SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of
the
Securities Exchange Act of 1934
Date
of report (Date of earliest event reported): March 8,
2007
|
|
CVS
CORPORATION
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(Exact
Name of Registrant
as
Specified in Charter)
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|
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Delaware
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|
(State
or Other Jurisdiction of Incorporation)
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|
|
001-01011
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050494040
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(Commission
File Number)
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|
(IRS
Employer Identification No.)
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|
One
CVS Drive
Woonsocket,
Rhode Island
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|
02895
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(Address
of Principal Executive Offices)
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(Zip
Code)
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|
Registrant’s
telephone number, including area code:
(401) 765-1500
|
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
|
x |
Written
communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
|
|
o |
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
|
o |
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR
240.14d-2(b))
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|
o |
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR
240.13e-4(c))
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Section
8 - Other Events
Item
8.01 Other
Events
The
purpose of this Form 8-K is to update the joint proxy statement/prospectus
included in the Registration Statement on Form S-4, file No. 333-139470, filed
by CVS Corporation (“CVS”) with the Securities and Exchange Commission (the
“SEC”) and declared effective by the SEC on January 19, 2007, and mailed by CVS
and Caremark Rx, Inc. (“Caremark”) to their respective stockholders commencing
on January 19, 2007. The information contained in this Form 8-K is incorporated
by reference into the above-mentioned joint proxy
statement/prospectus.
Background
CVS,
Caremark and Twain MergerSub L.L.C., a Delaware limited liability company and
wholly owned subsidiary of CVS (formerly known as Twain MergerSub Corp.)
originally entered into an Agreement and Plan of Merger (the “Merger Agreement”)
dated as of November 1, 2006.
On
January 16, 2007, pursuant to a Waiver Agreement between CVS and Caremark (the
“Waiver Agreement”), CVS granted Caremark a waiver under the Merger Agreement to
permit Caremark to declare and pay, and Caremark agreed that it would declare
and pay, a one-time special cash dividend in the amount of $2.00 per outstanding
share of Caremark common stock. The Waiver Agreement provided that such dividend
would be declared prior to the Caremark stockholder meeting to vote on the
merger (to holders of record of Caremark common stock prior to the effective
time of the merger), but would only become payable, and such payment would
be
conditioned, upon the occurrence of the effective time of the merger.
In
addition, CVS and Caremark separately agreed under the Waiver Agreement that,
as
promptly as practicable after the closing of the merger, the combined company
would execute an accelerated share repurchase transaction (the “Accelerated
Share Repurchase”) on customary terms, whereby the combined company would retire
150 million shares of its common stock.
On
February 12, 2007, CVS and Caremark entered into an amendment to the Waiver
Agreement (the “First Waiver Amendment”) to change the one-time special cash
dividend to Caremark stockholders (conditioned on occurrence of the merger)
from
$2.00 per share to $6.00 per share. Prior to execution of the First Waiver
Amendment, the CVS board of directors met telephonically to consider the
increase to the special
cash dividend in consultation with outside legal and financial advisors and
in
connection therewith received updated financial advisor presentations and
opinions.
Increase
in Special Cash Dividend to $7.50 Per Share; CVS to Effect Issuer Self-Tender
After Closing of Merger Consistent with (and in lieu of ) Previously Announced
Accelerated Share Repurchase Program
On
March
8, 2007, CVS and Caremark agreed that the one-time special cash dividend payable
to Caremark stockholders (conditioned on occurrence of the merger) would be
increased from $6.00 per share to $7.50 per share. CVS and Caremark also agreed
that, promptly after closing of the merger, consistent with (and in lieu of)
the
previously announced Accelerated Share Repurchase, CVS/Caremark would undertake
a tender offer for 150 million (or about 10%) of its outstanding shares at
a
fixed price of $35.00 per share. CVS and Caremark entered into the Second Waiver
Amendment to effect these changes. Prior to agreeing to these changes, the
CVS
board of directors met to consider these matters in consultation with outside
legal and financial advisors, and the financial advisors provided their oral
opinions as to the fairness of the exchange ratio to CVS from a financial point
of view.
