UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
FOR THE YEAR ENDED DECEMBER 31, 2002
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 15 (d) OF THE |
| SECURITIES AND EXCHANGE ACT OF 1934 |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 15 (d) OF THE |
| SECURITIES AND EXCHANGE ACT OF 1934 |
Commission File Number: 001-01011
| A. | Full title of the plan and the address of the plan, if different from that of the issuer named below: |
THE 401(K) PLAN AND THE EMPLOYEE STOCK OWNERSHIP PLAN OF CVS
CORPORATION AND AFFILIATED COMPANIES
| B. | Name of the issuer of the securities held pursuant to the plan and the address of its principal executive office: |
CVS CORPORATION
ONE CVS DRIVE
WOONSOCKET, RI 02895
REQUIRED INFORMATION
THE 401(K) PLAN AND THE EMPLOYEE STOCK OWNERSHIP PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES (THE PLAN) IS SUBJECT TO THE REQUIREMENTS OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA). ATTACHED HERETO IS A COPY OF THE MOST RECENT FINANCIAL STATEMENTS AND SCHEDULES OF THE PLAN PREPARED IN ACCORDANCE WITH THE FINANCIAL REPORTING REQUIREMENTS OF ERISA.
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP PLAN
OF CVS CORPORATION AND AFFILIATED COMPANIES
FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 2002 AND 2001
| Page | ||
| 2 | ||
| FINANCIAL STATEMENTS: |
||
| 3 | ||
| Statements of Changes in Net Assets Available for Plan Benefits |
4 | |
| 5 | ||
| SUPPLEMENTARY SCHEDULE: |
||
| 18 | ||
| 21 | ||
| 21 | ||
| 22 | ||
| Exhibit 99.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
23 | |
| Exhibit 99.2 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
24 | |
1
The Administrative Committee of The 401(k) Plan and
the Employee Stock Ownership Plan of
CVS Corporation and Affiliated Companies:
We have audited the accompanying statements of net assets available for plan benefits of The 401(k) Plan and the Employee Stock Ownership Plan of CVS Corporation and Affiliated Companies (the Plan) as of December 31, 2002 and 2001, and the related statements of changes in net assets available for plan benefits for the years then ended. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for plan benefits of the Plan as of December 31, 2002 and 2001, and the changes in net assets available for plan benefits for the years then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in note 1 to the financial statements, effective April 9, 2002, The 401(k) Profit Sharing Plan of CVS Corporation was merged into the CVS Corporation and Subsidiaries Employee Stock Ownership Plan, and the name of the CVS Corporation and Subsidiaries Employee Stock Ownership Plan was changed to The 401(k) Plan and the Employee Stock Ownership Plan of CVS Corporation and Affiliated Companies.
Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of assets held at end of year is presented for the purpose of additional analysis and is not a required part of the basic financial statements but is supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
| /s/ KPMG LLP | ||
| KPMG LLP |
June 2, 2003
Providence, Rhode Island
2
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Statements of Net Assets Available for Plan Benefits
December 31, 2002 and 2001
| 2002 |
2001 | ||||
| Assets: |
|||||
| Investments (note 7): |
|||||
| Guaranteed insurance contracts (note 2(b)) |
$ | 230,459,757 | — | ||
| Equities |
506,499,003 | 334,769,115 | |||
| Investments in pooled funds |
435,517,598 | — | |||
| Short term investments |
2,685,037 | 2,563,412 | |||
| Loans to participants (note 3) |
37,727,331 | — | |||
| 1,212,888,726 | 337,332,527 | ||||
| Receivables: |
|||||
| Interest (note 2(g)) |
1,508,186 | 3,967 | |||
| Dividends (note 2(g)) |
1,582,046 | — | |||
| Employer contributions (note 1(d)) |
7,075,868 | — | |||
| Employee contributions (note 1(d)) |
7,814,349 | — | |||
| 17,980,449 | 3,967 | ||||
| Total assets |
1,230,869,175 | 337,336,494 | |||
| Liabilities: |
|||||
| Notes payable (note 1(e)) |
194,400,000 | 219,900,000 | |||
| Accrued expenses and other liabilities |
3,725,359 | 94,168 | |||
| 198,125,359 | 219,994,168 | ||||
| Net assets available for plan benefits |
$ | 1,032,743,816 | 117,342,326 | ||
See accompanying notes to financial statements.
3
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Statements of Changes in Net Assets Available for Plan Benefits
Years ended December 31, 2002 and 2001
| 2002 |
2001 |
||||||
| Investment activity: |
|||||||
| Interest income (note 2(g)) |
$ | 10,508,821 | 98,620 | ||||
| Dividend income (note 2(g)) |
30,198,617 | 19,061,137 | |||||
| Realized (losses)/gains (note 4) |
(23,443,535 | ) | 5,866,809 | ||||
| Unrealized losses (note 4) |
(186,248,269 | ) | (353,829,292 | ) | |||
| Total investment activity |
(168,984,366 | ) | (328,802,726 | ) | |||
| Contributions: |
|||||||
| Employer contributions (note 1(d)) |
46,092,160 | 22,971,471 | |||||
| Employee contributions (note 1(d)) |
80,201,208 | — | |||||
| Total contributions |
126,293,368 | 22,971,471 | |||||
| Transfer in from 401(k) Plan |
1,050,013,103 | — | |||||
| Deductions: |
|||||||
| Benefits paid to participants (notes 1(g) and 2(c)) |
68,066,541 | 10,592,469 | |||||
| Net loans issued (note 3) |
903,328 | — | |||||
| Interest expense |
18,735,480 | 20,499,120 | |||||
| Administrative expenses |
3,986,706 | 404,212 | |||||
| Other deductions |
228,560 | 288,510 | |||||
| Total deductions |
91,920,615 | 31,784,311 | |||||
| Net increase (decrease) for the year |
915,401,490 | (337,615,566 | ) | ||||
| Net assets beginning of the year |
117,342,326 | 454,957,892 | |||||
| Net assets end of the year |
$ | 1,032,743,816 | 117,342,326 | ||||
See accompanying notes to financial statements.
