1. Significant Accounting Policies
Basis of presentation ~ The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated.
Fiscal Year ~ The Company operates on a "52/53 week" fiscal year. Fiscal year 2000 ended December 30, 2000 and included 52 weeks. Fiscal 1999 and 1998 ended on January 1, 2000 and December 26, 1998 and included 53 weeks and 52 weeks, respectively. Unless otherwise noted, all references to years relate to the Company’s fiscal year.
Use of estimates ~ The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications ~ Certain reclassifications have been made to the consolidated financial statements of prior years to conform to the current year presentation.
Cash and cash equivalents ~ Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less when purchased.
Accounts receivable ~ Accounts receivable are stated net of an allowance for uncollectible accounts of $47.9 million and $41.1 million as of December 30, 2000 and January 1, 2000, respectively. The balance primarily includes amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies and governmental agencies) and vendors.
Inventories ~ Inventories are stated at the lower of cost or market using the first-in, first-out method.
Financial instruments ~ Financial instruments include cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings. Due to the short-term nature of these instruments, the Company's carrying value approximates fair value. The fair value of long-term debt was $290 million as of December 30, 2000. The Company has no investments in derivative financial instruments.
Property and equipment ~ Depreciation of property and equipment is computed on a straight-line basis, generally over the estimated useful lives of the asset or, when applicable, the term of the lease, whichever is shorter. Estimated useful lives generally range from 10 to 40 years for buildings and improvements, 3 to 10 years for fixtures, equipment and software and 5 to 10 years for leasehold improvements.
Following are the components of property and equipment included in the consolidated balance sheets as of the respective balance sheet dates:
Description of business ~ CVS Corporation ("CVS" or the "Company") is principally in the retail drugstore business. As of December 30, 2000, the Company operated 4,133 retail and specialty pharmacy drugstores and various mail order facilities located in 31 states and the District of Columbia. See Note 9 for further information about the Company’s business segments.
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| In millions | December 30, 2000 |
January 1, 2000 |
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| Land | $ 97.1 | $ 89.6 |
| Buildings and improvements | 333.1 | 239.1 |
| Fixtures, equipment and software | 1,536.6 | 1,488.4 |
| Leasehold improvements | 632.3 | 585.3 |
| Capital leases | 2.2 | 2.2 |
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| 2,601.3 | 2,404.6 | |
| Accumulated depreciation and amortization | (859.2) | (803.6) |
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| $ 1,742.1 | $ 1,601.0 | |
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Impairment of long-lived assets ~ The Company primarily groups and evaluates fixed and intangible assets at an individual store level, which is the lowest level at which individual cash flows can be identified. Goodwill is allocated to individual stores based on historical store contribution, which approximates store cash flow. Other intangible assets (i.e., patient prescription files and favorable lease interests) are typically store specific and, therefore, are directly assigned to individual stores. When evaluating assets for potential impairment, the Company first compares the carrying amount of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows used in this analysis are less than the carrying amount of the asset, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset to the asset’s estimated future cash flows (discounted and with interest charges). If the carrying amount exceeds the asset’s estimated future cash flows (discounted and with interest charges), an impairment loss is recorded.
Goodwill ~ Goodwill, which represents the excess of the purchase price over the fair value of net assets acquired, is amortized on a straight-line basis generally over periods of 40 years. Accumulated amortization was $127.3 million and $105.0 million as of December 30, 2000 and January 1, 2000, respectively. The Company evaluates goodwill for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. If the carrying amount of the goodwill exceeds the expected undiscounted future cash flows, the Company records an impairment loss.
Other assets ~ Other assets primarily include patient prescription file purchases, which are amortized on a straight-line basis over their estimated useful life, cash surrender values of certain Company-owned life insurance policies and favorable leases, which are amortized on a straight-line basis over the life of the lease.
Revenue recognition ~ The Company recognizes revenue from the sale of merchandise at the time the merchandise is sold. Service revenue from the Company's pharmacy benefit management and internet segments is recognized at the time the service is provided.
Vendor allowances ~ The total value of any up-front or other periodic payments received from vendors that are linked to purchase commitments is initially deferred. The deferred amounts are then amortized to reduce cost of goods sold over the life of the contract based upon periodic purchase volume. The total value of any up-front or other periodic payments received from vendors that are not linked to purchase commitments is also initially deferred. The deferred amounts are then amortized to reduce cost of goods sold on a straight-line basis over the life of the related contract. Funds that are directly linked to advertising commitments are recognized as a reduction of advertising expense when the related advertising commitment is satisfied.
Store opening and closing costs ~ New store opening costs are charged directly to expense when incurred. When the Company closes a store, the estimated unrecoverable costs, including the remaining lease obligation, are charged to expense.
Advertising costs ~ External costs incurred to produce media advertising are charged to expense when the advertising takes place.
Stock-based compensation ~ The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under SFAS No. 123, companies can elect to account for stock-based compensation using a fair value based method or continue to measure compensation expense using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has elected to continue to account for its stock-based compensation plans under APB Opinion No. 25. See Note 5 for further information about the Company's stock incentive plans.
Insurance ~ The Company is self-insured for general liability, workers' compensation and automobile liability claims up to $500,000. Third party insurance coverage is maintained for claims that exceed this amount. The Company's self-insurance accruals are calculated using standard insurance industry actuarial assumptions and the Company’s historical claims experience.
Income taxes ~ Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as for the deferred tax effects of tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Interest expense, net ~ Interest expense was $84.1 million, $66.1 million and $69.7 million and interest income was $4.8 million, $7.0 million and $8.8 million in 2000, 1999 and 1998, respectively.
Nonrecurring gain ~ During 2000, the Company recorded a $19.2 million pre-tax ($11.5 million after-tax) nonrecurring gain in total operating expenses, which represented a partial payment of the Company's share of the settlement proceeds from a class action lawsuit against certain manufacturers of brand name prescription drugs. The timing and amount of any future payments have yet to be determined.
Earnings per common share ~ Basic earnings per common share is computed by dividing: (i) net earnings, after deducting the after-tax dividends on the ESOP preference stock, by (ii) the weighted average number of common shares outstanding during the year (the "Basic Shares").
When computing diluted earnings per common share, the Company assumes that the ESOP preference stock is converted into common stock and all dilutive stock options are exercised. After the assumed ESOP preference stock conversion, the ESOP trust would hold common stock rather than ESOP preference stock and would receive common stock dividends (currently $0.23 per share) rather than ESOP preference stock dividends (currently $3.90 per share). Since the ESOP Trust uses the dividends it receives to service its debt, the Company would have to increase its contribution to the ESOP trust to compensate it for the lower dividends. This additional contribution would reduce the Company's net earnings, which in turn, would reduce the amounts that would be accrued under the Company's incentive compensation plans.
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 options are exercised and the ESOP preference stock is converted into common stock.
New Accounting Pronouncements ~ Effective fiscal 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities—an amendment to FASB Statement No. 133." These statements, which established the accounting and financial reporting requirements for derivative instruments, require companies to recognize derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.
During the fourth quarter of 2000, the Company adopted Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements." The bulletin summarizes the application of generally accepted accounting principles to revenue recognition in financial statements. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.
