UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5975
HUMANA INC.
(Exact name of registrant as specified in its charter)
Delaware 61-0647538
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 West Main Street, Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
(502) 580-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock April 30, 1997
$.16 2/3 par value 162,949,696 shares
1 of 16
Humana Inc.
March 31, 1997
Form 10-Q
Page of
Form 10-Q
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement
of Income for the quarters ended
March 31, 1997 and 1996 3
Condensed Consolidated Balance
Sheet at March 31, 1997 and
December 31, 1996 4
Condensed Consolidated Statement
of Cash Flows for the quarters
ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated
Financial Statements 6-8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9-13
Part II: Other Information
Items 1 to 6 14-16
Exhibits
Exhibit 10 - Management Incentive Plan for Employees
Exhibit 12 - Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
2
Humana Inc.
Condensed Consolidated Statement of Income
For the quarters ended March 31, 1997 and 1996
Unaudited
(Dollars in millions except per share results)
1997 1996
Revenues:
Premiums $ 1,803 $ 1,560
Interest 26 25
Other income 3 3
Total revenues 1,832 1,588
Operating expenses:
Medical costs 1,484 1,274
Selling, general and administrative 261 203
Depreciation and amortization 24 25
Total operating expenses 1,769 1,502
Income from operations 63 86
Interest expense 3 5
Income before income taxes 60 81
Provision for income taxes 21 28
Net income $ 39 $ 53
Earnings per common share $ .24 $ .32
Shares used in earnings per common
share computation (000) 162,801 162,379
See accompanying notes.
3
Humana Inc.
Condensed Consolidated Balance Sheet
Unaudited
(Dollars in millions except per share amounts)
March 31, December 31,
Assets 1997 1996
Current assets:
Cash and cash equivalents $ 341 $ 322
Marketable securities 1,226 1,262
Premiums receivable, less
allowance for doubtful accounts
$42 - March 31, 1997 and
$38 - December 31, 1996 209 211
Deferred income taxes 93 94
Other 143 113
Total current assets 2,012 2,002
Long-term marketable securities 148 143
Property and equipment, net 373 371
Cost in excess of net assets
acquired 508 488
Other 144 149
Total assets $ 3,185 $ 3,153
Liabilities and Common Stockholders' Equity
Current liabilities:
Medical costs payable $ 1,063 $ 1,099
Trade accounts payable and
accrued expenses 367 369
Income taxes payable 83 32
Total current liabilities 1,513 1,500
Long-term debt 203 225
Professional liability and other
obligations 145 136
Total liabilities 1,861 1,861
Contingencies
Common stockholders' equity:
Common stock, $.16 2/3 par;
authorized 300,000,000 shares;
issued and outstanding
162,870,321 shares - March 31,
1997 and 162,681,123 shares -
December 31, 1996 27 27
Other 1,297 1,265
Total common stockholders' equity 1,324 1,292
Total liabilities and common
stockholders' equity $ 3,185 $ 3,153
See accompanying notes.
4
Humana Inc.
Condensed Consolidated Statement of Cash Flows
For the quarters ended March 31, 1997 and 1996
Unaudited
(Dollars in millions)
1997 1996
Cash flows from operating activities:
Net income $ 39 $ 53
Adjustments to reconcile
net income to net cash provided by
operating activities:
Depreciation and amortization 24 25
Deferred income taxes 4 (2)
Changes in operating assets
and liabilities (5) 89
Other 2 (3)
Net cash provided by
operating activities 64 162
Cash flows from investing activities:
Purchases and dispositions of
property and equipment, net (16) (13)
Acquisition of health plan assets (14)
Purchases, sales and maturities of
marketable securities, net 8 (33)
Other (2)
Net cash used in investing
activities (24) (46)
Cash flows from financing activities:
Repayment of long-term debt (20)
Change in commercial paper (22)
Other 1 1
Net cash used in financing
activities (21) (19)
Increase in cash and cash equivalents 19 97
Cash and cash equivalents at beginning
of period 322 182
Cash and cash equivalents at end
of period $ 341 $ 279
Interest payments $ 2 $ 4
Income tax refunds, net $ (35)
See accompanying notes.
5
Humana Inc.
Notes To Condensed Consolidated Financial Statements
Unaudited
(A) Basis of Presentation
The accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all of the disclosures normally required by generally accepted accounting
principles or those normally made in an annual report on Form 10-K.
Accordingly, for further information, the reader of this Form 10-Q may
wish to refer to the Form 10-K of Humana Inc. (the "Company") for the year
ended December 31, 1996.
The preparation of the Company's condensed consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect (a) the reported
amounts of assets and liabilities, (b) disclosure of contingent assets and
liabilities at the date of the financial statements and (c) reported amounts
of revenues and expenditures during the reporting period. Actual results
could differ from those estimates.
The financial information has been prepared in accordance with the Company's
customary accounting practices and has not been audited. In the opinion
of management, the information presented reflects all adjustments necessary
for a fair statement of interim results. All such adjustments are of a
normal and recurring nature.
