Caremark 2006 Annual Report Download

Download and view the complete annual report

Please find the complete 2006 Caremark annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 57

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57

More good things ON THE HORIZON
CVS CORPORATION
2006 ANNUAL REPORT

Table of contents

  • Page 1
    More good things ON THE HORIZON CVS CORPORATION 2006 ANNUAL REPORT

  • Page 2
    ... at calendar year end $ 43,813.8 2,441.6 1,368.9 1.60 30.91 25,479.1 $ 37,006.2 2,019.5 1,224.7 1.45 26.42 21,514.0 18.4% 20.9% 11.8% 10.3% 17.0% 18.4% STORE COUNT AT YEAR END 06 05 04 6,202 5,471 5,375 CVS/pharmacy and PharmaCare Specialty Pharmacy locations ANNUAL DIVIDENDS DECLARED...

  • Page 3
    ... United States. Our 176,000 colleagues work hard to make things "CVS easy" for our customers - from the pharmacy and the front of the store to MinuteClinic, PharmaCare, and CVS.com. Our company trades on the New York Stock Exchange under the ticker symbol "CVS." OUR VISION We help people live longer...

  • Page 4
    ... leadership in southern California, and we have made great progress in rapidly integrating and converting the stores to the CVS/pharmacy® brand. We also acquired MinuteClinic®, the pioneer and largest provider of retail healthcare in the United States, and have already nearly doubled the number...

  • Page 5
    ... of prescriptions filled. Although their lower prices depress revenue growth, generics are more profitable and help fuel our margin gains. They also help reduce overall healthcare costs for patients and payors. Our PharmaCare pharmacy benefits management (PBM) and specialty pharmacy business...

  • Page 6
    ... to improve our industry. Creating a company that serves payors and consumers more efficiently As this report goes to press, we are also close to a shareholder vote on our proposed merger of equals with Caremark Rx, Inc. If successful, the resulting entity, CVS/Caremark Corporation, 2006 Annual...

  • Page 7
    ... the CVS/pharmacy brand and our operational strength to drive growth. In MinuteClinic, we took an important step in broadening our healthcare offerings. Finally, our pending merger with Caremark would position us to be the low-cost provider and to offer payors, insurers, and consumers greater choice...

  • Page 8
    CVS Corporation enjoyed an outstanding year in 2006, and we see "more good things" on the horizon - for our customers and shareholders alike. We're opening new stores in some of the nation's fastest-growing markets, introducing even more consumers to our exclusive brands and the "CVS easy" shopping ...

  • Page 9
    ... an annual rate of 5 to 8 percent for the foreseeable future. With more locations than any other U.S. pharmacy retailer, CVS stands to be among the chief beneficiaries of this long-term trend. An aging population, rising use of generic drugs, the Medicare Part D prescription drug benefit, and new...

  • Page 10
    More good things FOR HEALTHY LIVING 2006 Annual Report 

  • Page 11
    ...card, helped drive industryleading same store sales growth in the front of the store. Stroll the aisles of a CVS/pharmacy and you will find a collection of exceptional brands not available at any other drugstore in the United States. In addition to our extensive line of over-the-counter medications...

  • Page 12
    More good things AT YOUR FINGERTIPS 2006 Annual Report 

  • Page 13
    More good things IN STORE 0 CVS Corporation

  • Page 14
    ...in retail-based health clinics since its launch in 2000, and we purchased the company in 2006. With our pharmacy accounting for 70 percent of CVS store sales, the combination makes a lot of sense. For starters, MinuteClinic allows us to broaden the role CVS plays as a provider of healthcare services...

  • Page 15
    More good things DOWN THE ROAD 2 CVS Corporation

  • Page 16
    ... business as we leverage a long-term turnaround opportunity. More CVS/pharmacy locations are on the way. We plan to open 275 new or relocated stores in 2007, adding another 3 percent to our total retail square footage. CVS/pharmacy Markets PharmaCare Specialty Pharmacy Stores 2006 Annual Report...

  • Page 17
    More good things BEYOND OUR STORES  CVS Corporation

  • Page 18
    ...costs, and the strength of the CVS/pharmacy retail network. For most people, the CVS name is synonymous with our 6,150 retail pharmacies located from coast to coast. Through our PharmaCare subsidiary, we also operate strong mail order, specialty pharmacy, and pharmacy benefits management businesses...

  • Page 19
    ... than just stores into our communities. Through the CVS All Kids Can program, we're improving the lives of children with disabilities and giving them an opportunity to learn, play, and succeed in life. CVS funds the Easter Seals Therapeutic Day School and Autism Research Center in Chicago, partners...

  • Page 20
    ... of Operations Consolidated Balance Sheets Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Five-Year Financial Summary Report of Independent Registered Public Accounting Firm 28 29 30 31 32 33 34 51 52 18 2006 Annual...

