CVS 2001 Annual Report Download - page 23

21
2001 Annual Report
I nt angible asset s ~ Go o dwill represents the excess o f the
purchase price o ver the fair value of net assets acquired and is
being amortized o n a straight-line basis generally o ver 40 years.
Acc umulated amo rtizatio n asso ciated with go o dwill was $149.9
millio n as of December 29, 2001 and $127.3 millio n as of
December 30, 2000. Purchased custo mer lists are amo rtized on a
straight- line basis o ver their estimated useful lives. Purchased
leases are amortized o n a straight-line basis o ver the remaining
life of the lease.
Revenue recogni t ion ~ The Co mpany reco gnizes revenue fro m
the sale of merchandise at the time the merchandise is so ld.
Service revenue fro m the Co mpany’s pharmacy benefit
management segment is reco gnized at the time the service
is pro vided.
Vendor allowances ~ The to tal value of any up-fro nt o r o ther
perio dic payments received fro m vendo rs that are linked to
purchase co mmitments is initially deferred. The deferred amo unts
are then amo rtized to reduce co st o f go o ds so ld o ver the life of
the co ntract based upo n perio dic purchase vo lume. The to tal
value of any up-front o r o ther periodic payments received from
vendo rs that are not linked to purchase co mmitments is also
initially deferred. The deferred amo unts are then amo rtized to
reduce co st o f go o ds so ld o n a straight-line basis o ver the life of
the related contract. Funds that are directly linked to advertising
co mmitments are reco gnized as a reductio n of advertising
expense when the related advertising co mmitment is satisfied.
St ore opening and closing cost s ~ New sto re o pening co sts are
charged directly to expense when incurred. When the Co mpany
clo ses a sto re, the estimated unrecoverable co sts, inc luding the
remaining lease o blig atio n, are charged to expense.
Advert i sing cost s ~ Advertising co sts are expensed when the
related advertising takes place.
St ock- based compensation ~ The Co mpany has ado pted
Statement of Financial Acco unting Standards ( “SFAS”) No . 123,
“Acc o unting fo r Sto ck-Based Co mpensatio n.” Under SFAS No . 123,
co mpanies can elect to acc o unt fo r sto ck-based co mpensation
using a fair value based metho d or co ntinue to measure
co mpensatio n expense using the intrinsic value metho d
prescribed in Acco unting Principles Bo ard ( “APB”) Opinio n No .
25, “Acco unting fo r Sto ck Issued to Emplo yees.” The Co mpany
has elected to co ntinue to acco unt fo r its sto ck-based
co mpensatio n plans under APB Opinio n No . 25. See No te 7 fo r
further info rmatio n abo ut the Co mpany’s stock incentive plans.
I nt erest expense, net ~ Interest expense was $65. 2 million,
$84.1 millio n and $66.1 millio n and interest inco me was $4.2
millio n, $4.8 million and $7.0 millio n in 2001, 2000 and
1999, respectively.
I nsurance ~ The Co mpany is self- insured fo r general liability,
wo rkers’ co mpensatio n and auto mobile liability claims up to
$500,000. Third party insurance co verage is maintained fo r claims
that exceed this amo unt. The Co mpany’s self- insurance ac cruals
are calculated using standard insurance industry actuarial
assumptio ns and the Co mpany’s histo rical claims experience.
Nonrecurring gains ~ During 2001, the Co mpany received $50.3
millio n o f settlement pro c eeds from vario us lawsuits ag ainst
certain manufacturers of brand name presc riptio n drug s. The
Co mpany elected to co ntribute $46.8 million of the settlement
pro ceeds to the CVS Charitable Trust, Inc. to fund future
charitable g iving. The net effect o f the two no nrecurring items
was a $3.5 million pre-tax ( $2.1 millio n after-tax) increase in net
earnings ( the “Net Litigatio n Gain”) . During 2000, the Co mpany
reco rded $19.2 millio n pre- tax ( $11.5 millio n after-tax)
nonrecurring g ain in to tal o perating expenses, which represented
a partial payment of the Co mpany’s share o f the settlement
pro ceeds from a class actio n lawsuit against certain
manufacturers o f brand name prescriptio n drugs.
I ncome taxes ~ Deferred tax assets and liabilities are reco gnized
fo r the future tax co nsequenc es attributable to differences
between the carrying amo unt o f assets and liabilities fo r financial
repo rting purpo ses and the amo unts used fo r inco me tax purpo ses
as well as fo r the deferred tax effects of tax credit carryfo rwards.
Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable inc o me in the years in
which those tempo rary differences are expected to be recoverable
o r settled.
Earnings per common share ~ Basic earnings per co mmo n share
is computed by dividing: ( i) net earnings, after deducting the
after-tax ESOP preference dividends, by ( ii) the weig hted average
number o f co mmo n shares o utstanding during the year (the
“Basic Shares”) .
When co mputing diluted earnings per co mmo n share, the
Co mpany assumes that the ESOP preference sto ck is co nverted
into co mmo n sto ck and all dilutive sto c k optio ns are exercised.
After the assumed ESOP preference sto ck co nversio n, the ESOP
trust wo uld ho ld co mmo n stock rather than ESOP preference sto ck
and wo uld receive co mmo n sto c k dividends ( currently $0.23 per
share) rather than ESOP preference sto ck dividends ( c urrently
$3.90 per share) . Since the ESOP Trust uses the dividends it
receives to service its debt, the Co mpany wo uld have to increase
its co ntribution to the ESOP trust to co mpensate it fo r the lo wer
dividends. This additio nal co ntributio n wo uld reduce the
Co mpany’s net earnings, whic h in turn, wo uld reduce the
amo unts that wo uld be accrued under the Co mpany’s incentive
co mpensatio n plans.