(B) Contingencies
The Company's Medicare risk contracts with the federal government are renewed
for a one-year term each December 31 unless terminated 90 days prior.
Current legislative proposals are being considered that include modification
of future reimbursement rates under the Medicare program and that encourage
the use of managed health care by Medicare beneficiaries. Management is
unable to predict the outcome of these proposals or the impact they may have
on the Company's financial position, results of operations, or cash flows.
Additionally, the Company's contract with the United States Department of
Defense under the Civilian Health and Medical Program of the Uniformed
Services ("CHAMPUS") is a one-year contract renewable annually for up to
four additional years. The loss of these contracts or significant changes
in these programs as a result of legislative action, including reductions
in payments or increases in benefits without corresponding increases in
payments, would have a material adverse effect on the revenues, profitability,
and business prospects of the Company.
Resolution of various loss contingencies, including litigation pending
against the Company in the ordinary course of business, is not expected to
have a material adverse effect on the Company's financial position, results
of operations, or cash flows.
6
Humana Inc.
Notes To Condensed Consolidated Financial Statements, continued
Unaudited
(C) Special Charges
During the second quarter of 1996, the Company recognized special charges of
$200 million before tax ($130 million after tax or $.80 per share). The
special charges included provisions for expected future losses on insurance
contracts ($105 million) as well as the estimated costs to be incurred in
restructuring the Washington, D.C., health plan (which was sold January 31,
1997) and closing markets or discontinuing product lines in 16 market areas.
The special charges also included the write-off of miscellaneous assets, a
litigation settlement, and other costs. During the quarter ended March 31,
1997, the beneficial effect of these charges was approximately $11 million
before tax ($7 million after tax or $.04 per share). Approximately $42
million (of the original $105 million) of the liability for expected future
losses on insurance contracts and approximately $4 million of other costs
reserves remain at March 31, 1997.
During the fourth quarter of 1996, the Company recognized an additional
special charge of $15 million before tax ($10 million after tax or $.06 per
share). This charge included severance and facility costs related to planned
workforce reductions, scheduled to be completed throughout 1997.
(D) Long-Term Debt
During April 1996, the Company implemented a commercial paper program and
began issuing debt securities thereunder. At March 31, 1997, borrowings
under the commmercial paper program totaled approximately $200 million, with
an average rate of interest during the quarter of 5.6 percent. The
commercial paper program is backed by the Company's $600 million revolving
line of credit, which expires in September 2000. Borrowings under the
commercial paper program have been classified as long-term debt based on
management's ability and intent to refinance borrowings on a long-term basis.
(E) Acquisition and Dispositions
On February 28, 1997, the Company acquired Health Direct, Inc. ("Health
Direct") from Advocate Health Care for $23 million cash. This transaction
added more than 50,000 medical members to the Company's Chicago membership.
On January 31, 1997, the Company completed the sale of its Washington, D.C.,
health plan to Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Effective April 1, 1997, the Company also completed the sale of its Alabama
operations to PrimeHealth of Alabama, Inc. This later sale excluded the
Company's small group business and Alabama CHAMPUS operations. These
transactions, which will not have a material impact on the Company's
financial position, results of operations, or cash flows, reduced total
medical membership by approximately 141,000.
7
Humana Inc.
Notes To Condensed Consolidated Financial Statements, continued
Unaudited
(F) Future Changes in the Presentation of Earnings per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS No.
128"). SFAS No. 128 specifies the computation, presentation, and disclosure
requirements for earnings per share and will be effective for both interim
and annual periods ending after December 15, 1997. Earlier application is
not permitted. If applied on a proforma basis, there would be no difference
between the basic and diluted earnings per share amounts computed using SFAS
No. 128 for the three month periods ended March 31, 1997 and 1996.
8
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion and analysis contains both historical and forward-looking
information. The forward-looking statements may be significantly impacted by
risks and uncertainties, and are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. There can be no
assurance that anticipated future results will be achieved because actual
results may differ materially from those projected in the forward-looking
statements. Readers are cautioned that a number of factors, which are
described herein and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, could adversely affect the Company's ability to
obtain these results. These include the effects of either federal or state
health care reform or other legislation, renewal of the Company's Medicare
risk contracts with the federal government, renewal of the Company's CHAMPUS
contract with the federal government, and the effects of other general
business conditions, including but not limited to, government regulation,
competition, premium rate changes, retrospective premium adjustments relating
to federal government contracts, medical cost trends, changes in Commercial
and Medicare risk membership, capital requirements, general economic
conditions, and the retention of key employees. In addition, past financial
performance is not necessarily a reliable indicator of future performance and
investors should not use historical performance to anticipate results or
future period trends.
Introduction
The Company offers managed health care products that integrate medical
management with the delivery of health care services through a network of
providers. This network of providers may share financial risk or have
incentives to deliver quality medical services in a cost-effective manner.
These products are marketed primarily through health maintenance organizations
("HMOs") and preferred provider organizations ("PPOs") that require or
encourage the use of contracting providers. HMOs and PPOs control health
care costs by various means, including pre-admission approval for hospital
inpatient services and pre-authorization of outpatient surgical procedures.