4
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
December 31, 2002 and 2001
| (1) | Plan Description |
The following description of The 401(k) Plan and the Employee Stock Ownership Plan of CVS Corporation and Affiliated Companies (the Plan) provides only general information. Participants should refer to the Plan document for a more complete description of the Plan’s provisions.
| (a) | Background |
The Plan is a defined contribution plan subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), as amended. The general administration of the Plan and the responsibility for carrying out the provisions of the Plan are maintained by a committee (the Plan Committee) of not less than three persons appointed by the board of directors of CVS Corporation (“CVS” or “the Company”), the sponsor of the Plan. In accordance with the provisions of the Plan, the Plan Committee has appointed an administrator (the Administrator), and a trustee (the Trustee). The Administrator maintains participant account records and instructs the Trustee to execute transactions such as benefit payments to participants. The Trustee holds the assets of the Plan and executes transactions at the direction of the Plan Committee and the Administrator.
Effective April 9, 2002, the 401(k) Profit Sharing Plan of CVS Corporation (the 401(k) Plan) was merged into this Plan, and the name of this plan was changed from CVS Corporation and Subsidiaries Employee Stock Ownership Plan (the ESOP) to The 401(k) Plan and the Employee Stock Ownership Plan of CVS Corporation and Affiliated Companies. All assets and liabilities under the 401(k) Plan as of April 9, 2002 were transferred to the Plan and, as of that date, benefits for the participants and beneficiaries of The 401(k) Plan have been paid from the Plan. Changes in net assets available for plan benefits shown in these financials include the changes related to the ESOP plan for the entire year, and changes related to The 401(k) plan from April 10, 2002 through December 31, 2002. See note 2(a) for further breakdown between ESOP and 401(k) assets.
The ESOP Plan and the 401(k) Plan were established as of January 1, 1989.
| (b) | Eligibility |
Employees are eligible to participate in the Plan upon attainment of age 21 and on the earliest of:
| • | The first payroll period of the first month after completion of 90 continuous days of service as a full-time employee, or |
| • | Completion of 12 months of service beginning on the employee’s enrollment date with at least 1,000 hours worked, or |
| • | Completion of at least 1,000 hours of service in the course of one calendar year. |
“Employees” referred to above are defined as regular employees of the Company other than:
| • | A nonresident alien receiving no U.S. earned income from the Company, |
| • | An individual covered under a collective bargaining agreement (unless the agreement provides for membership), |
| • | A leased employee (as defined in the Internal Revenue Code), |
5
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Notes to Financial Statements
December 31, 2002 and 2001
| • | A temporary employee (as determined by the Company) or |
| • | An independent contractor or consultant (as defined by the Company). |
| (c) | Leveraged ESOP Transaction |
On June 23, 1989, the ESOP Plan borrowed $357,500,000 from qualified lenders at an interest rate of 8.60% for a 20-year term. The loan to the ESOP Plan is guaranteed by CVS. The ESOP Plan used the proceeds of the loan to purchase 6,688,494 shares of CVS Corporation Series One ESOP Convertible Preference Stock (ESOP Preference Stock). Each share of ESOP Preference Stock is convertible into shares of CVS common stock at the election of the Plan’s Trustee. The conversion rate is 2.314 shares of CVS common stock for each share of ESOP Preference Stock. Shares of ESOP Preference Stock converted into common stock and retired amounted to 144,785 and 118,956 shares in 2002 and 2001, respectively. The annual dividend on the ESOP Preference Stock is $3.90 per share.
In accordance with the terms of the loan agreement, the interest rate on the loan was adjusted as of January 1, 1995 in connection with the increase in the Federal income tax rate to 35%. The adjusted interest rate is 8.52%.
As of December 31, 2002, annual maturities of notes payable are as follows:
| Amount | |||
| Year ending December 31: |
|||
| 2003 |
$ | 31,200,000 | |
| 2004 |
22,300,000 | ||
| 2005 |
26,900,000 | ||
| 2006 |
31,900,000 | ||
| 2007 |
37,600,000 | ||
| Thereafter |
44,500,000 | ||
| $ | 194,400,000 | ||
As the Plan makes principal payments, a specified percentage of ESOP Preference Stock is allocated to participants’ accounts. The borrowing is collateralized by the unallocated shares of ESOP Preference Stock. The lenders have no rights against the shares once they are allocated to participants’ accounts.
| (d) | Contributions |
If the amount of a scheduled debt payment due by the Plan on its notes payable outstanding is in excess of the cash available to the Plan from dividends, CVS contributes to the Plan the amount of the difference. Prior to April 9, 2002, no participant was required, or permitted, to make any contributions under the Plan.