References
in the joint proxy statement/prospectus to a $2.00 special cash dividend (or
to
any adjustments relating to a $2.00 special cash dividend) should now be read
by
reference to the $7.50 special cash dividend. References in the joint proxy
statement/prospectus to the Accelerated Share Repurchase should now be
disregarded. For federal income tax purposes, Caremark and CVS intend to report
the $7.50 special cash dividend as a dividend on IRS Form 1099-DIV. It is also
expected that the special cash dividend will be reported as having been received
by holders of record of Caremark common stock on the record date for the
dividend, which is the day immediately preceding the closing date of the merger,
notwithstanding that, pursuant to the rules of the New York Stock Exchange,
the
dividend will be paid to holders of Caremark common stock as of the closing
of
the merger. Holders of Caremark common stock who sell or acquire Caremark common
stock after the record date for the special cash dividend should consult their
tax advisors regarding the tax consequences of such sale or acquisition,
including the allocation of the purchase price between the right to receive
payment of the special cash dividend and the Caremark common stock. Please
refer
to the joint proxy statement/prospectus for additional discussion regarding
the
federal income tax characterization and consequences of the special cash
dividend.
The
information in this Current Report describing CVS’ planned tender offer
following closing of the CVS/Caremark merger is for informational purposes
only
and does not constitute an offer to buy or the solicitation of an offer to
sell
shares of CVS/Caremark common stock in the tender offer. The tender offer will
be made only pursuant to the Offer to Purchase and the related materials that
CVS/Caremark will distribute to its shareholders and only if the CVS/Caremark
merger is consummated. Shareholders should read the Offer to Purchase and the
related materials carefully because they contain important information,
including the various terms and conditions of the tender offer. Subsequent
to
the closing of the CVS/Caremark merger, shareholders of CVS/Caremark will be
able to obtain a free copy of the Tender Offer Statement on Schedule TO, the
Offer to Purchase and other documents that CVS/Caremark will be filing with
the
Securities and Exchange Commission from the Commission’s website at www.sec.gov.
Shareholders may also obtain a copy of these documents, without charge, from
Morrow & Co., Inc., the information agent for the tender offer, toll free at
1 (800) 245-1502 when these documents become available. Shareholders are urged
to carefully read these materials prior to making any decision with respect
to
the tender offer. Shareholders and investors who have questions or need
assistance may call Morrow & Co., Inc., the information agent for the tender
offer, toll free at 1 (800) 245-1502.
A
copy of
the press release announcing these changes
and a copy of the Second Waiver Amendment
are
attached hereto as Exhibits 99.1 and 99.2, respectively, and incorporated by
reference herein.
Unaudited
Pro Forma Condensed Combined Financial Information
In
connection with the Second Waiver Amendment, CVS has revised the unaudited
pro
forma condensed combined financial information, prepared to give effect to
the
merger of CVS and Caremark, which were included in the joint proxy
statement/prospectus. The revised unaudited pro forma condensed combined
financial information are set forth below.
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The
following unaudited pro forma condensed combined financial information, which
is
referred to as the pro forma financial information, has been prepared to
give
effect to the merger of CVS and Caremark. The pro forma financial information
was prepared using the historical consolidated financial statements of CVS
and
Caremark as well as the financial information for the acquisition CVS completed
on June 2, 2006.
The
unaudited pro forma condensed combined balance sheet as of December 30, 2006
combines the audited consolidated balance sheet of CVS as of December 30, 2006
and Caremark as of December 31, 2006 and gives effect to the merger as if it
occurred on December 30, 2006.
The
unaudited pro forma condensed combined statement of operations for the fiscal
year ended December 30, 2006 combines the audited consolidated statement of
operations of CVS for the 52 week fiscal year ended December 30, 2006 with
the
audited statement of income of Caremark for the calendar year ended December
31,
2006 and gives effect to the merger as if it occurred on the first day of the
period presented.
The
pro
forma adjustments are preliminary and have been made solely for purposes of
developing the pro forma financial information for illustrative purposes
necessary to comply with the requirements of the SEC. The merger’s impact on the
actual results reported by the combined company in periods following the merger
may differ significantly from that reflected in these pro forma financial
statements for a number of reasons, including but not limited to, the impact
of
the incremental costs incurred in integrating the two companies. As a result,
the pro forma information is not necessarily indicative of what the combined
company’s financial condition or results of operations would have been had the
merger been completed on the applicable dates of this pro forma financial
information. In addition, the pro forma financial information does not purport
to project the future financial condition and results of operations of the
combined company.