The Company also offers various specialty and administrative service products
including dental, group life, workers' compensation, and pharmacy benefit
management services.
The Company's HMO and PPO products are marketed primarily to employers and
other groups ("Commercial") as well as Medicare and Medicaid-eligible
individuals. The products marketed to Medicare-eligible individuals are
either HMO products ("Medicare risk") or indemnity insurance policies that
supplement Medicare benefits ("Medicare supplement"). The Medicare risk
product provides managed care services that include all Medicare benefits
and, in certain circumstances, additional managed care services. The Company
also offers administrative services ("ASO") to employers who self-insure
their employee health benefits.
9
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Special Charges
During the second quarter of 1996, the Company recognized special charges of
$200 million before tax ($130 million after tax or $.80 per share). The
special charges included provisions for expected future losses on insurance
contracts ($105 million) as well as the estimated costs to be incurred in
restructuring the Washington, D.C., health plan (which was sold January 31,
1997) and closing markets or discontinuing product lines in 16 market areas.
The special charges also included the write-off of miscellaneous assets, a
litigation settlement, and other costs. During the quarter ended March 31,
1997, the beneficial effect of these charges was approximately $11 million
before tax ($7 million after tax or $.04 per share). Approximately $42
million (of the original $105 million) of the liability for expected future
losses on insurance contracts and approximately $4 million of other costs
reserves remain at March 31, 1997.
During the fourth quarter of 1996, the Company recognized an additional
special charge of $15 million before tax ($10 million after tax or $.06 per
share). This charge included severance and facility costs related to planned
workforce reductions, scheduled to be completed throughout 1997.
Results of Operations
The Company's premium revenues increased 16 percent to $1.8 billion for the
quarter ended March 31, 1997, compared to $1.6 billion for the same period in
1996. Premium revenues increased primarily due to the Company's revenues
earned from its CHAMPUS contract as well as premium rate increases in its
Commercial and Medicare risk products. The impact on premium revenues of
Commercial membership declines was offset by Medicare risk membership
increases. Commercial and Medicare risk premium rates increased 2.9 percent
and 4.6 percent, respectively, for the quarter ended March 31, 1997. For
1997, Commercial premium rates are expected to increase approximately 3 to
3.5 percent, while Medicare risk premium rates are expected to increase
approximately 4 to 5 percent. The Company's expected 1997 Medicare risk
premium rate increase differs from the approximate 6 percent statutory
increase as a result of a 1996 change in the geographic mix of the Company's
members.
10
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Same-store Commercial membership decreased 113,400 members during the quarter
ended March 31, 1997, compared to a decrease of 18,100 for the same period in
1996. This same-store membership decline, which excludes the sale of the
Company's Washington, D.C., health plan (92,500 members) and the purchase of
Health Direct (22,100 members), was due to the Company's more disciplined
product pricing begun in the fall of 1996 and withdrawal from certain
unprofitable markets. Same-store Medicare risk membership increased 15,100
members during the quarter compared to a same-store increase of 10,200 members
for the same period in 1996. The Medicare risk membership growth is
primarily the result of sales in new Medicare markets. Given the
competitive large group Commercial pricing environment, the Company's new
pricing discipline and the closing or sale of certain markets, management
expects Commercial membership to be flat to down approximately 3 percent for
1997, while Medicare risk membership is expected to increase approximately 20
percent.
The medical loss ratio for the quarter ended March 31, 1997, was 82.3 percent
compared to 81.7 percent for the same period in 1996. The increase is
principally the result of higher medical costs in new Medicare risk markets
and increased pharmacy costs systemwide. Medical cost increases in these
areas were partially offset by a slight improvement in Commercial and
Medicare risk days per thousand trends.
The administrative cost ratio was 15.8 percent and 14.7 percent for the
quarters ended March 31, 1997 and 1996, respectively. The increase was due
to planned spending on critical core processes necessary for long-term
improvement in the areas of medical management, customer service and
information systems. Management anticipates improvement in the
administrative ratio during the third and fourth quarters of 1997 as
membership increases and workforce reductions begin to take place.
Interest income totaled $26 million and $25 million for the quarters ended
March 31, 1997 and 1996, respectively. The increase is primarily
attributable to increased levels of cash, cash equivalents and marketable
securities. The tax equivalent yield on invested assets approximated 8
percent for each of the quarters ended March 31, 1997 and 1996.
The Company's income before income taxes totaled $60 million for the quarter
ended March 31, 1997, compared to $81 million for the quarter ended March 31,
1996. Net income was $39 million and $53 million or $.24 and $.32 per share
for the quarters ended March 31, 1997 and 1996, respectively.
11
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Liquidity
Cash provided by the Company's operations totaled $64 million and $162
million for the quarters ended March 31, 1997 and 1996, respectively. The
decrease in net cash provided by operations was due to changes in operating
assets and liabilities and a reduction of net income. Changes in operating
assets and liabilities relate to the timing of receipts and disbursements for
premiums receivable, medical costs, unearned premiums and other liabilities.