  • Page 21
    ...management, mail order services and specialty pharmacy services through PharmaCare Management Services ("PharmaCare") and PharmaCare Pharmacy® stores. As of December 0, 2006, we operated 6,202 retail and specialty pharmacy stores in  states and the District of Columbia. PROPOSED CAREMARK MERGER...

  • Page 22
    ... Eckerd Corporation ("Eckerd"). This acquisition included more than ,200 Eckerd retail drugstores and Eckerd Health Services, which included Eckerd's mail order and pharmacy benefit management businesses (collectively, the "200 Acquired Businesses"). Excluding the revenues from the 200 Acquired...

  • Page 23
    ... the number of significant new drug introductions, higher consumer co-payments and co-insurance arrangements and an increase in the number of over-the-counter remedies that had historically only been available by prescription. To address the growth in mail order, we may choose not to participate in...

  • Page 24
    ...you review our results in this area, we believe you should consider the following important information: • The effective income tax rate was negatively impacted during 2006 due to the implementation of SFAS No. 2(R), as the compensation expense associated with our employee stock purchase plan is...

  • Page 25
    ... and improved inventory management. Net cash used in investing activities increased to $.6 billion in 2006. This compares to $0. billion in 2005 and $.2 billion in 200. The increase in net cash provided by investing activities was primarily due to the acquisition of the Standalone Drug Business...

  • Page 26
    ... merger agreement with Caremark and other financial information. Although we currently believe our long-term debt ratings will remain investment grade, we cannot guarantee the future actions of Moody's and Standard & Poor's. Our debt ratings have a direct impact on our future borrowing costs...

  • Page 27
    ... critical accounting policies with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosures relating to them. Our impairment loss calculation contains uncertainty since we must use judgment to estimate each store's future sales, profitability and cash flows...

  • Page 28
    ...it relates to our general liability, workers' compensation and auto liability. Similar reviews are conducted semi-annually to determine that our selfinsurance liability is adequate for our health and medical liability. Our total self-insurance liability covered by this critical accounting policy was...

  • Page 29
    ...regarding stock-based compensation. We adopted Financial Accounting Standards Board Staff Position ("FSP") No. FAS -, "Accounting for Rental Costs Incurred during a Construction Period," effective January , 2006. This FSP addresses the accounting for rental costs associated with operating leases...

  • Page 30
    ... state Medicaid pharmacy reimbursement rates; • Risks related to the change in industry pricing benchmarks that could adversely affect our financial performance; • The growth of mail order pharmacies and changes to pharmacy benefit plans requiring maintenance medications to be filled exclusively...

  • Page 31
    ...testing of the operating effectiveness of controls. Our system of internal control over financial reporting is enhanced by periodic reviews by our internal auditors, written policies and procedures and a written Code of Conduct adopted by our Company's Board of Directors, applicable to all employees...

  • Page 32
    ... of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that CVS Corporation and subsidiaries maintained effective internal control over financial reporting as of December 0, 2006, is fairly stated, in...

  • Page 33
    ...general and administrative expenses Depreciation and amortization Total operating expenses Operating profit Interest expense, net Earnings before income tax provision Income tax provision Net earnings Preference dividends, net of income tax benefit Net earnings available to common shareholders Basic...

  • Page 34
    .... 30, 2006 Dec. , 2005 Assets: Cash and cash equivalents Accounts receivable, net Inventories Deferred income taxes Other current assets Total current assets Property and equipment, net Goodwill Intangible assets, net Deferred income taxes Other assets Total assets Liabilities: Accounts payable...

  • Page 35
    ... of preference stock Employee stock purchase plan issuance End of year Guaranteed ESOP obligation: Beginning of year Reduction of guaranteed ESOP obligation End of year Capital surplus: Beginning of year Conversion of preference stock Stock option activity and awards Tax benefit on stock options and...

  • Page 36
    ... and amortization Stock based compensation Deferred income taxes and other non-cash items Change in operating assets and liabilities providing/ (requiring) cash, net of effects from acquisitions: Accounts receivable, net Inventories Other current assets Other assets Accounts payable Accrued expenses...

  • Page 37
    ...in  states, of which 2 are located within CVS retail drugstores. In addition, the Company provides pharmacy benefit management, mail order services and specialty pharmacy services through PharmaCare Management Services ("PharmaCare") and PharmaCare Pharmacy® stores. As of December 0, 2006, the...

  • Page 38
    ... an Agent," is recognized at the time the service is provided. Service revenue totaled $.5 million in 2006, $20. million in 2005 and $2. million in 200. Premium revenue from the Company's pharmacy benefit management segment is accounted for under SFAS No. , "Accounting and Reporting for...

