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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-5975
HUMANA INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 61-0647538
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
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500 WEST MAIN STREET LOUISVILLE, KENTUCKY 40202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 502-580-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, $.16 2/3 PAR VALUE NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 27, 1998 was $3,943,071,262 calculated using the
average price on such date of $25.47. The number of shares outstanding of the
Registrant's Common Stock as of February 27, 1998 was 165,210,259.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part II and Part IV incorporate herein by reference the
Registrant's 1997 Annual Report to Stockholders; Part III incorporates herein
by reference portions of the Registrant's Proxy Statement filed pursuant to
Regulation 14A covering the Annual Meeting of Stockholders scheduled to be
held May 14, 1998.
The Exhibit Index begins on page 16.
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PART I
ITEM 1. BUSINESS
GENERAL
Humana Inc. is a Delaware corporation organized in 1961. Its principal
executive offices are located at 500 West Main Street, Louisville, Kentucky
40202 and its telephone number at that address is (502) 580-1000. As used
herein, the terms "the Company" or "Humana" include Humana Inc. and its
subsidiaries. This Annual Report on Form 10-K 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, 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
contract with the federal government to administer the TRICARE program
(formerly the Civilian Health and Medical Program of the Uniformed Services),
renewal of the Company's Medicaid contracts with various state governments and
the Commonwealth of Puerto Rico, and the effects of other general business
conditions, including but not limited to the Company's ability to integrate
its acquisitions, the Company's ability to appropriately address the "Year
2000" computer system issue, 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, the ability of health care providers to
assume financial risk, 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.
Since 1983, the Company has offered 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
encourage or require 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 and workers' compensation.
The Company's HMO and PPO products are marketed primarily to employer and
other groups ("Commercial"), as well as Medicare- and Medicaid-eligible
individuals. At December 31, 1997, the Company had a total of 3,258,600 fully
insured Commercial customers, with an average group size of 26 members. 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. At December 31, 1997, the
Company had 480,800 Medicare risk members and 68,800 Medicare supplement
members. The Company maintains annual contracts with various states and a two-
year contract with the Commonwealth of Puerto Rico, expiring March 31, 1999,
to provide health care to Medicaid-eligible individuals. At December 31, 1997,
the Company had 635,200 Medicaid members. The Company also offers
administrative services ("ASO") to employers who self-insure their employee
health plans. At December 31, 1997, the Company provided claims processing,
utilization review and other administrative services to 651,200 ASO members.
In total, the Company's products are licensed in 47 states, the District of
Columbia and Puerto Rico.
On July 1, 1996, the Company began providing managed health care services to
approximately 1.1 million eligible beneficiaries under a contract with the
United States Department of Defense under the TRICARE program. The government
exercised its option to extend the contract for one year effective July 1,
1997. Under
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the TRICARE contract, which is renewable annually for up to three additional
years, the Company provides managed care services to the beneficiaries of
active military personnel and retired military personnel and their
beneficiaries located in the southeastern United States. The Company has
subcontracted with third parties to provide certain administration and
specialty services under the contract. Three health benefit options are
available to TRICARE beneficiaries. In addition to a traditional indemnity
option, participants may enroll in an HMO-like plan with a point-of-service
option or take advantage of reduced co-payments by using a network of
preferred providers.
On October 17, 1997, the Company acquired ChoiceCare Corporation
("ChoiceCare") for approximately $250 million in cash. The purchase was funded
with borrowings under the Company's commercial paper program. ChoiceCare
provides health care services products to approximately 250,000 medical
members in the Greater Cincinnati, Ohio, area.
On September 8, 1997, the Company acquired Physician Corporation of America
("PCA") for total consideration of $411 million in cash, consisting primarily
of $7 per share for PCA's outstanding common stock and the assumption of $121
million in debt. The purchase was funded with borrowings under the Company's
commercial paper program. PCA serves approximately 1.1 million medical members
and provides comprehensive health care services through its HMOs in Florida,
Texas and Puerto Rico. In addition, PCA provides workers' compensation third-
party administrative management services. Prior to November 1996, PCA also was
a direct writer of workers' compensation insurance in Florida.
On February 28, 1997, the Company acquired Health Direct, Inc. ("Health
Direct") from Advocate Health Care for $23 million in cash. This transaction
added approximately 50,000 medical members to the Company's Chicago, Illinois,
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, exclusive of its small group business and Alabama TRICARE
operations, to PrimeHealth of Alabama, Inc. On October 31, 1997, the Company
also sold The Lexington Hospital in Lexington, Kentucky, to Jewish Hospital
Healthcare Services, Inc. These sale transactions did not have a material
impact on the Company's financial position, results of operations or cash
flows.
COMMERCIAL PRODUCTS
HMOs
An HMO provides prepaid health care services to its members through primary
care and specialty physicians employed by the HMO at facilities owned by the
HMO, and/or through a network of independent primary care and specialty
physicians and other health care providers who contract with the HMO to
furnish such services. Primary care physicians generally include internists,
family practitioners and pediatricians. Generally, access to specialty
physicians and other health care providers must be approved by the member's
primary care physician. These other health care providers include, among
others, hospitals, nursing homes, home health agencies, pharmacies, mental
health and substance abuse centers, diagnostic centers, optometrists,
outpatient surgery centers, dentists, urgent care centers and durable medical
equipment suppliers. Because access to these other health care providers must
be approved by the primary care physician, the HMO product is the most
restrictive form of managed care.
At December 31, 1997, the Company owned and operated 18 HMOs, which
contracted with approximately 73,500 physicians (including approximately
21,500 primary care physicians) and approximately 1,100 hospitals. In
addition, the Company had approximately 7,000 contracts with other providers
to provide services to HMO members. The Company also employed approximately
450 providers in its staff model HMOs at December 31, 1997.
An HMO member, typically through the member's employer, pays a monthly fee
which generally covers, with minimal co-payments, health care services
received from or approved by the member's primary care
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physician. For the year ended December 31, 1997, Commercial HMO premium
revenues totaled approximately $1.8 billion or 23 percent of the Company's
total premium revenues. Approximately $181 million of the Company's Commercial
HMO premium revenues for the year ended December 31, 1997 were derived from
contracts with the United States Office of Personnel Management ("OPM"), under
which the Company provides health care benefits to approximately 113,000
federal civilian employees and their dependents. Pursuant to these contracts,
payments made by OPM may be retrospectively adjusted downward by OPM if an
audit discloses that a comparable product was offered by the Company to a
similar size subscriber group at a lower premium rate than that offered to
OPM. Management believes that any retrospective adjustments as a result of OPM
audits will not have a material impact on the Company's financial position,
results of operations or cash flows.
PPOs
PPO products include many elements of managed health care. PPOs are also
similar to traditional health insurance because they provide a member with the
freedom to choose a physician or other health care provider. In a PPO, the
member is encouraged, through financial incentives, to use participating
health care providers which have contracted with the PPO to provide services
at favorable rates. In the event a member chooses not to use a participating
health care provider, the member may be required to pay a greater portion of
the provider's fees.
At December 31, 1997, approximately 55,000 physicians and approximately 750
hospitals contracted directly with the Company to provide services to PPO
members. The Company also had approximately 5,500 contracts (including certain
contracts which also service the Company's HMOs) with other providers to
provide services to PPO members. In addition, the Company had access to 35
leased provider networks throughout the country.
For the year ended December 31, 1997, Commercial PPO premium revenues
totaled approximately $2.3 billion or 29 percent of the Company's total
premium revenues.
The Company expects that 1998 Commercial premium rates will increase
approximately 4 to 5 percent from 1997 levels. Over the last four years,
changes in the Company's Commercial premium rates have ranged between an
approximate 2 percent decrease for the year ended December 31, 1995, to an
approximate 5 percent increase for the year ended December 31, 1994, with an
average increase of approximately 2 percent.
MEDICARE PRODUCTS
Medicare is a federal program that provides persons age 65 and over and some
disabled persons certain hospital and medical insurance benefits, which
include hospitalization benefits for up to 90 days per incident of illness
plus a lifetime reserve aggregating 60 days. Each Medicare-eligible individual
is entitled to receive inpatient hospital care ("Part A") without the payment
of any premium, but is required to pay a premium to the federal government,
which is adjusted annually, to be eligible for physician care and other
services ("Part B").
Even though participating in both Part A and Part B of the traditional
Medicare program, beneficiaries are still required to pay certain deductible
and coinsurance amounts. They may, if they choose, supplement their Medicare
coverage by purchasing Medicare supplement policies which pay these
deductibles and coinsurance amounts. Many of these policies also cover other
services (such as prescription drugs) which are not included in Medicare
coverage.
Certain managed care companies which operate HMOs contract with the federal
government's Health Care Financing Administration ("HCFA") to provide medical
benefits to Medicare-eligible individuals residing in the geographic areas in
which their HMOs operate in exchange for a fixed monthly payment per member
from HCFA. Individuals who elect to participate in these Medicare risk
programs are relieved of the obligation to pay some or all of the deductible
or coinsurance amounts but are generally required to use exclusively the
services provided by the HMO and are required to pay a Part B premium to the
Medicare program. The enrollee pays the
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HMO a premium only in cases where the HMO provides additional benefits and
where competitive market conditions permit. Where competitive conditions
permit, the Company charges a premium to members (in addition to the payment
from HCFA) for some of its Medicare risk products. At December 31, 1997,
approximately 40,000 members in 16 markets were paying premiums which totaled
approximately $29 million for the year ended December 31, 1997.
Medicare Risk
A Medicare risk product involves a contract between an HMO and HCFA pursuant
to which HCFA makes a fixed monthly payment to the HMO on behalf of each
Medicare-eligible individual who chooses to enroll for coverage in the HMO.
Membership may be terminated by the member upon 30 days' notice. The fixed
monthly payment is determined by formula established in federal law.
As of January 1, 1998, the Company provides Medicare risk services under 16
contracts with HCFA in 11 states. Management believes that additional Medicare
risk growth opportunities exist because only approximately 15 percent of the
country's Medicare-eligible beneficiaries are enrolled in managed care
programs similar to those offered by the Company. The Company intends to
pursue those opportunities in under-penetrated markets which meet the
Company's long-term growth strategies.
At December 31, 1997, HCFA Contracts covered approximately 480,800 Medicare
risk members for which the Company received premium revenues of approximately
$2.4 billion or 31 percent of the Company's total premium revenues for the
year ended December 31, 1997. At December 31, 1997, one such HCFA Contract
covered approximately 249,000 members in Florida and accounted for premium
revenues of approximately $1.5 billion, which represented 62 percent of the
Company's HCFA premium revenues or 19 percent of the Company's total premium
revenues for the year ended December 31, 1997. HCFA Contracts are renewed for
a one-year term each December 31 unless terminated 90 days prior thereto.
Management believes termination of the HCFA Contract covering the members in
Florida would have a material adverse effect on the revenues, profitability
and business prospects of the Company.
The Company's 1998 average rate of statutory increase under the HCFA
Contracts will approximate 2 percent. Over the last five years, annual
increases have ranged from as low as the January 1998 increase of 2 percent to
as high as 9 percent in January 1996, with an average of approximately 5
percent, including the January 1998 increase.
The Balanced Budget Act of 1997 adopted certain changes to the Medicare
program that can be expected to affect the Company's Medicare risk program.
These include provisions that affect the methodology for payment and expand
the options available to Medicare beneficiaries by permitting HCFA to contract
with a variety of types of managed care plans, including provider sponsored
networks. HCFA is expected to publish regulations implementing the Balanced
Budget Act on June 1, 1998. (See "Health Care Reform--National.") Management
is unable to predict the effect of these regulations on the Company's
financial position, results of operations or cash flows. The loss of the
Company's HCFA Contracts or significant changes in the Medicare risk program
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.
Medicare Supplement
The Company's Medicare supplement product is an insurance policy which pays
for hospital deductibles, co-payments and coinsurance for which an individual
enrolled in the traditional Medicare program is responsible.
Under the terms of existing Medicare supplement policies, the Company may
not reduce or cancel the benefits contracted for by policyholders. These
policies are renewable annually by the insured at the Company's prevailing
rates, which may increase subject to approval by appropriate state insurance
regulators.
At December 31, 1997, the Company provided Medicare supplement benefits to
approximately 68,800 members. For the year ended December 31, 1997, Medicare
supplement premium revenues totaled approximately $79 million or 1 percent of
the Company's total premium revenues.
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MEDICAID PRODUCT
Medicaid is a federal program that is state-operated to provide health care
services to low-income residents. Each state which chooses to do so develops,
through a state specific regulatory agency, a Medicaid managed care initiative
which must be approved by HCFA. HCFA requires that Medicaid managed care plans
meet federal standards and cost no more than the amount that would have been
spent on a comparable fee-for-service basis. States currently use either a
formal proposal process reviewing many bidders or award individual contracts
to qualified bidders which apply for entry to the program. In either case, the
contractual relationship with the state is generally for a one-year period.
Management believes that the risks associated with participation in a state
Medicaid managed care program are similar to the risks associated with the
Medicare risk product discussed previously. In both instances, the Company
receives a fixed monthly payment from a government agency for which it is
required to provide managed health care services to enrolled members. Due to
the increased emphasis on state health care reform and budgetary constraints,
more states are utilizing a managed care product in their Medicaid programs.
The Company also maintains a two-year contract with the Commonwealth of Puerto
Rico, expiring March 31, 1999, to provide health care to Medicaid-eligible
individuals. For the year ended December 31, 1997, premium revenues from the
Company's Medicaid products totaled approximately $224 million or 3 percent of
the Company's total premium revenues. It is anticipated that Medicaid premium
revenues will be approximately 6 percent of the Company's total 1998 premium
revenues. At December 31, 1997, the Company had approximately 635,200 Medicaid
members in four states and the Commonwealth of Puerto Rico.
TRICARE
In 1993, the Company established Humana Military Healthcare Services, Inc.
(a wholly-owned subsidiary of the Company), to enter in contracts to provide
managed care services to the beneficiaries of active military personnel and
retired military personnel and their beneficiaries. In November 1995, the
United States Department of Defense awarded the Company its first TRICARE
contract covering approximately 1.1 million eligible beneficiaries in Florida,
Georgia, South Carolina, Mississippi, Alabama, Tennessee and Eastern
Louisiana.
On July 1, 1996, the Company began providing managed health care services to
these approximate 1.1 million eligible beneficiaries under a potential five-
year contract (a one-year contract originally renewable annually for up to
four additional years). The government exercised its option to extend the
contract for one year effective July 1, 1997. The Company has subcontracted
with third parties to provide certain administration and specialty services
under the contract. Three health benefit options are available to TRICARE
beneficiaries. In addition to a traditional indemnity option, participants may
enroll in an HMO-like plan with a point-of-service option or take advantage of
reduced co-payments by using a network of preferred providers. TRICARE premium
revenues were approximately $764 million or 10 percent of the Company's total
premium revenues for the year ended December 31, 1997.
The Company will actively seek opportunities to provide managed care
services to beneficiaries of federal and state programs, including other
TRICARE contracts.
OTHER RELATED PRODUCTS
The Company offers various specialty and administrative services products
including dental, group life and workers' compensation. Specialty membership
at December 31, 1997 totaled approximately 2.4 million members, including
approximately 884,000 members for which the Company provides only
administrative services. Specialty product premium revenues were approximately
$230 million or 3 percent of the Company's total premiums for the year ended
December 31, 1997.
PROVIDER ARRANGEMENTS
The Company's HMOs contract with individual or groups of primary care
physicians, generally for an actuarially determined, fixed, per-member-per-
month fee called a "capitation" payment. Under these
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arrangements, physicians are paid a fixed amount to provide services to their
members. These contracts typically obligate primary care physicians to provide
or make referrals to other health care providers for the provision of all
covered managed health care services to HMO members. These services include
services provided by specialty physicians and other providers. The capitation
payment does not vary with the nature or extent of services to the member and
is generally designed to shift a portion of the HMOs' financial risk to the
primary care physician. The degree to which the Company uses capitation
arrangements varies by provider. The Company also employs approximately 450
providers in markets where it operates staff model HMOs.
The Company also contracts with medical specialists and other providers to
which a primary care physician may refer a member. The contracts with
specialists may be capitation arrangements or may provide for payment on a
fee-for-service basis based on negotiated fees. Typically, payments by the
Company to these specialists and other providers reduce the ultimate payment
that otherwise would be made to primary care physicians. The Company's HMOs
also have arrangements under which physicians can earn bonuses when certain
target goals relating to quality and cost effectiveness in the provision of
patient care are met. The Company's contracts with capitated physicians
generally provide for stop-loss coverage so that a physician's financial risk
for any single member is limited to a certain amount on an annual basis.
The focal point for cost control in the Company's HMOs is the primary care
physician, whether employed or under contract, who provides services and
controls utilization of appropriate services by directing or approving
hospitalization and referrals to specialists and other providers. Cost control
is further achieved by directly negotiating provider discounts. Cost control
in the Company's PPOs is achieved primarily by establishing a cost-effective
network of participating health care providers and providing incentives for
members to use such providers. These providers are generally paid on a
negotiated fee-for-service basis. With respect to both HMO and PPO products,
cost control is further achieved through the use of a utilization review
system designed to allow only necessary hospital admissions, lengths of stay
and necessary or appropriate medical procedures. The Company's HMOs and PPOs
generally contract for hospital services under per-diem arrangements for
inpatient hospital services and discounted fee-for-service arrangements for
outpatient services. During the year ended December 31, 1997, approximately 41
percent of the Company's total medical costs were for services provided to its
members in hospitals or related facilities.
The Company has certain risk-sharing contracts whereby the providers assume
a specified level of risk for covered managed care services to its members.
Included in these contracts are full risk capitation arrangements ("global
capitation"), the majority of which were assumed as part of the PCA
acquisition. Under global capitation contracts, providers are paid a monthly
capitation payment per covered member to assume financial risk for the
delivery of all health care services. These payments are based on a specified
percentage of premiums (typically 78 to 88 percent depending on the contract).
At December 31, 1997, approximately 168,400 Commercial members, 40,800
Medicare risk members and 546,800 Medicaid members were covered under these
global capitation contracts.
Under all of its arrangements, the Company remains financially responsible
for the provision of or payment for covered medical services if its
contractors fail to perform their obligations under the contract.
In March 1998, the Company reached an agreement in principle with the
Advocate Health Care System ("Advocate") under which Advocate will assume
operations of 13 of the Company's staff model centers in the Chicago,
Illinois, area and will provide health care services under a long-term
provider agreement with the Company. This agreement encompasses 165 providers
employed by Humana and approximately 164,000 members of the Company.
During 1997, the Company continued its Hospital Inpatient Management System
("HIMS") which allows specially trained physicians to manage the entire range
of medical care while each HMO member is in the hospital, and coordinate the
member's discharge and care after discharge. The Company has also implemented
a Demand Management program which provides members telephone access to
registered nurses 24 hours a day, seven days a week. As of December 31, 1997,
the Demand Management program was available to the majority
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of the Company's fully insured members. The Company continues to implement
several disease management programs in various markets. Under these
arrangements, the Company provides financial incentives for contractors to
provide the full range of care to members with respect to a particular high
risk or chronic disease in a quality, cost-effective manner. These disease
management programs include congestive heart failure, prenatal and premature
infant care, end stage renal disease, diabetes and breast cancer screening.
QUALITY ASSESSMENT AND CUSTOMER SERVICE
Access to high quality health care services is an important element of the
Company's business. All of the Company's contracts require that the provider
participate in the Company's quality assurance program. Physician
participation in the Company's HMOs and PPOs is conditioned upon the physician
meeting the Company's requirements concerning the physician's professional
qualifications. When considering whether to contract with a physician, the
Company performs or contracts for on-going credentialing verifications and
peer review that meet both regulatory and accrediting agency standards.
The Company has a program in place to monitor important aspects of HMO plan-
wide service and quality indicators with oversight by a senior management
committee. Such indicators as credentialing, quality concerns, customer
service, disenrollment and satisfaction are measured against standards.
Another measure of quality is the reporting of Health Plan Employer Data
Information Sets ("HEDIS"), which the Company has been reporting since June
1994. HEDIS is useful to purchasers of managed health care services to measure
individual health plan quality and service. Each HMO has in place a peer
review procedure which is implemented by a quality management committee
("QMC"). This committee is headed by the HMO's medical director and is
composed of physicians and physician group representatives. The QMC performs
an initial evaluation of applicants for credentialing and reviews all
providers on a periodic basis to monitor the appropriateness of members' care.
HEALTH MAINTENANCE ORGANIZATION ACCREDITATION
With the increasing significance of managed care in the health care
industry, several independent organizations have been formed for the purpose
of responding to external demands for accountability over the managed care
industry. The organizations utilized by the Company are the National Committee
for Quality Assurance ("NCQA") and the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO"). In the states of Kansas and Florida,
accreditation or external review by an accrediting organization is mandatory
and generally required for licensure.
NCQA performs site reviews of standards established for quality assurance,
credentialing, utilization management, medical records, preventive services
and members rights and responsibilities. As of January 31, 1998, thirteen of
Humana's HMOs have achieved various levels of accreditation from NCQA. Humana
Medical Plan, Inc. in its South Florida, Northeast Florida, Tampa Bay and
Central Florida markets, Humana Health Plan, Inc. in its Chicago market,
Humana Health Plan of Texas, Inc. in its San Antonio market (which includes
Houston, Austin and Dallas) and Humana Kansas City, Inc. all received full
accreditation status. Humana Health Plan of Ohio, Inc. has received one-year
accreditation. During 1997, Humana acquired ChoiceCare Health Plans, Inc. and
PCA Health Plans of Florida, Inc.-Central, Northern and Southern regions and
PCA Health Plans of Texas, Inc. These plans had previously achieved full
accreditation from NCQA. The Company is currently preparing for NCQA
accreditation for the remainder of its HMO plans, beginning with the review of
Humana Health Plan, Inc. in Louisville scheduled for May 1998 and Humana
Wisconsin Health Organization in Milwaukee, which is scheduled for May 1999.
JCAHO reviews rights, responsibilities and ethics, continuum of care,
education and communication, leadership, management of information and human
resources, and network performance. JCAHO also evaluates the mechanisms the
organization has established to ensure continuous quality improvement. As of
December 31, 1997, Humana Medical Plan, Inc. in its Fort Walton market
received three-year accreditation from JCAHO.
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MANAGEMENT INFORMATION SYSTEMS
The Company's managed care health plans use centralized, integrated
information systems developed and/or customized specifically to meet the
Company's needs and to allow for aggregation of data and comparison across
markets. These information systems support marketing, sales, underwriting,
contract administration, billing, financial and other administrative
functions, as well as customer service, appointment scheduling, authorization
and referral management, concurrent review, physician capitation and claims
administration, provider management, quality management and utilization
review. The Company is currently in the process of integrating PCA and
ChoiceCare on to these centralized systems.
Key to the Company's information systems are operational reports, used by
market office and corporate personnel for such items as physician profiling,
utilization review, quality assessment, member satisfaction measurement and
employer reporting. Clinical software is used as well to assess
appropriateness of medical care provided to the Company's members. The
Company's information systems are continually upgraded to support new products
in an integrated manner, as well as to take advantage of the latest advances
in technology.
The Company has conducted an assessment of its computer systems to identify
the systems that could be affected by the "Year 2000" issue, which results
from computer programs having been written to define the applicable year using
two digits rather than four digits. The Company believes that, with
modifications to existing software, the Year 2000 issue will not pose
significant operational problems for its computer system as so modified. The
Company plans to complete the majority of the Year 2000 modifications by
December 31, 1998. At present, the Company anticipates that the incremental
costs incurred in connection with the Year 2000 project will approximate $12
to $15 million.
The costs of the project and the date on which the Company plans to complete
the necessary Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, the ability of the Company's
significant suppliers, customers and others with which it conducts business,
including federal and state governmental agencies, to identify and resolve
their own Year 2000 issues and similar uncertainties.
SALES AND MARKETING
Individuals become members of the Company's Commercial HMOs and PPOs through
their employer or other groups which typically offer employees or members a
selection of managed health care products, pay for all or part of the premiums
and make payroll deductions for any premiums payable by the employees. The
Company attempts to become an employer's or group's exclusive source of
managed health care benefits by offering HMO and PPO products that provide
cost-effective quality care consistent with the needs and expectations of the
employees or members.
The Company uses various methods to market its Commercial and Medicare
products, including television, radio, telemarketing and mailings. At December
31, 1997, the Company used approximately 44,600 licensed independent brokers
and agents and approximately 500 licensed employees to sell the Company's
Commercial products. Many of the Company's employer group customers are
represented by insurance brokers and consultants who assist these groups in
the design and purchase of health care products. The Company generally pays
brokers a commission based on premiums, with commissions varying by market and
premium volume.
At December 31, 1997, the Company used approximately 3,500 licensed
independent brokers for referrals and approximately 1,000 employed sales
representatives, who are each paid a salary and/or per member commission, to
market the Company's Medicaid and Medicare products. The Company also used
approximately 600 telemarketing representatives who assisted in the marketing
of Medicaid and Medicare products by making appointments for broker/sales
representatives with prospective members.