The Company's subsidiaries operate in states that require minimum levels of
equity and regulate the payment of dividends to the parent company. As a
result, the Company's ability to use operating subsidiaries' cash flows is
restricted to the extent of the subsidiaries' abilities to obtain regulatory
approval to pay dividends.
During April 1996, the Company implemented a commercial paper program and
began issuing debt securities thereunder. At March 31, 1997, borrowings
under the commmercial paper program totaled approximately $200 million, with
an average rate of interest during the quarter of 5.6 percent. The
commercial paper program is backed by the Company's $600 million revolving
line of credit, which expires in September 2000. Borrowings under the
commercial paper program have been classified as long-term debt based on
management's ability and intent to refinance borrowings on a long-term basis.
Management believes that existing working capital, future operating cash
flows, and funds available under the revolving credit agreement and
commercial paper program are sufficient to meet future liquidity needs.
Management also believes the aforementioned sources of funds are adequate
to allow the Company to pursue strategic acquisition and expansion
opportuities, as well as fund capital requirements.
Capital Resources
The Company's ongoing capital expenditures relate primarily to medical care
facilities used by either employed or affiliated physicians, as well as
administrative facilities and related information systems necessary for
activities such as claims processing, billing and collections, medical
utilization review and customer service.
Excluding acquisitions, planned capital spending in 1997 will be
approximately $80 to $90 million for the expansion and improvement of
medical care facilities, administrative facilities and related information
systems.
12
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Quarterly Membership 1997 1996
Commercial members at:
March 31 2,631,000 2,862,900
June 30 2,861,900
September 30 2,846,400
December 31 2,814,800
Medicare risk members at:
March 31 374,200 322,300
June 30 332,900
September 30 347,400
December 31 364,500
CHAMPUS eligible members at:
March 31 1,103,100
June 30
September 30 1,075,300
December 31 1,103,000
Medicare supplement members at:
March 31 93,500 109,600
June 30 106,000
September 30 101,800
December 31 97,700
Administrative services members at:
March 31 566,300 444,700
June 30 447,900
September 30 458,300
December 31 471,000
Total medical members at:
March 31 4,768,100 3,739,500
June 30 3,748,700
September 30 4,829,200
December 31 4,851,000
Specialty members at:
March 31 2,172,900 1,811,300
June 30 1,863,800
September 30 1,895,900
December 31 1,884,200
13
Humana Inc.
Part II: Other Information
Item 1: Legal Proceedings
Damages for claims for personal injuries and medical benefit denials are
usual in the Company's business. Personal injury claims are covered by
insurance from the Company's wholly owned captive insurance subsidiary and
excess carriers, except to the extent that claimants seek punitive damages,
which may not be covered by insurance if awarded. Punitive damages generally
are not paid where claims are settled and generally are awarded only where a
court determines there has been a willful act or omission to act.
Management does not believe that any pending legal actions will have a
material adverse effect on the Company's financial position, result of
operations, or cash flows.
Items 2 - 3:
None
Item 4: Submission of Matters to a Vote of Security Holders
(a) The regular annual meeting of stockholders of Humana Inc. was held in
Louisville, Kentucky on May 8, 1997, for the purpose of electing the
Board of Directors and voting on the Company's 1997 Management Incentive
Plan for Executive Management.
(b) Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934 and there was no solicitation in
opposition to management's solicitations. All of management's nominees
for directors were elected and the Company's 1997 Management Incentive
Plan for Executive Management was approved.
(c) Two proposals were submitted to a vote of security holders as follows:
(1) The stockholders approved the election of the following persons as
directors of the Company:
Name For Withheld
K. Frank Austen, M.D. 138,175,994 842,210
Michael E. Gellert 138,188,548 829,656
John R. Hall 138,194,678 823,526
David A. Jones 138,168,060 850,144
David A. Jones, Jr. 138,016,578 1,001,626
Irwin Lerner 138,152,717 865,487
W. Ann Reynolds, Ph.D 138,145,869 872,335
(2) The stockholders approved with 134,406,241 affirmative votes,
3,895,142 negative votes, and 716,821 abstentions, the proposal
to adopt the Company's 1997 Management Incentive Plan for Executive
Management.
14
Humana Inc.
Part II: Other Information, continued
Item 5:
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10 - 1997 Management Incentive Plan for Employees,
filed herewith.
Exhibit 12 - Statement re: Computation of Ratio of Earnings
to Fixed Charges, filed herewith.
Exhibit 27 - Financial Data Schedule, filed herewith.
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1997.
15
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUMANA INC.