6
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Notes to Financial Statements
December 31, 2002 and 2001
Effective April 9, 2002 (upon merger with the 401(k) Plan), participants may elect to have CVS contribute to their accounts from 1% to 15 % of the compensation that would otherwise be due them, in multiples of 1%, pursuant to a salary reduction agreement. Each participant’s total elective deferrals for any calendar year may not exceed 15% of annual compensation or the maximum allowed by the Internal Revenue Code (the Code), whichever is less, as specified in the Plan document. The maximum elective deferrals allowed by the Code were $11,000 for 2002 and $10,500 for 2001.
Effective April 1, 2000, the 401(k) Plan amended the employer matching contribution to 50% of the first 5% of pre-tax compensation contributed. In conjunction with this amendment, the ESOP was amended so that an additional match of 50% of the first 5% of pre-tax compensation is contributed to the ESOP in ESOP shares. As of April 1, 2000, overall, CVS matched 100% up to 5%, paid 50% to the employee’s 401(k) Plan account monthly, and 50% to the employee’s ESOP account at year end if the employee is actively employed at that time. The ESOP portion of the match may be diversified into other 401(k) investment elections any time after it has been made. Upon the merger of the two plans, this matching contribution agreement was not changed.
| (e) | Participant’s Account |
Each participant’s account is credited with an allocable share of the Plan’s investments, ESOP Preference Stock, and any unrealized appreciation or depreciation of those investments. The total amount of new shares to be allocated each year is calculated by multiplying the ratio of each year’s debt service payments to total current and future debt service payments by the total number of unallocated shares of ESOP Preference Stock in the Plan. Allocations to individual participant’s accounts are based on the number of shares due to each participant as described in 1(d) above.
Cash dividend payments on ESOP Preference Stock are used to make debt service payments and are not allocated to participant’s accounts. Shares of ESOP Preference Stock are allocated to a participant based upon the cash dividend amount for shares allocated to the participant’s account, divided by the greater of $53.45 (the cash liquidation value as specified in the Plan document) or the market price of CVS common stock at the time of allocation. Shortfalls in the number of shares allocated to participants and new shares to be allocated based on debt retirements are alleviated by the use of forfeited shares as described in (i) below. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s account (see (g) below).
| (f) | Vesting |
Participants become fully vested in Company contributions made to their accounts prior to January 1, 2002, upon the completion of five years of credited service. For Company contributions made after January 1, 2002, and the related earnings, participants will vest after three years.
Participants whose account balances have been transferred into the Plan from other defined contribution plans maintain at least the degree of vesting in the account they had at the time of the transfer. Notwithstanding the foregoing, participants are fully vested in, and have a nonforfeitable right to (1) their accounts upon death or disability, and (2) any elective deferrals described in note 1(d).
7
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Notes to Financial Statements
December 31, 2002 and 2001
| (g) | Payment of Benefits |
Upon termination of service by the participant, the Administrator will direct the Trustee to pay to the participant their benefit under one or more options, such as a single lump-sum, or in equal annual installments over a period not exceeding fifteen years, with interest payable at a reasonable rate as determined by the Plan Committee. The beneficiary may elect to receive their ESOP payment in shares of CVS common stock or in cash at $53.45 per ESOP share or the fair market value of a share of CVS common stock at the time of the distribution times a factor of 2.314, whichever is greater.
| (h) | Administrative Expenses |
Administrative expenses specifically attributable to the Plan, and not covered by forfeitures, were funded by the Plan for 2002 and 2001. Trustees fees were paid by the Plan for 2002 and 2001.
| (i) | Forfeitures |
On a participant’s termination date, any unvested portion of their account is forfeited. If a former participant resumes employment and eligibility in the Plan within five years of termination, any amounts previously forfeited are restored to the participant’s account, but remain subject to the vesting provisions of the Plan. Forfeitures during any plan year are applied as follows: (i) to restore amounts previously forfeited by participants but required to be reinstated upon resumption of employment; (ii) to pay administrative expenses of the Plan; or (iii) to reduce future CVS contributions. If forfeitures for any plan year are insufficient to restore the required forfeitures, CVS shall contribute the balance required for that purpose.
Approximately 35,338 and 126,524 shares of ESOP Preference Stock previously allocated to participant accounts were forfeited during 2002 and 2001, respectively, and have been applied as of December 31, 2002 and 2001. Forfeitures restored to participants in ESOP Preference Stock upon resumption of employment for 2002 and 2001 were approximately 6,241 and 5,145 shares of ESOP Preference Stock, respectively.
Cash forfeitures for 2002 were $1,019,525. Cash forfeitures restored to participants upon resumption of employment for 2002 were approximately $107,558.
| (j) | Investment Options |
Upon enrollment in the Plan or at select intervals thereafter, a participant may elect to direct contributions or investment balances within the investments listed below. The following is a brief explanation of each fund’s investment objectives:
Core Equity Fund (Vanguard Index 500 Portfolio Fund)
This fund’s objective is to replicate the total return of the Standard and Poor’s 500 Index by investing in the stocks that make up the Index. The Standard and Poor’s (S&P) 500 Index consists mainly of large companies and represents about 75% of the U.S. stock market value.