CVS
and
Caremark stockholders should read the pro forma financial information in
conjunction with CVS’ and Caremark’s audited historical consolidated financial
statements, accompanying footnotes and the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in
CVS’ and Caremark’s Annual Reports on Form 10-K for the fiscal year ended
December 30, 2006 and December 31, 2006, respectively.
Unaudited
Pro Forma Condensed Combined Balance Sheet
December
30, 2006
In
millions, except per share amounts
|
|
CVS
Dec.
30, 2006
|
|
Caremark
Dec.
31, 2006
|
|
Pro
Forma
Adjustments
(a)
|
|
Pro
Forma Combined
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
530.7
|
|
$
|
804.0
|
|
$
|
(804.0
|
)
|
$
|
530.7
|
|
Short-term
investments
|
|
|
—
|
|
|
396.7
|
|
|
—
|
|
|
396.7
|
|
Accounts
receivable, net
|
|
|
2,377.4
|
|
|
2,231.8
|
|
|
(138.3
|
)(b)
|
|
4,470.9
|
|
Inventories
|
|
|
7,108.9
|
|
|
540.9
|
|
|
—
|
|
|
7,649.8
|
|
Deferred
income taxes
|
|
|
274.3
|
|
|
114.7
|
|
|
—
|
|
|
389.0
|
|
Other
current assets
|
|
|
100.2
|
|
|
33.8
|
|
|
—
|
|
|
134.0
|
|
Total
current assets
|
|
|
10,391.5
|
|
|
4,121.9
|
|
|
(942.3
|
)
|
|
13,571.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
5,333.6
|
|
|
319.9
|
|
|
—
|
|
|
5,653.5
|
|
Goodwill
|
|
|
3,195.2
|
|
|
7,072.9
|
|
|
18,649.5
|
|
|
28,917.6
|
|
Intangible
assets, net
|
|
|
1,318.2
|
|
|
686.1
|
|
|
1,255.9
|
|
|
3,260.2
|
|
Deferred
income taxes
|
|
|
90.8
|
|
|
—
|
|
|
—
|
|
|
90.8
|
|
Other
assets
|
|
|
240.5
|
|
|
30.3
|
|
|
—
|
|
|
270.8
|
|
Total
assets
|
|
$
|
20,569.8
|
|
$
|
12,231.1
|
|
$
|
18,963.1
|
|
$
|
51,764.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
4,813.7
|
|
$
|
3,993.1
|
|
$
|
(138.3
|
|
$
|
8,668.5
|
|
Accrued
transaction costs
|
|
|
—
|
|
|
—
|
|
|
76.4
|
|
|
76.4
|
|
Short-term
debt
|
|
|
1,842.7
|
|
|
—
|
|
|
—
|
|
|
1,842.7
|
|
Current
portion of long-term debt
|
|
|
344.3
|
|
|
—
|
|
|
—
|
|
|
344.3
|
|
Total
current liabilities
|
|
|
7,000.7
|
|
|
3,993.1
|
|
|
(61.9
|
)
|
|
10,931.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,870.4
|
|
|
—
|
|
|
2,395.2
|
|
|
5,265.6
|
|
Deferred
tax liability
|
|
|
—
|
|
|
232.0
|
|
|
492.3
|
|
|
724.3
|
|
Other
long-term liabilities
|
|
|
781.1
|
|
|
326.3
|
|
|
—
|
|
|
1,107.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preference
stock
|
|
|
213.3
|
|
|
—
|
|
|
—
|
|
|
213.3
|
|
Common
stock
|
|
|
8.5
|
|
|
0.5
|
|
|
6.6
|
|
|
15.6
|
|
Treasury
stock
|
|
|
(314.5
|
)
|
|
(2,429.4
|
)
|
|
2,429.4
|
|
|
(314.5
|
)
|
Shares
held in trust
|
|
|
—
|
|
|
(89.8
|
)
|
|
89.8
|
|
|
—
|
|
Guaranteed
ESOP obligation
|
|
|
(82.1
|
)
|
|
—
|
|
|
—
|
|
|
(82.1
|
)
|
Capital
surplus
|
|
|
2,198.4
|
|
|
8,714.5
|
|
|
15,095.7
|
|
|
26,008.6
|
|
Retained
earnings
|
|
|
7,966.6
|
|
|
1,499.1
|
|
|
(1,499.1
|
)
|
|
7,966.6
|
|
Accumulated
other comprehensive loss
|
|
|
(72.6
|
)
|
|
(15.2
|
)
|
|
15.2
|
|
|
(72.6
|
)
|
Total
stockholders’ equity
|
|
|
9,917.6
|
|
|
7,679.7
|
|
|
16,137.6
|
|
|
33,734.9
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
20,569.8
|
|
$
|
12,231.1
|
|
$
|
18,963.1
|
|
$
|
51,764.0
|
|
See
accompanying notes to unaudited pro forma condensed combined financial
statements, including Note 3 for an explanation of the preliminary unaudited
pro
forma adjustments.