Date: May 15 , 1997 /s/ James E. Murray
James E. Murray
Chief Financial Officer
(Principal Accounting Officer)
Date: May 15, 1997 /s/ Arthur P. Hipwell
Arthur P. Hipwell
Senior Vice President and
General Counsel
16
____________________________________________________________
HUMANA INC. 1997 MANAGEMENT INCENTIVE PLAN
FOR EMPLOYEES
_____________________________________________________________
Effective as of January 1, 1997
<PAGE>
TABLE OF CONTENTS
Section Page
1. Purpose. . . . . . . . . . . . . . . . 1
2. Definitions. . . . . . . . . . . . . . 1
3. Administration . . . . . . . . . . . . 3
3.1 The Committee. . . . . . . . . . . . . 3
3.2 Authority of the Committee . . . . . . 3
3.3 Decisions Binding. . . . . . . . . . . 3
3.4 Compliance; Bifurcation of Plan. . . . 4
4. Eligibility. . . . . . . . . . . . . . 4
5. Performance Objectives . . . . . . . . 4
5.1 Quality Objectives . . . . . . . . . . 4
5.2 Growth Objectives. . . . . . . . . . . 5
5.3 Profit Objectives. . . . . . . . . . . 5
5.4 Rolling Weighted Average . . . . . . . 5
6. Awards . . . . . . . . . . . . . . . . 5
7. Payment of Awards. . . . . . . . . . . 6
7.1 Form of Payment. . . . . . . . . . . . 6
7.2 Payment of Award . . . . . . . . . . . 6
7.3 Withholding for Taxes. . . . . . . . . 6
8. Restricted Stock . . . . . . . . . . . 6
8.1 Restricted Stock Distribution. . . . . 6
8.2 Vesting. . . . . . . . . . . . . . . . 7
9. Termination of Employment During
Any Performance Period . . . . . . . 7
9.1 Termination for Reasons Other
Than Death or Disability . . . . . . 7
9.2 Death or Disability During
Performance Period . . . . . . . . . 7
10. Change in Control. . . . . . . . . . . 7
10.1 Nonforfeitability. . . . . . . . . . . 7
10.2 Calculation of Awards. . . . . . . . . 7
10.3 Payment of Awards. . . . . . . . . . . 7
11. Amendments, Modification and
Termination of the Plan . . . . . . . 7
-i-
TABLE OF CONTENTS
Section Page
12. Governing Law. . . . . . . . . . . . . 8
13. Gender and Number. . . . . . . . . . . 8
14. Severability . . . . . . . . . . . . . 8
15. Non-Transferability. . . . . . . . . . 8
16. No Granting of Employment Rights . . . 8
17. Indemnification. . . . . . . . . . . . 8
18. Successors . . . . . . . . . . . . . . 9
-ii-
HUMANA INC. 1997 MANAGEMENT INCENTIVE PLAN
FOR EMPLOYEES
1. Purpose. The purpose of the Humana Inc. 1997
Management Incentive Plan for Employees (the "Plan")
is to advance the interests of the Company by encouraging
and rewarding teamwork, providing management with a strong incentive
to increase value, creating a sense of
ownership among the Company's management, and recognizing the
interdependency of short-term and long-term goals.
2. Definitions. As used in this Plan, terms defined
parenthetically immediately after their use shall have the respective meanings
provided by such definitions, and the terms set forth below shall have the
following meanings:
(a) "Award" shall mean, individually or collectively, a
payment under the Plan of Restricted Stock or cash.
(b) "Board" shall mean the Board of Directors of the
Company.
(c) A "Change in Control" shall have the same meaning
as that term has in the Stock Incentive Plan.
(d) "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time, and any referenced section thereof
shall include any successor provision thereto.
(e) "Committee" shall mean the Compensation Committee of
the Board.
(f) "Company" shall mean Humana Inc.
(g) "Disabled" shall have the same meaning as the term
"Disability" has in the Stock Incentive Plan.
(h) "Effective Date" shall mean January 1, 1997.
(i) "Employee" shall mean an individual who is a full-time
employee of the Company or a Subsidiary.
(j) "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended from time to time, and any referenced section
thereof, or rule or regulation promulgated thereunder, and shall include any
successor provision thereto.
(k) "Fair Market Value" shall have the same meaning as
that term has in the Stock Incentive Plan.
(l) "Growth Objectives" shall mean the objectives
established by the Committee in accordance with Section 5.2.
(m) "Incentive Base" shall mean the Participant's base
salary received during the Performance Period.
(n) "Maximum Award" shall mean the maximum Award
for which a Participant is eligible in accordance with Section 6.
(o) "Maximum Growth Benchmark" shall mean the
maximum Growth Objective established by the Committee in accordance
with Section 5.2.
(p) "Maximum Profit Benchmark" shall mean the
maximum Profit Objective established by the Committee in accordance with
Section 5.3.
(q) "Minimum Growth Benchmark" shall mean the
minimum Growth Objective established by the Committee in accordance
with Section 5.2.
(r) "Minimum Profit Benchmark" shall mean the
minimum Profit Objective established by the Committee in accordance with
Section 5.3.
(s) "Participant" shall mean any Employee selected by
the Committee as eligible to receive an Award under the Plan.
(t) "Performance Period" shall mean the 12 month
period beginning January 1 and ending December 31.
(u) "Plan" shall mean this Humana Inc. 1997 Management
Incentive Plan for Employees as the same may be amended from time to time.
(v) "Profit Objectives" shall mean the objectives
established by the Committee in accordance with Section 5.3.
(w) "Quality Objectives" shall mean objectives established by
the Committee in accordance with Section 5.1.
(x) "Restricted Stock" shall mean Shares issued in
accordance with the Plan, but pursuant to the Stock Incentive Plan.