  • Page 39
    ... of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, no stock-based employee compensation costs were reflected in net earnings for options granted under those plans since they had an exercise price equal to...

  • Page 40
    ... or a liability for a plan's underfunded status, measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year, and recognize changes in the funded status of a defined benefit 2 ACQUISITION On June 2, 2006, CVS acquired certain assets and...

  • Page 41
    ..., including Eckerd Corporation ("Eckerd"). The acquisition included more than ,200 Eckerd retail drugstores and Eckerd Health Services, which includes Eckerd's mail order and pharmacy benefit management businesses (collectively, the "200 Acquired Businesses"). The final purchase price, including...

  • Page 42
    ... redemption price plus accrued interest. Net proceeds from the Notes were used to repay a portion of the outstanding commercial paper issued to finance the acquisition of the Standalone Drug Business. To manage a portion of the risk associated with potential changes in market interest rates, during...

  • Page 43
    ... and leasehold improvements to the views expressed by the Office of the Chief Accountant of the Securities and Exchange Commission to the American Institute of Certified Public Accountants on February , 2005. As a result, the Company recorded a $65. million non-cash pre-tax ($0.5 million after...

  • Page 44
    ... options, which includes the  Employee Stock Purchase Plan ("ESPP") totaled $60. million for 2006. The recognized tax benefit was $.0 million for 2006. Compensation expense related to restricted stock awards totaled $.2 million for 2006, compared to $5. million for 2005. Compensation costs...

  • Page 45
    ... cost be reported as a financing cash flow, rather than as an operating cash flow as required under prior guidance. Excess tax benefits of $2.6 million were included in financing activities in the accompanying consolidated statement of cash flow during 2006. Cash received from stock options...

  • Page 46
    ... and life insurance benefits to certain retirees who meet eligibility requirements. The Company's funding policy is generally to pay covered expenses as they are incurred. For retiree medical plan accounting, the Company reviews external data and its own historical trends for healthcare costs to...

  • Page 47
    ... results of operations, financial position or related disclosures. 2005 and $5.0 million in 200. The Company also has nonqualified supplemental executive retirement plans in place for certain key employees for whom it has purchased cost recovery variable life insurance. The Company uses an...

  • Page 48
    ..., fair value of plan assets and funded status of the Company's defined benefit and other postretirement benefit plans as of the respective balance sheet dates: In millions Defined Benefit Plans Dec. 30, 2006 Dec. , 2005 Other Postretirement Benefits Dec. 30, 2006 Dec. , 2005 Change in bene...

  • Page 49
    ... Island General Assembly and various Rhode Island companies, including Roger Williams Medical Center, Blue Cross & Blue Shield of Rhode Island and CVS. In connection with the investigation of these business relationships, a former state senator was criminally charged by federal and state authorities...

  • Page 50
    ...TO CONSOLIDATED FINANCIAL STATEMENTS In December 2006, Laurence M. Silverstein filed a purported class action lawsuit purportedly on behalf of Caremark stockholders relating to the proposed merger between Caremark and CVS in the United States District Court for the Middle District of Tennessee. The...

  • Page 51
    ...years: 2006 2005 200 11 BUSINESS SEGMENTS The Company currently operates two business segments, Retail Pharmacy and Pharmacy Benefit Management ("PBM"). The operating segments are segments of the Company for which separate Statutory income tax rate State income taxes, net of federal tax benefit...

  • Page 52
    ... tax benefit Net earnings available to common shareholders, basic Net earnings Dilutive earnings adjustment Net earnings available to common shareholders, diluted Denominator for earnings per common share calculation: Weighted average common shares, basic Preference stock Stock options Restricted...

  • Page 53
    ... reflect purchase accounting adjustments, including increased amortization expense for acquired intangible assets. On November , 2006, the Company entered into a definitive agreement and plan of merger with Caremark Rx, Inc., ("Caremark"). The agreement is structured as a merger of equals under...

  • Page 54
    ... its accounting for operating leases and leasehold improvements to the views expressed by the Office of the Chief Accountant of the Securities and Exchange Commission to the American Institute of Certified Public Accountants on February 7, 2005. As a result, the Company recorded a non-cash pre-tax...

  • Page 55
    ..., 2005, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of CVS Corporation's internal control over financial reporting as of December 0, 2006...

  • Page 56
    ...CVS Corporate Headquarters Stock Market Listing New York Stock Exchange Symbol: CVS (1) (3) Transfer Agent and Registrar Questions regarding stock holdings, certificate replacement/transfer, dividends and address changes should be directed to: The Bank of New York Shareholder Relations Department...

  • Page 57
    CVS CORPORATION 2006 ANNUAL REPORT ® ® ® One CVS Drive Woonsocket, RI 025 (0) 65-500 www.cvs.com