8
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Notes to Financial Statements
December 31, 2002 and 2001
Diversified Bond (PIMCO Total Return Admin Fund)
This fund is a core bond fund that seeks to outperform the Lehman Brothers Aggregate Bond Index on a consistent basis while maintaining an overall risk similar to the Index. Investments may include government and corporate debt securities, mortgage and other asset backed securities, money market instruments, and derivatives.
International Equity Fund (Templeton International Fund)
This fund’s investment objective is long-term capital growth through participation in stock markets outside the U.S. The fund invests primarily in the common stock of companies based in more developed countries, but may also include investments in developing countries.
Small Cap Growth Fund (Invesco Small Company Growth Fund)
This fund seeks long-term growth of capital and dividend income through participation in the stock market. The fund invests primarily in stocks of relatively small companies.
Global Equity (Janus Worldwide Fund)
This fund seeks long-term growth of capital by investing in a diversified portfolio of foreign and domestic companies. The fund tries to outperform the Morgan Stanley Capital International (MSCI) World Index, which measures the performance of U.S. and international stock markets.
Small Cap Value (Galaxy Small Cap Value Fund)
This fund seeks long-term growth by investing primarily in stocks of small to medium-sized companies that are believed to either offer superior earnings growth or appear to be undervalued. This fund is benchmarked by the Russell 2000 Index.
Growth and Income Fund (J & W Seligman Large Cap Value Fund)
This fund seeks long-term capital growth and dividend income through participation in the stock market. The fund invests primarily in the common stock of U.S. based, well-established medium to large size companies.
Large Cap Growth Fund (Columbus Circle Core Equity Fund)
This investment objective is long-term capital growth, through participation in the stock market. The fund invests primarily in the common stock of established large companies that are based in the U.S. and that represent industries expected to outperform the stock market as a whole.
Conservative Lifestyle Fund (various managers)
This fund is for people who will need access to their money in less than five years. Approximately 70% of the fund is invested in fixed-income or low-risk investments. The remaining 30% is invested in stock-oriented mutual funds or moderate-risk investments.
9
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Notes to Financial Statements
December 31, 2002 and 2001
Moderate Lifestyle Fund (various managers)
This fund is for less conservative investors who can keep their money invested for at least five years. Because stocks make up approximately 60% of the fund’s mix, the fund has more exposure to the fluctuations in the stock market than the Conservative fund. The remaining 40% is invested in bonds.
Aggressive Lifestyle Fund (various managers)
This fund is for those individuals who can keep their money invested for at least ten years or those who are willing to accept a greater level of risk in return for greater possible reward. Therefore, 80% of the fund is invested in stocks and the remaining 20% is invested in fixed-income securities.
CVS Corporation Common Stock Fund
This fund was established as a result of the transfer of assets from the Revco D.S., Inc. 401(k) Plan during 1997. The Plan may, at the discretion of the Plan Committee, offer a company stock fund as one of the available investment funds for employee and employer contributions. The fund holds CVS common stock. This fund seeks long-term growth and dividend income by purchasing shares of CVS common stock. Because the fund invests in only one company, it is considered a high-risk investment with potential for large rewards.
Investment Contract Fund (managed by State Street Bank & Trust Co.)
This fund seeks to preserve capital, while generating a steady rate of return higher than money market funds. The fund’s investments consist of highly rated (AA or higher) insurance company and bank investment contracts.
10
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Notes to Financial Statements
December 31, 2002 and 2001
| (2) | Summary of Significant Accounting Policies |
| (a) | Basis of Presentation |
The following table presents the breakdown of net assets available for plan benefits between the 401(k) Plan and the ESOP as of December 31, 2002. As of December 31, 2001 all assets and liabilities relate to the ESOP.
| 401(k) Plan |
ESOP |
Total | |||||||
| Assets: |
|||||||||
| Investments: |
|||||||||
| Guaranteed insurance contracts |
$ | 230,459,757 | $ | — | $ | 230,459,757 | |||
| Equities |
232,463,899 | 274,035,104 | 506,499,003 | ||||||
| Investments in pooled funds |
435,517,598 | — | 435,517,598 | ||||||
| Short term investments |
— | 2,685,037 | 2,685,037 | ||||||
| Loans to participants |
37,727,331 | — | 37,727,331 | ||||||
| 936,168,585 | 276,720,141 | 1,212,888,726 | |||||||
| Receivables |
|||||||||
| Interest |
