CVS Caremark Corporation (CVS)

PROPOSED CAREMARK MERGER

On November 1, 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 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 that the merger will be consummated. See “Risk Factors-Risks Related to the Proposed Merger.”

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’s customers are primarily employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health benefit plans and individuals throughout the United States. In addition, Caremark, through its SilverScript insurance subsidiary, is a national provider of drug benefits to eligible beneficiaries under the federal government’s Medicare Part D program.

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 and 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.

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 it 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 company will be retired. On January 19, 2007, the Registration Statement on Form S-4 relating to the proposed merger was declared effective by the U. S. 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 the 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.

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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 recently 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. See “Risk Factors-Risks Related to CVS, Caremark and the Combined Company” and “Legal Proceedings” for a fuller discussion of these matters. Also, on February 24, 2007, 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 its special meeting of shareholders to be held for the same purpose would be adjourned until March 9, 2007. In light of the Delaware court’s ruling CVS intends to once again adjourn the meeting to a later date in March, and will inform shareholders of the new meeting date as promptly as possible.

13     Proposed Caremark Merger

On November 1, 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 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. On December 20, 2006, the initial waiting period under the Hart-Scott-Rodino Act expired without a request for additional information from the U.S. Federal Trade Commission. On January 16, 2007, Caremark and CVS announced that Caremark shareholders would receive a special one-time cash dividend of $2 per share upon 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”).

On February 13, 2007, Caremark and CVS announced that the special one-time cash dividend payable to Caremark shareholders upon closing of the transaction would be increased to $6 per share. A special meeting of Caremark’s shareholders to approve the merger is to be held on March 16, 2007 and a special meeting of CVS’ shareholders for the same purpose will be held on a date later in March. The proposed merger will be accounted for using the purchase method of accounting under U.S. GAAP. Under the purchase method of accounting, CVS will be considered the acquiror of Caremark for accounting purposes and the total purchase price will be allocated to the assets acquired and liabilities assumed from Caremark based on their fair values as of the date of the completion of the merger and any excess of purchase price over those fair values will be recorded as goodwill. Our reported financial condition and results of operations issued after completion of the merger will reflect Caremark’s balances and results after completion of the merger, but will not be restated retroactively to reflect the historical financial position or results of operations of Caremark. Following the completion of the merger, our earnings will reflect purchase accounting adjustments, including increased amortization expense for acquired intangible assets.