CVS 2006 Annual Report Download - page 21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
18 CVS Corporation
On December 20, 2006, the initial waiting period under the Hart-Scott-
Rodino Act for the CVS/Caremark merger, expired without a request for
additional information from the U.S. Federal Trade Commission.
On January 7, 2007, Caremark issued a press release announcing that
its board of directors, after thorough consideration and consultation with
its legal and financial advisers, had determined that the Express Scripts
proposal did not constitute, and was not reasonably likely to lead to, a
superior proposal under the terms of the merger agreement with CVS.
Caremark further announced that its board of directors had unanimously
concluded that pursuing discussions with Express Scripts was not in the
best financial or strategic interests of Caremark and its shareholders.
On January 16, 2007, CVS and Caremark announced that Caremark
shareholders would receive a special one-time cash dividend of $2 per share
upon or promptly after closing of the transaction. In addition, CVS and
Caremark agreed that as promptly as practicable after the closing of the
merger, an accelerated share repurchase transaction will be executed,
whereby 150 million of the outstanding shares of the combined entity
will be retired. On January 19, 2007, the Registration Statement on Form
S-4 relating to the proposed merger was declared effective by the Securities
and Exchange Commission (the “SEC”). In addition, a special meeting
of Caremark shareholders to approve the merger was scheduled for
February 20, 2007 and a special meeting of CVS shareholders to be
held for the same purpose was scheduled for February 23, 2007.
On February 13, 2007, CVS and Caremark announced that the special
one-time cash dividend payable to Caremark shareholders upon or promptly
after closing of the transaction would be increased to $6 per share.
Caremark also announced that on February 12, 2007 its board of directors
had declared the $6 special cash dividend payable upon or promptly
after closing of the merger to Caremark shareholders of record on the
date immediately preceding the closing date of the merger. In connection
with its declaration of such dividend, the Caremark board also unanimously
reaffirmed its recommendation that Caremark shareholders vote “for”
the merger with CVS at the Caremark special meeting of shareholders.
On February 13, 2007, the Court of Chancery of the State of Delaware
determined that, to permit additional time for dissemination to Caremark
shareholders of certain newly filed information, the Caremark special
meeting of shareholders to approve the merger must be postponed to a
date not earlier than March 9, 2007. On February 23, 2007, the Court
of Chancery of the State of Delaware further delayed the Caremark
shareholder vote until twenty days after Caremark makes supplemental
disclosures regarding Caremark shareholders’ right to seek appraisal
and the structure of fees to be paid by Caremark to its financial advisors.
The supplemental disclosures were mailed to Caremark shareholders on
February 24, 2007, at which time Caremark announced that its special
meeting of shareholders to approve the merger had been adjourned
to March 16, 2007. On February 23, 2007, CVS announced that
The following discussion should be read in conjunction with our audited
consolidated financial statements and our Cautionary Statement Concerning
Forward-Looking Statements that are presented in this Annual Report.
OUR BUSINESS
Our Company is a leader in the retail drugstore industry in the United
States. We sell prescription drugs and a wide assortment of general
merchandise, including over-the-counter drugs, beauty products and
cosmetics, film and photofinishing services, seasonal merchandise,
greeting cards and convenience foods through our CVS/pharmacy® retail
stores and online through CVS.com®. We also provide healthcare services
through our 146 MinuteClinic healthcare clinics, located in 18 states,
of which 129 are located within CVS retail drugstores. In addition,
we provide pharmacy benefit management, mail order services and
specialty pharmacy services through PharmaCare Management Services
(“PharmaCare”) and PharmaCare Pharmacy® stores. As of December 30,
2006, we operated 6,202 retail and specialty pharmacy stores in 43 states
and the District of Columbia.
PROPOSED CAREMARK MERGER
On November 1, 2006, we entered into a definitive agreement and plan
of merger with Caremark Rx, Inc., (“Caremark”). The agreement is
structured as a merger of equals under which Caremark shareholders will
receive 1.670 shares of common stock, par value $0.01 per share, of
CVS for each share of common stock of Caremark, par value $0.001 per
share, issued and outstanding immediately prior to the effective time of
the merger. The closing of the transaction, which is expected to occur
during the first quarter of 2007, is subject to approval by the shareholders
of both CVS and Caremark, as well as customary regulatory approvals,
including review under the Hart-Scott-Rodino Act. Accordingly, there
can be no assurance the merger will be completed.
Caremark is a leading pharmacy benefits manager in the United States.
Caremark’s operations involve the design and administration of programs
aimed at reducing the costs and improving the safety, effectiveness and
convenience of prescription drug use. Caremark operates a national retail
pharmacy network with over 60,000 participating pharmacies (including
CVS/pharmacy stores), 7 mail service pharmacies, 21 specialty mail
service pharmacies and the industry’s only repackaging plant regulated
by the Food & Drug Administration. Through its Accordant® disease
management offering, Caremark also provides disease management
programs for 27 conditions. Twenty-one of these programs are accredited
by the National Committee for Quality Assurance.
On December 18, 2006, Caremark received an unsolicited offer from a
competing pharmacy benefits manager, Express Scripts, Inc. (“Express
Scripts”) pursuant to which Express Scripts offered to acquire all of the
outstanding shares of Caremark for $29.25 in cash and 0.426 shares of
Express Scripts common stock for each share of Caremark common stock.