Unaudited
Pro Forma Condensed Combined Statement of Operations
For
the Fiscal Year Ended December 30,
2006
In
millions, except per share amounts
|
|
CVS
Dec.
30, 2006
|
|
Completed Acquisition
(2)
Dec.
30, 2006
|
|
Caremark
Dec.
31, 2006
|
|
Pro
Forma Adjustments
|
|
Pro
Forma Combined
|
|
Net
revenue
|
|
$
|
43,813.8
|
|
$
|
2,373.9
|
|
$
|
36,750.2
|
|
$
|
(4,542.1
|
)(c)
|
$
|
78,395.8
|
|
Cost
of revenues
|
|
|
31,874.8
|
|
|
1,795.4
|
|
|
34,344.1
|
|
|
(4,542.1
|
)(c)
|
|
63,472.2
|
|
Gross
profit
|
|
|
11,939.0
|
|
|
578.5
|
|
|
2,406.1
|
|
|
—
|
|
|
14,923.6
|
|
Selling,
general and administrative expenses
|
|
|
9,497.4
|
|
|
494.5
|
|
|
675.1
|
|
|
57.4
|
(d)
|
|
10,724.4
|
|
Operating
profit
|
|
|
2,441.6
|
|
|
84.0
|
|
|
1,731.0
|
|
|
(57.4
|
)
|
|
4,199.2
|
|
Non-operating
gain, net
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest
expense (income), net
|
|
|
215.8
|
|
|
88.6
|
|
|
(38.4
|
)
|
|
167.7
|
(e)
|
|
433.7
|
|
Earnings/(loss)
before income tax provision/(benefit)
|
|
|
2,225.8
|
|
|
(4.6
|
)
|
|
1,769.4
|
|
|
(225.1
|
)
|
|
3,765.5
|
|
Income
tax provision/(benefit)
|
|
|
856.9
|
|
|
(1.7
|
)
|
|
695.4
|
|
|
(88.2
|
)(f)
|
|
1,462.4
|
|
Net
earnings/(loss)
|
|
|
1,368.9
|
|
|
(2.9
|
)
|
|
1,074.0
|
|
|
(136.9
|
)
|
|
2,303.1
|
|
Preference
dividends, net of income tax benefit
|
|
|
13.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13.9
|
|
Net
earnings/(loss) available to common stockholders
|
|
$
|
1,355.0
|
|
$
|
(2.9
|
)
|
$
|
1,074.0
|
|
$
|
(136.9
|
)
|
$
|
2,289.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
1.65
|
|
|
|
|
$
|
2.50
|
|
$ |
|
|
$
|
1.49
|
|
Weighted
average common shares outstanding
|
|
|
820.6
|
|
|
|
|
|
429.3
|
|
|
287.6
|
|
|
1,537.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
1.60
|
|
|
|
|
$
|
2.46
|
|
$ |
|
|
$
|
1.45
|
|
Weighted
average common shares outstanding
|
|
|
853.2
|
|
|
|
|
|
436.5
|
|
|
292.5
|
|
|
1,582.2
|
|
Dividends
declared per common share
|
|
$
|
0.1550
|
|
|
|
|
|
0.30000
|
|
|
—
|
|
$
|
0.1550
|
(g)
|
See
accompanying notes to unaudited pro forma condensed combined financial
statements, including Note 3 for an explanation of the preliminary unaudited
pro
forma adjustments.
