CVS 2007 Annual Report Download - page 60

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56 I CVS Caremark
Medicare Part D
The Company offers Medicare Part D benefits through its wholly-
owned subsidiary SilverScript Insurance Company (“SilverScript”)
which has been approved by the CMS as a PDP. SilverScript has
contracted with CMS to be the Company’s PDP and, pursuant to
the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (“MMA”), must be a risk-bearing entity regulated
under state insurance laws or similar statutes.
SilverScript is licensed through the Tennessee Department of
Commerce and Insurance (the “TDCI”) as a domestic insurance
company under the applicable laws and regulations of the State
of Tennessee. Pursuant to these laws and regulations, SilverScript
must file quarterly and annual reports with the National Association
of Insurance Commissioners (“NAIC”), and the TDCI must
maintain certain minimum amounts of capital and surplus under
a formula established by the NAIC and must, in certain circum-
stances, request and receive the approval of the TDCI before
making dividend payments or other capital distributions to the
Company. The Company does not believe these limitations on
dividends and distributions materially impact its financial position.
SilverScript is licensed as or has filed expansion applications for
licensure as an insurance company in other jurisdictions where
it does or may seek to do business. Certain of the expansion
insurance licensure applications for states in which SilverScript
currently operates were pending as of the date of this filing.
The Company has recorded estimates of various assets and
liabilities arising from its participation in the Medicare Part D
program based on information in its claims management
and enrollment systems. Significant estimates arising from its
participation in this program include: (i) estimates of low-income
cost subsidy and reinsurance amounts ultimately payable to or
receivable from CMS based on a detailed claims reconciliation
that will occur in 2008; (ii) estimates of amounts payable to or
receivable from other PDPs for claims costs incurred as a result
of retroactive enrollment changes, which were communicated by
CMS after such claims had been incurred; and (iii) an estimate of
amounts receivable from or payable to CMS under a risk-sharing
feature of the Medicare Part D program design, referred to as
the risk corridor.
Employee Stock Ownership Plan
The Company sponsors a defined contribution Employee Stock
Ownership Plan (the “ESOP”) that covers full-time employees
with at least one year of service.
In 1989, the ESOP Trust issued and sold $357.5 million of 20-year,
8.52% notes due December 31, 2008 (the “ESOP Notes”). The
proceeds from the ESOP Notes were used to purchase 6.7 million
shares of Series One ESOP Convertible Preference Stock (the
“ESOP Preference Stock”) from the Company. Since the ESOP
Notes are guaranteed by the Company, the outstanding balance
is reflected as long-term debt, and a corresponding guaranteed
ESOP obligation is reflected in shareholders’ equity in the
accompanying consolidated balance sheets.
Each share of ESOP Preference Stock has a guaranteed minimum
liquidation value of $53.45, is convertible into 4.628 shares of
common stock and is entitled to receive an annual dividend of
$3.90 per share.
The ESOP Trust uses the dividends received and contributions
from the Company to repay the ESOP Notes. As the ESOP Notes
are repaid, ESOP Preference Stock is allocated to participants based
on (i) the ratio of each year’s debt service payment to total current
and future debt service payments multiplied by (ii) the number of
unallocated shares of ESOP Preference Stock in the plan.
As of December 29, 2007, 3.8 million shares of ESOP Preference
Stock were outstanding, of which 3.4 million shares were
allocated to participants and the remaining 0.4 million shares
were held in the ESOP Trust for future allocations.
Annual ESOP expense recognized is equal to (i) the interest
incurred on the ESOP Notes plus (ii) the higher of (a) the principal
repayments or (b) the cost of the shares allocated, less (iii) the
dividends paid. Similarly, the guaranteed ESOP obligation is
reduced by the higher of (i) the principal payments or (ii) the
cost of shares allocated.
Following is a summary of the ESOP activity for the respective years:
In millions 2007 2006 2005
ESOP expense
recognized $ 29.8 $ 26.0 $ 22.7
Dividends paid 14.8 15.6 16.2
Cash contributions 29.8 26.0 22.7
Interest payments 7.0 9.7 12.0
ESOP shares allocated 0.4 0.4 0.3
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