CVS 2008 Annual Report Download - page 59

2008 ANNUAL REPORT 55
Each share of ESOP Preference Stock has a guaranteed mini-
mum 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 used the dividends received and contributions
from the Company to repay the ESOP Notes. As the ESOP
Notes were repaid, ESOP Preference Stock was allocated to
plan 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 31, 2008, 3.6 million shares of ESOP Preference
Stock were outstanding and allocated to plan participants. On
January 30, 2009, pursuant to the Company’s Amended and
Restated Certifi cate of Incorporation (the “Charter”), the
Company informed the trustee of the ESOP Trust of its intent to
redeem for cash all of the outstanding shares of ESOP Preference
Stock on February 24, 2009 (the “Redemption Date”). Under
the Charter, at any time prior to the Redemption Date, the trustee
is afforded the right to convert the ESOP Preference Stock into
shares of the Company’s Common Stock. The conversion rate at
the time of the notice was 4.628 shares of Common Stock for each
share of ESOP Preference Stock. The trustee exercised its right
of conversion on February 23, 2009, and all outstanding shares
of ESOP Preference Stock were converted into Common Stock.
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
fi scal years:
In millions 2008 2007 2006
ESOP expense recognized $ 34.3 $ 29.8 $ 26.0
Dividends paid 14.0 14.8 15.6
Cash contributions 34.3 29.8 26.0
Interest payments 3.8 7.0 9.7
ESOP shares allocated 0.4 0.4 0.4
Insurance Company, which is now licensed to operate as an
insurance company in all 50 states. The acquisition of Accendo
will allow RxAmerica to continue to offer Medicare Part D benefi ts
through Accendo after the expiration of its insurance waivers from
CMS on January 1, 2009.
SilverScript and Accendo are licensed domestic insurance
companies under the applicable laws and regulations. Pursuant
to these laws and regulations, SilverScript and Accendo must fi le
quarterly and annual reports with the National Association of
Insurance Commissioners (“NAIC”) and certain state regulators,
must maintain certain minimum amounts of capital and surplus
under a formula established by the NAIC and must, in certain
circumstances, request and receive the approval of certain state
regulators 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 fi nancial position.
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. Signifi cant 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 2009; (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 sponsored a defi ned 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, which were due and retired on 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 were guaranteed by
the Company, the outstanding balance was refl ected as long-term
debt, and a corresponding guaranteed ESOP obligation was
refl ected in shareholders’ equity in the accompanying consoli-
dated balance sheets.
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