CVS 1998 Annual Report Download - page 31

1998 Financial Report
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three will require cash outlays of which $269.3 million had been
incurred as of December 31, 1998. The remaining cash
outlays primarily include noncancelable lease commitments
and severance. The Company also recorded a $75.0 million
charge to cost of goods sold during the second quarter of
1997 to reflect markdowns on noncompatible Revco
merchandise (the “Revco Inventory Markdown”).
Merger transaction costs included in the above charges
primarily relate to fees for investment bankers, attorneys,
accountants, financial printing and other related charges.
Restructuring activities primarily relate to the consolidation
of administrative functions. These actions resulted in the
reduction of approximately 200 Arbor employees and 1,000
Revco employees, all of which had occurred as of December
31, 1998. Noncancelable lease obligations and duplicate facil-
ities primarily include noncancelable lease commitments and
shutdown costs. These costs did not provide future benefit
to the retained stores or corporate facilities.
In accordance with EITF 94-3 and SFAS No. 121, the
Company also recorded a $31.0 million charge to operating
expenses during the first quarter of 1997 for certain costs
associated with the restructuring of Big B (the “Big B
Charge”). This charge included accrued liabilities related to
certain exit plans for identified stores and duplicate
corporate facilities, such as the cancellation of lease
agreements and the write-down of unutilized fixed assets.
Asset write-offs included in this charge totaled $5.1 million.
The balance of the charge, $25.9 million, will require cash
outlays of which $10.0 million had been incurred as of
December 31, 1998. The remaining cash outlays primarily
include noncancelable lease commitments. These exit plans
did not provide future benefit to the retained stores or
corporate facilities.
Following is a summary of the significant components of the above charges:
CVS/Arbor Charge CVS/Revco and Big B Charges
Total 1998 Utilized Balance at Total 1997 Utilized Balance at
In millions Charge to Date Transfer 12/31/98(1) Charges to Date Transfer 12/31/98(1)
Merger transaction costs $ 15.0 $ (15.9) $ 0.9 $ — $ 35.0 $ (32.4) $(2.6) $ —
Restructuring costs:
Employee severence
and benefits 27.1 (13.8) 0.3 13.6 89.8 (77.4) — 12.4
Exit costs:
Noncancelable lease
obligations and duplicate
facilities 67.5 (25.8) (1.9) 39.8 211.6 (147.9) — 63.7
Fixed asset write-offs 41.2 (41.2) — — 87.3 (87.3) — —
Contract cancellation costs 4.8 (1.2) — 3.6 7.4 (7.4) — —
Other 2.7 (3.4) 0.7 — 11.6 (14.2) 2.6 —
$ 158.3 $ (101.3) $ — $ 57.0 $ 442.7 $ (366.6) $ — $ 76.1
(1) The Company believes that the reserve balances at December 31, 1998 are adequate to cover the remaining liabilities associated with these charges.
Merger &
Restructuring Charges
In accordance with Emerging Issues Task Force (“EITF”)
Issue No. 94-3, “Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)” and
SFAS No. 121, “Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of,”
the Company recorded the following charges in connection
with the Mergers.
In connection with the CVS/Arbor Merger, the Company
recorded a $158.3 million charge to operating expenses
during the second quarter of 1998 for direct and other
merger-related costs pertaining to the merger transaction
and certain restructuring activities (the “CVS/Arbor
Charge”). Asset write-offs included in this charge totaled
$41.2 million. The balance of the charge, $117.1 million,
will require cash outlays of which $60.1 million had been
incurred as of December 31, 1998. The remaining cash
outlays primarily include noncancelable lease commitments
and severance. The Company also recorded a $10.0 million
charge to cost of goods sold during the second quarter of
1998 to reflect markdowns on noncompatible Arbor
merchandise (the “Arbor Inventory Markdown”).
In connection with the CVS/Revco Merger, the Company
recorded a $411.7 million charge to operating expenses
during the second quarter of 1997 for direct and other
merger-related costs pertaining to the merger transaction
and certain restructuring activities (the “CVS/Revco
Charge”). Asset write-offs included in this charge totaled
$82.2 million. The balance of the charge, $329.5 million,