(y) "Shares" shall have the same meaning as that term
has in the Stock Incentive Plan.
(z) "Stock Incentive Plan" means the Humana Inc. 1996
Stock Incentive Plan for Employees.
(aa) "Subsidiary" shall mean any corporation or other
Person of which a majority of its voting power or its equity securities or
equity interest is owned, directly or indirectly, by the Company.
(bb) "Target Growth Benchmark" shall mean the target
Growth Objective established by the Committee in accordance with
Section 5.2.
(cc) "Target Profit Benchmark" shall mean the target
Profit Objective established by the Committee in accordance with
Section 5.3.
3. Administration.
3.1 The Committee. The Plan shall be administered by the
Committee, the members of which shall be appointed from time to time by,
and shall serve at the discretion of, the Board. The Committee shall be
composed solely of two or more directors who are non-employee directors
within the meaning of Rule 16b-3 promulgated under the Exchange Act.
3.2 Authority of the Committee. Subject to the provisions
of the Plan, the Committee shall have full authority to:
(a) select Participants to whom Awards may be granted;
(b) determine the size, types and frequency of
Awards granted under the Plan;
(c) determine the terms and conditions of Awards,
including any restrictions or conditions to the Awards, which need not be
identical;
(d) construe and interpret the Plan and any agreement
or instrument entered into under the Plan;
(e) establish, amend and rescind rules and regulations for
the Plan's administration; and
(f) amend the terms and conditions of any outstanding
Award to the extent such terms and conditions are within the discretion of
the Committee as provided in the Plan.
The Committee shall have sole discretion to make all other determinations
which may be necessary or advisable for the administration of the Plan. To
the extent permitted by law and Rule 16b-3 promulgated under the
Exchange Act, the Committee may delegate its authority as identified
hereunder.
3.3 Decisions Binding. All determinations and decisions
made by the Committee pursuant to the provisions of the Plan, and all
related orders or resolutions of the Board, shall be final, conclusive and
binding upon all persons, including the Company, its stockholders,
Employees, Participants and their estates and beneficiaries.
3.4 Compliance; Bifurcation of Plan. It is the intention
of the Company that the Plan and the administration of the Plan satisfy the
requirements of Rule 16b-3 promulgated under the Exchange Act so that
the Participants will be entitled to the benefit of Rule 16b-3, or any other
rule or regulation promulgated under the Exchange Act. Accordingly, if
any aspect of the administration of the Plan, or the operation of any
provision of the Plan, would conflict with this intent, such administration
or provision shall be deemed null and void, and in all events the Plan shall
be construed in favor of its operation and administration in accordance with
such intent. Notwithstanding anything in the Plan to the contrary, the
Board or the Committee, in its discretion, may bifurcate the Plan so as to
restrict, limit or condition the use of any provision of the Plan to
Participants who are subject to Section 16 of the Exchange Act without so
restricting, limiting or conditioning the Plan with respect to other
Participants.
4. Eligibility. The Committee shall annually select those
who, in the sole discretion of the Committee, shall be eligible to participate
in the Plan. Those Employees will be officers (other than executive
officers who are participants in the Humana Inc. 1997 Management
Incentive Plan for Executive Management), field executives and other key
employees and associates. Annually, those eligible Employees will be
advised that they are Participants in the Plan for a Performance Period.
5. Performance Objectives. Annually, the Committee
shall establish in writing the Quality Objectives, Growth Objectives and
Profit Objectives and the relative weightings of each for the Performance
Period.
5.1 Quality Objectives. Quality Objectives established for
each market area must be met before any Awards can be earned based on
Growth Objectives and Profit Objectives by non-corporate
health plan personnel in the respective market. The Quality
Objectives may include, but are not limited to, the following:
(a) Achieving initial accreditation from the National
Committee on Quality Assurance (NCQA), Joint Commission on Accreditation
of Health Care Organizations (JCAHO) or others, as applicable;
(b) Findings of Health Care Financing Administration
("HCFA") surveys;
(c) Remaining in good standing with the applicable state
Department of Insurance;
(d) Maintaining re-accreditation, as necessary, and
(e) Demonstrating improvement in Healthplan Employer
Data and Information Set ("HEDIS") measures.
If the applicable market Quality Objectives are not met, then no Awards
will be made to Participants in the respective market based on
the Growth Objectives and Profit Objectives for that market.
5.2 Growth Objectives. For each individual health plan
and for the Company as a whole, the Committee shall establish a Minimum
Growth Benchmark, Target Growth Benchmark and a Maximum Growth
Benchmark for that Performance Period based on membership enrollment
or premium revenue for any relevant Performance Period.
5.3 Profit Objectives. For each individual health plan and
for the Company as a whole, the Committee shall establish a Minimum
Profit Benchmark, Target Profit Benchmark and a Maximum Profit
Benchmark for any relevant Performance Period based on consolidated net
income or earnings per share for that Performance Period.
5.4 Rolling Weighted Average.
(a) For the Performance Period beginning January 1,
1997, the Award shall be based only on the results for that Performance
Period.