1,503,885 | 4,301 | 1,508,186 | ||||||
| Dividends |
1,582,046 | — | 1,582,046 | ||||||
| Employer contributions |
7,075,868 | — | 7,075,868 | ||||||
| Employee contributions |
7,814,349 | — | 7,814,349 | ||||||
| 17,976,148 | 4,301 | 17,980,449 | |||||||
| Total assets |
954,144,733 | 276,724,442 | 1,230,869,175 | ||||||
| Liabilities: |
|||||||||
| Notes payable |
— | 194,400,000 | 194,400,000 | ||||||
| Accrued expenses and other liabilities |
3,722,182 | 3,177 | 3,725,359 | ||||||
| Total liabilities |
3,722,182 | 194,403,177 | 198,125,359 | ||||||
| Net assets available for plan benefits |
$ | 950,422,551 | 82,321,265 | 1,032,743,816 | |||||
11
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Notes to Financial Statements
December 31, 2002 and 2001
The following table presents the net assets available for ESOP benefits separately, on an accrual basis, according to:
| • | The accounts of employees with rights to allocated stock (Allocated), and |
| • | Stock not yet allocated to employees (Unallocated) |
| As of December 31, 2002 |
As of December 31, 2001 |
||||||||||||||||||
| Allocated |
Unallocated |
Total |
Allocated |
Unallocated |
Total |
||||||||||||||
| Assets | |||||||||||||||||||
| CVS Corporation Series One ESOP Convertible Preference Stock, at market value (2,521,926 allocated and 2,220,760 unallocated shares in 2002 and 2,285,020 allocated and 2,602,451 unallocated shares in 2001) |
$ | 145,718,319 | 128,316,785 | 274,035,104 | 156,510,181 | 178,252,274 | 334,762,455 | ||||||||||||
| CVS Corporation Common Stock, at market value (0 shares allocated in 2002, and 225 shares allocated in 2001) |
— | — | — | 6,660 | — | 6,660 | |||||||||||||
| Interest receivable |
4,300 | 1 | 4,301 | 3,911 | 56 | 3,967 | |||||||||||||
| Short term investments, at market value, and cash |
2,683,959 | 1,078 | 2,685,037 | 1,729,091 | 834,321 | 2,563,412 | |||||||||||||
| Total assets |
148,406,578 | 128,317,864 | 276,724,442 | 158,249,843 | 179,086,651 | 337,336,494 | |||||||||||||
| Liabilities | |||||||||||||||||||
| Notes payable |
— | (194,400,000 | ) | (194,400,000 | ) | — | (219,900,000 | ) | (219,900,000 | ) | |||||||||
| Other payables |
(3,177 | ) | — | (3,177 | ) | (94,168 | ) | — | (94,168 | ) | |||||||||
| Total Liabilities |
(3,177 | ) | (194,400,000 | ) | (194,403,177 | ) | (94,168 | ) | (219,900,000 | ) | (219,994,168 | ) | |||||||
| Net assets (liabilities) available for plan benefits |
$ | 148,403,401 | (66,082,136 | ) | 82,321,265 | 158,155,675 | (40,813,349 | ) | 117,342,326 | ||||||||||
12
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Notes to Financial Statements
December 31, 2002 and 2001
The following table presents the breakdown of the changes in net assets available for plan benefits between the 401(k) Plan and the ESOP for the year-ended December 31, 2002. The changes in net assets available for plan benefits for the year ended December 31, 2001 all relate to the ESOP.
| 401(k) Plan |
ESOP |
Total |
||||||||||
| Investment activity: |
||||||||||||
| Interest income |
$ | 10,439,710 | $ | 69,111 | $ | 10,508,821 | ||||||
| Dividend income |
11,702,142 | 18,496,475 | 30,198,617 | |||||||||
| Realized (losses) gains |
(27,030,773 | ) | 3,587,238 | (23,443,535 | ) | |||||||
| Unrealized losses |
(134,660,830 | ) | (51,587,439 | ) | (186,248,269 | ) | ||||||
| Total investment activity |
(139,549,751 | ) | (29,434,615 | ) | (168,984,366 | ) | ||||||
| Contributions: |
||||||||||||
| Employer contributions |
21,186,705 | 24,905,455 | 46,092,160 | |||||||||
| Employee contributions |
80,201,208 | — | 80,201,208 | |||||||||
| Total contributions |
101,387,913 | 24,905,455 | 126,293,368 | |||||||||
| Transfer of assets from 401(k) |
1,050,013,103 | — | 1,050,013,103 | |||||||||
| Deductions: |
||||||||||||
| Benefits paid to participants |
(56,847,745 | ) | (11,218,796 | ) | (68,066,541 | ) | ||||||
| Net loans issued |
(903,328 | ) | — | (903,328 | ) | |||||||
| Interest expense |
— | (18,735,480 | ) | (18,735,480 | ) | |||||||
| Administrative expenses |
(3,866,623 | ) | (120,083 | ) | (3,986,706 | ) | ||||||
| Other credits (deductions) |
188,982 | (417,542 | ) | (228,560 | ) | |||||||
| Total deductions |
(61,428,714 | ) | (30,491,901 | ) | (91,920,615 | ) | ||||||
| Net increase (decrease) for the year |
950,422,551 | (35,021,061 | ) | 915,401,490 | ||||||||
| Net assets beginning of the year |
— | 117,342,326 | 117,342,326 | |||||||||
| Net assets end of the year |
$ | 950,422,551 | $ | 82,321,265 | $ | 1,032,743,816 | ||||||
13
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Notes to Financial Statements
December 31, 2002 and 2001
The following table presents the changes in net assets available for ESOP benefits separately, on an accrual basis, according to:
| • | The accounts of employees with rights to allocated stock (Allocated), and |
| • | Stock not yet allocated to employees (Unallocated) |
| Year ended December 31, 2002 |
Year ended December 31, 2001 |
|||||||||||||||||||
| Allocated |
Unallocated |
Total |
Allocated |
Unallocated |
Total |
|||||||||||||||
| Additions (deductions) |
||||||||||||||||||||
