CVS 2001 Annual Report Download - page 25

23
2001 Annual Report
co sts asso ciated with the Actio n Plan. In acco rdance with
Acc o unting Research Bulletin No . 43, “Restatement and Revisio n
of Acco unting Research Bulletins,” the Co mpany also reco rded a
$5.7 millio n pre-tax charge ($3.6 millio n after-tax) to co st o f
goo ds so ld during the fourth quarter o f 2001 to reflect the
markdo wn o f certain invento ry co ntained in the Sto res to its net
realizable value. In to tal, the restructuring and asset impairment
charge was $352.5 millio n pre- tax ( $230.5 millio n after-tax) , o r
$0.56 per diluted share in 2001 ( the “ Restructuring Charge” ) .
Fo llo wing is a summary o f the significant co mpo nents of the
Restructuring Charge:
The Restructuring Charge will require to tal cash payments o f
$246.9 millio n, whic h primarily co nsist of no ncancelable lease
o bligatio ns extending thro ug h 2024. As o f December 29, 2001,
the remaining future cash payments to tal $244.8 millio n.
No ncance lable le ase o bligatio ns inc luded $227.4 millio n fo r the
estimated co ntinuing lease o bligatio ns o f the Sto res, the Mail
Facility and the Satellite Facilities. As required by EITF Issue 88-
10, “Co sts Asso ciated with Lease Mo dificatio n o r Terminatio n,”
the estimated co ntinuing lease o bligatio ns were reduced by
estimated pro bable sublease rental inco me.
Asse t write -o ffs included $59.0 millio n for fixed asset write- o ffs,
$40.9 millio n fo r intangible asset write- offs and $5.7 millio n fo r
the markdo wn o f certain invento ry to its net realizable value. The
fixed asset and intangible asset write-o ffs relate to the Sto res,
the Mail Facility and the Satellite Facilities. Management’s
decisio n to clo se the abo ve lo cations was c o nsidered to be an
event o r change in circumstances as defined in SFAS No . 121.
Since management intended to use the Stores and the Mail
Facility o n a sho rt-term basis during the shutdo wn perio d,
impairment was measured using the “Assets to Be Held and Used”
pro visio ns of SFAS No. 121. The analysis was prepared at the
individual lo catio n level, which is the lo west level at which
individual cash flo ws can be identified. The analysis first
co mpared the carrying amo unt of the lo catio n’s assets to the
lo c atio n’s estimated future cash flo ws ( undisco unted and witho ut
interest charges) through the anticipated clo sing date. If the
estimated future cash flo ws used in this analysis were less than
the carrying amo unt o f the loc atio n’s assets, an impairment lo ss
calculatio n was prepared. The impairment lo ss calculatio n
co mpared the carrying value o f the lo c atio n’s assets to the
lo c atio n’s estimated future cash flo ws ( disco unted and with
interest charges) . Since these lo catio ns will co ntinue to be
o perated until clo sed, any remaining net bo o k value after the
impairment write do wn, will be depreciated o ver their revised
useful lives. Impairment o f the Satellite Facilities was measured
using the “Assets to Be Dispo sed Of” pro visio ns of SFAS No. 121,
since management intended to vacate the loc atio ns immediately.
The entire $3.5 million net bo o k value o f the Satellite Facilities
was co nsidered to be impaired since management intended to
discard the assets lo cated in the facilities. The invento ry
markdo wn resulted fro m the liquidatio n of certain fro nt store
inventory contained in the Sto res. Sinc e management intended to
liquidate the inventory belo w its co st, an adjustment was made
to reduce the invento ry’s co st to its net realizable value.
Employe e se ve rance and be nefits included $19.5 million for
severance pay, healthcare co ntinuatio n co sts and o utplacement
service co sts related to approximately 1,500 managerial,
administrative and sto re emplo yees in the Co mpany’s Wo o nso cket,
Rho de Island co rpo rate headquarters; Co lumbus, Mail Facility;
Henderso n, D.C. and the Sto res. As o f March 2002, approximately
90% of the emplo yees had been terminated. The remaining
employees, which are primarily lo c ated in the D.C., will be
terminated during the seco nd quarter of 2002.
In millions
No ncanc elable lease o bligatio ns $ 227.4
Asset write- offs 105.6
Emplo yee severance and benefits 19.5
To tal( 1 ) $ 352.5
( 1) The Restructuring Charge is c o mprise d o f $5. 7 millio n recorde d in c o st o f go o ds so ld
and $346.8 millio n rec o rded in selling, general and administrative expense s.
Fo llo wing is a reco nciliatio n o f the beginning and ending liability balances as of December 29, 2001:
No nc ancelable Lease Emplo yee
In millions Ob lig atio ns ( 1) Asset Write-Offs Seve rance & Benefits To tal
Restructuring charge $ 227.4 $ 105.6 $ 19.5 $ 352.5
Utilized – Cash — — ( 2.1) ( 2.1)
Utilized – No n-cash —( 105 .6 ) —( 105 .6 )
Balance at 12/ 29/ 01 ( 2 ) $ 227.4 $ — $ 17.4 $ 244.8
( 1) No ncancelable le ase o bligatio ns extend through 20 24.
( 2) The Co mpany be lie ve s that the rese rve balanc es as o f December 2 9, 2001 are adequate to co ver the remaining liabilitie s asso ciated with the Restruc turing Charge.