8
<PAGE>
The following table lists the Company's medical membership at December 31,
1997, by state and product:
MEDICAL MEMBERSHIP
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMERCIAL
--------------- MEDICARE MEDICARE PERCENT
PPO HMO RISK MEDICAID TRICARE SUPPLEMENT ASO TOTAL OF TOTAL
------- ------- -------- -------- ------- ---------- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida................. 192.2 387.6 282.6 128.8 422.2 6.7 6.3 1,426.4 23.0%
Texas................... 238.4 311.8 68.6 39.0 -- 8.0 16.7 682.5 11.0%
Illinois................ 213.2 306.8 57.7 16.4 -- 0.2 57.1 651.4 10.5%
Puerto Rico............. 75.8 25.4 -- 431.4 -- -- -- 532.6 8.6%
Wisconsin............... 85.7 117.0 -- 19.6 -- -- 241.6 463.9 7.5%
Kentucky................ 135.8 113.0 12.0 -- -- 32.4 128.1 421.3 6.8%
Georgia................. 85.0 4.2 -- -- 266.8 4.4 1.5 361.9 5.8%
Ohio.................... 82.1 191.8 6.6 -- -- -- 58.4 338.9 5.5%
Missouri/Kansas......... 48.9 114.0 21.7 -- -- 6.7 47.8 239.1 3.8%
Indiana................. 97.5 25.1 1.1 -- -- 1.7 26.2 151.6 2.4%
South Carolina.......... 7.7 -- -- -- 139.1 -- 1.1 147.9 2.4%
Tennessee............... 49.7 -- -- -- 71.7 0.8 6.0 128.2 2.1%
Other................... 346.5 3.4 30.5 -- 212.4 7.9 60.4 661.1 10.6%
------- ------- ----- ----- ------- ---- ----- ------- -----
Total................... 1,658.5 1,600.1 480.8 635.2 1,112.2 68.8 651.2 6,206.8 100.0%
======= ======= ===== ===== ======= ==== ===== ======= =====
</TABLE>
RISK MANAGEMENT
Through the use of internally developed underwriting criteria, the Company
determines the risk it is willing to assume and the amount of premium to
charge for its Commercial products. In most instances, employer and other
groups must meet the Company's underwriting standards in order to qualify to
contract with the Company for coverage. Small group reform laws in some states
have imposed regulations which provide for guaranteed issue of certain health
insurance products and prescribe certain limitations on the variation in rates
charged based upon assessment of health conditions.
Underwriting techniques are not employed in connection with Medicare risk
HMO products because HCFA regulations require the Company to accept all
eligible Medicare applicants regardless of their health or prior medical
history. The Company also is not permitted to employ underwriting criteria for
the Medicaid product but rather follows HCFA and state requirements. In
addition, with respect to the TRICARE contract, no underwriting techniques are
employed because the Company must accept all eligible beneficiaries who choose
to participate.
COMPETITION
The managed health care industry is highly competitive and contracts for the
sale of Commercial products are generally bid or renewed annually. The
Company's competitors vary by local market and include Blue Cross/Blue Shield
(including HMOs and PPOs owned by Blue Cross/Blue Shield plans), national
insurance companies and other HMOs and PPOs, including provider sponsored
networks. Many of the Company's competitors have larger membership in local
markets or greater financial resources. The Company's ability to sell its
products and to retain customers is or may be influenced by such factors as
benefits, pricing, contract terms, number and quality of participating
physicians and other managed health care providers, utilization review, claims
processing, administrative efficiency, relationships with agents, quality of
customer service and accreditation results.
9
<PAGE>
GOVERNMENT REGULATION
Of the Company's 18 licensed HMO subsidiaries, nine are qualified under the
Federal Health Maintenance Organization Act of 1973, as amended. Ten
subsidiaries are parties to HCFA contracts to provide Medicare risk HMO
products in 11 states.
To obtain federal qualification, an HMO must meet certain requirements,
including conformance with financial criteria, a standard method of rate
setting, a comprehensive benefit package, and prohibition of medical
underwriting of individuals. In certain markets, and for certain products, the
Company operates HMOs that are not federally qualified because this provides
greater flexibility with respect to product design and pricing than is
possible for federally qualified HMOs.
HCFA conducts audits of Medicare risk HMOs at least biannually and may
perform other reviews more frequently to determine compliance with federal
regulations and contractual obligations. These audits include review of the
HMO's administration and management (including management information and data
collection systems), fiscal stability, utilization management and incentive
arrangements, health services delivery, quality assurance, marketing,
enrollment and disenrollment activity, claims processing, and complaint
systems. HCFA regulations require quarterly and annual submission of financial
statements and restrict the number of Medicare risk and Medicaid members to no
more than the HMO's Commercial membership in a specified service area. In
1998, it is possible to seek a federal waiver of this requirement and in 1999
this requirement ceases to exist. The Company has applications for waivers
pending in its Florida, Las Vegas, Nevada, and Phoenix, Arizona, markets, and
intends to seek additional waivers during 1998. HCFA also requires independent
review of medical records and quality of care, review and approval by HCFA of
all advertising, marketing and communication materials, and independent review
of all denied claims and service complaints which are not resolved in favor of
a member.
In addition, HCFA requires certain disclosures to HCFA and to Medicare
beneficiaries concerning the financial arrangements which managed care
organizations have with physicians with whom they contract. These rules also
require certain levels of stop-loss coverage to protect contracted physicians
against major losses relating to patient care, depending on the amount of
financial risk they assume. HCFA also requires the reporting of certain health
care data contained in HEDIS.
The Company's Medicaid products are regulated by the applicable state agency
in the state in which the Company sells a Medicaid product and the
Commonwealth of Puerto Rico, in conformance with federal approval of the
applicable state plan, and are subject to periodic reviews by these agencies.
The reviews are similar in nature to those performed by HCFA.
Laws in each of the states (and the Commonwealth of Puerto Rico) in which
the Company operates its HMOs, PPOs and other health insurance-related
services regulate the Company's operations, including the scope of benefits,
rate formulas, delivery systems, utilization review procedures, quality
assurance, enrollment requirements, claim payments, marketing and advertising.
The HMO, PPO and other health insurance-related products offered by the
Company are sold under licenses issued by the applicable insurance regulators.
The Company's HMOs, PPOs and other health insurance-related services are
required to be in compliance with certain minimum capital requirements. These
requirements must be satisfied by investing in approved investments that
generally cannot be used for other purposes. Under state laws, the Company's
HMOs and health insurance companies are audited by state departments of
insurance for financial and contractual compliance, and its HMOs are audited
for compliance with health services standards by respective state departments
of health. Most states' laws require such audits to be performed at least
triennially.
The Company and its licensed subsidiaries are subject to regulation under
state insurance holding company and Commonwealth of Puerto Rico regulations.
These regulations require, among other things, prior approval and/or notice of
certain material transactions, including dividend payments, intercompany
agreements and the filing of various financial and operational reports.
Management believes that the Company is in substantial compliance with all
governmental laws and regulations affecting the Company's business.
10
<PAGE>
HEALTH CARE REFORM
There continue to be diverse legislative and regulatory initiatives at both
the federal and state levels to address aspects of the nation's health care
system.
National
In 1997, Congress passed the Balanced Budget Act ("Act") which revised the
structure of and reimbursement for private health plan options for Medicare
enrollees. The Act seeks to expand the options available to Medicare enrollees
by permitting HCFA to contract with a variety of types of managed care plans,
creating a new Medicare fee-for-service option and establishing a Medicare
Medical Savings Account Demonstration Program. The legislation also encourages
provider sponsored organizations to contract directly with HCFA to provide
coverage for Medicare enrollees. Federal reimbursement was modified so that
the premiums paid by HCFA will be adjusted to take into account, on an
increasing basis, a blend of national and local health care cost factors,
rather than only local costs--starting with a 10% national factor in 1998 and
moving to a 50% national factor by 2003. Congress also provided for gradual
removal of a graduate medical education factor in determining reimbursement.
In addition, effective January 1, 1998, the Company's Medicare reimbursement
has been reduced through the assessment of .4 percent of premium
(approximately $12 to $14 million). This assessment was designed to fund a
national senior education program.
Also in 1997, Congress provided states with funding for expansion of private
health plan coverage for children who currently are uninsured. Approximately
$20 billion over five years will be made available for states to offer such
coverage to uninsured children.
Current legislative proposals under consideration include greater government
oversight over private health insurance. Such proposals include creating
liability for medical decision making and setting minimum quality standards
and service delivery requirements for plan enrollees. In addition, the
President and the President's Advisory Commission on Consumer Protection and
Quality in the Health Care Industry have made recommendations for enhancing
certain consumer health insurance rights.
Congress is also evaluating whether to extend health insurance to certain
uninsured groups, such as early retirees and the unemployed. Such matters
under discussion include permitting individuals over the age of 62 to purchase
coverage under the Medicare program if no other plan is available and
extending coverage under the Consolidated Omnibus Budget Reconciliation Act
("COBRA") to individuals who accept early retirement after the age of 55.
Management believes that continuing concerns over health care accessibility,
costs, and quality will result in additional legislative and regulatory
efforts to reform the health care system.
State
Legislation enacted in the states has included, among other things,
conforming existing state law to the federally enacted Health Insurance
Portability and Affordability Act ("HIPAA"), mental health parity and
maternity length of stay laws. Issues relating to managed care consumer
protection standards, including increased plan information disclosure,
expanded emergency room services coverage, expedited appeals procedure, third
party review of certain medical decisions, health plan liability, access to
specialists and confidentiality of medical records continue to be under
discussion. Further, proposals that place restrictions on the selection and
termination of participating health care providers also are receiving review.
Management believes that managed care and health care in general will
continue to be scrutinized and may lead to additional legislative health care
reform initiatives. Management is unable to predict how existing federal or
state laws and regulations may be changed or interpreted, what additional laws
or regulations affecting the Company's businesses may be enacted or proposed,
when and which of the proposed laws will be adopted or what effect any such
new laws and regulations will have on the revenues, profitability and business
prospects of the Company.
11
<PAGE>
OTHER
Captive Insurance Company
The Company insures substantially all professional liability risks through a
wholly-owned subsidiary (the "Subsidiary"). The annual premiums paid to the
Subsidiary are determined by independent actuaries. The Subsidiary reinsures
levels of coverage for losses in excess of its retained limits with unrelated
insurance carriers.
Centralized Management Services
Centralized management services are provided to each health plan from the
Company's headquarters and service centers. These services include management
information systems, product administration, financing, personnel,
development, accounting, legal advice, public relations, marketing, insurance,
purchasing, risk management, actuarial, underwriting and claims processing.
EMPLOYEES
As of December 31, 1997, the Company had approximately 19,500 employees,
including approximately 600 employees covered by collective bargaining
agreements. The Company has not experienced any work stoppages and believes it
has good relations with its employees.
ITEM 2. PROPERTIES
The Company owns its principal executive office, which is located in the
Humana Building, 500 West Main Street, Louisville, Kentucky 40202.
The Company provides medical services in owned or leased medical centers
ranging in size from approximately 1,500 to 80,000 square feet. The Company's
administrative market offices are generally leased, with square footage
ranging from approximately 700 to 89,000. The following chart lists the
location of properties used in the operation of the Company at December 31,
1997:
<TABLE>
<CAPTION>
MEDICAL ADMINISTRATIVE
CENTERS OFFICES
------------ ----------------
OWNED LEASED OWNED LEASED TOTAL
----- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Florida..................................... 7 91 3 47 148
Illinois.................................... 8 18 -- 10 36
Texas....................................... 5 4 1 16 26
Puerto Rico................................. -- -- -- 24 24
Kentucky.................................... 8 4 2 2 16
Missouri/Kansas............................. 3 6 -- 6 15
Ohio........................................ -- -- -- 9 9
California.................................. -- -- -- 8 8
Wisconsin................................... -- -- -- 8 8
Other....................................... 1 3 1 42 47
--- --- ------- ------- ---
Total..................................... 32 126 7 172 337
=== === ======= ======= ===
</TABLE>
In addition, the Company owns buildings in Louisville, Kentucky, San
Antonio, Texas and Green Bay, Wisconsin, and leases facilities in
Jacksonville, Florida and Madison, Wisconsin, all of which are used for
customer service and claims processing. The Louisville and Green Bay
facilities also perform enrollment processing and other corporate functions.
ITEM 3. LEGAL PROCEEDINGS
A class action lawsuit styled Mary Forsyth, et al v. Humana Inc., et al,
Case #CV-5-89-249-PMP (L.R.L.), was filed on March 29, 1989, in the United
States District Court for the District of Nevada. On August 18, 1997, the
Company filed a Petition for Writ of Certiorari in the United States Supreme
Court ("Petition") requesting
12
<PAGE>
the Supreme Court to reverse part of a ruling by the Court of Appeals for the
Ninth Circuit which had reinstated certain claims that had been dismissed by
the U.S. District Court in Nevada in the case involving claims arising out of
the method of calculation of coinsurance for Nevada insureds prior to 1988.
The Petition requested the Supreme Court to reverse the Ninth Circuit's
decision to reinstate the claim under the Racketeer Influenced and Corrupt
Organizations Act ("RICO") on behalf of a class of insureds who paid
coinsurance at Humana hospitals (the "Co-Payer Class"). The petition is
pending before the Supreme Court. The Ninth Circuit, in a decision issued on
May 23, 1997, in response to the Company's Petition for Reconsideration on
Rehearing En Banc following its original November 4, 1996 decision, ruled that
the damages in the Co-Payer Class's RICO claim, before any trebling, were
correctly limited to the amount of overpayment of the coinsurance, which
totaled approximately $1.6 million plus interest. The Ninth Circuit also
reinstated an antitrust claim that had been dismissed by the District Court.
The Company requested summary judgment in the District Court on that Claim on
October 6, 1997. On September 22, 1997, plaintiffs filed their Fourth Amended
Complaint. On October 1, 1997, the plaintiffs filed a motion in the District
Court for leave to file a Fifth Amended Complaint reasserting an ERISA claim
and adding new RICO and antitrust claims. The Company filed a motion to
dismiss the amended complaint and a motion opposing the plaintiffs' request to
file the amended complaint. The motions are pending before the District Court.
Oral arguments on the plaintiffs' and Company's motions were held on January
30, 1998. The trial which was scheduled to begin on February 23, 1998 on all
of the remaining claims has been postponed.
On April 22, 1993, an alleged stockholder of the Company filed a purported
shareholder derivative action in the Court of Chancery of the State of
Delaware, County of New Castle, styled Lewis v. Austen, et al, Civil Action
No. 12937. The action was purportedly brought on behalf of the Company and
Galen Health Care, Inc. ("Galen") against all of the directors of both
companies at the time Galen was spun off from the Company alleging, among
other things, that the defendants had improperly amended the Company's
existing stock option plans to bifurcate their existing options to allow
employees of each company to receive options in the stock of the other
company. The challenged amendment to the plan was approved by the Company's
stockholders at the 1993 Annual Meeting of Stockholders. There has been little
activity in this case. The defendants filed a motion to dismiss the case in
October 1995, which is still pending. The Company believes that the complaint
is without merit.
Between November 19, 1997 and December 11, 1997, three related, purported
class action complaints entitled (i) Medhat Reiser v. PCA, et al, Civil Action
No. 97-3678 (S.D. Fla.) (Middlebrooks, J.), (ii) Janice Wells and Stewart
Colton v. PCA, et al, Civil Action No. 97-3832 (King, J.), and (iii) David
Applestein v. PCA, et al, Civil Action No. 97-4030 (Nesbitt, J.), were filed
in the United States District Court for the Southern District of Florida by
purported former stockholders of Physician Corporation of America ("PCA")
against PCA and certain of its former directors and officers. By order entered
February 13, 1998, the three actions were consolidated into a single action
entitled In re Physician Corporation of America Securities Litigation, Civil
Action No. 97-3678 (S.D. Fla.) (Middlebrooks, J.). The Reiser, Wells and
Applestein complaints (a consolidated amended complaint has not yet been
filed) contain the same or substantially similar allegations; namely, that PCA
and the individual defendants knowingly or recklessly made false and
misleading statements in press releases and public filings with respect to the
financial and regulatory difficulties of PCA's workers' compensation business.
Count I of all three complaints is premised on alleged violations of Section
10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and SEC Rule
10b-5, and Count II on alleged violations of Section 20(a) of the 1934 Act.
All three complaints seek certification of a class of stockholders who
purchased shares of PCA common stock from May 1996 through March 1997, as well
as money damages plus prejudgment interest in an unspecified amount, and costs
and expenses including attorneys fees. The Company believes that the
allegations in the above complaints are without merit and intends to pursue
the defense of the consolidated action vigorously.
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 Subsidiary and excess carriers, except 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.
13
<PAGE>
Management does not believe that any pending legal actions will have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are names and ages of all of the current executive officers
of the Company as of February 27, 1998, their positions, and the date first
elected an officer of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION FIRST ELECTED OFFICER
---- --- -------- ---------------------
<S> <C> <C> <C>
Gregory H. Wolf......... 41 President and Chief Executive Officer 10/95(1)
Victor M. Agruso........ 38 Vice President--Organization Development and 08/97(2)
Corporate Relations
David R. Astar.......... 45 Vice President--Customer Service 09/96(3)
Kenneth J. Fasola....... 38 Vice President--Sales and Marketing 05/96(4)
Arthur P. Hipwell....... 49 Senior Vice President and General Counsel 08/90(5)
Michael B. McCallister.. 45 Senior Vice President--Health System Management 09/89(6)
James E. Murray......... 44 Vice President and Chief Financial Officer 08/90(7)
David R. Nelson......... 43 Vice President and Chief Actuary 09/96(8)
Bruce D. Perkins........ 43 Senior Vice President--National Contracting 09/94(9)
Jerry D. Reeves, M.D.... 53 Senior Vice President and Chief Medical Officer 01/97(10)
Kirk E. Rothrock........ 39 Vice President--Specialty Products and Businesses 05/96(11)
George W. Vieth, Jr..... 42 Vice President--Strategy and Systems Development 12/95(12)
</TABLE>
- --------
(1) Mr. Wolf currently serves as President, Chief Executive Officer and
Director of the Company having been elected to this position December
1997. Mr. Wolf previously served as President and Chief Operating Officer
from September 1996 until December 1997 and served as Chief Operating
Officer of the Company since July 1996. Mr. Wolf was initially elected an
officer of the Company at the time of the acquisition of EMPHESYS in
1995. Mr. Wolf had been President and Chief Operating Officer of EMPHESYS
(now a wholly-owned subsidiary of the Company) since November 1994. Mr.
Wolf was named Executive Vice President for Employers Health Insurance
Company ("EHIC") (a wholly-owned subsidiary of EMPHESYS) in 1993 and was
named Senior Vice President for EHIC in 1990 for Marketing, Sales and
Business Development.
(2) Mr. Agruso was elected to the above position in August 1997. Before
joining the Company, Mr. Agruso was Global Director--Footwear Human
Resources at Nike, Inc. in Portland, Oregon in 1997. From the spring of
1995 until the fall of 1996, Mr. Agruso was Vice President--People
Services at Secura Insurance Companies in Appleton, Wisconsin. In 1995
and 1996, he also performed consulting services for various clients.
Prior to that, he was Director of Organization and Human Resource
Development at Hallmark Cards, Inc. in Kansas City, Missouri from 1992
through April 1995.
(3) Mr. Astar currently serves as Vice President--Customer Service and was
elected to this position in September 1996. Prior to that, Mr. Astar was
Vice President of Customer Service of EHIC since 1990.
(4) Mr. Fasola currently serves as Vice President--Sales and Marketing and
was elected an officer of the Company in May 1996. Prior to that, Mr.
Fasola was Vice President and National Sales Manager of EHIC since 1989.
(5) Mr. Hipwell was initially elected an officer of the Company in 1990 and
previously served in this same capacity from July 1992, until the spinoff
of Galen Health Care Inc. ("Galen"), when he became Senior Vice President
and General Counsel of Galen. Mr. Hipwell returned to the Company in
January 1994 and was named Senior Vice President and General Counsel of
the Company in June 1994.
(6) Mr. McCallister currently serves as Senior Vice President--Health System
Management and was elected to this position January 1998. Prior to that,
Mr. McCallister served as Division I President from July 1996 to January
1998. Mr. McCallister joined the Company in June 1974 as a Financial
Specialist and has served in several positions throughout the Company.
14
<PAGE>
(7) Mr. Murray currently serves as Vice President and Chief Financial Officer
and was elected to this position January 1997. Prior to that, Mr. Murray
served as Vice President--Finance from August 1990 to January 1997. Mr.
Murray joined the Company as Controller in October 1989.
(8) Mr. Nelson was elected to the above position in September 1996. Prior to
that, Mr. Nelson was Vice President and Chief Actuary of EHIC since 1992.
(9) Mr. Perkins currently serves as Senior Vice President--National
Contracting and was elected to this position January 1998. Prior to that,
Mr. Perkins served as Senior Vice President--Provider Affairs and
Reengineering from August 1996 to January 1998. He served as President of
the South/West Division from May 1996 to August 1996 and Vice President--
Region II from August 1994 to May 1996. Mr. Perkins joined the Company in
May 1978.
(10) Dr. Reeves, a pediatric oncologist, joined the Company in January 1997 in
the above position. Prior to that, Dr. Reeves was Senior Vice President--
Health Care Operations and Chief Medical Officer at Sierra Health
Services, Inc. in Las Vegas, Nevada. Dr. Reeves was employed by Sierra
for eight years.
(11) Mr. Rothrock was elected to the above position in May 1996. Prior to
that, Mr. Rothrock served in a similar capacity as Vice President for
EHIC since 1993 and as an Assistant Vice President since 1991.
(12) Mr. Vieth currently serves as Vice President--Strategy and Systems
Development and was elected to this position in January 1998. Prior to
that, Mr. Vieth served as Vice President--Development and Planning
beginning in December 1995. Mr. Vieth joined the Company in November 1992
as Director of Development and Planning. Before joining the Company, Mr.
Vieth was Vice President and General Counsel of Glenmore Distilleries in
Louisville, Kentucky since 1989.
Executive officers are elected annually by the Company's Board of Directors
and serve until their successors are elected or until resignation or removal.
There are no family relationships among any of the executive officers of the
Company.
PART II
Certain information for Items 5 through 8 of this report, which appears in
the 1997 Annual Report to Stockholders as indicated on the following table, is
incorporated by reference herein in this report and filed as an
exhibit hereto:
<TABLE>
<CAPTION>
ANNUAL REPORT
TO STOCKHOLDERS
PAGE
---------------
<S> <C>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................... 47
As of December 31, 1997, there were approximately 9,500
Company stockholders.
ITEM 6. SELECTED FINANCIAL DATA............................... 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 22-29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements......................... 30-43
Report of independent accountants......................... 44
Quarterly financial information (unaudited)............... 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
</TABLE>
15
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item other than the information set forth
in Part I under the Section entitled "EXECUTIVE OFFICERS OF THE COMPANY," is
herein incorporated by reference from the Registrant's Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on May 14, 1998, appearing
under the caption "ELECTION OF DIRECTORS OF THE COMPANY FOR 1998" of such
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is herein incorporated by reference
from the Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 14, 1998, appearing under the caption "EXECUTIVE
COMPENSATION OF THE COMPANY" of such Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is herein incorporated by reference
from the Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 14, 1998, appearing under the caption "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMPANY COMMON STOCK" of such Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is herein incorporated by reference
from the Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 14, 1998, appearing under the caption "CERTAIN
TRANSACTIONS WITH MANAGEMENT AND OTHERS" of such Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statements, financial statement schedules and exhibits set
forth below are filed as part of this report.
(1) Financial Statements--The response to this portion of Item 14 is
submitted as Item 8 of this report.
(2) Index to Consolidated Financial Statement Schedules:
Consolidated Schedules as of and for the years ended December 31,
1997, 1996 and 1995:
I Parent Company Financial Information
II Valuation and Qualifying Accounts
All other schedules have been omitted because they are not
applicable.
(3) Exhibits:
3(a) Restated Certificate of Incorporation filed with the Secretary of
State of Delaware on November 9, 1989, as restated to incorporate
the amendment of January 9, 1992, and the correction of March 23,
1992. Exhibit 4(i) to the Company's Post-Effective Amendment to the
Registration Statement on Form S-8 (Reg. No. 33-49305) filed
February 2, 1994, is incorporated by reference herein.
16
<PAGE>
<TABLE>
<C> <S>
3(b) By-laws, as amended filed herewith.
4(a) Form of Amended and Restated Rights Agreement dated February 14,
1996, between Humana Inc. and Mid-America Bank of Louisville and
Trust Company. Exhibit 1.3 to the Registration Statement (File
No. 1-5975) on Form 8-A/A dated February 14, 1996, is
incorporated by reference herein.
(b) There are no instruments defining the rights of holders with
respect to long-term debt in excess of 10 percent of the total
assets of the Company on a consolidated basis. Other long-term
indebtedness of the Company is described in Note 6 of Notes to
Consolidated Financial Statements in the Company's 1997 Annual
Report to Stockholders. The Company agrees to furnish copies of
all such instruments defining the rights of the holders of such
indebtedness to the Commission upon request.
10(a)* 1981 Non-Qualified Stock Option Plan, as amended. Exhibit 10(c)
to the Company's Form SE filed on November 25, 1987, is
incorporated by reference herein.
(b)* Amendment No. 2 to the 1981 Non-Qualified Stock Option Plan, as
amended. Annex A to the Company's Proxy Statement covering the
Annual Meeting of Stockholders held on February 18, 1993, is
incorporated by reference herein.
(c)* 1989 Stock Option Plan for Employees. Exhibit A to the Company's
Proxy Statement covering the Annual Meeting of Stockholders held
on January 11, 1990, is incorporated by reference herein.
(d)* Amendment No. 1 to the 1989 Stock Option Plan for Employees.
Annex B to the Company's Proxy Statement covering the Annual
Meeting of Stockholders held on February 18, 1993, is
incorporated by reference herein.