| Allocation of CVS Corporation Series One ESOP Convertible Preference Stock, at liquidation value (381,691 shares and 355,492 shares in 2002 and 2001, respectively) |
$ | 20,401,393 | (20,401,393 | ) | — | $ | 19,001,027 | (19,001,027 | ) | — | ||||||||||
| Interest income |
68,923 | 188 | 69,111 | 98,362 | 258 | 98,620 | ||||||||||||||
| Dividend income |
— | 18,496,475 | 18,496,475 | — | 19,061,137 | 19,061,137 | ||||||||||||||
| Employer contribution |
(62 | ) | 24,905,517 | 24,905,455 | — | 22,971,471 | 22,971,471 | |||||||||||||
| Realized gain |
3,587,238 | — | 3,587,238 | 5,866,809 | — | 5,866,809 | ||||||||||||||
| Unrealized loss |
(22,053,345 | ) | (29,534,094 | ) | (51,587,439 | ) | (140,829,642 | ) | (212,999,650 | ) | (353,829,292 | ) | ||||||||
| Total additions (deductions) |
2,004,147 | (6,533,307 | ) | (4,529,160 | ) | (115,863,444 | ) | (189,967,811 | ) | (305,831,255 | ) | |||||||||
| Deductions: |
||||||||||||||||||||
| Benefits paid to participants |
(11,218,796 | ) | — | (11,218,796 | ) | (10,592,469 | ) | — | (10,592,469 | ) | ||||||||||
| Interest expense |
— | (18,735,480 | ) | (18,735,480 | ) | — | (20,499,120 | ) | (20,499,120 | ) | ||||||||||
| Administrative expenses |
(120,083 | ) | — | (120,083 | ) | (404,212 | ) | — | (404,212 | ) | ||||||||||
| Miscellaneous |
(417,542 | ) | — | (417,542 | ) | (288,510 | ) | — | (288,510 | ) | ||||||||||
| Total deductions |
(11,756,421 | ) | (18,735,480 | ) | (30,491,901 | ) | (11,285,191 | ) | (20,499,120 | ) | (31,784,311 | ) | ||||||||
| Net decrease for year |
(9,752,274 | ) | (25,268,787 | ) | (35,021,061 | ) | (127,148,635 | ) | (210,466,931 | ) | (337,615,566 | ) | ||||||||
| Net assets (liabilities) available for plan benefits: |
||||||||||||||||||||
| Beginning of year |
158,155,675 | (40,813,349 | ) | 117,342,326 | 285,304,310 | 169,653,582 | 454,957,892 | |||||||||||||
| End of year |
$ | 148,403,401 | (66,082,136 | ) | 82,321,265 | $ | 158,155,675 | (40,813,349 | ) | 117,342,326 | ||||||||||
14
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Notes to Financial Statements
December 31, 2002 and 2001
| (b) | Investment Valuation |
The value of the investments in the 401(k) portion of the Plan held at December 31, 2002 is based on the fair value of the underlying funds and contracts. The value fluctuates in response to various factors including, but not limited to, the price of the shares in the underlying funds, dividends paid, earnings and losses, and the mix of assets in the respective fund. The fair value for the guaranteed insurance contracts at December 31, 2002 is $246,117,439. The average yield for 2002 was 5.87%.
Short-term investments, which consist primarily of cash and cash equivalents, and loans to participants, are valued at fair value.
The ESOP portion of the Plan invests its funds primarily in ESOP Preference Stock. The investment in ESOP Preference Stock is carried at the higher of the cash liquidation value of $53.45 or 2.314 times the market value of an equivalent share of CVS common stock. The market value of CVS common stock was $24.97 and $29.60 per share at December 31, 2002 and 2001, respectively.
| (c) | Benefits Paid |
Benefits are recorded when paid.
| (d) | Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of changes in net assets available for plan benefits during the reporting period. Actual results could differ from those estimates.
| (e) | Accrual Basis of Accounting |
The Plan utilizes the accrual basis of accounting.
| (f) | Purchase and Sale of Securities |
Purchase and sales of securities are made on a trade-date basis.
| (g) | Investment Income |
Dividend and interest income is recorded when earned.
| (3) | Loans to Participants |
Prior to merger with the 401(k) Plan, loans were not allowed from the Plan. Effective April 9, 2002, under the amended terms of the Plan, participants may obtain bona fide loans from the Plan, utilizing funds accumulated in their accounts. The minimum amount which may be borrowed is $1,000. Participants can borrow up to 50% of their vested account balance but not more than $50,000 less their highest outstanding loan balance during the previous twelve months.
15
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Notes to Financial Statements
December 31, 2002 and 2001
The loans are repaid to the Plan through after-tax payroll deductions. The term of the loan is selected at the discretion of the participant, but may not exceed five years for a general loan and twenty-five years for a home purchase loan. Interest on loans is equal to the Prime rate plus 1%.
| (4) | Investment Policy |
At December 31, 2002 and 2001, most of the Plan’s 401(k) related assets were allocated among the investment options discussed in note 1(j) based on Employee’s elections. The investment options are administered by independent investment managers. Employee asset allocations that are awaiting processing are temporarily invested in commingled funds held by a bank-administered trust fund. These commingled funds are also used to account for and administer participants’ loans. The loan repayments and interest earned are allocated to each of the investment funds based upon the participants’ contribution election percentages.
