CVS 2000 Annual Report Download - page 37

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 merger was a tax-free
reorganization that was accounted for as a pooling of interests
under APB Opinion No. 16,“Business Combinations.”
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 that were located in Arbor’s Troy, Michigan corporate
headquarters, including the 22 senior executives that were
covered by employment agreements.
Exit Costs ~ In conjunction with the merger transaction,
management made the decision to close Arbor’s Troy, Michigan
corporate headquarters and 55 Arbor store locations. As a result,
the following exit plan was executed:
1. Arbor’s Troy, Michigan corporate headquarters would be
closed as soon as possible after the merger. Management
anticipated that this facility would be closed by no later than
December 31, 1998. Since this location was a leased facility,
management returned the premises to the landlord at the
conclusion of the current lease term, which extended through
1999.This facility was closed in December 1998.
2. Arbor’s Troy, Michigan corporate headquarters employees
would be terminated as soon as possible after the merger.
Management anticipated that these employees would be
terminated by no later than December 31, 1998. However,
significant headcount reductions were planned and occurred
throughout the transition period. As of December 31, 1998, all
of the employees had been terminated.
3. The 55 Arbor store locations discussed above would be closed
as soon as practical after the merger. As of December 30, 2000,
all of these locations have been closed or are in the process
of being closed. Since these locations were leased facilities,
management planned to either return the premises to the
respective landlords at the conclusion of the current lease
term or negotiate an early termination of the contractual
obligations.
Noncancelable lease obligations included $40.0 million for the
estimated continuing lease obligations of the 55 Arbor store
locations discussed above. As required by EITF Issue 88-10,
“Costs Associated with Lease Modification or Termination,” the
estimated continuing lease obligations were reduced by estimated
probable sublease rental income.
Duplicate facility included the estimated costs associated
with Arbor’s Troy, Michigan corporate headquarters during
the shutdown period. This facility was considered to be a
duplicate facility that was not required by the combined
company. Immediately after the merger transaction, the Company
assumed all decision-making responsibility for Arbor and Arbor’s
corporate employees.The combined company did not retain these
employees since they were incremental to their CVS counterparts.
During the shutdown period, these employees primarily worked
on shutdown activities.The $16.5 million charge included $1.8
million for the estimated cost of payroll and benefits that would
be incurred in connection with complying with the Federal
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
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2000 Annual Report