CVS 2007 Annual Report Download - page 59

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55 I 2007 Annual Report
To manage a portion of the risk associated with potential changes
in market interest rates, during the second quarter of 2006 the
Company entered into forward starting pay fixed rate swaps (the
“Swaps”), with a notional amount of $750 million. During 2006,
the Swaps settled in conjunction with the placement of the long-
term financing, at a loss of $5.3 million. The Company accounts
for the above derivatives in accordance with SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,”
as modified by SFAS No. 138, “Accounting for Derivative
Instruments and Certain Hedging Activities,” which requires the
resulting loss to be recorded in shareholders’ equity as a compo-
nent of accumulated other comprehensive loss. This unrealized loss
will be amortized as a component of interest expense over the
life of the related long-term financing. As of December 29, 2007,
the Company had no freestanding derivatives in place.
The credit facilities, unsecured senior notes and ECAPS 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 29, 2007 are $47.2 million in
2008, $653.0 million in 2009, $1.8 billion in 2010, $803.9 million
in 2011 and $1.0 billion in 2012.
Leases
The Company leases most of its retail and mail locations, nine
of its distribution centers and certain corporate offices under non-
cancelable operating leases, with initial terms of 15 to 25 years
and with options that permit renewals for additional periods.
The Company also leases certain equipment and other assets
under non-cancelable operating leases, with initial terms of 3 to
10 years. 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 2007 2006 2005
Minimum rentals $ 1,557.0 $ 1,361.2 $ 1,213.2
Contingent rentals 65.1 61.5 63.3
1,622.1 1,422.7 1,276.5
Less: sublease income (21.5) (26.4) (18.8)
$ 1,600.6 $ 1 ,396.3 $ 1,257.7
Following is a summary of the future minimum lease payments
under capital and operating leases as of December 29, 2007:
Capital Operating
In millions Leases Leases
2008 $ 16.0 $ 1,584.5
2009 16.0 1,548.3
2010 16.1 1,654.5
2011 16.2 1,418.2
2012 16.5 1,500.5
Thereafter 256.5 14,384.6
$ 337.3 $ 22,090.6
Less: imputed interest (192.2)
Present value of capital
lease obligations $ 145.1 $ 22,090.6
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 and does not provide any
guarantees, other than a guarantee of lease payments, in
connection with the sale-leaseback transactions. Proceeds from
sale-leaseback transactions totaled $601.3 million, $1.4 billion,
which included approximately $800 million in proceeds associated
with the sale and leaseback of properties acquired as part of the
acquisition of the Standalone Drug Business, and $539.9 million
in 2007, 2006 and 2005, respectively. The operating leases that
resulted from these transactions are included in the above table.
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