Notes
to Unaudited Pro Forma Condensed Combined Financial
Statements
(Dollars
in millions)
Note
1—Basis of Presentation
The
unaudited pro forma condensed combined balance sheet as of December 30, 2006
combines the audited consolidated balance sheets of CVS and Caremark as of
December 30, 2006 and December 31, 2006, respectively and gives effect to the
merger as if it occurred on December 30, 2006.
The
unaudited pro forma condensed combined statement of operations for the fiscal
year ended December 30, 2006 gives effect to the merger as if it occurred on
the
first day of the period presented.
The
unaudited pro forma condensed combined financial statements, which are referred
to as pro forma financial statements, are based on the historical financial
statements of CVS and Caremark, as well as financial information for the
acquisition CVS completed on June 2, 2006, and give effect to the merger of
CVS
and Caremark under the purchase method of accounting. As a result, the pro
forma
financial statements are based on assumptions and adjustments, including
assumptions relating to the consideration paid and the allocation thereof to
the
assets acquired and liabilities assumed from Caremark based on preliminary
estimates of fair value. The final purchase price and the allocation thereof
will differ from that reflected in the pro forma financial statements after
valuation procedures are performed and amounts are finalized following the
completion of the merger.
The
pro
forma adjustments are preliminary and have been made solely for purposes of
developing the pro forma financial statements for illustrative purposes. The
merger’s impact on the actual results reported by the combined company in
periods following the merger may differ significantly from that reflected in
these pro forma financial statements. The pro forma financial statements do
not
give effect to the post-closing issuer self-tender offer discussed in this
Current Report on Form 8-K. In addition, the pro forma financial statements
do
not give effect to any potential cost savings or operating synergies that CVS
and Caremark expect to result from the merger, nor do they give effect to any
potential costs to be incurred in integrating the two companies.
Note
2—Completed
Acquisition
On
June
2, 2006, CVS acquired certain assets and assumed certain liabilities from
Albertson’s, Inc., which is referred to as Albertson’s, for $4.0 billion. The
assets acquired and the liabilities assumed included approximately 700
stand-alone drugstores and a distribution center, which are referred to
collectively as the Standalone Drug Business. CVS financed the acquisition
of
the Standalone Drug Business by issuing commercial paper and borrowing $1.0
billion from a bridge loan facility. During the third quarter of 2006, CVS
repaid a portion of the commercial paper used to finance the acquisition with
the proceeds received from the issuance of $800 million of 5.75% unsecured
senior notes due August 15, 2011 and $700 million of 6.125% unsecured senior
notes due August 15, 2016.
The
financial information included in the unaudited pro forma condensed combined
statement of operations is based on the historical results of the Standalone
Drug Business and includes the incremental interest expense for the indebtedness
incurred to finance the purchase and the impact of the preliminary purchase
price allocation. The incremental interest expense for the fiscal year ended
December 30, 2006 was $218.0 million. The impact of the preliminary purchase
price allocation included adjustments to convert the Standalone Drug Business
from the LIFO method to the FIFO method of accounting for inventories, resulting
in a reduction to gross profit for the fiscal year ended December 30, 2006
of
$4.0 million. In addition, the fiscal year ended December
30,
2006
reflects adjustments required to record incremental estimated depreciation
and
amortization on property, equipment and intangible assets over their useful
lives of $15.0 million and $52.0 million, respectively. For further information
on the purchase price allocation used by CVS see the “Notes to Consolidated
Condensed Financial Statements” included in CVS’ Annual Report on Form 10-K for
the fiscal year ended December 30, 2006.
Note
3—Unaudited
Pro Forma Adjustments
The
purchase price allocation included in the pro forma financial statements is
preliminary and is based on information that was available to management of
CVS
and Caremark at the time the pro forma financial statements were prepared.
Accordingly, the purchase price and the allocation thereof will change and
the
impact of such changes could be material.
