suspended future benefit
accruals under this plan. Benefits paid to retirees are based upon
age at retirement, years of credited service and average
compensation during the five year period ending September 20,
1997. The plan is funded based on actuarial calculations and
applicable federal regulations.
Pursuant to various labor agreements, the Company is also
required to make contributions to certain union-administered
pension and health and welfare plans that totaled $12.1 million in
2002, $11.1 million in 2001and $9.3 million in 2000. The
Company also has nonqualified supplemental executive retirement
plans in place for certain key employees for whom it has purchased
cost recovery variable life insurance.
Defined Contribution Plans
The Company sponsors a voluntary 401(k) Savings Plan that
covers substantially all employees who meet plan eligibility
requirements. The Company makes matching contributions
consistent with the provisions of the plan. At the participant’s
option, account balances, including the Company’s matching
contribution, can be moved without restriction among various
investment options, including the Company’s common stock. The
Company also maintains a nonqualified, unfunded Deferred
Compensation Plan for certain key employees. This plan provides
participants the opportunity to defer portions of their
compensation and receive matching contributions that they would
have otherwise received under the 401(k) Savings Plan if not for
certain restrictions and limitations under the Internal Revenue
Code. The Company’s contributions under the above defined
contribution plans totaled $29.1 million in 2002, $26.7 million in
2001and $23.0 million in 2000. The Company also sponsors an
Employee Stock Ownership Plan. See Note 5 for further
information about this plan.
Other Postretirement Benefits
The Company provides postretirement healthcare and life
insurance benefits to certain retirees who meet eligibility
requirements. The Company’s funding policy is generally to pay
covered expenses as they are incurred. For retiree medical plan
accounting, the Company reviews external data and its own
historical trends for healthcare costs to determine the healthcare
cost trend rates.
Notes to Consolidated Financial Statements
32 CVS Corporation
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In millions 2002 2001 2000
ESOP expense recognized $26.0 $22.1 $ 18.8
Dividends paid 18 . 3 19 . 1 19 . 5
Cash contributions 26.0 22.1 18.8
Interest payments 18 . 7 20.5 21.9
ESOP shares allocated 0.4 0.4 0.3
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