(e)* Amendment No. 2 to the 1989 Stock Option Plan for Employees.
Exhibit 10(e) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, is incorporated by reference
herein.
(f)* 1989 Stock Option Plan for Non-Employee Directors. Exhibit B to
the Company's Proxy Statement covering the Annual Meeting of
Stockholders held on January 11, 1990, is incorporated by
reference herein.
(g)* Amendment No. 1 to the 1989 Stock Option Plan for Non-Employee
Directors. Annex C to the Company's Proxy Statement covering the
Annual Meeting of Stockholders held on February 18, 1993, is
incorporated by reference herein.
(h)* Amendment No. 2 to the 1989 Stock Option Plan for Non-Employee
Directors. Exhibit 10(h) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, is incorporated
by reference herein.
(i)* 1996 Stock Incentive Plan for Employees. Annex A to the Company's
Proxy Statement covering the Annual Meeting of Stockholders held
on May 9, 1996, is incorporated by reference herein.
(j)* Executive Management Incentive Compensation Plan--Group A,
Corporate. Exhibit C to the Company's Proxy Statement covering
the Annual Meeting of Stockholders held on May 26, 1994, is
incorporated by reference herein.
(k)* Humana Inc. 1997 Management Incentive Plan for Executive
Management. Annex A to the Company's Proxy Statement covering the
Annual Meeting of Stockholders held on May 8, 1997, is
incorporated by reference herein.
(l)* Humana Inc. 1997 Management Incentive Plan for Employees. Exhibit
10 to the Company's Form 10-Q for the quarter ended March 31,
1997, is incorporated by reference herein.
</TABLE>
- --------
* Exhibits 10(a) through and including 10(u) are compensatory plans or
management contracts.
17
<PAGE>
<TABLE>
<C> <S>
10(m)* Restated agreement providing for termination benefits in the
event of a change of control, filed herewith.
(n)* Humana Inc. 1998 Management Incentive Compensation Plan, filed
herewith.
(o)* Employment Agreement--Gregory H. Wolf, dated December 1, 1997,
filed herewith.
(p)* Humana Officers' Target Retirement Plan, as amended, filed
herewith.
(q)* Form Letter Agreement concerning Humana Officers' Target
Retirement Plan dated June 18, 1992, for David A. Jones. Exhibit
10(s) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, is incorporated by reference
herein.
(r)* Humana Thrift Excess Plan as amended. Exhibit 10(s) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, is incorporated by reference herein.
(s)* Humana Supplemental Executive Retirement Plan as amended. Exhibit
10(t) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, is incorporated by reference
herein.
(t)* Letter agreement with Company officers concerning health
insurance availability. Exhibit 10(mm) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994,
is incorporated by reference herein.
(u)* Form of Retention Bonus Agreement between each of Gregory H. Wolf
and certain other executive officers and the Company. Exhibit
10(w) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995, is incorporated by reference
herein.
(v) Indemnity Agreement. Appendix B to the Company's Proxy Statement
covering the Annual Meeting of Stockholders held on January 8,
1987, is incorporated by reference herein.
(w) Agreement between the Secretary of the Department of Health and
Human Services and Humana Medical Plan, Inc. Exhibit 10(w) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, is incorporated by reference herein.
(x) The $1.5 Billion Credit Facility between the Company and Chase
Manhattan Bank. Exhibit 10 to the Company's Current Report on
Form 8-K filed on September 23, 1997, is incorporated by
reference herein.
(y) The $1.5 Billion Commercial Paper Private Placement Memorandum
between the Company and Chase Securities, Inc. Exhibit 4a to the
Company's Current Report on Form 8-K filed on September 23, 1997,
is incorporated by reference herein.
(z) The $1.5 Billion Commercial Paper Private Placement Memorandum
between the Company and Merrill Lynch Money Markets, Inc. Exhibit
4b to the Company's Current Report on Form 8-K filed on September
23, 1997, is incorporated by reference herein.
(aa) Assumption of Liabilities and Indemnification Agreement between
the Company and Galen Health Care, Inc. ("Galen"). Exhibit 10(g)
to the Company's Current Report on Form 8-K filed on March 5,
1993, is incorporated by reference herein.
(bb) Agreement between the United States Department of Defense and
Humana Military Healthcare Services, Inc., a wholly-owned
subsidiary of the Company. Exhibit 10(dd) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995,
is incorporated by reference herein.
</TABLE>
- --------
* Exhibits 10(a) through and including 10(u) are compensatory plans or
management contracts.
18
<PAGE>
<TABLE>
<C> <S>
12 Statement re: Computation of Ratio of Earnings to Fixed Charges,
filed herewith.
13 1997 Annual Report to Stockholders, filed herewith. The Annual
Report shall not be deemed to be filed with the Commission except to
the extent that information is specifically incorporated by
reference herein.
21 List of Subsidiaries, filed herewith.
23 Consent of Coopers & Lybrand L.L.P., filed herewith.
27 Financial Data Schedule, filed herewith.
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
HUMANA INC.
/s/ James E. Murray
By: ------------------------------------
James E. Murray
Chief Financial Officer
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ James E. Murray Chief Financial Officer March 31, 1998
- ------------------------- (Principal Accounting Officer)
James E. Murray
/s/ David A. Jones Chairman of the Board March 31, 1998
- -------------------------
David A. Jones
/s/ David A. Jones, Jr. Vice Chairman of the Board March 31, 1998
- -------------------------
David A. Jones, Jr.
/s/ K. Frank Austen, M.D. Director March 31, 1998
- -------------------------
K. Frank Austen, M.D.
/s/ Michael E. Gellert Director March 31, 1998
- -------------------------
Michael E. Gellert
/s/ John R. Hall Director March 31, 1998
- -------------------------
John R. Hall
/s/ Irwin Lerner Director March 31, 1998
- -------------------------
Irwin Lerner
/s/ W. Ann Reynolds, Ph.D. Director March 31, 1998
- -------------------------
W. Ann Reynolds, Ph.D.
/s/ Gregory H. Wolf Director, President and March 31, 1998
- ------------------------- Chief Executive Officer
Gregory H. Wolf
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Humana Inc.
Our report on our audits of the consolidated financial statements of Humana
Inc. dated February 10, 1998 has been incorporated by reference in this Form
10-K from page 44 of the 1997 Annual Report to Stockholders of Humana Inc. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedules listed in the index in Item 14(a)(2)
of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Louisville, Kentucky
February 10, 1998
21
<PAGE>
HUMANA INC.
SCHEDULE I--PARENT COMPANY FINANCIAL INFORMATION(a)
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
ASSETS ------ ------
<S> <C> <C>
Receivables from operating subsidiaries.......................... $ 162 $ 158
Other current assets............................................. 11 42
Property and equipment, net...................................... 167 153
Investments in subsidiaries...................................... 2,251 1,342
Other............................................................ 60 61
------ ------
TOTAL ASSETS................................................. $2,651 $1,756
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities.............................................. $ 229 $ 223
Long-term debt................................................... 889 222
Other............................................................ 32 19
------ ------
Total liabilities............................................ 1,150 464
------ ------
Contingencies(b)
Preferred stock, $1 par; authorized 10,000,000 shares; none is-
sued............................................................ -- --
Common stock, $.16 2/3 par; authorized 300,000,000 shares; issued
and outstanding 164,058,225 shares--1997 and 162,681,123
shares--1996.................................................... 27 27
Other stockholders' equity....................................... 1,474 1,265
------ ------
Total stockholders' equity................................... 1,501 1,292
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $2,651 $1,756
====== ======
</TABLE>
- --------
(a) Parent company financial information has been derived from the
consolidated financial statements of the Company and excludes the accounts
of all operating subsidiaries. This information should be read in
conjunction with the consolidated financial statements of the Company.
(b) In the normal course of business, the parent company indemnifies certain
of its subsidiaries for health plan obligations its subsidiaries may be
unable to meet.
22
<PAGE>
HUMANA INC.
SCHEDULE I--PARENT COMPANY FINANCIAL INFORMATION(a)
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1997(b) 1996 1995(c)
------- ---- -------
<S> <C> <C> <C>
Revenues:
Management fees charged to operating subsidiaries....... $228 $170 $181
Interest income......................................... 5 3 23
---- ---- ----
233 173 204
---- ---- ----
Expenses:
Selling, general and administrative..................... 201 189 146
Depreciation and amortization........................... 26 21 20
Interest expense........................................ 17 9 14
---- ---- ----
244 219 180
---- ---- ----
Income (loss) before income taxes and equity in income of
subsidiaries............................................ (11) (46) 24
Income tax (expense) benefit............................ 9 18 (9)
---- ---- ----
Income (loss) before equity in income of subsidiaries.... (2) (28) 15
Equity in income of subsidiaries........................ 175 40 175
---- ---- ----
Net income............................................... $173 $ 12 $190
==== ==== ====
</TABLE>
- --------
(a) Parent company financial information has been derived from the
consolidated financial statements of the Company and excludes the accounts
of all operating subsidiaries. This information should be read in
conjunction with the consolidated financial statements of the Company.
(b) Includes the operations of Health Direct, Inc., Physician Corporation of
America and ChoiceCare Corporation since their dates of acquisition,
February 28, 1997, September 8, 1997 and October 17, 1997, respectively.
(c) Includes the operations of EMPHESYS Financial Group, Inc. since October
11, 1995, the date of acquisition.
23
<PAGE>
HUMANA INC.
SCHEDULE I--PARENT COMPANY FINANCIAL INFORMATION(a)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net cash provided by operating activities(b)............... $ 191 $ 57 $ 186
----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment....................... (38) (32) (24)
Purchases of marketable securities........................ (6) (6) (65)
Maturities and sales of marketable securities............. 1 5 303
Parent funding of operating subsidiaries.................. (209) (46) (31)
Acquisitions of health plans.............................. (656) -- (657)
Other..................................................... 17 (8) (25)
----- ----- -----
Net cash used in investing activities.................... (891) (87) (499)
----- ----- -----
Cash flows from financing activities:
Issuance of long-term debt................................ 300 -- 250
Repayment of long-term debt............................... -- (250) --
Net commercial paper borrowings........................... 367 222 --
Other..................................................... 33 58 63
----- ----- -----
Net cash provided by financing activities................ 700 30 313
----- ----- -----
Change in cash and cash equivalents........................ -- -- --
Cash and cash equivalents at beginning of period........... -- -- --
----- ----- -----
Cash and cash equivalents at end of period................. $ -- $ -- $ --
===== ===== =====
</TABLE>
- --------
(a) Parent company financial information has been derived from the
consolidated financial statements of the Company and excludes the accounts
of all operating subsidiaries. This information should be read in
conjunction with the consolidated financial statements of the Company.
(b) During the years ended December 31, 1997, 1996 and 1995, the Company
received dividends from its operating subsidiaries totaling $146 million,
$140 million and $145 million, respectively.
24
<PAGE>
HUMANA INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND ACQUIRED DEDUCTIONS OR END OF
OF PERIOD EXPENSES BALANCES WRITE-OFFS PERIOD
---------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for loss on
premiums receivable:
Year ended December 31,
1995.................. $20 $ 4 $13 $(1) $36
Year ended December 31,
1996.................. 36 11 -- (9) 38
Year ended December 31,
1997.................. 38 10 9 (9) 48
</TABLE>
25
<PAGE>
Exhibit 3(b)
Restated November 12, 1997
BY-LAWS OF
HUMANA INC.
ARTICLE I
Meetings of Stockholders
Section 1.1 Annual Meetings. The annual meeting of the stockholders
for the election of directors and for the transaction of such other business as
properly may come before such meeting shall be held on such date, and at such
time and place within or without the State of Delaware as may be designated by
the Board of Directors.
Section 1.2 Special Meetings. Special meetings of the stockholders
for any purpose or purposes, unless otherwise prescribed by law, may be called
at any time by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer, or the President, to be held on such date, and at such time
and place within or without the State of Delaware as the Board of Directors, the
Chairman of the Board, the Chief Executive Officer or the President, whichever
has called the meeting, shall direct. A special meeting of the stockholders
shall be called by the Chairman of the Board, the Chief Executive Officer, or
the President whenever stockholders owning one-fourth of the shares of the
Corporation then issued and outstanding and entitled to vote on matters to be
submitted to stockholders of the Corporation shall make application therefor in
writing. Any such written request shall state a proper purpose or purposes of
the meeting and shall be delivered to the Chairman of the Board, the Chief
Executive Officer or the President.
Section 1.3 Notice of Meeting. Written notice of every meeting of
the stockholders shall be given by, or at the direction of, the person
authorized to call the meeting, to each stockholder of record entitled to vote
at the meeting, at his address appearing on the books of the Corporation or
supplied by him to the Corporation for the purpose of notice. The notice of
every meeting of the stockholders shall specify the place, day and hour of the
meeting and, in the case of a special meeting, the matter or matters to be acted
upon at such meeting. Only the matter or matters specified in the notice of a
special meeting shall be acted upon thereat. All notices of meetings of the
stockholders shall be mailed at least ten days before the time of the meeting.
The notice of every meeting of the stockholders may be accompanied by
a form of proxy approved by the Board of Directors in favor of such person or
persons as the Board of Directors may select.
Section 1.4 Quorum. Except where otherwise provided by law or these
By-laws, the presence at any meeting, in person or by proxy, of the holders of
record of a majority of the shares then issued and outstanding and entitled to
vote shall be necessary and sufficient to constitute a quorum for the
transaction of business.
Section 1.5 Adjournments. In the absence of a quorum, a majority in
interest of the stockholders entitled to vote, present in person or by proxy,
or, if no stockholder entitled to vote is present in person or by proxy, any
officer entitled to preside or act as secretary of such meeting, may adjourn the
meeting from time to time until a quorum shall be present. At any such
adjourned meeting at which a quorum shall be present, any business may be
transacted which might have been transacted at the meeting as originally called.
Section 1.6 Voting. Directors shall be chosen by a plurality of the
votes cast at the election, and, except where otherwise provided by law, all
other questions shall be determined by a majority of the votes cast on such
question. All voting shall be on a non-cumulative basis.
<PAGE>
Section 1.7 Proxies. Any stockholder entitled to vote may vote by
proxy, provided that the instrument authorizing such proxy to act shall have
been executed in writing (which shall include telegraphing or cabling) by the
stockholder or by his duly authorized attorney-in-fact and filed with the
Secretary of the Corporation.
Section 1.8 Judges of Election. The Board of Directors may appoint
judges of election to serve at any election of directors and at balloting on any
other matter that may properly come before a meeting of stockholders. If no
such appointment shall be made, or if any of the judges so appointed shall fail
to attend, or refuse to or be unable to serve, then such appointment may be made
by the presiding officer at the meeting.
Section 1.9 Stockholder Proposals. At an annual meeting of
stockholders only such business shall be conducted, and only such proposals
shall be acted upon, as shall have been properly brought before the annual
meeting of stockholders (a) by, or at the direction of, the Board of Directors
or (b) by a stockholder of the Corporation who complies with the procedures set
forth in this Section 1.9. For business or a proposal to be properly brought
before an annual meeting of stockholders by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the scheduled date of the annual meeting, regardless
of any postponement, deferral or adjournment of that meeting to a later date;
provided, however, that if less than 70 days' notice or prior public disclosure
of the date of the annual meeting is given or made to stockholders, notice by
the stockholder to be timely must be so delivered or received not later than the
close of business on the 10th day following the earlier of (i) the day on which
such notice of the date of the meeting was mailed or (ii) the day on which such
public disclosure was made.
A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before an annual meeting of
stockholders (i) a description, in 500 words or less, of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on the
Corporation's books, of the stockholders known by such stockholder to be
supporting such proposal, (iii) the class and number of shares of the
Corporation which are beneficially owned by such stockholder on the date of such
stockholder's notice and by any other stockholders known by such stockholder to
be supporting such proposal on the date of such stockholder's notice, (iv) a
description, in 500 words or less, of any interest of the stockholder in such
proposal, and (v) a representation that the stockholder is a holder of record of
stock of the Corporation and intends to appear in person or by proxy at the
meeting to present the proposal specified in the notice. Notwithstanding
anything in these By-Laws to the contrary, no business shall be conducted at a
meeting of stockholders except in accordance with the procedures set forth in
this Section 1.9.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that the business was not properly brought before the
meeting in accordance with the procedures prescribed by this Section 1.9, and if
he should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted. Notwithstanding
the foregoing, nothing in this Section 1.9 shall be interpreted or construed to
require the inclusion of information about any such proposal in any proxy
statement distributed by, at the direction of, or on behalf of, the Board of
Directors.
The provisions of this Section 1.9 shall be applicable to annual
meetings of stockholders after the 1993 annual meeting of stockholders.
2
<PAGE>
Section 1.10 Stockholder Nominations. Subject to the rights, if any,
of the holders of any series of Preferred Stock then outstanding, only persons
nominated in accordance with the procedures set forth in this Section 1.10 shall
be eligible for election as directors. Nominations of persons for election to
the Board may be made at an annual meeting of stockholders or special meeting of
stockholders called by the Board of Directors for the purpose of electing
directors (i) by or at the direction of the Board or (ii) by any stockholder of
the Corporation entitled to vote for the election of directors at such meeting
who complies with the notice procedures set forth in this Section 1.10. Such
nominations, other than those made by or at the direction of the Board, shall be
made pursuant to timely notice in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the scheduled date of the meeting, regardless of any
postponement, deferral or adjournment of that meeting to a later date; provided,
however, that if less than 70 days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so delivered or received not later than the close of
business on the 10th day following the earlier of (i) the day on which such
notice of the date of the meeting was mailed or (ii) the day on which such
public disclosure was made.
A stockholder's notice to the Secretary shall set forth (i) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director (a) the name, age, business address and residence address of such
person, (b) the principal occupation or employment of such person, (c) the class
and number of shares of the Corporation which are beneficially owned by such
person on the date of such stockholder's notice and (d) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, or any successor statute thereto (the "Exchange Act") (including
without limitation such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (ii) as to the
stockholder giving the notice (a) the name and address, as they appear on the
Corporation's books, of such stockholder and any other stockholders known by
such stockholder to be supporting such nominee(s), (b) the class and number of
shares of the Corporation which are beneficially owned by such stockholder on
the date of such stockholder's notice and by any other stockholders known by
such stockholder to be supporting such nominee(s) on the date of such
stockholder's notice, (c) a representation that the stockholder is a holder of
record of stock of the Corporation entitled to vote at such meeting and intends
to appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; and (iii) a description of all arrangements or
understandings between the stockholder and each nominee and other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder.
No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 1.10. The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Section 1.10, and if he should
so determine, he shall so declare to the meeting and the defective nomination
shall be disregarded.
The provisions of this Section 1.10 shall be applicable to meetings of
stockholders after the 1993 annual meeting of stockholders.
3
<PAGE>
Section 1.11 Record Date for Written Consents. In order that the
Corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than ten (10) days after the date upon which the resolution
fixing the record date is adopted by the Board of Directors. Any stockholder of
record seeking to have the stockholders authorize or take corporate action by
written consent shall, by written notice to the Secretary, request the Board of
Directors to fix a record date. The Board of Directors shall promptly, but in
all events within ten (10) days after the date on which such a request is
received, adopt a resolution fixing the record date. If no record date has been
fixed by the Board of Directors within ten (10) days of the date on which such a
request is received, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is required by applicable law, shall be the first date
on which a signed written consent setting forth the action taken or proposed to
be taken is delivered to the Corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or any officer or agent
of the Corporation having custody of the book in which proceedings of
stockholders meetings are recorded, to the attention of the Secretary of the
Corporation. Delivery shall be by hand or by certified or registered mail,
return receipt requested. If no record date has been fixed by the Board of
Directors and prior action by the Board of Directors is required by applicable
law, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall be at the close of business
on the date on which the Board of Directors adopts the resolution taking such
prior action.
ARTICLE II
Board of Directors
Section 2.1 Number. The number of directors which shall constitute
the whole Board of Directors shall be fixed from time to time by resolution of
the Board of Directors or stockholders (any such resolution of either the Board
of Directors or stockholders being subject to any later resolution of either of
them) but in no event shall such number be less than three or more than fifteen.
Section 2.2 Election and Term of Office. Directors shall be elected
at the annual meeting of the stockholders. Each director (whether elected at an
annual meeting or to fill a vacancy or otherwise) shall continue in office until
his successor shall have been elected or until his earlier death, resignation or
removal in the manner hereinafter provided.
Section 2.3 The Chairman of the Board. The Chairman of the Board
shall be elected from among the members of the Board of Directors. If present,
he shall preside at all meetings of stockholders and the Board of Directors and
he shall see that all orders and resolutions of the Board of Directors are
carried into effect. He may sign, with any officer thereunto duly authorized,
certificates of stock of the Corporation the issuance of which shall have been
duly authorized (the signature to which may be a facsimile signature). He shall
also perform such other duties as are given to him by these By-laws or as from
time to time may be assigned to him by the Board of Directors.
Section 2.4 Vice Chairman of the Board. The Vice Chairman of the
Board shall, in the absence of the Chairman of the Board, preside at all
meetings of stockholders and the Board of Directors. He shall preform such
other duties as may be assigned to him by these By-laws, the Board of Directors
or the Chairman of the Board.
Section 2.5 Vacancies and Additional Directorships. If any vacancy
shall occur among the directors by reason of death, resignation, or removal, or
as the result of an increase in the number of directorships, the directors then
in office shall continue to act and may fill any such vacancy by a vote of the
directors then in office, though less than a quorum. If the whole board shall
resign, said
4
<PAGE>
board, prior to their resignations, may elect their successors who
will take office upon such resignations.
Section 2.6 Meetings. A meeting of the Board of Directors shall be
held for organization, for the election of officers and for the transaction of
such other business as may properly come before the meeting, within thirty days
after each annual election of directors. The Board of Directors by resolution
may provide for the holding of regular meetings and may fix the time and places
at which such meetings shall be held. Notice of regular meetings shall not be
required to be given, provided that whenever the time or place of regular
meetings shall be fixed or changed, notice of such action shall be mailed
promptly to each director who shall not have been present at the meeting at
which such action was taken, addressed to him at his residence or usual place of
business. Special meetings of the Board of Directors may be called by the
Chairman of the Board, the Chief Executive Officer, the President, or any three
directors. Except as otherwise required by statute, notice of each special
meeting shall be mailed to each director addressed to him at his residence or
usual place of business, or shall be sent to him at such place by telegram,
radio or cable, or telephoned or delivered to him personally, not later than two
days before the day on which the meeting is to be held. Such notice shall state
the time and place of such meeting but, unless otherwise required by statute,
the Certificate of Incorporation of the Corporation or these By-laws, need not
state the purposes thereof. Notice of any meeting need not be given to any
director who shall attend such meeting in person or who shall waive notice
thereof, before or after such meeting in writing or by telegram, radio or cable.
Meetings of the directors may be held by the directors participating in the same
by means of a conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other, and
participation in a meeting in such manner shall constitute presence in person by
all persons so participating. Meetings may also be held in such other manner
authorized or permitted by Delaware law. Whenever the laws of the State of
Delaware authorize or permit directors to act other than at a meeting,
including, but not limited to, acting through unanimous or other written
consents, then such actions shall be as effective as if taken by the directors
at a meeting.
Section 2.7 Quorum. A majority of the total number of members
of the Board of Directors as constituted from time to time shall be necessary
and sufficient to constitute a quorum for the transaction of business. In the
absence of a quorum, a majority of those present at the time and place of any
meeting may adjourn the meeting from time to time until a quorum shall be
present and the meeting may be held as adjourned without further notice. Except
as otherwise provided by law, the Certificate of Incorporation or by these By-
Laws, a majority of the Directors present at any meeting at which a quorum is
present may decide any question properly brought before such meeting.
Section 2.8 Resignation of Directors. Any director may resign
at any time by giving written notice of such resignation to the Board of
Directors, the Chairman of the Board or the Chief Executive Officer or the
President. Any such resignation shall take effect at the time specified therein
or, if no time is specified, upon receipt thereof by the Board of Directors or
one of the above named officers; and, unless specified therein, the acceptance
of such resignation shall not be necessary to make it effective.
Section 2.9 Removal of Directors. At any special meeting of the
stockholders, duly called as provided in these By-laws, any director or
directors may, by the affirmative vote of the holders of a majority of all the
shares of stock outstanding and entitled to vote for the election of directors,
be removed from office, either with or without cause. At such meeting a
successor or successors may be elected by a plurality of the votes cast, or if
any such vacancy is not so filled, it may be filled by the directors as provided
in Section 2.5.
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Section 2.10 Compensation of Directors. Directors shall receive
such reasonable compensation for their services as such, whether in the form of
salary of a fixed fee for attendance at meetings, with expenses, if any, as the
Board of Directors may from time to time determine. Nothing herein contained
shall be construed to preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor.
ARTICLE III
Committees of the Board
Section 3.1 Executive Committee. There shall be an Executive
Committee of the Corporation, consisting of not less than three nor more than
seven members of the Board of Directors, including the Chairman of the Board, as
may be determined from time to time by the Board of Directors. The Board of
Directors, by resolution adopted by a majority of the whole Board, shall elect
the members of the Executive Committee and shall fill any vacancy in the
Executive Committee. The members of the executive Committee shall hold office
until the first meeting of the Board of Directors after the next succeeding
annual meeting of the stockholders and until their successors are elected.
All action of the Executive Committee shall be reported to the Board
of Directors, and, when the Board of Directors of the Corporation is not in
session, the Executive Committee shall have and exercise the authority of the
Board of Directors in the management of the business, affairs and property of
the Corporation.