Unaudited
Pro Forma Condensed
Combined Balance Sheet
(a) Purchase
price:
For
each share of Caremark common stock outstanding, Caremark stockholders will
have
the right to receive 1.670 shares of CVS common stock (together with cash in
lieu of fractional shares). Additionally, CVS will issue replacement stock
options under a formula whereby each Caremark optionee will receive options
to
purchase 1.670 shares of CVS/Caremark common stock for each underlying option
to
purchase shares of Caremark common stock. Each option of the combined company
will have an exercise price per share equal to (1) the aggregate exercise price
required to purchase all shares of Caremark common stock subject to the Caremark
option before the completion of the merger divided by
(2) the
number of shares of CVS/Caremark common stock subject to the option after
completion of the merger, rounded up to the nearest whole cent.
The
pro
forma purchase price, which would have been paid to Caremark stockholders under
the computation specified in the merger agreement, is based on the number of
shares of Caremark common stock and stock options outstanding as of December
30,
2006.
Under
the
provisions of Statement of Financial Accounting Standards No. 141, Business
Combinations,
CVS is
treated as the acquiror of Caremark for accounting purposes. Accordingly, the
combined company will allocate the purchase price paid by CVS to the fair value
of the Caremark assets acquired and liabilities assumed. Due to legal
restrictions, many of the details concerning individual assets and liabilities
cannot be disclosed between CVS and Caremark prior to the merger’s completion.
Therefore, the pro forma presentation presumes that the historical value of
Caremark’s tangible assets and liabilities approximates fair value.
Additionally, the allocation of purchase price to acquired intangible assets
is
preliminary and subject to the final outcome of independent analyses to be
conducted after the completion of the merger. The residual amount of the
purchase price has been allocated to goodwill. The actual amounts recorded
when
the merger is completed may differ materially from the pro forma amounts
presented herein.
Aggregate
purchase price of Caremark common stock (1)
|
|
$
|
23,269.4
|
|
Non-cash
purchase price- fair value of stock options (2)
|
|
|
547.9
|
|
Caremark
Special Cash Dividend (3)
|
|
|
3,199.1
|
|
Accrued
transaction costs (4)
|
|
|
50.0
|
|
Aggregate
consideration
|
|
|
27,066.4
|
|
Book
value of the net assets acquired as of December 30, 2006
|
|
|
606.8
|
|
Intangible
assets, net (5)
|
|
|
1,255.9
|
|
Deferred
Tax Liability (6)
|
|
|
(492.3
|
)
|
Accrued
Expenses (7)
|
|
|
(26.4
|
)
|
Goodwill
|
|
$
|
25,722.4
|
|
|
(1)
|
The
aggregate purchase price of Caremark common stock is calculated
as follows
(in millions, except ratios and per share
amounts):
|
Exchange
ratio
|
|
|
1.670
|
|
Average
closing price per share of CVS common stock for the five trading
days
ending February 14, 2007(a)
|
|
$
|
32.67
|
|
Total
purchase price per share
|
|
|
54.55
|
|
Caremark
shares outstanding (December 31, 2006)
|
|
|
426.6
|
|
Total
purchase price excluding fair value of stock options, Caremark
Special
Dividend and transaction Costs
|
|
$
|
23,269.4
|
|
|
(a) |
As
a result of the waiver to allow for a special dividend pursuant
to the
Waiver Agreement, as amended, this calculation reflects the average
closing price per share of CVS common stock for the five trading
days
ending February 14, 2007.
|
(2)
|
At
the effective time of the merger, Caremark stock options will be
exchanged
for stock options to purchase shares of CVS/Caremark common stock
exercisable for that number of shares of CVS/Caremark common stock
equal
to the number of shares of Caremark common stock previously subject
to the
corresponding Caremark stock option multiplied by 1.670 at an exercise
price per share equal to (1) the aggregate exercise price required
to
purchase all shares of Caremark common stock subject to the Caremark
option before the completion of the merger divided by (2) the number
of
shares of CVS/Caremark common stock subject to the option after
completion
of the merger, rounded up to the nearest whole cent.
|
|
|
|
The
fair value of the options issued to Caremark optionees, net of
the fair
value of unvested options, represents additional purchase consideration.