(b) For the Performance Period beginning January 1,
1998, the award shall be based one-third on the results achieved for the
1997 Performance Period and two-thirds on the results achieved for the
1998 Performance Period.
(c) For Performance Periods beginning on or after
January 1, 1999, the Award shall be based one-sixth on the results achieved
for the Performance Period occurring two years prior to the current
Performance Period, two-sixths on the results achieved for the Performance
Period one year prior to the current Performance Period, and three-sixths
on the results achieved for the current Performance Period.
(d) To the extent that, in any single year, the growth or
profit results exceeded a Benchmark ("Excess") with the result that the
Excess was not taken into account in calculating a Participant's' Award, the
Committee may apply the Excess to the prior Performance Period's or
subsequent Performance Period's results in calculating the Participant's
Award for the then current Performance Period.
6. Awards. Awards will be determined as soon as reasonably
practicable after the close of each Performance Period. The Committee
shall annually establish, at the time it establishes the Growth Objectives and
Profit Objectives, the percentage of the Maximum Award which will be
based upon the achievement of the Growth Objectives, the percentage of
the Maximum Award which will be based upon achievement of the Profit
Objective and the percentage of the Maximum Award which will be
discretionary. The Committee shall annually establish, in the case of
Participants who are non-corporate health plan personnel, in determining
whether Growth Objectives and Profit Objectives have been met, the
percentage which will be based upon achievement for the Participant's
health plan market and the percentage which will be based upon achievement
for the Company as a whole.
7. Payment of Awards.
7.1 Form of Payment. Subject to the discretion of the
Committee, Awards shall be paid as follows:
(a) For any portion of an Award calculated based on
results at or below the combination of the Target Growth Benchmark and
the Target Profit Benchmark, the Award will be distributed solely in cash
in a single sum; and
(b) For the Performance Period beginning January 1,
1997, at the discretion of the Committee, the portion of an Award based
upon results in Excess of the combination of the Target Growth Benchmark
and the Target Profit Benchmark will be paid (i) in Shares of Restricted
Stock having a Fair Market Value on the date of issuance of up to 25% of
the Award (up to 50% for Performance Periods beginning on or after
January 1, 1998), and (ii) the remainder in a single sum in cash.
The number of shares of Restricted Stock granted, which may consist in
whole or in part of authorized and unissued Shares or treasury Shares, will
be the whole number of Shares which can be purchased for the dollar
amount computed above. Notwithstanding the foregoing, if there are an
insufficient number of Shares authorized under the Stock Incentive Plan to
issue the number of shares of Restricted Stock to which a Participant is
entitled, any amount not paid in shares of Restricted Stock shall be paid in
cash.
7.2 Payment of Award. The Award shall be paid to each
Participant as soon as reasonably practicable following the end of the
Performance Period, but no later than March 15 of each year following the
Performance Period to which the Award relates.
7.3 Withholding for Taxes. The Company shall have the
right to deduct from all cash Awards any taxes required to be withheld as
a result thereof, whether federal, state or local. If the Company has a
withholding obligation upon the issuance or vesting of Shares under the
Plan, a Participant may, subject to the discretion of the Committee, elect
to satisfy the withholding requirement, in whole or in part, by having the
Company withhold Shares, or delivering to the Company Shares, having
a Fair Market Value on the date the withholding tax is to be determined
equal to the amount required to be withheld under applicable law.
Notwithstanding the foregoing, the Committee may, by the adoption of
rules or otherwise, modify the provisions of this Section 7.3 or impose such
other restrictions or limitations on such elections as may be necessary to
ensure that such elections will be exempt transactions under Section 16(b)
of the Exchange Act. Notwithstanding anything in this Section 7.3 to the
contrary, the Participant shall be obligated to make arrangements with the
Company to enable the Company to satisfy its withholding obligation with
respect to the issuance of Shares.
8. Restricted Stock.
8.1 Restricted Stock Distribution. The Restricted Stock
shall be issued in accordance with the terms of the Stock Incentive Plan.
8.2 Vesting. One-half of the Restricted Stock will become
fully vested on the first anniversary of the date of its issuance. The
remainder of the Restricted Stock will become vested on the second
anniversary of the date of its issuance. Notwithstanding the foregoing, if
a Participant dies or becomes Disabled while owning Restricted Stock, the
Restricted Stock shall immediately become fully vested.
9. Termination of Employment During Any Performance Period.
9.1 Termination for Reasons Other Than Death or
Disability. If the Participant's employment by the Company or a
Subsidiary terminates for any reason (other than death or Disability) during
any Performance Period, such Participant shall not be entitled to any
Award for that Performance Period.
9.2 Death or Disability During Performance Period. If
a Participant dies or becomes Disabled during any Performance Period, the
amount of the Award shall be calculated in the same manner as described
in Section 10.2. Such Award shall be nonforfeitable and shall be distributed
in the same manner as described in Section 10.3.
10. Change in Control. If there is a Change in Control
while the Plan remains in effect, then the following shall apply:
10.1 Nonforfeitability. Each Participant's Restricted Stock
shall become fully vested and nonforfeitable and the Participant's accrued
Award, calculated in accordance with Section 10.2 below shall automatically
become nonforfeitable on the date of such Change in Control.