Section 3.2 Other Committees. The Board of Directors may from time
to time appoint such further standing or special committees as it may deem for
the best interest of the Corporation, but no such committee shall have any
powers, except such as are expressly conferred upon it by the Board of
Directors. Each committee referred to in this Article III shall act only as a
committee and the individual members shall have no power as such.
Section 3.3 Meetings, Notices and Records. Each committee may
provide for the holding of regular meetings, with or without notice, and may fix
the time and place at which such meetings shall be held. Special meetings of
each committee shall be held upon call by or at the direction of its chairman
or, if there be no chairman, by or at the direction of any two of its members,
at the time and place specified in the respective notices or waivers of notice
thereof. Notice of each special meeting of a committee shall be mailed to each
member of such committee, addressed to him at his residence or usual place of
business, at least two days before the day on which the meeting is to be held,
or shall be sent by telegram, radio or cable, addressed to him at such place, or
telephoned or delivered to him personally, not later than the day before the day
on which the meeting is to be held. Notice of any meeting of a committee need
not be given to any member thereof who shall attend the meeting or who shall
waive notice thereof by telegram, radio, cable or other writing. Notice of any
adjourned meeting need not be given. Each committee shall keep a record of its
proceedings, and report the same to the Board of Directors when required.
Meetings of the committees may be held by the members of the committees
participating in the same by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting in such manner shall
constitute presence in person by all persons so participating. Meetings may
also be held in such other manner authorized or permitted by Delaware law.
Whenever the laws of the State of Delaware authorize or permit members of the
committees to act other than at a meeting, including but not limited to acting
through unanimous or other written consents, then such actions shall be as
effective as if taken by the committee at a meeting.
Section 3.4 Quorum and Manner of Acting. At each meeting of any
committee the presence of a majority but not less than two of its members then
in office shall be necessary and sufficient to constitute a quorum for the
transaction of business, and the act of a majority of the
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members present at any meeting at which a quorum is not present at the time and
place of any meeting may adjourn the meeting from time to time and until a
quorum shall be present. Subject to the foregoing and other provisions of these
By-laws and except as otherwise determined by the Board of Directors, each
committee may make rules for the conduct of its business. Any determination made
in writing and signed by all the members of such committee shall be as effective
as if made by such committee at a meeting.
Section 3.5 Resignations. Any member of a committee may resign at
any time by giving written notice of such resignation to the Board of Directors,
the Chairman of the Board, the Chief Executive Officer, or the President.
Unless otherwise specified in such notice, such resignation shall take effect
upon receipt thereof by the Board or any such officer.
Section 3.6 Removal. Any member of any committee may be removed at
any time by the Board of Directors with or without cause.
Section 3.7 Vacancies. If any vacancy shall occur in any committee
by reason of death, resignation, disqualification, removal or otherwise, the
remaining members of such committee, though less than a quorum, shall continue
to act until such vacancy is filled by the Board of Directors.
Section 3.8 Compensation. Committee members shall receive such
reasonable compensation for their services as such, whether in the form of
salary or a fixed fee for attendance at meetings, with expenses, if any, as the
Board of Directors may from time to time determine. Nothing herein contained
shall be construed to preclude any committee member from serving the Corporation
in any other capacity and receiving compensation therefor.
ARTICLE IV
Officers
Section 4.1 Number. The officers of the Corporation shall be a Chief
Executive Officer, a President, such Vice-Presidents (including Executive Vice-
Presidents or Senior Vice-Presidents) as may from time to time be necessary or
desirable, a Secretary, who may have one or more assistant secretaries, a
Treasurer, who may have one or more assistant treasurers, and such other
officers as the Board of Directors may from time to time determine. Any two or
more offices may be held by the same person.
Section 4.2 Election, Term of Office and Qualifications. Each
officer (except such officers as may be appointed in accordance with the
provisions of Section 4.3) shall be elected by the Board of Directors. Each
such officer (whether elected at the first meeting of the Board of Directors
after the annual meeting of stockholders or to fill a vacancy or otherwise)
shall hold his office until the first meeting of the Board of Directors after
the next annual meeting of stockholders and until his successor shall have been
elected, or until his death, or until he shall have resigned in the manner
provided in Section 4.4 or shall have been removed in the manner provided in
Section 4.5.
Section 4.3 Subordinate Officers and Agents. The Board of Directors
from time to time may appoint other officers or agents to hold office for such
period, have such authority and perform such duties as are provided in these By-
laws or as may be provided in the resolutions appointing them. The Board of
Directors may delegate to any officer or agent the power to appoint any such
subordinate officers or agents and to prescribe their respective terms of
office, authorities and duties, and unless such power is removed by the Board,
the Chairman of the Board, the Chief Executive Officer and the President shall
have the power to appoint and remove Assistant Secretaries and Assistant
Treasurers.
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Section 4.4 Resignations. Any officer may resign at any time by
giving written notice of such resignation to the Board of Directors, the
Chairman of the Board, the Chief Executive Officer or the President. Unless
otherwise specified in such written notice, such resignation shall take effect
upon receipt thereof by the Board of Directors or any such officer.
Section 4.5 Removal. Any officer may be removed at any time, with or
without cause, at any meeting of the Board of Directors by the vote of a
majority of all the directors then in office. Any officer or agent appointed in
accordance with the provisions of Section 4.3 may be removed, with or without
cause, by the Board of Directors at any meeting, by the vote of a majority of
the directors present at such meeting, or by any officer or agent upon whom such
power of removal shall have been conferred by the Board of Directors.
Section 4.6 Vacancies. A vacancy in any office by reason of death,
resignation, removal, disqualification or any other cause shall be filled for
the unexpired portion of the term in the manner prescribed by these By-laws for
regular election or appointment to such office.
Section 4.7 The Chief Executive Officer. The Chief Executive Officer
shall be the principal executive officer of the Corporation and may be elected
from among the members of the Board of Directors. The Chairman of the Board or
President may be the Chief Executive Officer of the Corporation. Subject to the
direction of the Board of Directors, he shall have general charge of the
business, affairs and property of the Corporation and general supervision over
its officers and agents. In the absense of the Chairman of the Board and the
Vice Chairman of the Board, he shall preside at all meetings of stockholders and
he shall see that all orders and resolutions of the Board of Directors are
carried into effect. He may sign, with any other officer thereunto duly
authorized, certificates of stock of the Corporation the issuance of which shall
have been duly authorized (the signature to which may be a facsimile signature),
He may sign and execute in the name of the Corporation deeds, mortgages, bonds,
contracts, agreements or other instruments duly authorized by the Board of
Directors except in cases where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent.
From time to time, he shall report to the Board of Directors all matters within
his knowledge which the interests of the Corporation may require to be brought
to its attention. He shall also perform such other duties as are given to him by
these By-laws or as from time to time may be assigned to him by the Board of
Directors.
Section 4.8 The President. The President shall be an executive officer
of the Corporation and may also be the Chief Executive Officer, as determined by
the Board of Directors. Subject to the direction of the Board of Directors and
the Chief Executive Officer, the President shall have supervision of the
business of the Corporation and its other officers and agents. He may sign, with
any other officer thereunto duly authorized, certificates of stock of the
Corporation the issuance of which shall have been duly authorized (the signature
to which may be a facsimile signature), and may sign and execute in the name of
the Corporation, deeds, mortgages, bonds, contracts, agreements or other
instruments duly authorized by the Board of Directors except in cases where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent. From time to time, he shall report to
the Board of Directors all matters within his knowledge which the interests of
the Corporation may require to be brought to its attention. He shall also
perform such other duties as are given to him by these By-laws, or from time to
time may be assigned to him by the Chief Executive Officer or the Board of
Directors.
Section 4.9 The Vice Presidents. The Vice Presidents shall perform
such duties and exercise such authority as shall from time to time may be
assigned to them by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer or the President, and, in the order of their seniority, or in
any other order as the Board of Directors may from time to time determine,
shall, in the absence of the President, have all the powers of and be subject to
all restrictions upon the President.
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Section 4.10 The Secretary. The Secretary shall
(a) Record all the proceedings of the meetings of the stockholders,
the Board of Directors, and any committees in a book or books to be kept for
that purpose;
(b) Cause all notices to be duly given in accordance with the
provisions of these By-laws and as required by statute;
(c) Whenever any committee shall be appointed in pursuance of a
resolution of the Board of Directors, furnish the chairman of such committee
with a copy of such resolution;
(d) Be custodian of the records and of the seal of the Corporation,
and cause such seal to be affixed to all certificates representing stock of the
Corporation prior to the issuance thereof and to all instruments the execution
of which on behalf of the Corporation under its seal shall have been duly
authorized;
(e) See that the lists, books, reports, statements, certificates and
other documents and records required by statute are properly kept and filed;
(f) Have charge of the stock and transfer books of the Corporation,
and exhibit such stock book at all reasonable times to such persons as are
entitled by statute to have access thereto;
(g) Sign (unless the Treasurer or an Assistant Secretary or an
Assistant Treasurer shall sign) certificates representing stock of the
Corporation the issuance of which shall have been duly authorized (the signature
to which may be a facsimile signature); and
(h) In general, perform all duties incident to the office of the
Secretary and such other duties as are given to him by these By-laws or as from
time to time may be assigned to him by the Board of Directors, the Chairman of
the Board, the Chief Executive Officer or the President.
Section 4.11 Assistant Secretaries. At the request of the Secretary or
in his absence or disability, the Assistant Secretary designated by him (or in
the absence of such designation, the Assistant Secretary designated by the Board
of Directors or the Chairman of the Board, the Chief Executive Officer or the
President) shall perform all duties of the Secretary, and, when so acting, shall
have all the powers of and be subject to all restrictions upon the Secretary.
The Assistant Secretaries shall perform such other duties as from time to time
may be assigned to them respectively by the Board of Directors, the Chairman of
the Board, the Chief Executive Officer, the President or the Secretary.
Section 4.12 The Treasurer. The Treasurer shall
(a) Have charge of and supervision over and be responsible for the
funds, securities, receipts and disbursements of the Corporation;
(b) Cause the moneys and other valuable effects of the Corporation to
be deposited in the name and to the credit of the Corporation in such banks or
trust companies or with such bankers or other depositaries as shall be selected
in accordance with Section 5.3 of these By-laws or to be otherwise dealt with in
such manner as the Board of Directors may direct;
(c) Cause the funds of the Corporation to be disbursed by checks or
drafts upon the authorized depositaries of the Corporation, and cause to be
taken and preserved proper vouchers for all moneys disbursed;
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(d) Render to the Board of Directors or the Chairman of the Board, the
Chief Executive Officer or the President, whenever requested, a statement of the
financial condition of the Corporation and of all his transactions as Treasurer;
(e) Cause to be kept at the Corporation's principal office correct
books of account of all its business and transactions and such duplicate books
of account as he shall determine and upon application cause such books or
duplicates thereof to be exhibited to any director;
(f) Be empowered, from time to time, to require from the officers or
agents of the Corporation, reports or statements giving such information as he
may desire with respect to any and all financial transactions of the
Corporation;
(g) Sign (unless the Secretary or an Assistant Secretary or an
Assistant Treasurer shall sign) certificates representing stock of the
Corporation, the issuance of which shall have been duly authorized (the
signature to which may be a facsimile signature); and
(h) In general, perform all duties incident to the office of Treasurer
and such other duties as are given to him by these By-laws or as from time to
time may be assigned to him by the Board of Directors, the Chairman of the
Board, the Chief Executive Officer or the President.
Section 4.13 Assistant Treasurers. At the request of the Treasurer or
in his absence or disability, the Assistant Treasurer designated by him (or in
the absence of such designation, the Assistant Treasurer designated by the Board
of Directors, the Chairman of the Board, the Chief Executive Officer or the
President) shall perform all the duties of the Treasurer, and, when so acting,
shall have all the powers of and be subject to all restrictions upon the
Treasurer. The Assistant Treasurers shall perform such other duties as from time
to time may be assigned to them respectively by the Board of Directors, the
Chairman of the Board, the Chief Executive Officer, the President or the
Treasurer.
Section 4.14 Surety Bonds. If the Board of Directors shall so require,
any officer or agent of the Corporation shall execute to the Corporation a bond
in such sum and with such surety or sureties as the Board of Directors may
direct, conditioned upon the faithful discharge of his duties, including
responsibility for negligence and for the accounting for all property, funds or
securities of the Corporation which may come into his hands.
ARTICLE V
Execution of Instruments and Deposit
of Corporate Funds
Section 5.1 Execution of Instruments Generally. The Chairman of the
Board, the Chief Executive Officer, the President, any Vice President, the
Secretary or the Treasurer, subject to the approval of the Board of Directors,
may enter into any contract or execute and deliver any instrument in the name
and on behalf of the Corporation. The Board of Directors may authorize any
officer or officers, or agents or agent, to enter into any contract or execute
and deliver any instrument in the name and on behalf of the Corporation, and
such authorization may be general or confined to specific instances. Such
authorization may include, but shall not be limited to, the power to fix the
price at which any shares, debentures or other securities are to be sold by the
Corporation.
Section 5.2 Borrowing. No loans or advances shall be obtained by or
contracted for, by or on behalf of the Corporation and no negotiable paper shall
be issued in its name, unless and except as authorized by the Board of
Directors. Such authorization may be general or confined to specific instances.
Any officer or agent of the Corporation thereunto so authorized may obtain loans
and advances, may make, execute and deliver promissory notes, bonds or other
evidences of indebtedness
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of the Corporation and, in connection therewith, may fix the interest rate
payable by the Corporation thereunder. Any officer or agent of the Corporation
thereunto so authorized may pledge, hypothecate or transfer as security for the
payment of any and all loans, advances, indebtedness and liabilities of the
Corporation, and any and all stocks, bonds, other securities and other personal
property at any time held by the Corporation, and to that end may endorse,
assign and deliver the same and do every act and thing necessary or proper in
connection therewith.
Section 5.3 Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time its credit in such banks or trust
companies or with such bankers or other depositaries as the Board of Directors
may select, or as may be selected by any officer or officers or agent or agents
authorized so to do by the Board of Directors. Endorsements for deposit to the
credit of the Corporation in any of its duly authorized depositaries shall be
made in such manner as the Board of Directors from time to time may determine.
Section 5.4 Checks, Drafts, and Orders. All checks, drafts, or other
orders for the payment of money, and all notes or other evidences of
indebtedness issued in the name of the Corporation, shall be signed by such
officer or officers or agent or agents of the Corporation, and in such manner,
as from time to time shall be determined by the Board of Directors.
Section 5.5 Proxies. Proxies to vote with respect to shares of stock
of other corporations owned by or standing in the name of the Corporation may be
executed and delivered from time to time on behalf of the Corporation by the
Chairman of the Board, the Chief Executive Officer, the President or by any
other person or persons thereunto authorized by the Board of Directors.
ARTICLE VI
Record Dates
Section 6.1 In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment or any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall be not more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. Only those
stockholders of record on the date so fixed shall be entitled to any of the
foregoing rights, notwithstanding the transfer of any such stock on the books of
the Corporation after any such record date fixed by the Board of Directors.
ARTICLE VII
Corporate Seal
Section 7.1 The Corporate seal shall be circular in form and shall
bear the name of the Corporation and words and figures denoting its organization
under the laws of the State of Delaware and the year thereof and otherwise shall
be in such form as shall be approved from time to time by the Board of
Directors.
ARTICLE VIII
Fiscal Year
Section 8.1 The fiscal year of the Corporation shall begin on the 1st
day of January in each year and end on the 31st day of December in each year.
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ARTICLE IX
Amendments
Section 9.1 These By-laws may be amended, altered or repealed, and new
By-laws may be made by the affirmative vote of the holders of record of a
majority of the outstanding shares of stock of the Corporation entitled to vote
cast at any annual or special meeting, or by the affirmative vote of a majority
of the directors cast at any regular or special meeting at which a quorum is
present.
ARTICLE X
Indemnification
Section 10.1 Right to Indemnification. Each person who was or is made
a party or is threatened to be made a party to or is involved in any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative ("Proceeding"), by reason of the fact that he,
or a person of whom he is the legal representative, is or was a director,
officer, employee or agent of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such Proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended, (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than said Law permitted the
Corporation to provide prior to such amendment) against all expenses, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith; provided, however, that the
Corporation shall indemnify any such person seeking indemnity in connection with
a Proceeding (or part thereof) initiated by such person only if the Proceeding
(or part thereof) was authorized by the Board of Directors of the Corporation.
The right to indemnification conferred in this Section 10.1 shall be a contract
right and shall include the right to be paid by the Corporation expenses
incurred in defending any such Proceeding in advance of its final disposition;
provided, however, that if the Delaware General Corporation Law requires, the
payment of such expenses incurred by a director or officer in his capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of such Proceeding, shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it should be determined ultimately that such
director or officer is not entitled to be indemnified under this Section or
otherwise.
Section 10.2 Non-Exclusivity of Rights. The rights conferred on any
person by Section 10.1 shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, by-laws, agreement, vote of stockholders or
disinterested directors, or otherwise.
Section 10.3 Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any such director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
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Section 10.4 Gender and Number References. In this document the
singular means the plural and the plural the singular, as appropriate, and the
proper gender- male, female, or neuter- shall be deemed substituted as
appropriate.
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EXHIBIT 10(m)
CHANGE IN CONTROL AGREEMENT
This CHANGE IN CONTROL AGREEMENT ("AGREEMENT") is made as of _________,
1997 by and between HUMANA INC., Louisville, Kentucky (the "COMPANY"), and
____________________ (the "EMPLOYEE").
WHEREAS, the Board of Directors (the "Board") of Humana Inc. desires to
foster the continuous employment of the Employee and has determined that
appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of the Employee to his/her duties free from
distractions which could arise in the event of a threatened Change in Control of
the Company;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the Company and the Employee agree as follows:
1. TERMINATION BENEFITS. If, within twenty-four (24) months following a
Change in Control and during the Term of this Agreement, the Employee's
employment with the Company shall be terminated (A) by the Company other than
for Cause, or (B) by the Employee for Good Reason, then:
a) The Company shall, within ten (10) business days after the Date
of Termination, pay the Employee:
1) His/her full base salary earned but not yet paid through the
Date of Termination at the greater of the rate in effect at the time the Change
in Control occurred or when the Notice of Termination was given, plus any
bonuses or incentive compensation which, pursuant to the terms of any
compensation or benefit plan, have been earned and are payable as of the Date of
Termination. For purposes of this Agreement, bonuses and incentive compensation
shall be considered payable if all conditions for earning them have been met and
any requirement that Employee be actively employed as of the date of payment
shall be disregarded; and
2) A lump sum in an amount equal to __________ (___) times the
amount equal to the sum of (1) the Employee's Annual Base Salary at the greater
of the rate in effect at the time the Change in Control occurred or when the
Notice of Termination was given plus (2) the maximum bonus or incentive
compensation which could have been earned by the Employee calculated as if all
relevant goals had been met during the then-current fiscal year of the Company
pursuant to the terms of the incentive compensation plan in which he/she
participates. If there is no incentive compensation plan in effect at the time
the Notice of Termination is given, then for purposes of this
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Agreement it shall be assumed that the amount of incentive compensation to be
paid to the Employee shall be the maximum target amount under any incentive
compensation plan in which he/she participated at the date of the Change in
Control or the most recent plan participated in, whichever would be greater.
b) The Company shall, for the period stated below, maintain in full
force and effect for the benefit of the Employee and the Employee's dependents
and beneficiaries, at the Company's expense, all life insurance, health
insurance, dental insurance, accidental death and dismemberment insurance and
disability insurance under plans and programs in which the Employee and/or the
Employee's dependents and beneficiaries participated immediately prior to the
Date of Termination, provided that continued participation is possible under the
general terms and provisions of such plans and programs. The Extended Benefits
shall be continued until the earlier of (A) the second (2nd) anniversary of the
Date of Termination, (B) the effective date of the Employee's coverage under
equivalent benefits from a new employer (provided that no such equivalent
benefits shall be considered effective unless and until all pre-existing
condition limitations and waiting period restrictions have been waived or have
otherwise lapsed), or (C) the death of the Employee. If participation in any
such plan or program is barred, the Company shall arrange at its own expense to
provide the Employee with benefits substantially similar to those which he/she
was entitled to receive under such plans and programs. At the end of the period
of coverage, the Employee shall have the right to have assigned to him/her, at
no cost and with no apportionment of prepaid premiums, any assignable insurance
policy relating specifically to him/her. Employee shall be entitled to
continuation coverage as provided by the Consolidated Omnibus Budget
Reconciliation Act (COBRA) at the conclusion of the coverage provided under this
Subsection.
2. DEFINITIONS. For purposes of this Agreement, the following
definitions shall apply:
a) "Change in Control" shall mean a Change in Control as defined in
the Company's 1996 Stock Incentive Plan for Employees.
b) "Company" shall mean Humana Inc. or any successor thereof.
c) A termination for "Cause" shall be termination by reason of the
conviction of the Employee, by a court of competent jurisdiction and following
the exhaustion of all possible appeals, of a criminal act involving the Company
or its assets.
d) "Good Reason" shall mean the occurrence after a Change in Control
of any of the following events without the Employee's express written consent:
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1) Any material reduction in the Employee's title, authority or
responsibilities, including reporting responsibilities;
2) A reduction by the Company in the Employee's Annual Base
Salary as in effect on the date hereof or as the same may be increased from time
to time;
3) The relocation of the Employee's office at which he/she is
to perform his/her duties to a location more than thirty (30) miles from the
location at which the Employee performed his/her duties prior to the Change in
Control;
4) The failure by the Company to continue in effect any
incentive, bonus or other compensation plan in which the Employee participates,
unless the Company substitutes a substantially equivalent benefit;
5) The failure by the Company to continue in effect any
Employee benefit plan (including any medical, hospitalization, life insurance,
dental or disability benefit plan in which the Employee participated) or any
material fringe benefit or perquisite enjoyed by the Employee at the time of the
Change in Control, unless the Company substitutes benefits which, in the
aggregate, are equivalent;
6) Any material breach by the Company of any provision of this
Agreement; or
7) The failure of the Company to obtain a satisfactory
agreement from any successor or assign of the Company to assume and agree to
perform this Agreement.
e) "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement which is relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Employee's employment under the provision
so indicated. Any purported termination by the Company or by the Employee
hereunder shall not be effective until communicated by written Notice of
Termination to the other party.
f) "Date of Termination" shall mean the date specified in the Notice
of Termination, not to exceed thirty (30) days from the date such Notice of
Termination is given.
g) "Annual Base Salary" shall mean an Employee's stated annual
compensation without regard to any bonus, perquisite or other benefits.
3. TERM OF AGREEMENT. This Agreement shall continue in effect until
December 31, 199_; provided, however, commencing on December 31, 199_ and on
each December 31 thereafter, there shall automatically be an extension of one
(1) year on the then-current term of this Agreement,
3
<PAGE>
unless either the Company or the Employee shall have given written notice to the
other on or before said December 31, that the term of this Agreement shall not
be so extended. Notwithstanding any such notice by the Company not to extend,
the term of this Agreement shall not expire prior to the expiration of twenty-
four (24) months after a Change in Control if the Agreement is still in effect
on the date of the Change in Control. If the Employee's employment with the
Company shall be terminated prior to and not in contemplation of a Change in
Control, this Agreement shall automatically expire.
4. SUCCESSORS; BINDING AGREEMENT.
a) The Company will require any successor or assign (whether direct
or indirect, by purchase, merger, consolidation or otherwise) of all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent the Company would be required to perform it if no such succession or
assignment had taken place.
b) This Agreement shall inure to the benefit of and be enforceable
by the Employee's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Employee should
die while any amounts would still be payable to him/her hereunder if he/she had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee, and if there is no such devisee, legatee or designee,
to the Employee's estate.
5. NO MITIGATION. The Employee shall not be required to mitigate the
amount of any payment or benefit provided for in this Agreement by seeking other
employment; nor shall such be reduced by any compensation earned by the Employee
as a result of employment or otherwise.
6. FEES AND EXPENSES. Following a Change in Control, the Company shall
pay all legal fees and related expenses (including the costs of experts,
evidence and counsel) incurred by the Employee as a result of the Employee
seeking to obtain or enforce any right or benefit provided by this Agreement or
by any other plan or arrangement maintained by the Company under which the
Employee is or may be entitled to receive benefits
7. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses last given by each party to the other, provided that all notices to
the
4
<PAGE>
Company shall be directed to the attention of the Board with a copy to the
Secretary of the Company. All notices and communications shall be deemed to have
been received on the date of delivery thereof or on the third business day after
the mailing thereof, except that notice of change of address shall be effective
only upon receipt.
8. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of Kentucky without giving effect to the
conflicts of laws principles thereof.
9. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
10. ENTIRE AGREEMENT/TERMINATION OF ANY PRIOR AGREEMENT. This Agreement
constitutes the entire agreement between the parties hereto and supersedes and
terminates all prior agreements, understandings and arrangements, oral or
written, between the Employee and the Company or any of its subsidiaries or any
entity acquired by the Company with respect to the salary and other benefits
referenced in Section 1 of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by its duly authorized officer and the Employee has executed this
Agreement, each as of the day and year set forth above.
HUMANA INC. EMPLOYEE
BY:
-------------------------------- -----------------------------------
ATTEST:
BY:
--------------------------------
Secretary
5
<PAGE>
Exhibit 10(n)
HUMANA INC.
