CVS 2007 Annual Report Download - page 65

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61 I 2007 Annual Report
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 guaran-
tees 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 29,
2007, the Company guaranteed approximately 220 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 $325 to $375 mil-
lion as of December 29, 2007.
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.
In 2006, a number of shareholder derivative lawsuits have been
filed in the Tennessee state court and the Tennessee federal court
against Caremark and various officers and directors of Caremark
seeking, among other things, a declaration that the directors
breached their fiduciary duties, imposition of a constructive trust
upon any illegal profits received by the defendants and punitive
and other damages. The cases brought in the Tennessee federal
court were consolidated into one action in August 2006, and
the consolidated action was voluntarily dismissed without
prejudice by the plaintiffs in March 2007. The cases brought in
the Tennessee state court were also consolidated into one action,
and the plaintiffs amended their complaint to add CVS and
its directors as defendants and to allege class action claims.
A stipulation of settlement was entered into by the parties on
July 5, 2007, which provided, among other things, that (i) the
plaintiffs will dismiss the case and release the defendants from
claims asserted in the action, (ii) a temporary restraining order
issued by the court in March 2007 will be vacated, (iii) defendants
will agree to maintain for at least four years a number of
corporate governance provisions relating to the granting, exercise
and disclosure of stock option awards and (iv) the defendants will
not oppose plaintiffs’ petition for an award of attorneys’ fees and
expenses not to exceed $7.5 million. As part of the settlement,
the defendants specifically denied any liability or wrongdoing
with respect to all claims alleged in the litigation, including claims
relating to stock option backdating, and acknowledged that they
entered into the settlement solely to avoid the distraction, burden
and expense of the pending litigation. The settlement was orally
approved by the court, but it remains subject to final court
approval. The settlement is also subject to a pending application
for extraordinary appeal filed by plaintiffs’ counsel relating to the
court’s prior rulings concerning the settlement and the award of
attorney’s fees and expenses.
Caremark’s subsidiary Caremark, Inc. (now known as Caremark,
L.L.C.) is a defendant in a qui tam lawsuit initially filed by a relator
on behalf of various state and federal government agencies in
Texas federal court in 1999. The case was unsealed in May 2005.
The case seeks money damages and alleges that Caremark’s
processing of Medicaid and certain other government claims on
behalf of its clients violates applicable federal or state false claims
acts and fraud statutes. The U.S. Department of Justice and the
States of Texas, Tennessee, Florida, Arkansas, Louisiana and
California intervened in the lawsuit, but Tennessee and Florida
withdrew from the lawsuit in August 2006 and May 2007,
respectively. A phased approach to discovery is ongoing. The parties
have filed cross motions for partial summary judgment, argued
those motions before the court, and final rulings are pending.
In December 2007, the Company received a document subpoena
from the Office of Inspector General within the United States
Department of Health and Human Services requesting certain
information relating to the processing of Medicaid claims and
claims of certain other government programs on an adjudication
platform of AdvancePCS (now known as CaremarkPCS, L.L.C.).
The Company will cooperate with these requests for information
and cannot predict the timing, outcome, or consequence of the
review of such information.
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