10.2 Calculation of Awards. The Committee, as soon as
reasonably practicable after the date of such Change in Control, shall
determine each Participant's Award accrued through the end of the calendar
month which immediately precedes the date of such Change in Control.
The Award shall be in an amount which is equal to the greater of (a) the
Maximum Award available multiplied by a percentage equal to the
percentage of the Maximum Award that would have been earned assuming
that the rate at which the Growth Objectives and Profit Objectives have
been achieved as of the date of such Change in Control would have
continued until the end of the Performance Period or (b) the Maximum
Award available multiplied by the percentage of the Performance Period
completed at the time of the Change in Control.
10.3 Payment of Awards. Each Participant's accrued
Award (determined as provided in Section 10.2) shall be paid in a single
sum in cash and Shares (in the percentages provided in Section 7.1(b)) as
soon as reasonably practicable after the date of the Committee's determination
of the Award.
11. Amendments, Modification and Termination of the
Plan. The Board may terminate the Plan, in whole or in part, may amend
the Plan from time to time, including the adoption of amendments deemed
necessary or desirable to correct any defect, supply an omission or
reconcile any inconsistency in the Plan. Notwithstanding the foregoing, no
amendment shall be made without stockholder approval if: (a) such
approval is necessary to satisfy any applicable (i) provision of the Code or
the Exchange Act or any regulation promulgated thereunder, (ii) requirement of
any national securities exchange or system on which the Shares are
then listed or reported, or (iii) any other regulatory law or regulation, and
(b) the Board determines that it is appropriate to seek stockholder approval.
No amendment, modification or termination of the Plan shall in any manner
adversely affect any Participant with respect to a current Performance
Period without the written consent of such Participant.
12. Governing Law. The Plan and all determinations made
and actions taken pursuant thereto shall, to the extent not preempted by
federal law, be governed by, and construed in accordance with, the laws of
the State of Delaware, without regard to the conflict of law provisions
thereof.
13. Gender and Number. Unless otherwise indicated by the
context, reference to the masculine gender shall include the feminine gender
and vice-versa, the plural shall include the singular and the singular shall
include the plural.
14. Severability. In the event any provision of the Plan shall
be held illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining parts of the Plan, and the Plan shall be construed
and enforced as if the illegal or invalid provision had not been included.
15. Non-Transferability. A Participant's rights under this
Plan may not be assigned, pledged or otherwise transferred other than by
will or the laws of descent and distribution, except that upon a Participant's
death, the Participant's rights to payment may be transferred pursuant to the
laws of descent and distribution.
16. No Granting of Employment Rights. Neither the
Plan, nor any action taken under the Plan, shall be construed as giving any
Employee the right to become a Participant, nor shall the fact that an
Employee is a Participant be construed as giving such Employee any right
with respect to continuance of employment by the Company. The
Company expressly reserves the right to terminate, whether by dismissal,
discharge or otherwise, a Participant's employment at any time, with or
without cause, except as may otherwise be provided by any written
agreement between the Company and the Participant.
17. Indemnification. No member of the Board or the
Committee, nor any officer or Employee acting on behalf of the Board or
the Committee, shall be personally liable for any action, determination or
interpretation taken or made with respect to the Plan, and all members of
the Board, the Committee and each and any officer or Employee of the
Company acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company with respect to any such
action, determination or interpretation.
18. Successors. All obligations of the Company under the
Plan shall be binding on any successor to the Company, whether the
existence of such successor is a result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the
business and/or assets of the Company.
Exhibit 12
Humana Inc.
Ratio of Earnings to Fixed Charges
For the quarters ended March 31, 1997 and 1996
Unaudited
(Dollars in millions)
1997 1996
Earnings:
Income before income taxes $ 60 $ 81
Fixed charges 5 6
$ 65 $ 87
Fixed charges:
Interest charged to expense $ 3 $ 5
One-third of rent expense 2 1
$ 5 $ 6
Ratio of earnings to fixed charges 12.7 13.8
For the purpose of determining earnings in the calculation of the ratio of
earnings to fixed charges, earnings have been increased by the provision for
income taxes and fixed charges. Fixed charges consist of interest expense on
borrowings and one-third (the proportion deemed representative of the
interest portion) of rent expense.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM HUMANA INC.'S FORM 10-K
FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 341
<SECURITIES> 1,226
<RECEIVABLES> 251
<ALLOWANCES> 42
<INVENTORY> 7
<CURRENT-ASSETS> 2,012
<PP&E> 698
<DEPRECIATION> 325
<TOTAL-ASSETS> 3,185
<CURRENT-LIABILITIES> 1,513
<BONDS> 203
<COMMON> 27
0
0
<OTHER-SE> 1,297
<TOTAL-LIABILITY-AND-EQUITY> 3,185
<SALES> 1,803
<TOTAL-REVENUES> 1,832
<CGS> 1,484
<TOTAL-COSTS> 1,769
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 60
<INCOME-TAX> 21
<INCOME-CONTINUING> 39
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