1998 MANAGEMENT INCENTIVE COMPENSATION PLAN
I. OBJECTIVES
----------
The objective of the Humana Inc. 1998 Management Incentive Compensation
Plan (the "Plan") is to reward executive officers for their efforts in
optimizing the profitability and growth of Humana Inc. (the "Company")
consistent with the Company's vision to improve the health of its members,
and provide value to its customers, partners and shareholders.
II. ELIGIBILITY AND AWARDS
----------------------
A. Membership in this Plan will consist of any executive officers
designated (a "Participant") by the Organization and Compensation
Committee of the Board of Directors of the Company (the "Committee").
The Committee will notify each Participant of his/her selection.
B. Incentive compensation will be computed by measuring (i) the Company's
achievement of actual consolidated net income ("Consolidated Net
Income") measured as Earnings Per Share ("EPS") for each fiscal year
against Consolidated Net Income/EPS objectives established by the
Committee for each fiscal year, or (ii) Growth Objectives or Profit
Objectives, the relative weightings of which have been pre-determined by
the Committee, or (iii) such other performance goals as may be
established by the Compensation Committee from time to time.
C. Incentive compensation for a fiscal year shall be based on the
Participant's salary earnings paid during the fiscal year exclusive of
any bonus or fringe benefits paid or accrued during such fiscal year
("Salary"). The maximum incentive compensation paid for any fiscal year
to any Participant shall not exceed seventy-five percent (75%) of
Salary; the precise percentage earned shall be based upon a schedule of
target goals established pursuant to Section II B. above. The Committee
may, in its sole discretion, increase or decrease the amount of
incentive compensation to be paid for any fiscal year based on the
Company's actual performance for that year.
1
<PAGE>
D. The Company's achievement of predetermined goals for each fiscal year
will be determined in accordance with generally accepted accounting
principles; provided, however, that (i) the effects of accounting policy
changes from the prior fiscal year and unusual non-recurring gains and
losses will be excluded, and (ii) incentive compensation generated
pursuant to incentive plans of the Company, including this Plan, shall
be accrued and deducted as an expense for such fiscal year.
E. Incentive compensation will be paid to Participants on or before March
15 following the close of the fiscal year in respect of which it was
earned.
III. ADMINISTRATION OF THIS PLAN
---------------------------
This Plan shall be administered by the Committee, which shall have full
power and final authority to construe, interpret and administer the Plan.
Following the close of a fiscal year and before any payments are made
hereunder for that fiscal year, the Committee shall determine whether and
to what extent the performance goals have been satisfied. No member of the
Committee shall be personally liable for damage, in the absence of bad
faith, for any act or omission with respect to service on the Committee.
IV. ELIGIBILITY DURING FISCAL YEAR
------------------------------
Subject to the discretion of the Committee as set forth in Section II C. of
this Plan, an individual who becomes a Participant in this Plan due to
employment, transfer or promotion during the fiscal year will be eligible
to receive partial incentive compensation based upon the Participant's
Salary for the period of time eligible and the level of achievement in
relation to targeted goals for the entire fiscal year. In no event,
however, will partial payments be made for any period of time of less than
two (2) months.
V. INELIGIBILITY DURING FISCAL YEAR
--------------------------------
A Participant in this Plan who becomes ineligible during the fiscal year
due to transfer or change of position shall cease to be eligible for
further participation in this Plan on the date of transfer or change to the
ineligible position. Subject to the discretion of the Committee as set
forth in Section II C. of this Plan, if the Participant, prior to the date
of transfer or change, has been a Participant in the Plan for a minimum of
two (2) calendar months of the fiscal year, the Participant will be
eligible to receive partial incentive compensation based upon the
Participant's Salary for such period of time and
2
<PAGE>
the level of achievement in relation to targeted goals for the entire
fiscal year.
VI. TERMINATION OF EMPLOYMENT; LEAVE OF ABSENCE
-------------------------------------------
Subject to the discretion of the Committee as set forth in Section II C. of
this Plan, a Participant who has been employed (i) during the entire fiscal
year for which incentive compensation is to be paid, but whose employment
is terminated, voluntarily or involuntarily (other than for cause), or who
is granted a leave of absence after the end of such fiscal year and prior
to the payment date therefor will be eligible to receive his/her full
incentive compensation with respect to such fiscal year as determined in
accordance with the provisions of this Plan, or (ii) through the first two
(2) calendar months of any fiscal year, but whose employment is terminated,
voluntarily or involuntarily (other than for cause), or who is granted a
leave of absence after the end of the first two (2) calendar months of any
fiscal year but prior to the end of such fiscal year will be eligible to
receive partial incentive compensation with respect to such fiscal year
based upon the Participant's Salary for the period of time he/she was a
Participant at the level of achievement in relation to targeted goals for
the entire fiscal year. A Participant whose employment is terminated for
cause or whose employment is terminated for any other reason prior to the
end of the first two (2) calendar months of such fiscal year shall not be
eligible to receive any incentive compensation under this Plan other than
those amounts which have been paid to him/her prior to the date he/she is
terminated.
VII. DEFERRED COMPENSATION
---------------------
A Participant in this Plan may irrevocably elect to defer receipt of any
amount earned pursuant to this Plan, provided such election is made in
writing. The terms of any deferred compensation arrangement must be
approved in writing by the Chairman of the Committee and the Participant.
Any amount deferred pursuant to this Plan will bear interest at a rate
determined by the Committee.
VIII.COMPANY'S RIGHT TO TERMINATE
----------------------------
The Company shall have the right to terminate this Plan, with or without
notice, in whole or in part, at any time.
3
<PAGE>
IX. GENERAL PROVISIONS
------------------
A. No person has any claim or right to be included in this Plan or to be
granted incentive compensation under this Plan until such individual has
been declared a Participant and received an official written notice
thereof in accordance with the procedures as set forth in this Plan. In
addition, all of the requirements and applicable rules and regulations
of this Plan must have been met including, but not limited to the
availability of funds for incentive compensation awards and the
determination by the Committee of the extent to which targeted goals
have been met.
B. The designation of an individual as a Participant under this Plan does
not in any way alter the nature of the Participant's employment
relationship.
X. EFFECTIVE DATE.
---------------
This Plan shall be effective as of January 1, 1998.
4
<PAGE>
EXHIBIT 10(O)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of December 1, 1997, by and between HUMANA
INC. (hereinafter "Company"), a Delaware corporation having its principal place
of business in Louisville, Kentucky, and Gregory H. Wolf (hereinafter
"Employee"):
WITNESSETH:
WHEREAS, Employee desires to render faithful and efficient service to the
Company; and
WHEREAS, the Company desires to receive the benefit of Employee's service;
and
WHEREAS, Employee is willing to be employed by the Company; and
WHEREAS, both Company and Employee desire to formalize the conditions of
Employee's employment by written agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties agree as follows:
1. Office. The Company hereby employs Employee as President and Chief
------
Executive Officer, and Employee hereby agrees to serve the Company in
such capacity.
2. Term of Employment. Employee's employment shall be for the "Employment
------------------
Period," with the initial term commencing on December 1, 1997 and
extending through December 31, 2000. The initial term shall be
automatically renewed and extended upon the expiration thereof for
successive periods of one (1) year until such time as the Employment
Period shall terminate pursuant to the terms of this Agreement, or until
the Company on the one hand, or Employee on the other hand, shall
terminate the Employment Period by giving written notice to the other
party on or before sixty (60) days prior to the expiration date of the
initial or any renewal term. The renewal and extension of this Agreement
shall also be referred to as the "Employment Period." The effective date
of Employee's termination of employment for whatever reason under this
Agreement shall be the "Termination Date."
3. Responsibilities. During the Employment Period, Employee shall devote
----------------
his entire business time and attention, except during reasonable
vacation periods, to, and exert his best efforts to promote, the affairs
of the Company, and shall render such services to the Company as may be
required by the Board of Directors of the Company ("Board") consistent
with his employment as Chief
<PAGE>
Executive Officer. Nothing herein contained
shall pre clude service by Employee on a reasonable number of boards of
directors or trustees of other entities not engaged in any business
competitive with the business of the Company, provided that Employee
shall discuss any such board service in advance with the Company's
Board.
4. Incapacity. If during the Employment Period Employee should be
----------
prevented from performing his duties or fulfilling his responsibilities
by reason of any incapacity or disability for a continuous period of six
(6) months, then the Company's Board, in its sole and absolute
discretion, may, based on the opinion of a qualified physician, consider
such incapacity or disability to be total and may on ninety (90) days
written notice to Employee terminate the Employment Period. Benefits and
payments shall be made under this Employment Agreement following
incapacity as if it were a termination without Good Cause in accordance
with Section 8(a).
5. Death. The Employment Period shall automatically terminate upon the
-----
death of Employee, and payments will be made to the Employee's estate as
if it were a termination without Good Cause in accordance with Section
8(a).
6. Compensation. During the Employment Period, Employee shall (i) receive
------------
a base salary (hereinafter "Annual Base Salary") that shall be an annual
amount of not less than Eight Hundred Thousand Dollars ($800,000)
payable in accordance with the payroll practices of the Company, and
shall (ii) participate in an incentive plan providing for a target
incentive compensation amount of not less than one hundred percent
(100%) of his Annual Base Salary.
7. Benefit Plans and Programs. During the Employment Period, Employee
--------------------------
shall be eligible for participation in all benefit plans and programs,
including those for executive employees, made available by the Company
to its respective employees.
8. Severance Payments.
------------------
(a) In the event that (i) Employee's employment is terminated by the
Company while this Agreement is in effect without Good Cause, (ii)
the Employment Period is terminated by reason of incapacity or
disability in accordance with Section 4, or (iii) the Employment
Period is terminated by reason of death in accordance with Section
5:
(1) The Company shall pay to Employee or his estate, no later
than thirty (30) calendar days after such Termination Date, an
amount
2
<PAGE>
equal to any unpaid current Annual Base Salary accrued through
the Termination Date, his bonus, calculated at one hundred
percent (100%) of his Annual Base Salary prorated for the
current fiscal year through the Termination Date, plus one (1)
times the sum of his then current Annual Base Salary and
bonus, calculated at one hundred percent (100%) of his Annual
Base Salary. The Company shall continue to keep in full force
and effect all plans or policies of medical, accident and life
insurance benefits with respect to Employee and his dependents
with the same level of coverage available to employees under
the terms of those employee benefit plans for a period of
twelve (12) months, upon the same terms, costs and otherwise
to the same extent as such plans are in effect for employees
of the Company who were similarly situated to Employee as of
the Termination Date.
(2) All restricted shares previously awarded to Employee but not
yet vested shall become vested and non-forfeitable as of the
Termination Date.
(3) To the extent stock options granted to Employee have not
become fully vested and exercisable as of the Termination
Date, such options shall become fully vested and all vested
stock options shall be exercisable for two (2) years
commencing on the Termination Date.
(b) In the event that Employee's employment is terminated by the
Company with Good Cause or if Employee voluntarily terminates his
employment:
(1) The Company shall pay to Employee, no later than thirty (30)
calendar days after the Termination Date, an amount equal to
his then current Annual Base Salary accrued but unpaid through
the Termination Date; and Employee shall have a period of
ninety (90) days after such Termination Date in which to
exercise any exercisable vested stock options, subject to the
provisions of any applicable stock option agreement.
(2) Any restricted shares or stock options previously granted but
still subject to restriction or unvested at the Termination
Date shall be forfeited.
3
<PAGE>
(c) Good Cause shall mean the Company's Board has determined in good
faith, without being bound by the Company's progressive discipline
policy for employees,
(1) that Employee has engaged in acts or omissions against the
Company or any of its subsidiaries constituting dishonesty,
intentional breach of fiduciary obligation or intentional
wrongdoing or misfeasance; or,
(2) that Employee has been arrested or indicted in a possible
criminal violation involving fraud or dishonesty; or,
(3) that Employee has intentionally and in bad faith acted in a
manner which results in a material detriment to the assets,
business or prospects of the Company or any of its
subsidiaries; or
(4) that after due consideration and with notice to the Employee,
Employee has performed poorly.
(d) In the event that Employee's employment is terminated (i) by the
Company for Good Cause as defined in Section 8(c)(4) above, (ii)
because either the Company or Employee terminates the Employment
Period pursuant to Section 2 of this Employment Agreement, or
(iii) because Employee voluntarily leaves the employ of the
Company during the Employment Period, then the Company shall pay
to Employee, no later than thirty (30) calendar days after such
Termination Date, an amount equal to any unpaid current Annual
Base Salary accrued through the Termination Date, plus one (1)
times his then current Annual Base Salary. Any bonus finally
determined to be payable, at the end of the fiscal year in which
the Termination Date is included, shall be prorated for the period
up to and including the Termination Date and shall be promptly
paid to Employee at the same time any other similar bonuses are
paid to any other employee of the Company for such fiscal year.
The Company shall continue to keep in full force and effect all
plans or policies of medical, accident and life insurance benefits
with respect to Employee and his dependents with the same level of
coverage available to employees under the terms of those employee
benefit plans for a period of twelve (12) months, upon the same
terms, costs and otherwise to the same extent as such plans are in
effect for employees of the Company who were similarly situated to
Employee as of the Termination Date.
4
<PAGE>
(e) Following the Employment Period, Employee shall be eligible for
continuation of health and dental insurance coverage pursuant to
the Consolidated Omnibus Budget Reconciliation Act (COBRA) for
eighteen (18) months. For the first twelve (12) months, Employee's
cost will be an amount equal to the normal employee contribution.
Thereafter, the cost will be an amount equal to the COBRA cost of
such coverage. During the first eighteen (18) months, Employee may
elect any of the coverages available to Humana employees.
Thereafter, Humana agrees that Employee may elect coverage under
any of the insured products offered by Humana's health insurance
or HMO subsidiaries for Employee, his spouse as of the date hereof
("Spouse"), and any eligible dependent until the later of
Employee's age sixty-five (65) or eligibility for Medicare
coverage (hereinafter "Extended Coverage"). At the earlier of
Employee attaining Medicare eligibility or death, Employee's
Spouse and any now current eligible dependent of Employee and
Spouse will be eligible for Extended Coverage until the later of
Spouse's age sixty-five (65) or Medicare coverage eligibility. If
at any time during which the Extended Coverage is in effect
Employee or his Spouse obtains Medicare or becomes eligible for
other employee group health insurance coverage which does not
exclude a pre-existing condition of Employee, Spouse or dependent,
Humana's obligation will cease as to the one who has obtained
Medicare or in the case of other employee group health coverage,
as to that person and their eligible dependents. Employee's
premium for the Extended Coverage and Spouse's premium, if she
retains Extended Coverage, will be an amount equal to the COBRA
cost of such coverage. If Humana hereafter adopts a retiree health
insurance program and Humana still has obligations under this
provision, Employee will be offered the option of participating in
that program in lieu of the Extended Coverage described herein.
The health and dental insurance benefits hereunder shall be
administered in conjunction with any other similar benefits which
the Employee has from the Company but in no case shall be
duplicative.
9. Termination After A Change in Control. In the event of a "Change in
-------------------------------------
Control" of the Company (as defined as of the date hereof in the
Company's 1996 Stock Incentive Plan for Employees), if, within
twenty-four (24) months following the closing of such Change in Control
(or at any time prior thereto but in contemplation thereof):
(i) There is a material reduction in the Employee's title,
authority or responsibilities, including reporting
responsibilities;
5
<PAGE>
(ii) The Employee's Annual Base Salary is reduced;
(iii) The Employee's office at which he is to perform his duties is
relocated to a location more than thirty (30) miles from the
location at which the Employee performed his duties prior to
the Change in Control;
(iv) The Company fails to continue in effect any incentive, bonus or
other compensation plan in which the Employee participates,
unless the Company substitutes a substantially equivalent
benefit;
(v) The Company fails to continue in effect any Employee benefit plan
(including any medical, hospitalization, life insurance, dental
or disability benefit plan in which the Employee participated) or
any material fringe benefit or perquisite enjoyed by the Employee
at the time of the Change in Control, unless the Company
substitutes benefits which, in the aggregate, are substantially
equivalent;
(vi) The Company breaches any material provision of this Employment
Agreement; or
(vii) The Company fails to obtain a satisfactory agreement from any
successor or assign of the Company to assume and agree to perform
this Employment Agreement,
Then the Employee shall have the option to voluntarily terminate his
employment and the Company shall:
(a) Pay the Employee his full base salary earned but not yet paid
through the Termination Date at the greater of the rate in effect
at the time of the Change in Control or the Termination Date
("Higher Annual Base Salary"), plus any bonuses or incentive
compensation which, pursuant to the terms of any compensation or
benefit plan, have been earned and are payable as of the
Termination Date. For purposes of this Agreement, bonuses and
incentive compensation shall be considered payable if all
conditions for earning them have been met and any requirement
that Employee be actively employed as of the date of payment
shall be disregarded.
(b) Pay the Employee a lump sum in an amount equal to two and one-
half (2 1/2) times the amount equal to the sum of (1) the
Employee's Higher Annual Base Salary plus (2) the maximum target
bonus or incentive compensation which could have been earned by
the Employee calculated
6
<PAGE>
as if all relevant goals had been met during the then current
fiscal year of the Company pursuant to the terms of the incentive
compensation plan in which he participates. If there is no
incentive compensation plan in effect as of Termination Date,
then for purposes of this Agreement it shall be assumed that the
amount of incentive compensation to be paid to the Employee shall
be the maximum target amount under any incentive compensation
plan in which he participated at the date of the Change in
Control or the most recent plan participated in, whichever would
be greater.
(c) Maintain in full force and effect for the benefit of the Employee
and the Employee's dependents and beneficiaries, at the Company's
expense, all life insurance, health insurance, dental insurance,
accidental death and dismemberment insurance and disability
insurance under plans and programs in which the Employee and/or
the Employee's dependents and beneficiaries participated
immediately prior to the Termination Date, provided that
continued participation is possible under the general terms and
provisions of such plans and programs ("Extended Benefits"). The
Extended Benefits shall be continued until the earlier of (A) the
second (2nd) anniversary of the Termination Date, (B) the
effective date of the Employee's coverage under equivalent
benefits from a new employer (provided that no such equivalent
benefits shall be considered effective unless and until all pre-
existing condition limitations and waiting period restrictions
have been waived or have otherwise lapsed), or (C) the death of
the Employee. If participation in any such plan or program is
barred, the Company shall arrange at its own expense to provide
the Employee with benefits substantially similar to those which
he was entitled to receive under such plans and programs. At the
end of the period of coverage, the Employee shall have the right
to have assigned to him, at no cost and with no apportionment of
prepaid premiums, any assignable insurance policy relating
specifically to him. Employee shall be entitled to continuation
coverage as provided by the Consolidated Omnibus Budget
Reconciliation Act (COBRA) at the conclusion of the coverage
provided under this Section.
The amount of any payment or benefit provided for in this Section 9
shall be offset by any lump sum cash payments due the Employee upon
Termination under any other provisions of this Employment Agreement.
10. Restrictive Covenants. Employee shall not during the Employment
---------------------
Period, directly or indirectly, alone or as a member of a partnership
or association, or as an officer, director, advisor, consultant, agent
or employee of any other
7
<PAGE>
company, be engaged in or concerned with any other duties or pursuits
requiring his personal services except with the prior consent of the
Company's Board. Nothing herein contained shall preclude the ownership
by Employee of stocks or other investment securities.
11. Confidential Information and Trade Secrets.
------------------------------------------
(a) Employee recognizes that Employee's position with the Company
requires considerable responsibility and trust, and, in reliance
on employee's loyalty, the Company may entrust Employee with
highly sensitive confidential, restricted and proprietary
information involving Trade Secrets and Confidential Information.
(b) For purposes of this Agreement, a "Trade Secret" is any
scientific or technical information, design, process, procedure,
formula or improvement that is valuable and not generally known
to competitors of the Company. "Confidential Information" is any
data or information, other than Trade Secrets, that is important,
competitively sensitive, and not generally known by the public,
including, but not limited to, the Company's business plans,
business prospects, training manuals, product development plans,
bidding and pricing procedures, market strategies, internal
performance statistics, financial data, confidential personnel
information concerning employees of the Company, supplier data,
operational or administrative plans, policy manuals, and terms
and conditions of contracts and agreements. The term "Trade
Secret" and "Confidential Information" shall not apply to
information which is (i) already in Employee's possession (unless
such information was used in connection with formulating the
Company's business plans, obtained by Employee from the Company
or was obtained by Employee in the course of Employee's
employment by the Company), or (ii) required to be disclosed by
any applicable law.
(c) Except as required to perform Employee's duties hereunder,
Employee will not use or disclose any Trade Secrets or
Confidential Information of the Company during employment, at any
time after termination of employment and prior to such time as
they cease to be Trade Secrets or Confidential Information
through no act of employee in violation of this Section 11.
(d) Upon the request of the Company and, in any event, upon the
termination of employment hereunder, Employee will surrender to
the Company all memoranda, notes, records, plans, manuals or
other
8
<PAGE>
documents pertaining to the Company's business or Employee's
employment (including all copies thereof). Employee will also
leave with the Company all materials involving Trade Secrets or
Confidential Information of the Company. All such information and
materials, whether or not made or developed by Employee, shall be
the sole and exclusive property of the Company, and Employee
hereby assigns to the Company all of Employee's right, title and
interest in and to any and all of such information and materials.
12. Covenant Not to Compete.
-----------------------
Employee hereby covenants and agrees that for a period commencing on
the date hereof and ending twelve (12) months after ceasing employment
with the Company for any reason, he shall not:
(a) Compete in any way with the Company without the Company's prior
written consent.
(b) Interfere with the relationship of the Company and any employee,
agent or representative.
(c) Divert, or attempt to cause the diversion from the Company, any
business with which the Company has been actively engaged in
during any part of the past two (2) year period preceding the
Termination Date, nor interfere with relationships of the Company
with policyholders, dealers, distributors, marketers, sources of
supply, or customers.
Employee further specifically acknowledges that the geographic area to
which the covenants contained in this Section 12 apply is the same
geographic area in which the Company transacted its business during
any part of the twelve (12) month period immediately prior to the
Termination Date. The time period during which the prohibitions set
forth in this Section 12 apply shall be tolled and suspended as to
Employee for a period equal to the aggregate quantity of time during
which Employee violates such prohibitions in any respect.
13. Specific Enforcement. Employee specifically acknowledges and agrees
--------------------
that the restrictions set forth in Sections 11 and 12 hereof are
reasonable and necessary to protect the legitimate interest of the
Company and that the Company would not have entered into this
Agreement in the absence of such restrictions. Employee further
acknowledges and agrees that any violation of the provisions of
Sections 11 or 12 hereof will result in irreparable injury to the
Company, that the remedy at law for any violation or threatened
violation of such Section(s)
9
<PAGE>
will be inadequate and that in the event of any such breach, the
Company, in addition to any other remedies or damages available to it
at law or in equity, shall be entitled to temporary injunctive relief
before trial from any court of competent jurisdiction as a matter of
course, and to permanent injunctive relief without the necessity of
proving actual damages.
14. Effect of Termination of the Employment Period. Upon the termination
----------------------------------------------
of the Employment Period, this Agreement shall terminate, and all of
the parties' obligations hereunder shall forthwith terminate, except
that rights and remedies accruing prior to such termination or arising
out of this Agreement shall survive.
15. Notice. Any notice required to be given by the Company hereunder to
------
Employee shall be in proper form and signed by an officer or Director
of the Company. Until one party shall advise the other in writing to
the contrary, notices shall be deemed delivered:
(a) To the Company if delivered to the Chairman of the Board of the
Company, or if mailed, certified or registered mail postage
prepaid, to Humana Inc., 500 West Main Street, Louisville,
Kentucky; Attention: Chairman of the Board, with a copy to the
Company's General Counsel.
(b) To Employee if delivered to Employee, or if mailed to him by
certified or registered mail, postage prepaid, to Gregory H. Wolf,
581 Sunset Road, Louisville, Kentucky 40206.
16. Benefit. This Agreement shall bind and inure to the benefit of the
-------
Company and the Employee, their respective heirs, successors and
assigns.
17. Severability. If a judicial determination is made that any of the
------------
provisions of this Employment Agreement constitutes an unreasonable or
otherwise unenforceable restriction against Employee, such provision
shall be rendered void only to the extent that such judicial
determination finds such provisions to be unreasonable or otherwise
unenforceable. In this regard, the parties hereto hereby agree that any
judicial authority construing this Employment Agreement shall be
empowered to sever any portion of the territory or prohibited business
activity from the coverage of Sections 11 or 12 and to apply the
provisions to the remaining portion of the territory or the remaining
business activities not so severed by such judicial authority.
Moreover, notwithstanding the fact that any provisions of this
Employment Agreement are determined not to be specifically enforceable,
the Company shall nevertheless be entitled to recover monetary damages
as a result of the breach of such provision by Employee.
10
<PAGE>
18. Conditions. This Agreement shall become effective upon approval by the
----------
Compensation Committee of the Board of Directors of the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
Attest: HUMANA INC.