Substantially all options outstanding to Caremark optionees will
accelerate vesting at the time of the merger, due to provisions
of the
underlying stock options plan, upon change of control. For purposes
of the
pro forma financial statements, it is assumed that the change in
control
provisions resulted in all options being fully vested as of the
balance
sheet date, December 30, 2006. The aggregate fair value of these
options,
for the purposes of the pro forma balance sheet, was calculated
using the
Black-Scholes option pricing model and following assumptions (in
millions,
except per share amounts, ratios and
percentages):
|
Expected
term (years)
|
|
|
1.75
|
|
Risk
free interest rate
|
|
|
4.75
|
%
|
Dividend
yield
|
|
|
0.48
|
%
|
Expected
volatility
|
|
|
21.40
|
%
|
Weighted
average fair value
|
|
|
16.43
|
|
Number
of shares underlying options(i)
|
|
|
33.3
|
|
Aggregate
fair value allocated to purchase price
|
|
$
|
547.9
|
|
|
|
|
(i)
|
Number
of shares underlying options was computed using the exchange ratio
of
1.670:1 share based on Caremark’s options outstanding at December 31,
2006.
|
|
|
|
|
(ii)
|
The
aggregate fair value of the options calculated above does not reflect
adjustments to the options to be effected at closing to reflect the
special cash dividend. |
|
|
(3)
|
Represents
the Caremark special cash dividend in the amount of $7.50 per share
to be
paid pursuant to the terms as set forth in the Waiver Agreement,
as
amended, and as more fully described in this Current Report on
Form 8-K.
Such dividend is expected to be funded utilizing a combination
of cash
($804.0 million) and long-term debt.
|
|
|
(4)
|
Represents
the estimated transaction costs related to the merger, which primarily
includes investment banker fees and professional fees.
|
|
|
(5)
|
Represents
the adjustments to record intangible assets at estimated fair value,
net
of the elimination of historical Caremark amounts and includes
customer
relationships ($1,173.9 million, net of $686.1 million of historical
Caremark amounts), proprietary technology ($15.0 million) and trade
names
($67.0 million).
|
|
|
(6)
|
Represents
the estimated deferred income tax benefit of the acquired intangible
assets (other than goodwill).
|
|
|
(7)
|
Represents
estimated costs associated with provisions of employment agreements
that
would require future payment.
|
|
(b)
|
Intercompany
elimination: Adjustments necessary to eliminate trade receivables and
payables between CVS and Caremark related to CVS being included
in
Caremark’s pharmacy networks.
|
Unaudited
Pro Forma Condensed Combined Statement of Operations
|
(c)
|
Represents
the adjustment necessary to eliminate revenues and cost of revenue,
of CVS
and Caremark that represent inter-company amounts that would ordinarily
be
eliminated in the preparation of consolidated financial
statements.
|
|
|
|
|
(d)
|
Represents
the adjustment to record estimated incremental depreciation and
amortization on identifiable intangible assets over their respective
useful lives. Customer relationships are amortized over an estimated
useful life of 19 years. Proprietary technology is amortized over
an
estimated useful life of 5 years, while trade names are estimated
to have
indefinite life and are not amortized. In accordance with SFAS
No. 142,
“Goodwill and Other Intangible Assets,” the unaudited pro forma combined
condensed statements of operations do not include goodwill
amortization.
|
|
|
|
|
(e)
|
Represents
the adjustments to record the pro forma interest expense on the
long-term
debt used to fund the Caremark Special Cash Dividend utilizing
an interest
rate of 7%.
|
|
|
|
|
(f)
|
Represents
the adjustments to record the pro forma combined income tax provision
at
the estimated effective income tax rate of the combined
company.
|
|
|
|
|
(g)
|
Pro
forma combined dividends declared per common share were computed
using the
CVS dividend rate.
|
Note
4—Unaudited Pro Forma Combined Earnings Per Common Share
Unaudited
pro forma combined earnings per common share are computed in accordance with
SFAS No. 128, “Earnings
Per Share”.
