CVS 2006 Annual Report Download - page 40

2006 Annual Report 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Diluted earnings per common share is computed by dividing: (i) net
earnings, after accounting for the difference between the dividends
on the ESOP preference stock and common stock and after making
adjustments for the incentive compensation plans, by (ii) Basic Shares
plus the additional shares that would be issued assuming that all dilutive
stock awards are exercised and the ESOP preference stock is converted
into common stock. Options to purchase 4.7 million, 6.9 million and
9.4 million shares of common stock were outstanding as of December 30,
2006, December 31, 2005 and January 1, 2005, respectively, but were
not included in the calculation of diluted earnings per share because
the options’ exercise prices were greater than the average market price
of the common shares and, therefore, the effect would be antidilutive.
New Accounting Pronouncements
The Company adopted, SFAS No. 123(R), “Share-Based Payment,”
effective January 1, 2006. This statement established standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. The statement focused primarily on
accounting for transactions in which an entity obtains employee services
in share-based payment transactions. The adoption of this statement
resulted in a $42.7 million reduction in net earnings for 2006. Please
see Note 7 to the Company’s consolidated financial statements for
additional information regarding stock-based compensation.
The Company adopted FASB Staff Position (“FSP”) No. FAS 13-1,
“Accounting for Rental Costs Incurred during a Construction Period,”
effective January 1, 2006. The FSP addresses the accounting for
rental costs associated with operating leases that are incurred during a
construction period and requires rental costs associated with ground or
building operating leases that are incurred during a construction period
to be recognized as rental expense over the life of the lease. The adoption
of this statement did not have a material impact on the Company’s
consolidated results of operations, financial position or cash flows.
The Company adopted the Securities and Exchange Commission (SEC)
Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements,” effective November 15, 2006. SAB No. 108
requires misstatements to be quantified based on their impact on each
of the financial statements and related disclosures. The adoption of this
statement resulted in a $24.7 million increase in net earnings for 2006.
The Company adopted SFAS No. 158, “Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R),” effective December 15, 2006.
SFAS No. 158 requires an employer to recognize in its statement of
financial position an asset for a plan’s overfunded status or a liability for
a plan’s underfunded status, measure a plan’s assets and its obligations
that determine its funded status as of the end of the employer’s fiscal
year, and recognize changes in the funded status of a defined benefit
postretirement plan in the year in which the changes occur. Those changes
will be reported in comprehensive income and in a separate component
of shareholder’s equity. The adoption of this statement did not have a
material impact on the Company’s consolidated results of operations,
financial position or cash flows.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued
FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109.” FIN No. 48
clarifies the accounting and disclosure for uncertain tax positions, which
relate to the uncertainty about how certain tax positions taken or expected
to be taken on a tax return should be reflected in the financial statements
before they are finally resolved with the taxing authorities. FIN No. 48 is
effective for fiscal years beginning after December 15, 2006. Although the
Company is still analyzing the impact of FIN No. 48, it does not believe
the adoption will have a material impact on its consolidated results of
operations and financial position.
In September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurement.” SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and
expands disclosures regarding fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The Company is currently evaluating
the impact that SFAS No. 157 may have on its consolidated results of
operations and financial position.
2 ACQUISITION
On June 2, 2006, CVS acquired certain assets and assumed certain
liabilities from Albertson’s, Inc. (“Albertsons”) for $4.0 billion. The
Company believes that this acquisition is consistent with its long-term
strategy of expanding its retail drugstore business in high-growth markets.
The assets acquired and the liabilities assumed included approximately
700 standalone drugstores and a distribution center (collectively
the “Standalone Drug Business”). CVS financed the acquisition of the
Standalone Drug Business by issuing commercial paper and borrowing
$1.0 billion from a bridge loan facility. During the third quarter of 2006,
CVS repaid a portion of the commercial paper used to finance the
acquisition with the proceeds received from the issuance of $800 million
of 5.75% unsecured senior notes due August 15, 2011 and $700 million of
6.125% unsecured senior notes due August 15, 2016. During the
fourth quarter of 2006, CVS sold a substantial portion of the acquired
real estate through a sale-leaseback transaction, the proceeds of which
were used in retiring the bridge loan facility. The results of the operations
of the Standalone Drug Business from June 2, 2006 through December 30,
2006, have been included in CVS’ consolidated statements of operations
for the period ended December 30, 2006.