Net unrealized appreciation (depreciation) represents the net difference between the fair value of the investment and its historical cost basis if purchased during the plan year or the change in its fair value during the Plan year. During 2002 and 2001, the Plan’s investments (including investments bought, sold, and held during the year) experienced net appreciation (depreciation) as follows:
| 2002 |
2001 |
|||||||||||
| Realized |
Unrealized |
Realized |
Unrealized |
|||||||||
| 401(k) Plan |
$ | (27,030,773 | ) | (134,660,830 | ) | — | — | |||||
| ESOP |
3,587,238 | (51,587,439 | ) | 5,866,809 | (353,829,292 | ) | ||||||
| $ | (23,443,535 | ) | (186,248,269 | ) | 5,866,809 | (353,829,292 | ) | |||||
| (5) | Plan Termination and Related Commitments |
Although it has not expressed any intention to do so, CVS has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. If CVS terminates the Plan, all participants in the Plan would become fully vested.
| (6) | Federal Income Taxes |
The Plan is qualified pursuant to Section 401(a) and 4975 (e)(7) of the Internal Revenue Code (the Code), and the trust established under the Plan to hold the Plan’s assets is exempt from Federal income taxes pursuant to Section 501(a) of the Code; accordingly, the trust’s net investment income is exempt from income taxes. The Plan has obtained a favorable tax determination letter from the Internal Revenue Service and the Plan’s sponsor believes that the Plan, as amended, continues to qualify and operate as designed.
16
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Notes to Financial Statements
December 31, 2002 and 2001
| (7) | Investment Valuation |
The following represents total investments related to the 401(k) Plan segregated by investment type. Investments that represent 5% or more of the fair value of the Plan’s assets are marked by an asterisk (*).
| 2002 |
2001 |
||||||
| Mutual Funds: |
|||||||
| Vanguard Index Trust 500 Portfolio Fund |
$ | 135,135,823 | * | — | |||
| PIMCO Total Return Admin Fund |
117,749,685 | * | — | ||||
| Templeton International Fund |
46,787,266 | — | |||||
| Invesco Small Company Growth Fund |
12,657,016 | — | |||||
| Janus Worldwide Fund |
30,831,850 | — | |||||
| Galaxy Small Cap Value Fund |
84,412,653 | * | — | ||||
| J & W Seligman Large Cap Value Fund |
88,125,613 | * | — | ||||
| Columbus Circle Core Equity Fund |
115,048,070 | * | — | ||||
| CVS Corporation Common Stock Fund |
621,277 | 6,660 | |||||
| CVS Corporation ESOP Common Stock |
36,283,987 | — | |||||
| Commingled Fund |
328,257 | — | |||||
| 667,981,497 | 6,660 | ||||||
| Loans to participants |
37,727,331 | — | |||||
| Guaranteed insurance contracts |
230,459,757 | * | — | ||||
| Allocated: CVS Corp Series One ESOP Convertible Stock |
145,718,319 | * | 156,510,181 | * | |||
| Short term investments |
2,683,959 | 1,729,091 | |||||
| Unallocated: CVS Corp Series One ESOP Convertible Stock |
128,316,785 | * | 178,252,274 | * | |||
| Short term investments |
1,078 | 834,321 | |||||
| $ | 1,212,888,726 | 337,332,527 | |||||
| (8) | Transfer of Asset from 401(k) Plan |
The transfer of assets from the 401(k) Plan to the ESOP Plan was not a physical transfer, and the assets are still held separately in various Bank of New York accounts.
17
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Schedule of Assets (Held at End of Year)
December 31, 2002
| Fund |
Par value/ number of shares |
Identity Of Investment |
Description |
Cost |
Current Value | |||||||
| Loans to participants |
— | Loans to participants* | Prime plus 1% at loan request date | $ | — | $ | 37,727,331 | |||||
| Commingled |
325,385 | Bank of New York* | Collective Short-Term Investment | |||||||||
| Fund Non-Discretionary | 325,385 | 325,385 | ||||||||||
| 64 | Comcast Corp | Common Stock | — | 1,508 | ||||||||
| 39 | AT&T Corp | Common Stock | — | 1,018 | ||||||||
| 61 | AT&T Wireless Svsc Inc. | Common Stock | — | 346 | ||||||||
| Commingled Subtotal |
328,257 | |||||||||||
| Lifestyle Conservative |
57,936 | Vanguard Institutional Index Trust 500 Portfolio Fund | Mutual Fund | 5,940,622 | 4,660,909 | |||||||
| 830,369 | PIMCO Total Return Admin Fund | Mutual Fund | 8,719,702 | 8,860,034 | ||||||||
| 15,022,936 | State Street Bank | Various GICs held at State Street; due 9/15/05 | 15,022,936 | 15,022,936 | ||||||||
| Lifestyle Conservative Subtotal |
28,543,879 | |||||||||||
| Lifestyle Moderate |
104,666 | Vanguard Institutional Index Trust 500 Portfolio Fund | Mutual Fund | 11,246,912 | 8,420,366 | |||||||
| 2,490,549 | PIMCO Total Return Admin Fund | Mutual Fund | 25,983,835 | 26,574,162 | ||||||||