Pro
forma combined basic earnings per CVS common share is computed by dividing:
(i)
pro forma combined net earnings, after deducting the after-tax dividends on
the
CVS ESOP preference stock, by (ii) the weighted average number of CVS common
shares outstanding during the period as if the merger had occurred on the first
day of the period presented, which are referred to as the basic
shares.
When
computing pro forma combined diluted earnings per common share, CVS assumes
that
the CVS ESOP preference stock is converted into CVS common stock and all
dilutive stock options are exercised. After the assumed CVS ESOP preference
stock conversion, the trustee of the ESOP would hold CVS common stock rather
than CVS ESOP preference stock and would receive CVS common stock dividends
($0.155 annually per share in 2006) rather than CVS ESOP preference stock
dividends (currently $3.90 annually per share). Since the CVS trustee of the
ESOP uses the dividends it receives to service its debt, CVS would have to
increase its contribution to the CVS trustee of the ESOP to compensate it for
the lower dividends. This additional contribution would reduce CVS’ net
earnings, which in turn, would reduce the amounts that would have to be accrued
under CVS’ incentive compensation plans. Pro forma combined diluted earnings per
common share is computed by dividing: (i) pro forma combined net earnings,
after
accounting for the difference between the dividends on the CVS ESOP preference
stock and CVS 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 awards are exercised and the CVS ESOP
preference stock is converted into CVS common stock.
Both
the
basic and diluted average number of shares of Caremark common stock outstanding
have been adjusted to reflect the impact of the merger by applying the 1.670:1
exchange ratio to amounts historically reported by Caremark.
The
following table provides the computational data for unaudited combined pro
forma
basic and diluted earnings per share for the periods presented:
In
millions, except per share amounts
|
|
Preliminary
Pro Forma Fiscal Year Ended December 30, 2006
|
|
Numerator
for pro forma combined earnings per common share:
|
|
|
|
|
Unaudited
pro forma combined net earnings
|
|
$
|
2,303.1
|
|
Preference
dividends, net of income tax benefit
|
|
|
(13.9
|
)
|
Net
pro forma combined earnings available to common stockholders,
basic
|
|
$
|
2,289.2
|
|
|
|
|
|
|
Unaudited
pro forma combined net earnings
|
|
|
2,303.1
|
|
Dilutive
earnings adjustment
|
|
|
(4.2
|
)
|
Net
pro forma combined earnings available to common stockholders,
diluted
|
|
$
|
2,298.9
|
|
|
|
|
|
|
Denominator
for pro forma combined earnings per common share:
|
|
|
|
|
Weighted
average common shares, basic
|
|
|
1,537.5
|
|
Effect
of dilutive securities:
|
|
|
|
|
Preference
stock
|
|
|
18.8
|
|
Stock
options
|
|
|
23.6
|
|
Other
stock awards
|
|
|
2.3
|
|
Weighted
average common shares, diluted
|
|
|
1,582.2
|
|
Pro
forma combined basic earnings per common share
|
|
$
|
1.49
|
|
Pro
forma combined diluted earnings per common share
|
|
$
|
1.45
|
|
The
unaudited pro forma combined basic and diluted earnings per share of common
stock do not purport to be indicative of the actual results that would have
been
achieved by the combined company for the periods presented or that will be
achieved by the combined company in the future.
Section
9 - Financial Statements and Exhibits
Item
9.01 Financial
Statements and Exhibits
Exhibit
No.
|
|
Document
|
99.1
|
|
Press
Release, dated March 8, 2007, of CVS Corporation
|
|
|
|
99.2
|
|
Second
Amendment to Waiver Agreement dated as of March 8, 2007 between CVS
Corporation and Caremark Rx, Inc.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
|
CVS
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
Date:
|
March
8, 2007
|
|
By:
|
/s/
Douglas A. Sgarro
|
|
|
|
|
Name:
|
Douglas
A. Sgarro
|
|
|
|
|
Title:
|
Executive
Vice President and Chief Legal
Officer
|
EXHIBIT
INDEX
Exhibit
No.
|
|
Document
|
99.1
|
|
Press
Release, dated March 8, 2007, of CVS Corporation
|
|
|
|
99.2
|
|
Second
Amendment to Waiver Agreement dated as of March 8, 2007 between CVS
Corporation and Caremark Rx, Inc.
|
14