CVS 2010 Annual Report Download - page 66

Notes to Consolidated Financial Statements
The Company finances a portion of its store development program through sale-leaseback transactions. The properties are
generally sold at net book value, which generally approximates fair value, and the resulting leases qualify and are accounted for
as operating leases. The operating leases that resulted from these transactions are included in the previous table. The Company
does not have any retained or contingent interests in the stores and does not provide any guarantees, other than a guarantee
of lease payments, in connection with the sale-leaseback transactions. Proceeds from sale-leaseback transactions totaled
$507 million in 2010, $1.6 billion in 2009 and $204 million in 2008.
7: MEDICARE PART D
The Company offers Medicare Part D benefits through SilverScript and Accendo, which have contracted with CMS to be a PDP
and, pursuant to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”), must be risk-bearing
entities regulated under state insurance laws or similar statutes.
SilverScript and Accendo are licensed domestic insurance companies under the applicable laws and regulations. Pursuant to
these laws and regulations, SilverScript and Accendo must file 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 financial 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. 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 2011; (ii) 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 and (iii) estimates for
claims that have been reported and are in the process of being paid or contested and for our estimate of claims that have been
incurred but have not yet been reported.
8: EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsored a defined contribution Employee Stock Ownership Plan (the “ESOP”) that covered full-time employees
with at least one year of service.
In 1989, the ESOP Trust issued and sold $358 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 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 reflected as long-term debt, and a corresponding guaranteed ESOP obligation was reflected in
shareholders’ equity in the consolidated balance sheet.
Each share of ESOP Preference Stock had a guaranteed minimum liquidation value of $53.45, was convertible into 4.628 shares
of common stock and was 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, 2010 and 2009, no shares of ESOP Preference Stock were outstanding and allocated to plan participants. On
January 30, 2009, pursuant to the Company’s Amended and Restated Certificate 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 had 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.
– 62 –
CVS Caremark 2010 Annual Report