CVS 1999 Annual Report Download - page 28

Notes to Consolidated Financial Statements
26
CVS Corporation
Business Combinations
CVS/Arbor Merger
On March 31, 1998, CVS completed a merger with Arbor
Drugs, Inc. (“Arbor”), pursuant to which 37.8 million
shares of CVS common stock were exchanged for all the
outstanding common stock of Arbor (the “CVS/Arbor
Merger”). Each outstanding share of Arbor common stock
was exchanged for 0.6364 shares of CVS common stock.
In addition, outstanding Arbor stock options were converted
at the same exchange ratio into options to purchase 5.3
million shares of CVS common stock.
CVS/Revco Merger
On May 29, 1997, CVS completed a merger with Revco D.S.,
Inc. (“Revco”), pursuant to which 120.6 million shares of
CVS common stock were exchanged for all the outstanding
common stock of Revco (the “CVS/Revco Merger”). Each
outstanding share of Revco common stock was exchanged
for 1.7684 shares of CVS common stock. In addition,
outstanding Revco stock options were converted at the
same exchange ratio into options to purchase 6.6 million
shares of CVS common stock.
The CVS/Arbor Merger and CVS/Revco Merger constituted
tax-free reorganizations and have been accounted for as
pooling of interests under APB Opinion No. 16, “Business
Combinations.” Accordingly, all prior period financial
statements were restated to include the combined results
of operations, financial position and cash flows of Arbor
and Revco as if they had always been owned by CVS.
The Company also acquired other businesses that were
accounted for as purchase business combinations and
immaterial pooling of interests. These acquisitions did
not have a material effect on the Company’s consolidated
financial statements either individually or in the aggregate.
The results of operations of these businesses have been
included in the consolidated financial statements since
their respective dates of acquisition.
Merger, Restructuring & Asset Impairment Charges
CVS/Arbor Charge
In accordance with APB Opinion No. 16, Emerging Issues
Task Force (“EITF”) Issue 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,” CVS recorded a $147.3 million charge
to operating expenses during the second quarter of 1998
for direct and other merger-related costs pertaining to the
CVS/Arbor merger transaction and certain restructuring
activities (the “CVS/Arbor Charge”). 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.
Following is a summary of the significant components of
the CVS/Arbor Charge:
Merger transaction costs included $12.0 million for estimated
investment banker fees, $2.5 million for estimated professional
fees, and $0.5 million for estimated filing fees, printing costs
and other costs associated with furnishing information to
shareholders.
Employee severance and benefits included $15.0 million for
estimated excess parachute payment excise taxes and related
income tax gross-ups, $11.0 million for estimated employee
severance and $1.1 million for estimated employee
outplacement costs. The excess parachute payment excise
taxes and related income tax gross-ups relate to employment
agreements that Arbor had in place with 22 senior executives.
Employee severance and benefits and employee outplacement
costs relate to 236 employees who were located in Arbor’s
Troy, Michigan corporate headquarters, including the 22
senior executives who were covered by employment
agreements.
1 23 4 5 6 7 8 9 10 11 12 13 14 15 1 2 34 5 6 7 8 9 10 11 12 13 14 15
In millions
Merger transaction costs $ 15.0
Restructuring costs:
Employee severance and benefits 27.1
Exit costs:
Noncancelable lease obligations 40.0
Duplicate facility 16.5
Asset write-offs 41.2
Contract cancellation costs 4.8
Other 2.7
Total $147.3