CVS 2002 Annual Report Download - page 37

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2002 Annual Report
Income Taxes
The provision for income taxes consisted of the following for the
respective years:
Following is a reconciliation of the statutory income tax rate to the
Company’s effective tax rate for the respective years:
Following is a summary of the significant components of the
Company’s deferred tax assets and liabilities as of the respective
balance sheet dates:
Income taxes paid were $319.5 million, $397.0 million and
$342.5 million for 2002, 2001 and 2000, respectively. The
Company believes it is more likely than not that the deferred tax
assets included in the above table will be realized during future
periods in which the Company generates taxable earnings.
Commitments & Contingencies
Between 1991 and 1997, the Company sold a number of former
divisions, including Bob’s Stores, Linens ‘n Things, Inc., Marshalls,
Kay-Bee Toys, Wilsons, This End Up and Footstar, Inc. Typically,
when a former division leased a store, the Company provided a
corporate level guarantee of the lease payments. When the
divisions were sold, the Company’s guarantees remained in place,
although each purchaser indemnified the Company for the lease
guarantee. If any of the purchasers were to become insolvent, the
Company could be required to assume the lease obligation. As of
December 28, 2002, we had guarantees remaining on
approximately 875 stores with leases extending through 2018.
Assuming that each respective purchaser became insolvent, an
event that the Company believes to be highly unlikely,
management estimates that it could settle these obligations for
approximately $660 million as of December 28, 2002. In the
opinion of management, the ultimate disposition of these
guarantees will not have a material adverse effect on the
Company’s consolidated financial condition, results of operations
or future cash flows.
As of December 28, 2002, the Company had outstanding
commitments to purchase $215 million of merchandise inventory
for use in the normal course of business. The Company currently
expects to satisfy these purchase commitments by 2008.
Beginning in August 2001, a total of nine actions were filed
against the Company in the United States District Court for the
District of Massachusetts asserting claims under the federal
securities laws. The actions were subsequently consolidated under
the caption In re CVS Corporation Securities Litigation, No. 01-
CV-11464 (D. Mass.) and a consolidated and amended complaint
was filed on April 8, 2002. The consolidated amended complaint
names as defendants the Company, its chief executive officer and
its chief financial officer and asserts claims for alleged securities
fraud under sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 there under on behalf of a purported
class of persons who purchased shares of the Company's common
stock between February 6, 2001 and October 30, 2001. On June
7, 2002, all defendants moved to dismiss the consolidated
amended complaint. This motion was subsequently denied by the
court on December 18, 2002. The Company believes the
consolidated action is entirely without merit and intends to defend
against it vigorously.
The Company is also a party to other litigation arising in the
normal course of its business, none of which is expected to be
material to the Company.
In millions 2002 2001 2000
Current: Federal $347.1 $360.3 $ 397.2
State 57.0 53.9 73.9
404.1 414 . 2 471 . 1
Deferred: Federal 32.0 (111.8) 21.9
State 3.1 (6.0) 4.4
35.1 (117.8) 26.3
Total $439.2 $ 296.4 $ 497.4
2002 2001 2000
Statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 3.4 3.4 4.1
Goodwill and other(1) (0.4) 1.0 0.9
Effective tax rate before
Restructuring Charge 38.0 39.4 40.0
Restructuring Charge —2.4 —
Effective tax rate 38.0% 41.8% 40.0%
(1) Decrease in goodwill and other was primarily due to the elimination of goodwill amortiza-
tion during 2002 that was not deductible for income tax purposes.
December 28, December 29,
In millions 2002 2001
Deferred tax assets:
Restructuring Charge $73.1 $122.0
Retirement benefits 53.9 24.1
Employee benefits 44.1 28.1
Lease and rents 43.9 49.1
Inventory 36.3 9.8
Amortization method 29.9 31 . 1
Allowance for bad debt 27.1 19 . 5
Other 64.9 82.6
Total deferred tax assets 373.2 366.3
Deferred tax liabilities:
Accelerated depreciation (150.2) (115.6)
Total deferred tax liabilities (150.2) (115.6)
Net deferred tax assets $223.0 $250.7
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