By:
Joan O. Lenahan David A. Jones
- ------------------------------- ---------------------------------
DAVID A. JONES
Chairman, Board of Directors
Arthur Hipwell Gregory H. Wolf
- ------------------------------- -------------------------------------
Witness Gregory H. Wolf
"EMPLOYEE"
11
<PAGE>
EXHIBIT 10(p)
HUMANA OFFICERS' TARGET RETIREMENT PLAN
AMENDED AND RESTATED AS OF
JULY 10, 1997
<PAGE>
HUMANA OFFICERS' TARGET RETIREMENT PLAN
AMENDED AND RESTATED AS OF
JULY 10, 1997
WHEREAS, Humana Inc. ("Humana"), a Delaware corporation with its principal
place of business in Louisville, Kentucky ("Sponsoring Employer"), has adopted
the Humana Officers' Target Retirement Plan ("Plan"), and
WHEREAS, the Board of Directors of the Sponsoring Employer desires to amend
the Plan, and has authorized and approved the amendment and restatement of the
Plan provided for herein,
NOW, THEREFORE, the Sponsoring Employer, pursuant to the right to amend
hereby approves and adopts this amendment and restatement of the Plan effective
July 10, 1997, which should read as follows:
ARTICLE 1
PURPOSE AND APPLICABILITY OF PLAN
---------------------------------
1.01 The purpose of the Plan shall be to provide supplemental retirement
benefits to Participants upon the terms and conditions and subject to the
limitations contained herein.
1.02 The provisions of the Plan shall apply only to persons who are
Officers of the Sponsoring Employer duly elected by its Board of Directors or
other key management employees designated by the Committee on and after the
Effective Date.
ARTICLE 2
DEFINITIONS
-----------
As used herein the following words and phrases shall have the meanings
specified below, unless a different meaning is plainly required by context or
otherwise determined by the Committee. The meaning of any term not specifically
defined below will be governed by the definition in the Humana Retirement and
Savings Plan.
2.01 The term "Attained Age" shall mean, unless clearly indicated to the
contrary, the age of a Participant as of the Participant's last birthday.
2.02 The term "Average Participating Compensation" shall mean the average
of Participating Compensation as determined using the highest three (3) Plan
Years of the Participant's last five (5) Plan Years (including any partial Plan
Year) coincident with or preceding the Participant's Early or Normal Retirement
Date, Disability Retirement Date, Late Retirement Date or date of death. If the
Participant has fewer than three (3) full Plan Years of Participating
<PAGE>
Compensation, Average Participating Compensation shall be based on the number of
full Plan Years that the Participant has Participating Compensation.
2.03 The term "Annual Retirement Benefit" shall mean an amount equal to
the Participant's Average Participating Compensation multiplied by the lesser of
(i) fifty percent (50%), or (ii) a percentage equal to 1.67% times the
Participant's Service.
2.04 The term "Beneficiary and Secondary Beneficiary" shall mean the
person or persons (or an estate or trust) as set forth under the Employer
Retirement Account.
2.05 The term "Board of Directors" shall mean the Board of Directors of
the Sponsoring Employer.
2.06 The term "Code" shall mean the Internal Revenue Code of 1986, as it
has been and may be amended from time to time. Reference to any section of the
Code shall include any provision which is a successor thereto.
2.07 The term "Committee" shall mean the Compensation Committee (or its
equivalent) of the Board of Directors.
2.08 The term "Disability Retirement Date" shall mean the date a
Participant's employment is terminated due to Total and Permanent Disability.
2.09 The term "Disabled Participant" shall mean any Participant who has
been credited with at least ten (10) Years of Service and who is Totally and
Permanently Disabled.
2.10 The term "Disability Payment" shall mean Monthly Retirement Income
due a Disabled Participant.
2.11 The term "Early Retirement Date" shall mean, for each Participant,
the first (1st) day of the month immediately following or coinciding with the
date such Participant shall retire prior to the Participant's Normal Retirement
Date.
2.12 The term "Effective Date" shall mean May 10, 1990.
2.13 The term "Humana SERP" shall mean the Humana Supplemental Executive
Retirement Plan as it may be amended from time to time.
2.14 The term "Retirement Account and SERP Benefit" shall mean an amount
equal to the life annuity equivalent of the account balances in the Retirement
Account in the Humana Retirement and Savings Plan and the Humana SERP, using a
conversion factor based upon an interest rate of eight percent (8%) and the 1983
GAM table with no setback.
2
<PAGE>
2.15 The term "Late Retirement Date" shall mean the first day of any
month subsequent to the Participant's Normal Retirement Date coinciding with or
immediately following the date the Participant terminates employment for any
reason other than death.
2.16 The term "Monthly Retirement Income" shall mean a monthly income due
a Retired Participant which shall commence as of his Early, Normal or Late
Retirement Date, or the commencement date of payments due to disability.
2.17 The term "Normal Retirement Date" shall mean the first (1st) day of
the month coinciding with or immediately following the Participant's sixty-fifth
(65th) birthday.
2.18 The term "Officer" shall mean the Chief Executive Officer,
President, all Vice Presidents, Secretary and Treasurer of the Sponsoring
Employer who have been duly elected as officers of the Sponsoring Employer by
the Board of Directors.
2.19 The term "Participant" shall mean any Officer of the Sponsoring
Employer or other key management employee who has become a Participant as
provided in Article 3 hereof.
2.20 The term "Participating Compensation" shall mean the Participant's
annual base salary in effect for the first full pay period in the Plan Year,
plus any incentive compensation or bonus earned by the Participant in the
immediately preceding Plan Year and payable during the current Plan Year,
whether or not actually paid to the Participant during the Plan Year.
2.21 The term "Plan Administrator" shall mean the Sponsoring Employer.
2.22 The term "Plan Year" shall mean the twelve (12) month period
commencing on the first (1st) day of January and ending on the last day of the
immediately following December.
2.23 The term "Primary Insurance Amount" as of any date shall mean the
monthly amount of old age benefits payable to a Participant commencing at the
Participant's unreduced Social Security retirement age. The amount will be
calculated based on the Social Security Act in effect as of the date of
calculation, without regard to any dependent benefits.
2.24 The term "Retired Participant" shall mean any Participant who has
retired from Humana and who is receiving a Monthly Retirement Income.
2.25 The term "Retirement and Savings Plan" shall mean the Humana
Retirement and Savings Plan adopted effective as of the Distribution Date, as it
may be amended from time to time or its successor plan.
2.26 The term "Retirement Account" shall mean the Retirement Account in
the Humana Retirement and Savings Plan.
3
<PAGE>
2.27 The term "Service" shall mean all years and completed months of
Service with the Sponsoring Employer or any corporation which is a member of the
"affiliated group" [as defined in Section 1054(a) of the Code] of the Sponsoring
Employer.
2.28 The term "Sponsoring Employer" shall mean Humana Inc., a Delaware
corporation.
2.29 The term "Spouse" shall mean the legally married spouse of the
Participant at the Participant's date of death; provided, however, that for
purposes of Section 4.04(b), "Spouse" shall mean the legally married spouse of
the Participant at the earlier of the Participant's date of death or
commencement of benefits under that section.
2.30 The term "Target Plan" or "Plan" shall mean the Humana Officers'
Target Retirement Plan provided for herein, as it may be amended from time to
time.
2.31 The term "Total and Permanent Disability" shall mean a physical or
mental condition that renders the Participant eligible for disability benefits
under the Retirement and Savings Plan.
ARTICLE 3
PARTICIPATION IN THE PLAN
-------------------------
3.01 Each person who is an Officer of the Sponsoring Employer on and
after the Effective Date or a key management employee designated by or at the
direction of the Committee shall be a Participant in this Plan to the extent of
the benefits provided herein.
3.02 Each Officer or key management employee designated hereunder shall
be notified upon becoming a Participant.
ARTICLE 4
RETIREMENT INCOME
-----------------
4.01 When a Participant retires, he shall be entitled to receive a
Monthly Retirement Income under this Plan in an amount provided in Section
4.01(a), reduced by the amounts provided in Section 4.01(b) and (c).
(A) An amount equal to one twelfth (1/12) of the Participant's
Annual Retirement Benefit.
(B) The amount provided in Section 4.01(a) shall be reduced by the
Retirement Account and Humana SERP Benefit.
4
<PAGE>
(C) The amount provided in Section 4.01(a) shall also be reduced by
the Participant's Primary Insurance Amount; provided that in the case of a
Participant taking Early Retirement, such reduction shall only apply when the
Participant is eligible for an unreduced Primary Insurance Amount.
4.02 A Participant may remain in the employ of the Sponsoring Employer
after his Normal Retirement Date, in which event no Monthly Retirement Income
shall be paid until the Participant's Late Retirement Date. The benefit payable
at the Participant's Late Retirement Date shall be equal to the amount as
determined in Section 4.01 except that the Participant's Average Participating
Compensation, Years of Service, Retirement Account and Humana SERP Benefit and
Primary Insurance Amount shall be determined as of the Participant's Normal or
Late Retirement Date, whichever would produce the greater benefit under this
Plan. Unless otherwise determined by the Committee, in no event, however, will
the Participant's Annual Retirement Benefit exceed fifty percent (50%) of his
Average Participating Compensation as of his Normal or Late Retirement Date,
whichever is greater.
4.03 Upon the written application of the Participant received by the Plan
Administration, a Participant whose Attained Age is at least fifty-five (55)
shall be retired as of an Early Retirement Date. Commencing at his Early
Retirement Date, such Participant shall be entitled to a benefit computed in
accordance with Section 4.01; provided, that the amount set forth in Section
4.01(a) shall be reduced by two/twelfths percent (2/12%) of that amount for each
full month that payments commence prior to the Participant's Normal Retirement
Date to a maximum reduction not to exceed twenty percent (20%). A Participant
taking an Early Retirement Benefit may also request an alternate form of
distribution in accordance with Section 4.04.
4.04 The basic form of payment of the Annual Retirement Benefit shall be
a Monthly Retirement Income specified in Section 4.01 which shall be paid on a
monthly basis commencing on the Participant's Disability, Early, Normal or Late
Retirement Date, payable for the life of the Participant.
A Participant may request the Committee to approve an alternate form
of payment of the benefits under this Plan. Such request shall be in writing
and shall be filed at least sixty (60) days before the payment is to be made or
commenced. Once a request is approved, it shall be binding on the Participant.
Alternative forms of payment are as follows:
(A) A monthly income payable to the Participant for either sixty
(60), one hundred and twenty (120), one hundred and eighty (180) or two hundred
and forty (240) payments guaranteed. Upon the Participant's death, distribution
of his remaining benefit, if any, shall be made to the Participant's Beneficiary
or Secondary Beneficiary.
(B) A monthly income payable for the lifetime of the Participant,
with one-half ( 1/2) of such amount continuing to the Participant's Spouse after
the Participant's death for the lifetime of the Spouse.
5
<PAGE>
(C) A single sum payment to the Participant.
(D) Any other form of payment which is actuarially equivalent and
is approved by the Committee.
If the single sum value of the Participant's Monthly Retirement
Income is less than Fifty Thousand Dollars ($50,000), the benefit shall be paid
to the Participant as a single sum.
The alternate forms as provided in Section 4.04(a), (b) and (c)
above shall be determined using the same conversion factor as is used to
determine the Retirement Account and SERP Benefit as defined in Section 2.14.
4.05 If a Participant should die before benefit payments under the Plan
commence, a death benefit shall be payable. Such death benefit shall be equal
to the present value of the Participant's monthly retirement income as of the
Participant's date of death calculated in accordance with this Article 4 as if
the Participant had retired on his date of death; provided, however, that the
reduction for the Primary Insurance Amount set forth in Section 4.01(c) shall
not apply. Such death benefit shall be paid to the Participant's Beneficiary as
a single sum in accordance with the provisions of Section 4.04(c).
If a death benefit is payable under this Article 4 and the designated
Beneficiary has predeceased the Participant, the death benefit shall be paid to
the Secondary Beneficiary. If neither the Beneficiary nor the Secondary
Beneficiary is living at the time of the death of the Participant, or if there
is not a valid Beneficiary designated, the Sponsoring Employer shall pay the
death benefit to the Participant's estate. If the Beneficiary or Secondary
Beneficiary is living at the death of the Participant but such person dies prior
to receiving the entire death benefit, the remaining portion of such death
benefit shall be paid in a single sum to the estate of such deceased Beneficiary
or Secondary Beneficiary.
ARTICLE 5
BENEFITS UPON DISABILITY
------------------------
5.01 If a Participant is determined to be Totally and Permanently
Disabled prior to his Normal Retirement Date, such Disabled Participant shall be
retired as of the date provided in the Retirement and Savings Plan. In such
event, the Disabled Participant's benefit under this Plan shall be deferred
until his Normal Retirement Date. The amount of the Participant's Monthly
Retirement Income payable on account of such Disability Retirement shall be
calculated in accordance with Section 4.01, provided that his Average
Participating Compensation shall be determined as of his date of disability.
Years of Service shall be calculated as though the Disabled Participant had
continued in employment until his Normal Retirement Date, and the Participant's
life annuity equivalent of the account balance in the Retirement Plan Account
shall be based on
6
<PAGE>
such account balance at time of distribution [if prior to age sixty-five (65)
projected to age sixty-five (65) at eight percent (8%) per annum].
5.02 As an alternative, a Participant who has met the requirements for
early Retirement shall be entitled to apply for Benefits pursuant to the
provisions of Section 4.03. If such request is granted, the continued accruals
provided for above will cease as of the Participant's receipt of Benefits.
5.03 If a Disabled Participant should die before benefit payments under
this Plan commence, a death benefit shall be payable. Such death benefit shall
be equal to the present value of the Participant's monthly retirement income as
of the Participant's date of death calculated in accordance with Article 4 and
shall be paid to the Participant's Beneficiary as a single sum in accordance
with the provisions of Section 4.04(c).
In calculating the death benefit, the continued accruals of Section 5.01
will cease at date of death and the benefit will be reduced as for Early
Retirement (as set forth in Section 4.03). The reduction for the Primary
Insurance Amount set forth in Section 4.01(c) shall not apply. A Participant
under age fifty-five (55) will be deemed to be age fifty-five (55) for purposes
of calculating his benefit.
If a death benefit is payable under this Article 5 and the designated
Beneficiary has predeceased the Participant, the death benefit shall be paid to
the Secondary Beneficiary. If neither the Beneficiary nor the Secondary
Beneficiary is living at the time of the death of the Participant, or if there
is not a valid Beneficiary designated, the Sponsoring Employer shall pay the
death benefit to the Participant's estate. If the Beneficiary or Secondary
Beneficiary is living at the death of the Participant, but such person dies
prior to receiving the entire death benefit, the remaining portion of such death
benefit shall be paid in a single sum to the estate of such deceased Beneficiary
or Secondary Beneficiary.
ARTICLE 6
PLAN ADMINISTRATION
-------------------
6.01 The Committee shall be responsible for making all policy decisions
which arise under the Plan. The Plan Administrator shall be responsible for
administering the Plan.
6.02 Subject to the limitations of the Plan, the Plan Administrator shall
from time to time establish rules for the administration of the Plan. Without
limiting the generality of the preceding sentence, it is specifically provided
that the Plan Administrator shall set forth the procedures to be followed in
presenting claims for benefits under the Plan. The Plan Administrator shall
rely on the records of the Sponsoring Employer, as certified to it, with respect
to any and all factual matters dealing with the employment of a Participant. In
case of any factual dispute hereunder, the Committee shall resolve such dispute
giving due weight to all evidence available to it. The
7
<PAGE>
Committee shall interpret the Plan and shall determine all questions arising in
the administration, interpretation and application of the Plan. All such
determinations shall be final, conclusive and binding.
6.03 Except as otherwise specifically provided herein, every decision and
action of the Committee shall be valid if concurred in by a majority of the
members then in office, which concurrence may be had without a formal meeting.
6.04 The Plan Administrator shall be responsible for the determination of
a Participant's benefit in accordance with this Plan.
6.05 In discharging its duties under this Plan, the Plan Administrator
and the Committee may employ such counsel, accountants and other agents as they
shall deem advisable. The Sponsoring Employer shall pay the compensation of such
counsel, accountants and other agents and any other expenses incurred by the
Plan Administrator and the Committee in carrying out their duties under the
plan.
ARTICLE 7
MODIFICATION AND TERMINATION
----------------------------
7.01 The Sponsoring Employer reserves the right at any time, by action of
its Board of Directors, to modify or amend, in whole or in part, any or all of
the provisions of the Plan.
7.02 Notwithstanding the provisions of Section 7.01, no amendment,
suspension or termination shall adversely affect:
(A) the Monthly Retirement Income of any Participant, or the
Beneficiary or Secondary Beneficiary of any Participant, who has retired prior
thereto, or
(B) the right of any Participant then employed by the Sponsoring
Employer who has attained age fifty-five (55) or otherwise has vested benefits
under the Plan to receive upon death, retirement or disability, the benefit to
which such person would have been entitled under the Plan prior to its
amendment, suspension or termination.
ARTICLE 8
MISCELLANEOUS PROVISIONS
------------------------
8.01 Neither the interest of a Participant or any other person nor the
benefit payable hereunder is subject to the claim of creditors of Participants
or their Beneficiaries and will not be subject to attachment, garnishment or any
other legal process. Neither a Participant nor his Beneficiaries may assign,
sell, borrow against or otherwise encumber any of his beneficial interest
8
<PAGE>
in the Plan, nor shall any such benefits be in any manner liable for or subject
to the deeds, contracts, liabilities, engagements or torts of any Participant or
Beneficiary. All such payments and rights thereto are expressly declared to be
non-assignable and non-transferable, and in the event of any attempt of
assignment or transfer by the Participant or Beneficiaries, the Sponsoring
Employer shall have no further liability hereunder.
8.02 Although it is the intention of the Sponsoring Employer that this
Plan shall be continued, this Plan is entirely voluntary on the part of the
Sponsoring Employer, and, subject to the provisions of Article 7, the
continuance of the Plan is not assumed as a contractual obligation of the
Sponsoring Employer.
8.03 Benefits under this Plan shall be paid exclusively from the general
assets of the Sponsoring Employer and no Participant or other person shall have
any right or claim to the payment of a benefit which in any manner whatsoever is
superior to or different from the right or claim of a general and unsecured
creditor of the Sponsoring Employer.
8.04 This Plan shall not be deemed to constitute a contract between the
Sponsoring Employer and any Participant or to be a consideration or an
inducement for the employment of any Participant. Nothing contained in this
Plan shall be deemed to give any Participant the right to be retained in the
employment of the Sponsoring Employer or to interfere with the right of the
Sponsoring Employer to discharge any Participant at any time regardless of the
effect which such discharge shall have upon such individual as a Participant in
the Plan.
8.05 This Plan shall be construed and enforced according to the laws of
the Commonwealth of Kentucky, and all provisions hereunder shall be administered
according to the laws thereof. It is intended that this Plan be exempt from
Title I of the Employee Retirement Income Security Act of 1974, as amended,
under Section 4(b)(5) thereof, as an excess benefit plan which is unfunded, and
any ambiguities in construction shall be resolved in favor of interpretation
which will effectuate such intention.
8.06 Any words herein used in the masculine or neuter shall read and be
construed in the feminine, masculine or neuter where they would so apply. Words
in the singular shall be read and construed as though used in the plural in all
cases where they would so apply. Titles of articles are inserted for
convenience of reference only and, in the event of any conflict, the text of the
Plan, rather than such titles shall control.
8.07 In making any payment to or for the benefit of any minor or
incompetent Beneficiary, the Plan Administrator, in its sole, absolute and
uncontrolled discretion, may, but need not, make such payment to a legal or
natural guardian or other relative of such minor or court appointed committee of
such incompetent, or to any adult with whom such minor or incompetent
temporarily or permanently resides, with any such guardian, committee, relative
or other person shall have full authority and discretion to expend such
distribution for the use and benefit of such minor or incompetent, and the
receipt of such guardian, committee, relative or other person shall
9
<PAGE>
be a complete discharge of the Sponsoring Employer, without any responsibility
on its part or on the part of the Committee to see to the application thereof.
8.08 If a Participant's employment is terminated due to his commission of
theft, fraud, or criminal acts against the Sponsoring Employer or any
corporation which is a member of the "affiliated group" [as defined in Section
1054(a) of the Code] with the Sponsoring Employer, such Participant shall not be
entitled to receive any benefit under this Plan.
END
10
<PAGE>
Exhibit 12
HUMANA INC.
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in millions) YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings:
Income before income taxes $ 270 $ 18 $ 288
Fixed charges 29 19 17
----- ----- -----
$ 299 $ 37 $ 305
===== ===== =====
Fixed charges:
Interest charged to expense $ 20 $ 11 $ 11
One-third of rent expense (a) 9 8 6
----- ----- -----
$ 29 $ 19 $ 17
===== ===== =====
Ratio of earnings to fixed charges 10.4 2.0(a) 17.9
===== ===== =====
</TABLE>
For the purpose of determining earnings in the calculation of the ratio of
earnings to fixed charges (the "Ratio"), 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.
(a) Exclusive of the special charges of $215 million before income taxes, the
ratio for the year ended December 31, 1996 would have been 13.3.
<PAGE>
EXHIBIT 13
FINANCIAL SECTION
- --------------------------------------------------------------------------------
Humana Inc.
1 Selected Financial Data
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
3 Consolidated Balance Sheets
4 Consolidated Statements of Income
5 Consolidated Statements of Stockholders' Equity
6 Consolidated Statements of Cash Flows
7 Notes to Consolidated Financial Statements
8 Report of Independent Accountants
9 Quarterly Financial Information (Unaudited)
10 Board of Directors
11 Corporate Officers
12 Additional Information
<PAGE>
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
Humana Inc.
<TABLE>
<CAPTION>
Dollars in millions, except per share results
- ----------------------------------------------------------------------------------------------------
For the years ended December 31, 1997 (a) 1996 (b) 1995 (c) 1994 (d) 1993
- ----------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums:
Commercial $4,387 $4,255 $2,883 $2,054 $1,709
Medicare risk 2,426 1,907 1,569 1,406 1,296
TRICARE 764 351 - - -
Medicaid 224 71 51 2 -
Medicare supplement 79 93 102 114 132
- ----------------------------------------------------------------------------------------------------
Total premiums 7,880 6,677 4,605 3,576 3,137
Interest and other income 156 111 97 78 58
- ----------------------------------------------------------------------------------------------------
Total revenues 8,036 6,788 4,702 3,654 3,195
Income before income taxes 270 18 288 257 143
Net income 173 12 190 176 89
Earnings per common share 1.06 .07 1.17 1.10 .56
Earnings per common share -
assuming dilution 1.05 .07 1.16 1.07 .55
Net cash provided by operations 289 341 150 298 185
FINANCIAL POSITION
- ----------------------------------------------------------------------------------------------------
Cash and investments $2,646 $1,727 $1,518 $1,203 $1,134
Total assets 5,418 3,153 2,878 1,957 1,731
Medical and other costs payable 2,075 1,099 866 527 448
Debt and other long-term
obligations 1,057 361 399 83 71
Stockholders' equity 1,501 1,292 1,287 1,058 889
OPERATING DATA
- ----------------------------------------------------------------------------------------------------
Medical loss ratio 82.8% 84.3% 81.7% 81.6% 83.8%
Administrative cost ratio 15.5% 15.5% 13.9% 13.6% 13.2%
Medical membership:
Commercial 3,258,600 2,759,600 2,834,900 1,500,800 1,214,000
Medicare risk 480,800 364,500 310,400 287,400 270,800
TRICARE 1,112,200 1,103,000 - - -
Medicaid 635,200 55,200 49,000 27,500 -
Medicare supplement 68,800 97,700 115,000 131,700 153,600
- ----------------------------------------------------------------------------------------------------
5,555,600 4,380,000 3,309,300 1,947,400 1,638,400
Administrative services 651,200 471,000 495,100 93,500 63,700
- ----------------------------------------------------------------------------------------------------
Total 6,206,800 4,851,000 3,804,400 2,040,900 1,702,100
- ----------------------------------------------------------------------------------------------------
Specialty membership:
Dental 936,400 844,800 797,000
Group life 717,300 642,700 576,300
Workers' compensation 507,100 132,700 234,200
Other 279,800 264,000 252,500
- --------------------------------------------------------------------------
Total 2,440,600 1,884,200 1,860,000
==========================================================================
</TABLE>
(a) Includes the operations of Health Direct, Inc., Physician Corporation of
America and ChoiceCare Corporation since their dates of acquisition,
February 28, 1997, September 8, 1997 and October 17, 1997, respectively.
(b) Includes special charges of $215 million pretax ($140 million after tax or
$.85 per diluted share) related to the restructuring of the Washington,
D.C., health plan, provision for expected future losses on insurance
contracts, closing 13 service areas, discontinuing unprofitable products in
three markets, a litigation settlement and planned workforce reductions.
(c) Includes the operations of EMPHESYS Financial Group, Inc. since October 11,
1995, the date of acquisition.
(d) Includes nonrecurring income of $11 million pretax ($17 million after tax or
$.10 per diluted share) related to the favorable settlement of income tax
disputes with the Internal Revenue Service, partially offset by the write-
down of a nonoperational asset.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Humana Inc.
The consolidated financial statements of Humana Inc. (the "Company") in this
Annual Report present the Company's financial position, results of operations
and cash flows, and should be read in conjunction with the following discussion
and analysis. 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, 1997, 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 contract with
the federal government to administer the TRICARE program (formerly the Civilian
Health and Medical Program of the Uniformed Services), renewal of the Company's
Medicaid contracts with various state governments and the Commonwealth of Puerto
Rico, and the effects of other general business conditions, including but not
limited to the Company's ability to integrate its acquisitions, the Company's
ability to appropriately address the "Year 2000" computer system issue,
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, the
ability of health care providers to assume financial risk, 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 though health maintenance organizations
("HMOs") and preferred provider organizations ("PPOs") that encourage or require
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 and workers' compensation.