| 799,404 | Templeton International Fund | Mutual Fund | 7,595,377 | 6,689,365 | ||||||||
| 605,949 | Liberty Small Cap Value Fund | Mutual Fund | 8,306,853 | 7,665,261 | ||||||||
| 8,314,210 | State Street Bank | Various GICs held at State Street; due 9/15/05 | 8,314,210 | 8,314,210 | ||||||||
| Lifestyle Moderate Subtotal |
57,663,364 | |||||||||||
18
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Schedule of Assets (Held at End of Year ) (Continued)
December 31, 2002
| Fund |
Par value/ number of shares |
Identity of issue |
Description |
Cost |
Current value | |||||
| Lifestyle Aggressive |
79,610 | Vanguard Institutional Index Trust 500 Portfolio Fund |
Mutual Fund | 8,471,081 | 6,404,657 | |||||
| 1,862,177 | PIMCO Funds Return Admin Fund |
Mutual Fund | 19,387,032 | 19,869,427 | ||||||
| 1,346,855 | Templeton International Fund |
Mutual Fund | 12,839,957 | 11,270,402 | ||||||
| 2,027,901 | Liberty Small Cap Value Fund |
Mutual Fund | 27,963,565 | 25,652,946 | ||||||
| Lifestyle Aggressive Subtotal |
63,197,432 | |||||||||
| International Equity Fund |
3,444,994 | Templeton International Fund |
Mutual Fund | 31,111,064 | 28,827,499 | |||||
| Core Equity Fund |
1,431,372 | Vanguard Institutional Index Trust 500 Portfolio Fund |
Mutual Fund | 154,824,605 | 115,649,900 | |||||
| Growth & Income Fund |
3,189,356 | J & W Seligman Large Cap Value |
Mutual Fund | 107,495,745 | 85,646,772 | |||||
| 2,478,841 | Collective short term invest fund |
2,478,841 | 2,478,841 | |||||||
| 88,125,613 | ||||||||||
| Large Cap Growth Fund |
3,680,167 | Columbus Circle Core Equity Fund |
Mutual Fund | 117,028,858 | 110,225,704 | |||||
| 4,822,366 | Collective short term invest fund |
4,822,366 | 4,822,366 | |||||||
| 115,048,070 | ||||||||||
| Small Cap Growth Fund |
1,519,450 | Invesco Small Company Growth Fund |
Mutual Fund | 17,838,073 | 12,657,016 | |||||
| Diversified Bond Fund |
5,852,490 | PIMCO Total Return Admin Fund |
Mutual Fund | 62,448,101 | 62,446,063 | |||||
| Small Cap Value Fund |
4,039,087 | Galaxy Small Cap Value Fund |
Mutual Fund | 57,779,421 | 51,094,436 | |||||
| Global Equity Fund |
959,597 | Janus Worldwide Fund | Mutual Fund | 55,354,527 | 30,831,850 | |||||
| Investment Contract Fund |
207,122,611 | State Street Bank | Various GICs held at State Street due; 09/15/05 |
207,122,611 | 207,122,611 | |||||
19
THE 401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP
PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES
Schedule of Assets (Held at End of Year) (Continued)
December 31, 2001
| Fund |
Par value/ number of shares |
Identity of issue |
Description |
Cost |
Current value | ||||||
| CVS Stock Fund |
24,782 | CVS Corporation Common Stock Fund* |
Common Stock | 651,894 | 618,807 | ||||||
| 2,470 | Bank of New York* | Collective short term investment fund non-discretionary |
2,470 | 2,470 | |||||||
| ESOP Common Stock |
1,440,518 | ESOP Common Stock* | Common Stock | 48,195,359 | 35,969,734 | ||||||
| 314,253 | Collective short term investment fund non- discretionary |
314,253 | 314,253 | ||||||||
| 36,283,987 | |||||||||||
| Allocated CVS Corp |
|||||||||||
| Series One ESOP |
|||||||||||
| Convertible Preference Stock |
2,521,926 | ESOP Common Stock* | ESOP Common Stock | 134,797,914 | 145,718,319 | ||||||
| Allocated Short Term Invest |
2,683,959 | Short Term Investments* | Short Term Investments | 2,683,959 | 2,683,959 | ||||||
| Unallocated CVS Corp |
|||||||||||
| Series One ESOP |
|||||||||||
| Convertible Preference Stock |
2,220,760 | ESOP Common Stock* | ESOP Common Stock | 118,699,607 | 128,316,785 | ||||||
| Unallocated Short Term Invest |
1,078 | Short Term Investments* | Short Term Investments | 1,078 | 1,078 | ||||||
| $ | 1,212,888,726 | ||||||||||
*Party-in-interest
See accompanying independent auditor’s report.
20
Pursuant to the requirements of the Securities Exchange Act of 1934, the trustee (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized.
| 401(K) PLAN AND THE EMPLOYEE STOCK OWNERSHIP PLAN OF CVS CORPORATION AND AFFILIATED COMPANIES | ||||||||
| Date: June 27, 2003 |
By: | /s/ DAVID B. RICKARD | ||||||
| David B. Rickard Senior Executive and Financial Member of the Plan Committee | ||||||||
| Exhibit |
Description | |
| 23 | Consent of Independent Accountants | |
| 99.1 | Certification by the Senior Executive Member of the Plan Committee as required by Section 906 of Sarbanes-Oxley Act of 2002 | |
| 99.2 | Certification by the Senior Financial Member of the Plan Committee as required by Section 906 of Sarbanes-Oxley Act of 2002 | |
21