CVS 2006 Annual Report Download - page 43

40 CVS Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the future minimum lease payments under
capital and operating leases as of December 30, 2006:
Capital Operating
In millions Leases Leases
2007 $ 14.2 $ 1,445.7
2008 14.2 1,394.4
2009 14.2 1,346.1
2010 14.3 1,453.3
2011 14.3 1,220.7
Thereafter 194.3 13,014.8
$ 265.5 $ 19,875.0
Less: imputed interest (144.6)
Present value of capital lease obligations $ 120.9 $ 19,875.0
The Company finances a portion of its store development program
through sale-leaseback transactions. The properties are sold and the
resulting leases qualify and are accounted for as operating leases.
The Company does not have any retained or contingent interests in the
stores, nor does the Company provide any guarantees, other than a
guarantee of lease payments, in connection with the sale-leasebacks.
Proceeds from sale-leaseback transactions totaled $1,375.6 million
in 2006, $539.9 million in 2005 and $496.6 million in 2004. The
operating leases that resulted from these transactions are included
in the above table.
6 EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors a defined contribution Employee Stock Ownership
Plan (the “ESOP”) that covers full-time employees with at least one year
of service.
In 1989, the ESOP Trust issued and sold $357.5 million of 20-year,
8.52% notes due December 31, 2008 (the “ESOP Notes”). The proceeds
from the ESOP Notes were used to purchase 6.7 million shares of Series
One ESOP Convertible Preference Stock (the “ESOP Preference Stock”)
from the Company. Since the ESOP Notes are guaranteed by the
Company, the outstanding balance is reflected as long-term debt, and a
corresponding guaranteed ESOP obligation is reflected in shareholders’
equity in the accompanying consolidated balance sheets.
Each share of ESOP Preference Stock has a guaranteed minimum
liquidation value of $53.45, is convertible into 4.628 shares
of common stock and is entitled to receive an annual dividend of
$3.90 per share.
The credit facilities and unsecured senior notes contain customary
restrictive financial and operating covenants. The covenants do not
materially affect the Company’s financial or operating flexibility.
The aggregate maturities of long-term debt for each of the five years
subsequent to December 30, 2006 are $344.3 million in 2007,
$48.1 million in 2008, $654.0 million in 2009, $4.5 million in
2010 and $805.0 million in 2011.
5 LEASES
The Company leases most of its retail locations and eight of its
distribution centers under non-cancelable operating leases, whose initial
terms typically range from 15 to 25 years, along with options that
permit renewals for additional periods. The Company also leases certain
equipment and other assets under non-cancelable operating leases,
whose initial terms typically range from 3 to 10 years.
During 2004, the Company conformed its accounting for operating
leases and leasehold improvements to the views expressed by the Office
of the Chief Accountant of the Securities and Exchange Commission to
the American Institute of Certified Public Accountants on February 7,
2005. As a result, the Company recorded a $65.9 million non-cash
pre-tax ($40.5 million after-tax) adjustment to total operating expenses,
which represents the cumulative effect of the adjustment for a period
of approximately 20 years (the “Lease Adjustment”). Since the effect of
the Lease Adjustment was not material to 2004 or any previously reported
fiscal year, the cumulative effect was recorded in the fourth quarter of 2004.
Minimum rent is expensed on a straight-line basis over the term of the
lease. In addition to minimum rental payments, certain leases require
additional payments based on sales volume, as well as reimbursement
for real estate taxes, common area maintenance and insurance, which
are expensed when incurred.
Following is a summary of the Company’s net rental expense for operating
leases for the respective years:
In millions 2006 2005 2004
Minimum rentals $ 1,361.2 $ 1,213.2 $ 1,020.6
Contingent rentals 61.5 63.3 61.7
1,422.7 1,276.5 1,082.3
Less: sublease income (26.4) (18.8) (14.0)
$ 1,396.3 $ 1,257.7 $ 1,068.3