The Company's HMO and PPO products are marketed primarily to employer 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 maintains annual contracts
with various states and a two-year contract with the Commonwealth of Puerto
Rico, expiring March 31, 1999, to provide health care to Medicaid-eligible
individuals. The Company also offers administrative services ("ASO") to
employers who self-insure their employee health plans. In total, the Company's
products are licensed in 47 states, the District of Columbia and Puerto Rico,
with approximately 23 percent of its membership in the state of Florida.
The Company is in the second year of its managed care support contract with the
United States Department of Defense to administer the TRICARE program. Under
the TRICARE contract, which is renewable annually for up to three additional
years, the Company provides managed care services to the beneficiaries of active
military personnel and retired military personnel and their beneficiaries
located in the southeastern United States.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
On October 17, 1997, the Company acquired ChoiceCare Corporation ("ChoiceCare")
for approximately $250 million in cash. The purchase was funded with borrowings
under the Company's commercial paper program. ChoiceCare provides health
services products to approximately 250,000 medical members in the Greater
Cincinnati, Ohio, area. This transaction was recorded using the purchase method
of accounting.
On September 8, 1997, the Company acquired Physician Corporation of America
("PCA") for total consideration of $411 million in cash, consisting primarily of
$7 per share for PCA's outstanding common stock and the assumption of $121
million in debt. The purchase was funded with borrowings under the Company's
commercial paper program. PCA serves approximately 1.1 million medical members
and provides comprehensive health services through its HMOs in Florida, Texas
and Puerto Rico. In addition, PCA provides workers' compensation third-party
administrative management services. Prior to November 1996, PCA also was a
direct writer of workers' compensation insurance in Florida. Long-term medical
and other costs payable in the accompanying consolidated balance sheets includes
the long-term portion of workers' compensation liabilities related to this
business. This transaction was recorded using the purchase method of
accounting.
On February 28, 1997, the Company acquired Health Direct, Inc. ("Health Direct")
from Advocate Health Care for $23 million in cash. This transaction, which was
recorded using the purchase method of accounting, added approximately 50,000
medical members to the Company's Chicago, Illinois, 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, exclusive of its small group business and Alabama TRICARE
operations, to PrimeHealth of Alabama, Inc. On October 31, 1997, the Company
also sold The Lexington Hospital in Lexington, Kentucky, to Jewish Hospital
Healthcare Services, Inc. These sale transactions did not have a material
impact on the Company's financial position, results of operations or cash flows.
SPECIAL CHARGES
During the second quarter of 1996, the Company recognized special charges of
$200 million pretax ($130 million after tax or $.79 per diluted share). The
special charges included provisions for expected future losses on insurance
contracts ($105 million), as well as 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 years ended December 31, 1997
and 1996, the beneficial effect of these charges approximated $25 million pretax
($17 million after tax or $.10 per diluted share) and $30 million pretax ($20
million after tax or $.12 per diluted share), respectively. These beneficial
effects consisted primarily of charges against liabilities for expected future
losses on insurance contracts and amounts related to foregone depreciation and
amortization on asset write-downs.
The second quarter special charges are presented in the accompanying
consolidated statements of income for the year ended December 31, 1996 as
follows: the provision for expected future losses on insurance contracts has
been included in medical costs ($105 million); asset write-downs, restructuring
costs, market closing and product discontinuance costs have been included in
asset write-downs and other special charges ($81 million); and litigation and
certain other costs have been included in selling, general and administrative
expenses ($14 million).
During the fourth quarter of 1996, the Company recognized an additional special
charge of $15 million pretax ($10 million after tax or $.06 per diluted share).
This charge included severance and facility costs related to planned workforce
reductions, scheduled to be completed throughout 1997. The fourth quarter
special charge
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
has been included in the accompanying consolidated statements of income in asset
write-downs and other special charges.
For additional information, see Note 3 of Notes to Consolidated Financial
Statements.
COMPARISON OF RESULTS OF OPERATIONS
In order to enhance comparability, the following discussions comparing the
results for the years ended December 31, 1997, 1996 and 1995 exclude the impact
of the $215 million pretax ($140 million after tax or $.85 per diluted share)
asset write-downs and other special charges recorded in 1996, as previously
discussed.
Years Ended December 31, 1997 and 1996
Income before income taxes totaled $270 million for the year ended December 31,
1997, compared to $234 million for the year ended December 31, 1996, excluding
the aforementioned special charges. Net income, also excluding the special
charges, was $173 million or $1.05 per diluted share in 1997, compared to $152
million or $.92 per diluted share in 1996. The earnings increase was primarily
a result of increasing Commercial premium rates, an improvement in hospital
utilization and providing a full year of health care services under the TRICARE
contract, which commenced during the third quarter of 1996. These favorable
items were partially offset by higher than anticipated medical costs in the
Company's new Medicare risk markets and increased pharmacy costs system wide.
The aforementioned acquisitions of PCA and ChoiceCare did not significantly
impact 1997 earnings.
The Company's premium revenues increased 18 percent to $7.9 billion for the year
ended December 31, 1997, from $6.7 billion for the year ended December 31, 1996.
The premium revenue increase is primarily attributable to the full year impact
of the TRICARE contract, the acquisitions of PCA and ChoiceCare and increased
premium rates. TRICARE premium revenues totaled approximately $764 million for
the year ended December 31, 1997, compared to approximately $351 million for the
period July 1 through December 31, 1996. PCA and ChoiceCare premium revenues
totaled approximately $512 million since their dates of acquisition. Premium
rate changes contributed approximately $276 million to the 1997 premium
increase, as same-plan Commercial and Medicare risk premium rates increased 4.2
percent and 4.3 percent, respectively. For 1998, Commercial premium rates are
expected to increase approximately 4 to 5 percent, while Medicare risk premium
rates are expected to increase by approximately 2 percent. The changing
geographical mix of the Company's membership resulting from acquisitions and the
growth of the Medicare risk product in new markets will impact the Company's
1998 per member revenue trends.
Same-plan Medicare risk membership increased 65,800 or 19 percent in 1997. This
increase primarily resulted from sales in new Medicare risk markets and compares
to an increase of 54,100 or 17 percent in 1996. Offsetting this membership
increase were same-plan membership declines in the Company's fully insured
Commercial line of business. Reflecting the effects of a premium pricing
discipline begun during the second half of 1996 and intended to maintain
adequate profitability, same-plan membership in the Company's fully insured
Commercial products declined 62,500 or 2 percent, compared to a 75,300 or 3
percent decline in 1996. Commercial same-plan ASO membership increased 130,000
or 28 percent during 1997, compared to a 24,100 or 5 percent decline during
1996.
In addition to the changes in same-plan membership discussed above, the Health
Direct, PCA and ChoiceCare acquisitions added 673,000 Commercial members,
599,000 Medicaid members, 60,000 Medicare risk members and 63,000 ASO members.
Same-plan membership results also exclude the sale of the Washington, D.C.,
health plan and the Company's Alabama operations. As illustrated in the
following table, during 1997 the Company's total medical membership increased 28
percent to over 6.2 million members.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
Medical membership data at December 31, 1997 and 1996 follows:
- ---------------------------------------------
In thousands 1997 1996
- ---------------------------------------------
Beginning medical membership 4,851 3,804
Same-plan sales 828 783
Same-plan cancellations (729) (839)
Acquisitions 1,395 -
Dispositions (147) -
TRICARE 9 1,103
- ---------------------------------------------
Ending medical membership 6,207 4,851
=============================================
Management expects same-plan Commercial membership to increase at a low to mid
single digit rate during 1998, while Medicare risk membership is expected to
increase approximately 20 percent.
During 1997, the Company's medical loss ratio increased to 82.8 percent from
82.7 percent (excluding special charges) for the year ended December 31, 1996 as
a result of the PCA and ChoiceCare acquisitions. Excluding the effect of these
acquisitions, the Company's medical loss ratio improved to 82.4 percent,
reflecting the aforementioned premium rate increases, favorable physician cost
trends (compared to premium rate increases) in the Company's Commercial products
and an overall improvement in hospital utilization. These medical cost
improvements were partially offset by higher than anticipated medical costs in
the Company's new Medicare risk markets (where a large portion of Medicare risk
membership growth is taking place) and increased pharmacy costs system wide.
During 1998, the Company must experience medical cost improvements, particularly
in the Medicare risk product, to maintain its medical loss ratio.
The Company's administrative cost ratio was 15.5 percent and 15.3 percent
(excluding special charges) for the years ended December 31, 1997 and 1996,
respectively. Although investment spending in such areas as customer service,
information systems and Medicare risk product growth initiatives resulted in
this year-over-year increase, efforts to rationalize the Company's staffing
levels and streamline the organizational structure have resulted in sequential
quarterly improvements in the administrative cost ratio throughout 1997.
Continued improvement is expected in the administrative cost ratio in 1998.
Interest income totaled $131 million for the year ended December 31, 1997,
compared to $101 million for the year ended December 31, 1996. The increase is
primarily attributable to a larger investment portfolio resulting from the
addition of TRICARE, PCA and ChoiceCare. The tax equivalent yield on invested
assets approximated 7.5 percent and 8 percent for the years ended December 31,
1997 and 1996, respectively. Tax equivalent yield is the rate earned on
invested assets, excluding unrealized gains and losses, adjusted for the benefit
of nontaxable investment income. The weighted average investment life decreased
to 2.6 years at December 31, 1997, from 3.1 years at December 31, 1996.
Years Ended December 31, 1996 and 1995
Income before income taxes, excluding the $215 million special charges, totaled
$234 million for the year ended December 31, 1996, compared to $288 million for
the year ended December 31, 1995. Net income, also excluding the special
charges, was $152 million or $.92 per diluted share in 1996, compared to $190
million or $1.16 per diluted share in 1995. The earnings decline was primarily
a result of increasing Commercial and Medicare risk medical costs in a period of
declining Commercial premium rates, partially offset by earnings from the
commencement of TRICARE operations.
The Company's premium revenues increased 46 percent to $6.7 billion for the year
ended December 31, 1996, from $4.6 billion for the year ended December 31, 1995.
The premium revenue increase is primarily attributable to the acquisition of
EMPHESYS Financial Group, Inc. ("EMPHESYS") in the fourth quarter of 1995 and
the commencement of health care services under the TRICARE contract during the
third quarter of 1996. EMPHESYS premium revenues totaled approximately $1.7
billion for the year ended December 31, 1996, compared to approximately $370
million for the period October 11 through December 31, 1995.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
TRICARE premium revenues were approximately $351 million for the period July 1
through December 31, 1996. Premium rate changes also contributed approximately
$127 million to the 1996 premium increase as Commercial premium rates declined
0.6 percent and the Medicare risk premium rates increased 7.8 percent. In
addition, membership changes added approximately $260 million to 1996 premium
revenues.
The membership changes which positively impacted premium revenues included
Medicare risk membership growth and the beneficial effect on 1996 premium
revenues of 1995 Commercial membership growth, partially offset by 1996
Commercial membership declines. Membership in the Company's fully insured
Commercial products declined 75,300 or 3 percent during 1996, due to the closing
or sale of certain markets and the pricing of products at rates intended to
maintain adequate profitability. This decline compares to an increase
(excluding the EMPHESYS acquisition) of 276,900 or 19 percent for the year ended
December 31, 1995. Medicare risk membership increased, in both core and new
markets, by 54,100 or 17 percent for the year ended December 31, 1996, compared
to an increase of 23,000 or 8 percent in 1995. ASO membership declined 24,100
during 1996, compared to an increase of 184,700 during 1995.
Medical membership data at December 31, 1996 and 1995 follows:
- ---------------------------------------------
In thousands 1996 1995
- ---------------------------------------------
Beginning medical membership 3,804 2,041
Same-plan sales 783 739
Same-plan cancellations (839) (320)
Acquisitions - 1,344
TRICARE 1,103 -
- ---------------------------------------------
Ending medical membership 4,851 3,804
=============================================
The Company's medical loss ratio increased to 82.7 percent (excluding special
charges) for the year ended December 31, 1996, from 81.7 percent for the year
ended December 31, 1995. The increase in the medical loss ratio was due to
increased medical costs during a Commercial pricing environment which saw
premium rates decline 0.6 percent. Medical cost increases were most notable in
hospital outpatient, physician and pharmacy services in both the Commercial and
Medicare risk products. Partially offsetting these cost increases were
improvements in hospital inpatient utilization in both products.
The Company's administrative cost ratio was 15.3 percent (excluding special
charges) and 13.9 percent for the years ended December 31, 1996 and 1995,
respectively. The increase in the administrative cost ratio was the result of
higher administrative costs associated with both the EMPHESYS small-group and
TRICARE businesses. Excluding the effect of the EMPHESYS acquisition and the
addition of the TRICARE business, the Company's administrative cost ratio was
13.2 percent and 13.3 percent for the years ended December 31, 1996 and 1995,
respectively.
Interest income totaled $101 million for the year ended December 31, 1996,
compared to $87 million for the year ended December 31, 1995. The increase is
primarily attributable to a larger investment portfolio resulting from the
addition of EMPHESYS and TRICARE. The tax equivalent yield on invested assets
approximated 8 percent for the years ended December 31, 1996 and 1995. Tax
equivalent yield is the rate earned on invested assets, excluding unrealized
gains and losses, adjusted for the benefit of nontaxable investment income. The
weighted average investment life decreased to 3.1 years at December 31, 1996,
from 4.0 years at December 31, 1995.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
LIQUIDITY
Cash provided by the Company's operations totaled $289 million, $341 million and
$150 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The 1997 decline in net cash provided by operations was due to changes in
operating assets and liabilities, the result of increased TRICARE premiums
receivable and more timely medical claim processing. The 1996 increase in
operating cash flows was primarily attributable to the timing of payments for
medical costs and other liabilities, due to the commencement of operations under
the TRICARE contract. Also impacting 1996 operating cash flows was a decrease
in net income.
Due in large part to the Company's 1997 acquisitions, cash used in investing
activities totaled $664 million in 1997, a $490 million increase over 1996.
Similarly, reflecting the debt incurred to fund such acquisitions (as discussed
below), cash provided by 1997 financing activities totaled $680 million,
compared to a $27 million net use of cash in 1996.
The Company's subsidiaries operate in states which require certain 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' ability to obtain regulatory
approval to pay dividends.
In August 1997, the Company entered into a five-year revolving credit agreement
("Credit Agreement") which provides a line of credit of up to $1.5 billion. The
Credit Agreement replaced an existing $600 million revolving line of credit.
Principal amounts outstanding under the Credit Agreement bear interest at rates
ranging from LIBOR plus 12 basis points to LIBOR plus 30 basis points, depending
on the ratio of debt to debt plus net worth. The Credit Agreement, under which
$300 million was outstanding at December 31, 1997 bearing interest at a rate of
6.2 percent, contains customary covenants and events of default.
The Company also maintains a commercial paper program and issues debt securities
thereunder. At December 31, 1997 and 1996, borrowings under the commercial
paper program totaled approximately $589 million and $222 million, respectively.
The average interest rate for 1997 and 1996 borrowings was 5.9 percent and 5.6
percent, respectively. The commercial paper program is backed by the Credit
Agreement. Borrowings under both the Credit Agreement and 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 existing 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 opportunities, as well as to fund
capital requirements.
RISK SENSITIVE FINANCIAL INSTRUMENTS AND POSITIONS
The Company's risk of fluctuation in earnings due to changes in interest income
from its fixed income portfolio is partially mitigated by the Company's long-
term debt position, as well as the short duration of the fixed income portfolio.
The Company has evaluated the interest income and debt expense impact resulting
from a hypothetical change in interest rates of 100, 200 and 300 basis points
over the next 12-month period, as reflected in the table below. In the past 10
years, annual changes in commercial paper rates have equaled or exceeded 300
basis points one time, were between 200 and 300 basis points two times, and were
between 100 and 200 basis points two times. The modeling technique used to
calculate the pro forma net change considered the cash flows related to fixed
income investments and debt which are subject to interest rate changes during a
prospective 12-month period.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in earnings Increase (decrease) in earnings
given an interest rate given an interest rate
Dollars in millions decrease of X basis points increase of X basis points
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(300) (200) (100) 100 200 300
- -------------------------------------------------------------------------------------------------------------
Fixed income portfolio $(15.1) $(10.0) $(5.0) $ 4.9 $ 9.9 $ 14.8
Long-term debt 12.3 8.2 4.1 (4.1) (8.2) (12.3)
- -------------------------------------------------------------------------------------------------------------
Total $ (2.8) $ (1.8) $ (.9) $ .8 $ 1.7 $ 2.5
=============================================================================================================
</TABLE>
The following table presents the hypothetical change in fair market values of
common equity securities held by the Company at December 31, 1997 which are
sensitive to changes in stock market values. These common equity securities are
held for purposes other than trading.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Decrease in Increase in
valuation of security Fair value valuation of security
given an X% decrease in as of given an X% increase in
Dollars in millions each equity security's value December 31, 1997 each equity security's value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(30%) (20%) (10%) 10% 20% 30%
- ---------------------------------------------------------------------------------------------------------------
Common equity securities $(15.5) $(10.4) $(5.2) $51.8 $5.2 $10.4 $15.5
===============================================================================================================
</TABLE>
Changes in equity valuations (based upon the Standard & Poor's 500 stock index)
over the past 10 years which were in excess of 30 percent occurred two times,
between 20 percent and 30 percent occurred three times, and between 10 percent
and 20 percent occurred one time.
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. Total capital expenditures, excluding
acquisitions, were $73 million, $72 million and $54 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
Excluding acquisitions, planned capital spending in 1998 will approximate $70 to
$80 million for the expansion and improvement of medical care facilities,
administrative facilities and related information systems.
EFFECTS OF INFLATION AND CHANGING PRICES
The Company's operations are regulated by various state and federal government
agencies. Actuarially determined premium rate increases for Commercial and
Medicare supplement products are generally approved by the respective state
insurance commissioners, while increases in premiums for Medicare risk products
are established and implemented by the Health Care Financing Administration.
The Company's 1998 average rate of statutory increase under the Medicare risk
contracts is approximately 2 percent. Over the last five years, annual increases
have ranged from as low as the January 1998 increase of 2 percent to as high as
9 percent in January 1996, with an average of approximately 5 percent. 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 thereto. Current
legislative proposals are being considered which include modification of future
reimbursement rates under the Medicare program and which encourage the use of
managed health care for Medicare beneficiaries. Management is
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
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. The
Company also maintains annual contracts with various states and a two-year
contract with the Commonwealth of Puerto Rico, expiring March 31, 1999, to
provide health care to Medicaid-eligible individuals. Additionally, the
Company's TRICARE contract is a one-year contract renewable annually for up to
three 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.
During the years ended December 31, 1997, 1996 and 1995, combined premium
revenues from the Company's Medicare risk, Medicaid and TRICARE lines of
business represented approximately 43 percent, 35 percent and 35 percent,
respectively, of total premium revenues.
IMPACT OF THE YEAR 2000 ISSUE
The Company has conducted an assessment of its computer systems to identify the
systems that could be affected by the "Year 2000" issue, which results from
computer programs having been written to define the applicable year using two
digits rather than four digits. The Company believes that, with modifications
to existing software, the Year 2000 issue will not pose significant operational
problems for its computer system as so modified. The Company plans to complete
the majority of the Year 2000 modifications by December 31, 1998. At present,
the Company anticipates that the incremental costs incurred in connection with
the Year 2000 project will approximate $12 to $15 million.
The costs of the project and the date on which the Company plans to complete the
necessary Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause
such material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer codes, the ability of the Company's significant suppliers,
customers and others with which it conducts business to identify and resolve
their own Year 2000 issues and similar uncertainties.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in the financial statements.
Comprehensive income is defined as all changes in equity during a period except
those resulting from investments by owners and distribution to owners. This
statement is effective for periods beginning after December 15, 1997. Given
that the components required to be included in comprehensive income are
currently presented in the Company's consolidated financial statements, adoption
of SFAS No. 130 will have little impact on the Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 requires, if certain quantitative thresholds are
met, public companies to report separate financial information about operating
segments, as well as certain information about their products and services, the
geographic areas in which they operate and their major customers. This statement
is effective for financial statements for fiscal years beginning after December
15, 1997. The Company is continuing to assess the disclosure impacts of
adopting SFAS No. 131.
OTHER INFORMATION
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.
9
<PAGE>
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
Humana Inc.
Dollars in millions, except per share amounts
- -------------------------------------------------------------------------------
December 31, 1997 1996
- -------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 627 $ 322
Marketable securities 1,507 1,262
Premiums receivable, less allowance for doubtful
accounts of $48 in 1997 and $38 in 1996 351 211
Deferred income taxes 34 94
Other 231 113
- -------------------------------------------------------------------------------
Total current assets 2,750 2,002
- -------------------------------------------------------------------------------
Property and equipment, net 420 371
Other assets:
Long-term marketable securities 512 143
Cost in excess of net assets acquired 1,224 488
Deferred income taxes 160 17
Other 352 132
- -------------------------------------------------------------------------------
Total other assets 2,248 780
- -------------------------------------------------------------------------------
Total Assets $5,418 $3,153
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Medical and other costs payable $1,478 $1,099
Trade accounts payable and accrued expenses 471 333
Unearned premium revenues 304 36
Income taxes payable 10 32
- -------------------------------------------------------------------------------
Total current liabilities 2,263 1,500
Long-term medical and other costs payable 597 -
Long-term debt 889 225
Professional liability and other obligations 168 136
- -------------------------------------------------------------------------------
Total liabilities 3,917 1,861
- -------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par; authorized 10,000,000
shares; none issued - -
Common stock, $.16 2/3 par; authorized 300,000,000
shares; issued and outstanding 164,058,225 shares -
1997 and 162,681,123 shares - 1996 27 27
Capital in excess of par value 841 822
Retained earnings 624 451
Net unrealized investment gains (losses) 9 (8)
- -------------------------------------------------------------------------------
Total stockholders' equity 1,501 1,292
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $5,418 $3,153
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
10
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Humana Inc.
Dollars in millions, except per share results
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Revenues:
Premiums $7,880 $6,677 $4,605
Interest and other income 156 111 97
- --------------------------------------------------------------------------------
Total revenues 8,036 6,788 4,702
- --------------------------------------------------------------------------------
Operating expenses:
Medical costs 6,522 5,625 3,762
Selling, general and administrative 1,116 940 571
Depreciation and amortization 108 98 70
Asset write-downs and other special charges - 96 -
- --------------------------------------------------------------------------------
Total operating expenses 7,746 6,759 4,403
- --------------------------------------------------------------------------------
Income from operations 290 29 299
Interest expense 20 11 11
- -------------------------------------------------------------------------------
Income before income taxes 270 18 288
Provision for income taxes 97 6 98
- --------------------------------------------------------------------------------
Net income $ 173 $ 12 $ 190
================================================================================
Earnings per common share $1.06 $ .07 $ 1.17
================================================================================
Earnings per common share - assuming dilution $1.05 $ .07 $ 1.16
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
11
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Humana Inc.
<TABLE>
<CAPTION>
In millions
- -------------------------------------------------------------------------------------------------------------------
Common Stock Capital In Net Unrealized Total
----------------- Excess of Retained Investment Stockholders'
Shares Amount Par Value Earnings Gains (Losses) Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 161 $27 $803 $249 $(21) $1,058
Net income - - 190 - 190
Other 1 - 12 - 27 39
- -------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 162 27 815 439 6 1,287
Net income - - 12 - 12
Other 1 - 7 - (14) (7)
- -------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 163 27 822 451 (8) 1,292
NET INCOME - - 173 - 173
OTHER 1 - 19 - 17 36
- -------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 164 $27 $841 $624 $ 9 $1,501
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
12
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Humana Inc.
Dollars in millions
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 173 $ 12 $ 190
Adjustments to reconcile net income
to net cash provided by operating activities:
Asset write-downs - 70 -
Depreciation and amortization 108 98 70
Deferred income taxes 40 (25) 13
Changes in operating assets and liabilities:
Premiums receivable (102) (81) (27)
Other assets (47) (31) (4)
Medical and other costs payable (149) 215 (9)
Other liabilities 57 84 (78)
Unearned premium revenues 203 (3) (5)
Other 6 2 -
- --------------------------------------------------------------------------------
Net cash provided by operating activities 289 341 150
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of health plan assets (669) (6) (697)
Purchases of property and equipment (73) (72) (54)
Dispositions of property and equipment 15 5 5
Purchases of marketable securities (608) (440) (402)
Maturities and sales of marketable securities 648 356 731
Other 23 (17) (33)
- --------------------------------------------------------------------------------
Net cash used in investing activities (664) (174) (450)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 300 - 250
Repayment of long-term debt - (250) (51)
Net commercial paper borrowings 367 222 -
Other 13 1 11
- --------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 680 (27) 210
- --------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 305 140 (90)
Cash and cash equivalents at beginning of period 322 182 272
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $627 $322 $182
================================================================================
Interest payments, net $ 15 $ 11 $ 12
Income tax payments, net 8 39 94
The accompanying notes are an integral part of the consolidated financial
statements.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Humana Inc.
1. REPORTING ENTITY
Nature of Operations
Humana Inc. (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 encourage or require
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 and workers' compensation.
The Company's HMO and PPO products are marketed primarily to employer 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. In addition, the Company maintains annual
contracts with various states and a two-year contract with the Commonwealth of
Puerto Rico, expiring March 31, 1999, to provide health care to Medicaid-
eligible individuals. The Company also offers administrative services ("ASO")
to employers who self-insure their employee health plans. The Company's
products are licensed in 47 states, the District of Columbia and Puerto Rico,
with approximately 23 percent of its membership in the state of Florida.
