CVS 2006 Annual Report Download - page 49

46 CVS Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recorded a pension liability of $105.4 million as of
December 30, 2006 as required by the provisions of SFAS No. 158.
The Company recorded a minimum pension liability of $117.0 million
as of December 31, 2005, as required by SFAS No. 87. During 2005,
the Company engaged its actuaries to perform a study to review the
mortality experience of its defined benefit plans. As a result of the study,
the Company changed the mortality table used to the 1994 Group
Annuity Basic Table, projected to 2002 with Scale AA (the “2002 GATT
Table”), which increased the minimum pension liability during 2005.
A minimum pension liability is required when the accumulated benefit
obligation exceeds the combined fair value of the underlying plan assets
and accrued pension costs. The minimum pension liability adjustment
is reflected in other long-term liabilities, long-term deferred income
taxes and accumulated other comprehensive loss, which is included in
shareholders’ equity, in the accompanying consolidated balance sheet.
9 COMMITMENTS & CONTINGENCIES
Between 1991 and 1997, the Company sold or spun off a number
of subsidiaries, including Bob’s Stores, Linens ‘n Things, Marshalls,
Kay-Bee Toys, Wilsons, This End Up and Footstar. In many cases, when
a former subsidiary leased a store, the Company provided a guarantee
of the store’s lease obligations. When the subsidiaries were disposed of,
the Company’s guarantees remained in place, although each initial
purchaser has indemnified the Company for any lease obligations the
Company was required to satisfy. If any of the purchasers or any of
the former subsidiaries were to become insolvent and failed to make the
required payments under a store lease, the Company could be required
to satisfy these obligations. As of December 30, 2006, the Company
guaranteed approximately 240 such store leases, with the maximum
remaining lease term extending through 2022. Assuming that each
respective purchaser became insolvent, and the Company was required
to assume all of these lease obligations, management estimates that
the Company could settle the obligations for approximately $350 to
$400 million as of December 30, 2006.
Management believes the ultimate disposition of any of the guarantees
will not have a material adverse effect on the Company’s consolidated
financial condition, results of operations or future cash flows.
The Rhode Island Attorney General’s Office, the Rhode Island Ethics
Commission, and the United States Attorney’s Office for the District of
Rhode Island have been investigating the business relationships between
certain former members of the Rhode Island General Assembly and various
Rhode Island companies, including Roger Williams Medical Center,
Blue Cross & Blue Shield of Rhode Island and CVS.
In connection with the investigation of these business relationships,
a former state senator was criminally charged by federal and state
authorities, and pled guilty to federal and state charges. In January 2007,
two CVS employees on administrative leave from the Company were
indicted on federal charges relating to their involvement in entering into
a $12,000 per year consulting agreement with the former state senator
seven years ago. The indictment alleges that the two CVS employees
concealed the true nature of the Company’s relationship with the former
state senator from other Company officials and others. CVS will continue
to cooperate fully in this investigation, the timing and outcome of which
cannot be predicted with certainty at this time.
The United States Department of Justice and several state attorneys
general are investigating whether any civil or criminal violations resulted
from certain practices engaged in by CVS and others in the pharmacy
industry with regard to dispensing one of two different dosage forms of
a generic drug under circumstances in which some state Medicaid programs
at various times reimbursed one dosage form at a different rate from the
other. The Company is in discussions with various governmental agencies
involved to resolve this matter on a civil basis and without any admission
or finding of any violation.
The enforcement staff of the United States Securities and Exchange
Commission (the “SEC”) has commenced an inquiry into matters related
to the accounting for a transaction that occurred in 2000 (the “2000
Transaction”). Pursuant to the 2000 Transaction, the Company (i) made
accounting entries reflecting the conveyance of certain excess plush toy
collectible inventory to a third party; (ii) received a total of $42.5 million
in barter credits; and (iii) made a cash payment of $12.5 million to the
same third party.
In December 2005, the Audit Committee of the Company’s Board of
Directors engaged independent outside counsel to undertake an internal
review of this matter (the “Internal Review”). In March 2006, based on
the findings from the Internal Review, the Audit Committee reached certain
conclusions regarding the 2000 Transaction. The Audit Committee
concluded that various aspects of the Company’s accounting for the
2000 Transaction were incorrect, although the Internal Review did not
result in any adjustments to the financial statements included in this
Annual Report. On March 10, 2006, the Audit Committee reported its
findings to the Company’s Board of Directors, which adopted those findings.
Subsequent to the Audit Committee reaching these conclusions, the
Company’s Controller (who was also the Principal Accounting Officer)
and the Company’s Treasurer resigned their positions.
Over time, CVS has produced a large number of documents and other
information requested by the SEC staff and has made a number of
witnesses available for formal testimony. There are currently no outstanding
requests for further documents or testimony from CVS.
The Company cannot predict the outcome or timing of the SEC inquiry,
or of any related proceedings, although we do not believe that any of
the above matters will have any material effect on the Company’s results
of operations or financial condition.
On November 1, 2006, CVS and Caremark Rx, Inc. announced that
they have entered into a definitive merger agreement. Several actions
relating to the proposed merger are now pending, some of which name
CVS as a defendant.