Caremark 2003 Annual Report Download - page 45

4. Two satellite office facilities (the “Satellite Facilities”)
would be closed and their operations would be
consolidated into the Company’s Woonsocket,
Rhode Island corporate headquarters by no later
than December 2001. Since these locations were
leased facilities, management planned to either return
the premises to the landlords at the conclusion of
the leases or negotiate an early termination of the
contractual obligations. The Satellite Facilities were
closed in December 2001.
5. Approximately 1,500 managerial, administrative and
store employees in the Company’s Woonsocket, Rhode
Island corporate headquarters; Columbus Mail Facility;
Henderson D.C. and the Stores would be terminated.
As of April 30, 2002, all of these employees had
been terminated.
In accordance with Emerging Issues Task Force (“EITF”)
Issue 94-3, “Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring),”
SFAS No. 121 and Staff Accounting Bulletin No. 100,
“Restructuring and Impairment Charges,” the Company
recorded a $346.8 million pre-tax charge ($226.9 million
after-tax) to operating expenses during the fourth quarter
of 2001 for restructuring and asset impairment costs.
In accordance with Accounting Research Bulletin No. 43,
“Restatement and Revision of Accounting Research
Bulletins,” the Company also recorded a $5.7 million
pre-tax charge ($3.6 million after-tax) to cost of goods
sold during the fourth quarter of 2001 to reflect the
markdown of certain inventory contained in the Stores
to its net realizable value. In total, the restructuring
and asset impairment charge was $352.5 million pre-tax
($230.5 million after-tax), or $0.56 per diluted share in
2001 (the “Restructuring Charge”). The aggregate impact
of the 229 stores on the Company’s consolidated financial
statements for the year ended December 29, 2001, totaled
$585.3 million in net sales and $13.7 million in operating
losses, which included depreciation and amortization
of $12.4 million, incremental markdowns incurred in
connection with liquidating inventory and incremental
payroll and other store-related costs incurred in connection
with closing and/or preparing the 229 stores for closing.
Whenever possible, the Company attempts to transfer the
customer base of its closed stores to adjacent CVS store
locations. The Company’s success in retaining customers
and the related impact on the above revenue and operating
income or loss, however, cannot be precisely calculated.
Following is a summary of the significant components of
the Restructuring Charge:
In millions
Noncancelable lease obligations $ 227.4
Asset write-offs 105.6
Employee severance and benefits 19.5
To t a l (1) $ 352.5
(1) The Restructuring Charge is comprised of $5.7 million
recorded in cost of goods sold and $346.8 million recorded
in selling, general and administrative expenses.
The Restructuring Charge will require total cash payments
of $246.9 million. The remaining Restructuring Charge
liability totaled $168.9 million as of January 3, 2004 and
$192.1 million as of December 28, 2002. The remaining
liability in both years primarily consisted of future cash
payments for noncancelable lease obligations extending
through 2024. The Company believes that the reserve
balances as of January 3, 2004 are adequate to cover the
remaining liabilities associated with the Restructuring Charge.
Noncancelable lease obligations included $227.4 million
for the estimated continuing lease obligations of the Stores,
the Mail Facility and the Satellite Facilities. As required
by EITF Issue 88-10, “Costs Associated with Lease
Modification or Termination,” the estimated continuing
lease obligations were reduced by estimated probable
sublease rental income.
Asset write-offs included $59.0 million for fixed asset
write-offs, $40.9 million for intangible asset write-offs
and $5.7 million for the markdown of certain inventory
to its net realizable value. The fixed asset and intangible
asset write-offs relate to the Stores, the Mail Facility
and the Satellite Facilities. Management’s decision to
close the above locations was considered to be an event
or change in circumstances as defined in SFAS No. 121.
Since management intended to use the Stores and the Mail
Facility on a short-term basis during the shutdown period,
impairment was measured using the “Assets to Be Held
and Used” provisions of SFAS No. 121. The analysis
was prepared at the individual location level, which is
the lowest level at which individual cash flows can be
identified. The analysis first compared the carrying amount
of the location’s assets to the location’s estimated future
cash flows (undiscounted and without interest charges)
through the anticipated closing date. If the estimated future
cash flows used in this analysis were less than the carrying
amount of the location’s assets, an impairment loss
calculation was prepared. The impairment loss calculation
compared the carrying value of the location’s assets to the
location’s estimated future cash flows (discounted and with
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