On July 1, 1996, the Company began providing managed health care services to
approximately 1.1 million eligible beneficiaries under a contract with the
United States Department of Defense under the TRICARE program (formerly the
Civilian Health and Medical Program of the Uniformed Services). The government
exercised its option to extend the contract for one year effective July 1, 1997.
Under the TRICARE contract, which is renewable annually for up to three
additional years, the Company provides managed care services to the
beneficiaries of active military personnel and retired military personnel and
their beneficiaries located in the southeastern United States. The Company has
subcontracted with third parties to provide certain administration and specialty
services under the contract. Three health benefit options are available to
TRICARE beneficiaries. In addition to a traditional indemnity option,
participants may enroll in an HMO-like plan with a point-of-service option or
take advantage of reduced co-payments by using a network of preferred providers.
During the years ended December 31, 1997, 1996 and 1995, premium revenues from
the Company's Medicare risk, Medicaid and TRICARE lines of business represented
approximately 43 percent, 35 percent and 35 percent, respectively, of total
premium revenues.
Basis of Presentation
The preparation of the Company's 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include all subsidiaries of the Company.
All significant intercompany accounts and transactions have been eliminated.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits, money market funds,
commercial paper and certain U.S. Government securities with an original
maturity of three months or less. Carrying value approximates fair value due to
the short-term maturities of the investments.
Marketable Securities
At December 31, 1997 and 1996, marketable debt and equity securities have been
categorized as available for sale and, as a result, are stated at fair value
based generally on quoted market prices. Commercial mortgage loans are carried
at cost. Marketable debt and equity securities available for current operations
are classified as current assets. Marketable securities available for the
Company's capital spending, professional liability, long-term insurance product
requirements and payment of long-term workers' compensation claims are
classified as long-term assets. Unrealized holding gains and losses, net of
applicable deferred taxes, are included as a component of stockholders' equity
until realized.
For the purpose of determining gross realized gains and losses, the cost of
securities sold is based upon specific identification.
Property and Equipment
Property and equipment is carried at cost and comprises the following at
December 31, 1997 and 1996:
- -----------------------------------------
Dollars in millions 1997 1996
- -----------------------------------------
Land $ 33 $ 33
Buildings 302 278
Equipment 393 370
- -----------------------------------------
728 681
Accumulated depreciation (308) (310)
- -----------------------------------------
$ 420 $ 371
=========================================
Depreciation is computed using the straight-line method over estimated useful
lives ranging from three to 10 years for equipment and 20 years for buildings.
Depreciation expense was $66 million, $59 million and $50 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired represents the unamortized excess of cost
over the fair value of tangible and identifiable intangible assets acquired and
is being amortized on a straight-line basis over varying periods not exceeding
40 years. The carrying values of all intangible assets are periodically reviewed
by management and impairments are recognized when the expected undiscounted
future operating cash flows derived from operations associated with such
intangible assets are less than their carrying value. Accumulated amortization
totaled $37 million and $18 million at December 31, 1997 and 1996, respectively.
Revenue and Medical Cost Recognition
Premium revenues are recognized as income in the period members are entitled to
receive services. Premiums received prior to such periods are recorded as
unearned premium revenues.
Medical costs include claim payments, capitation payments, physician salaries
and various other costs incurred to provide medical care to members, as well as
estimates of future payments to hospitals and others for medical care provided
prior to the balance sheet date. Capitation payments represent monthly prepaid
fees disbursed to participating primary care physicians and other providers who
are responsible for providing medical care to members. The estimates of future
medical claim payments are developed using actuarial methods and assumptions
based upon payment patterns, medical inflation, historical development and other
relevant factors. Estimates of future payments relating to services incurred in
the current and prior periods are continually reviewed by management and
adjusted as necessary. Management believes the Company's medical and other
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
costs payable are adequate to cover future claims payments required; however,
such estimates are subject to changes in assumptions, and, therefore, the actual
liability could differ from amounts provided.
Stock Options
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") and continues to apply Accounting Principles Board Opinion No. 25 and
related interpretations in the accounting for its stock option plans. No
compensation expense has been recognized in connection with the granting of
stock options. See Note 8 for discussion of stock options and the disclosures
required by SFAS No. 123.
Earnings Per Common Share
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") which
specifies the computation, presentation and disclosure requirements for earnings
per share effective for periods ending after December 15, 1997. In accordance
with SFAS No. 128, all prior-period earnings per share data have been restated.
Detail supporting the computation of earnings per common share and earnings per
common share-assuming dilution follows:
<TABLE>
<CAPTION>
Dollars in millions, except per share results
- -----------------------------------------------------------------------------------
Per Share
Year Ended December 31, 1997 Net Income Shares Results
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings per common share $ 173 163,406,460 $1.06
Effect of dilutive stock options 2,436,019
Earnings per common share - assuming dilution $ 173 165,842,479 $1.05
- -----------------------------------------------------------------------------------
Year Ended December 31, 1996
- -----------------------------------------------------------------------------------
Earnings per common share $ 12 162,531,524 $ .07
Effect of dilutive stock options 2,747,294
Earnings per common share - assuming dilution $ 12 165,278,818 $ .07
- -----------------------------------------------------------------------------------
Year Ended December 31, 1995
- -----------------------------------------------------------------------------------
Earnings per common share $ 190 162,268,815 $1.17
Effect of dilutive stock options 2,325,637
Earnings per common share - assuming dilution $ 190 164,594,452 $1.16
- -----------------------------------------------------------------------------------
</TABLE>
Options to purchase 2,414,148, 1,580,891 and 1,229,500 shares for the years
ended December 31, 1997, 1996 and 1995, respectively, were not included in the
computation of earnings per common share-assuming dilution because the options'
exercise prices were greater than the average market price of the common shares.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year presentation.
3. SPECIAL CHARGES
During the second quarter of 1996, the Company recognized special charges of
$200 million pretax ($130 million after tax or $.79 per diluted share). The
second quarter special charges included provisions for expected future losses on
insurance contracts ($105 million) as well as an estimate of the costs to be
incurred
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
in restructuring the Washington, D.C., health plan (which was sold January 31,
1997; see below) 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.
The 1996 special charges included $70 million of asset write-downs related to
long-lived assets, primarily associated with the Company's Washington, D.C.,
health plan. In accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company conducted a review of the carrying value
of its Washington, D.C., health plan's long-lived assets. This review was
initiated because the health plan was experiencing significant operating losses.
A forecast of expected undiscounted future cash flows was prepared to determine
whether an impairment existed and fair values were used to measure the amount of
the impairment. As a result of the review, the Washington, D.C., health plan's
long-lived assets were written down to their estimated fair value.
The second quarter special charges have been included in the accompanying
consolidated statement of income for the year ended December 31, 1996 as
follows: the provision for expected future losses on insurance contracts has
been included in medical costs ($105 million); asset write-downs, restructuring
costs, market closing and product discontinuance costs have been included in
asset write-downs and other special charges ($81 million); and litigation and
certain other costs have been included in selling, general and administrative
expenses ($14 million).
During the fourth quarter of 1996, the Company recognized an additional special
charge of $15 million pretax ($10 million after tax or $.06 per diluted share).
This charge included severance and facility costs related to planned workforce
reductions, scheduled to be completed throughout 1997. The fourth quarter
special charge has been included in the accompanying consolidated statement of
income in asset write-downs and other special charges.
The components and usage of the 1996 special charges follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Liability For Asset
Expected Future Write-downs &
Losses On Workforce
Dollars in millions Insurance Contracts Reductions Other Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provision for special charges $105 $ 96 $ 14 $215
1996 usage (cash) (30) (11) (10) (51)
1996 usage (non-cash) - (70) - (70)
- --------------------------------------------------------------------------------------
Balances at December 31, 1996 75 15 4 94
1997 usage (cash) (59) (12) (1) (72)
- --------------------------------------------------------------------------------------
Balances at December 31, 1997 $ 16 $ 3 $ 3 $ 22
======================================================================================
</TABLE>
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, exclusive of its small group business and Alabama TRICARE
operations, to PrimeHealth of Alabama, Inc. These sale transactions did not
have a material impact on the Company's financial position, results of
operations or cash flows.
At December 31, 1997 and 1996, there were additional liabilities totaling
approximately $46 million and $50 million, respectively, included in the
accompanying consolidated balance sheets, primarily related to contract
disputes. This liability was originally recognized in August 1992. Management
regularly evaluates the continued reasonableness of this liability, as well as
the 1996 special charges, and to the extent adjustments are necessary, current
earnings are charged or credited.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
4. MARKETABLE SECURITIES
Marketable securities classified as current assets at December 31, 1997 and 1996
included the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1997 1996
----------------------------------------- -------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Dollars in millions Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government obligations $ 178 $ 1 $ - $ 179 $ 68 $ - $ (1) $ 67
Tax exempt municipal bonds 723 5 (2) 726 613 3 (6) 610
Corporate bonds 282 6 - 288 313 1 (3) 311
Redeemable preferred stocks 113 1 (2) 112 117 - (1) 116
Collateralized mortgage
obligations 35 1 - 36 54 1 - 55
Marketable equity securities 114 5 (1) 118 79 2 (3) 78
Other 45 3 - 48 22 6 (3) 25
- -----------------------------------------------------------------------------------------------------------------------
$1,490 $22 $(5) $1,507 $1,266 $13 $(17) $1,262
=======================================================================================================================
</TABLE>
Marketable securities classified as long-term assets at December 31, 1997 and
1996 included the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1997 1996
----------------------------------------- --------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Dollars in millions Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government obligations $146 $ - $ - $ 146 $ 3 $ - $ - $ 3
Tax exempt municipal bonds 284 3 (2) 285 77 - (1) 76
Redeemable preferred stocks 16 - - 16 9 - - 9
Marketable equity securities 19 1 - 20 5 - - 5
Other 45 - - 45 49 1 - 50
- -----------------------------------------------------------------------------------------------------------------------
$510 $ 4 $(2) $ 512 $143 $ 1 $(1) $143
=======================================================================================================================
</TABLE>
The contractual maturities of debt securities available for sale at December 31,
1997, regardless of their balance sheet classification, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Amortized Fair
Dollars in millions Cost Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due within one year $ 330 $ 332
Due after one year through five years 685 680
Due after five years through ten years 328 335
Due after ten years 145 153
Not due at a single maturity date 379 381
- -----------------------------------------------------------------------------------------------------------------------
$1,867 $1,881
=======================================================================================================================
</TABLE>
Gross realized gains and losses for the years ended December 31, 1997, 1996 and
1995 were immaterial.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
5. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
Dollars in millions 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision:
Federal $ 51 $ 30 $ 78
State 6 1 7
- -----------------------------------------------------------------------------------------------------------------------
57 31 85
- -----------------------------------------------------------------------------------------------------------------------
Deferred provision (benefit):
Federal 36 (23) 11
State 4 (2) 2
- -----------------------------------------------------------------------------------------------------------------------
40 (25) 13
- -----------------------------------------------------------------------------------------------------------------------
$ 97 $ 6 $ 98
=======================================================================================================================
</TABLE>
The provision for income taxes was different from the amount computed using the
federal statutory income tax rate due to the following:
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
Dollars in millions 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision at federal statutory rate $ 95 $ 6 $ 101
State income taxes, net of federal benefit 10 1 7
Tax exempt investment income (13) (12) (12)
Amortization 10 12 6
Other items, net (5) (1) (4)
- -----------------------------------------------------------------------------------------------------------------------
$ 97 $ 6 $ 98
=======================================================================================================================
</TABLE>
Cumulative temporary differences which gave rise to deferred tax assets and
liabilities at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
- -----------------------------------------------------------------------------------------------------------------------
Dollars in millions 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Marketable securities $ (6) $ 2
Long-term assets (42) (41)
Medical and other costs payable 126 28
Liabilities for special charges 14 46
Professional liability risks 41 34
Other 61 42
- -----------------------------------------------------------------------------------------------------------------------
$ 194 $ 111
=======================================================================================================================
</TABLE>
Management believes that the deferred tax assets are realizable based primarily
on the existence of taxable income within the allowable carryback periods.
During 1995, the Company made a $30 million payment to the IRS to stop the
accrual of interest expense and resolve disputed amounts related to tax periods
September 1, 1991 through December 31, 1993.
At December 31, 1997, the Company has available tax net operating loss
carryforwards of approximately $69 million related to prior acquisitions. These
loss carryforwards, if unused to offset future taxable income of the acquired
subsidiaries, will expire in 2002 through 2011.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
6. LONG-TERM DEBT
In August 1997, the Company entered into a five-year revolving credit agreement
("Credit Agreement") which provides a line of credit of up to $1.5 billion. The
Credit Agreement replaced an existing $600 million revolving line of credit,
under which there were no outstanding borrowings at December 31, 1996.
Principal amounts outstanding under the Credit Agreement bear interest at rates
ranging from LIBOR plus 12 basis points to LIBOR plus 30 basis points, depending
on the ratio of debt to debt plus net worth. The Credit Agreement, under which
$300 million was outstanding at December 31, 1997 bearing interest at a rate of
6.2 percent, contains customary covenants and events of default.
The Company also maintains a commercial paper program and issues debt securities
thereunder. At December 31, 1997 and 1996, borrowings under the commercial
paper program totaled approximately $589 million and $222 million, respectively.
The average interest rate for 1997 and 1996 borrowings was 5.9 percent and 5.6
percent, respectively. The commercial paper program is backed by the Credit
Agreement.
Borrowings under both the Credit Agreement and 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.
7. PROFESSIONAL LIABILITY AND OTHER OBLIGATIONS
The Company insures substantially all professional liability risks through a
wholly-owned subsidiary (the "Subsidiary"). Provisions for such risks, including
expenses incident to claim settlements, were $32 million, $31 million and $27
million for the years ended December 31, 1997, 1996 and 1995, respectively. The
Subsidiary reinsures levels of coverage for losses in excess of its retained
limits with unrelated insurance carriers. Allowance for professional liability
risks and the equivalent amounts of marketable securities related to the funding
thereof included in the accompanying consolidated balance sheets were $111
million and $95 million at December 31, 1997 and 1996, respectively.
In addition to the long-term portion of the allowance for professional liability
risks, professional liability and other obligations in the accompanying
consolidated balance sheets consist primarily of liabilities for disability and
other long-term insurance products and the Company's employee retirement and
benefit plans. These liabilities totaled $57 million and $61 million at
December 31, 1997 and 1996, respectively.
8. STOCKHOLDERS' EQUITY
As a result of state regulatory requirements, the Company must maintain certain
levels of capital in its licensed subsidiaries. The Company's ability to make
use of the capital of its subsidiaries is subject to these restrictions, as well
as regulatory approval.
In 1987, the Company adopted, and in 1996 amended, a stockholders' rights plan
designed to deter takeover initiatives not considered to be in the best
interests of the Company's stockholders. The rights are redeemable by action of
the Company's Board of Directors at a price of $.01 per right at any time prior
to their becoming exercisable. Pursuant to the plan, under certain conditions,
each share of stock has a right to acquire 1/100th of a share of Series A
Participating Preferred Stock at a price of $145 per share. The plan expires in
2006.
The Company has plans under which options to purchase common stock have been
granted to officers, directors and key employees. Options are granted at the
market price on the date of grant. Exercise provisions vary, but most options
vest in whole or in part one to five years after grant and expire 10 years after
grant. At December 31, 1997, there were 14,870,811 shares reserved for employee
and director stock option plans. At December 31, 1997, there were 1,825,166
shares of common stock available for future grants. In January 1998, a total of
1,714,350 options were granted.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
The Company's option plan activity for the years ended December 31, 1997, 1996
and 1995 is summarized below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Weighted
Shares Exercise Price Average
Under Option Per Share Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1995 7,670,201 $ 4.32 to $17.94 $ 7.75
Granted 3,107,000 18.94 to 23.06 22.84
Exercised (751,096) 4.32 to 11.90 8.35
Canceled or lapsed (190,250) 6.56 to 23.06 13.11
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 9,835,855 4.32 to 23.06 12.37
Granted 1,888,500 15.63 to 27.56 19.74
Exercised (454,044) 4.32 to 23.06 8.11
Canceled or lapsed (348,424) 6.56 to 27.56 15.87
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 10,921,887 4.32 to 26.94 13.71
Granted 2,819,000 18.31 to 23.69 19.79
Exercised (1,247,793) 4.32 to 23.06 8.67
Canceled or lapsed (270,830) 6.56 to 23.06 17.32
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 12,222,264 $ 5.80 to $26.94 $15.54
===========================================================================================================================
</TABLE>
A summary of stock options outstanding and exercisable at December 31, 1997
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Stock Options Outstanding Stock Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.80 to $ 6.87 3,462,410 3.9 years $ 6.56 2,669,910 $ 6.56
8.00 to 9.64 1,031,307 4.9 years 8.18 720,932 8.26
10.54 to 14.44 174,350 3.3 years 11.23 171,100 11.24
15.63 to 18.94 2,626,833 8.6 years 18.38 266,672 17.21
19.19 to 22.97 2,329,700 8.7 years 20.54 790,094 19.89
23.06 to 26.94 2,597,664 6.4 years 23.39 1,597,068 23.24
- ---------------------------------------------------------------------------------------------------------------------------
$ 5.80 to $26.94 12,222,264 6.4 years $15.54 6,215,776 $13.32
============================================================================================================================
</TABLE>
As of December 31, 1996 and 1995, there were 4,786,969 and 2,079,980 options
exercisable, respectively. The weighted average exercise price of options
exercisable during 1996 and 1995 was $11.05 and $7.51, respectively.
If the Company had adopted the expense recognition provisions of SFAS No. 123
for purposes of determining compensation expense related to stock options
granted during the years ended December 31, 1997, 1996 and 1995, net income and
earnings per common share would have been changed to the pro forma amounts shown
below:
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
Dollars in millions, except per share results 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $ 173 $ 12 $ 190
Pro forma 159 4 181
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per common share As reported $1.06 $ .07 $1.17
Pro forma .97 .02 1.11
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per common share - As reported $1.05 $ .07 $1.16
assuming dilution Pro forma .96 .02 1.10
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
The fair value of each option granted during 1997, 1996 and 1995 was estimated
on the date of grant using an option-pricing model (Black-Scholes) with the
following weighted average assumptions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 38.5% 40.2% 40.2%
Risk-free interest rate 6.1% 7.0% 7.0%
Expected option life (years) 5.4 5.8 5.8
Weighted average fair value at grant date $8.88 $8.92 $9.57
- --------------------------------------------------------------------------------
</TABLE>
The effects of applying SFAS No. 123 in the pro forma disclosures are not likely
to be representative of the effects on pro forma net income for future years
because variables such as option grants, exercises and stock price volatility
included in the disclosures may not be indicative of future activity.
9. COMMITMENTS AND 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 thereto.
Current legislative proposals are being considered which include modification of
future reimbursement rates under the Medicare program and which encourage the
use of managed health care for 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. The Company
also maintains annual contracts with various states and a two-year contract with
the Commonwealth of Puerto Rico, expiring March 31, 1999, to provide health care
to Medicaid-eligible individuals. Additionally, the Company's TRICARE contract
is a one-year contract renewable annually for up to three 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.
During the ordinary course of business, the Company is subject to pending and
threatened legal actions. Management of the Company does not believe that any
of these actions will have a material adverse effect on the Company's financial
position, results of operations or cash flows.
10. ACQUISITIONS
On October 17, 1997, the Company acquired ChoiceCare Corporation ("ChoiceCare")
for approximately $250 million in cash. The purchase was funded with borrowings
under the Company's commercial paper program. ChoiceCare provides health
services products to approximately 250,000 medical members in the Greater
Cincinnati, Ohio, area.
On September 8, 1997, the Company acquired Physician Corporation of America
("PCA") for total consideration of $411 million in cash, consisting primarily of
$7 per share for PCA's outstanding common stock and the assumption of $121
million in debt. The purchase was funded with borrowings under the Company's
commercial paper program. PCA serves approximately 1.1 million medical members
and provides comprehensive health services through its HMOs in Florida, Texas
and Puerto Rico. In addition, PCA provides workers' compensation third-party
administrative management services. Prior to November 1996, PCA also was a
direct writer of workers' compensation insurance in Florida. Long-term medical
and other costs payable in the accompanying consolidated balance sheets
includes the long-term portion of workers' compensation liabilities related to
this business.
On February 28, 1997, the Company acquired Health Direct, Inc. ("Health Direct")
from Advocate Health Care for $23 million in cash. This transaction added
approximately 50,000 medical members to the Company's Chicago, Illinois,
membership.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
On October 11, 1995, the Company acquired EMPHESYS Financial Group, Inc.
("EMPHESYS") for a total purchase price of approximately $650 million. The
purchase was funded though available cash of $400 million and bank borrowings of
$250 million under the Company's revolving line of credit in existence at that
time. On November 30, 1995, the Company acquired certain primary care centers
in South Florida and Tampa previously owned by Coastal Physician Group, Inc. for
approximately $50 million.
The above acquisitions, and certain other minor acquisitions, were accounted for
under the purchase method of accounting. In connection with these acquisitions,
the Company allocated the acquisition costs to tangible and identifiable
intangible assets based upon their fair values. Identifiable intangible assets,
which are included in other long-term assets in the accompanying consolidated
balance sheets, include subscriber and provider contracts and, at December 31,
1997 and 1996, totaled $93 million and $88 million, respectively. Any remaining
value not assigned to tangible or identifiable intangible assets was then
allocated to cost in excess of net assets acquired. Cost in excess of net
tangible and identifiable intangible assets acquired, recorded in connection
with the acquisitions, was $754 million in 1997 and $387 million in 1995.
Subscriber and provider contracts are amortized over their estimated useful
lives (seven to 14 years), while cost in excess of net assets acquired is
amortized over periods not exceeding 40 years.
The results of operations for the previously mentioned acquisitions have been
included in the accompanying consolidated statements of income since the date of
acquisition. The following unaudited pro forma consolidated results of
operations give effect to those acquisitions as if they had occurred at the
beginning of the year preceding the year of acquisition:
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------
Dollars in millions, except per share results 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $9,272 $8,581 $5,968
Net income (loss) 64 (271) 200
- ----------------------------------------------------------------------------------
Earnings (loss) per common share $ .39 $(1.67) $ 1.23
Earnings (loss) per common share - assuming dilution .39 (1.67) 1.22
- ----------------------------------------------------------------------------------
</TABLE>
The unaudited pro forma information may not necessarily reflect future results
of operations or what the results of operations would have been had the
acquisitions actually been consummated at the beginning of the year preceding
the year of acquisition.
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors
Humana Inc.
We have audited the accompanying consolidated balance sheets of Humana Inc. as
of December 31, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Humana Inc. as of
December 31, 1997 and 1996, and the consolidated results of operations and cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Louisville, Kentucky
February 10, 1998
24
<PAGE>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
Humana Inc.
A summary of the Company's quarterly results of operations follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Dollars in millions, except per share results 1997 (a)
- ---------------------------------------------------------------------------------------------------
First Second Third Fourth
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $1,832 $1,836 $1,968 $2,400
Income before income taxes 60 65 69 76
Net income 39 42 44 48
Earnings per common share .24 .26 .27 .29
Earnings per common share -
assuming dilution .24 .25 .27 .29
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Dollars in millions, except per share results 1996
- ---------------------------------------------------------------------------------------------------
First Second (b) Third Fourth (c)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $1,588 $1,605 $1,784 $1,811
Income (loss) before income taxes 81 (146) 48 35
Net income (loss) 53 (95) 32 22
Earnings (loss) per common share .32 (.58) .20 .13
Earnings (loss) per common share -
assuming dilution .32 (.58) .19 .13
</TABLE>
(a) Includes the results of Health Direct, Inc., Physician Corporation of
America and ChoiceCare Corporation since their dates of acquisition,
February 28, 1997, September 8, 1997 and October 17, 1997, respectively.
(b) Includes special charges of $200 million pretax ($130 million after tax or
$.79 per diluted share) related to the restructuring of the Washington,
D.C., health plan, provision for expected future losses on insurance
contracts, closing 13 service areas, discontinuing unprofitable products in
three markets and a litigation settlement.
(c) Includes a special charge of $15 million pretax ($10 million after tax or
$.06 per diluted share) related to planned workforce reductions.
25
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
K. FRANK AUSTEN, M.D. MICHAEL E. GELLERT JOHN R. HALL
Theodore B. Bayles Professor of Medicine, General Partner, Windcrest Chairman of the Board,
Harvard Medical School and the Partners, private investment Arch Coal, Inc.
Brigham and Women's Hospital partnership Retired Chairman of the Board
and Chief Executive Officer,
Ashland Inc.
DAVID A. JONES DAVID A. JONES, JR. IRWIN LERNER
Chairman of the Board, Humana Inc. Vice Chairman, Humana Inc. Retired Chairman of the Board
Managing Director, and Executive Committee,
Chrysalis Ventures, Inc., Hoffmann-La Roche Inc.
venture capital firm
W. ANN REYNOLDS, PH.D. GREGORY H. WOLF
President, University of Alabama at President and Chief Executive
Birmingham Officer, Humana Inc.
<CAPTION>
BOARD COMMITTEES
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Executive Committee Audit Committee Investment Committee
DAVID A. JONES, Chairman MICHAEL E. GELLERT, Chairman W. ANN REYNOLDS, PH.D., Chairwoman
MICHAEL E. GELLERT K. FRANK AUSTEN, M.D. MICHAEL E. GELLERT
DAVID A. JONES, JR. JOHN R. HALL JOHN R. HALL
GREGORY H. WOLF IRWIN LERNER DAVID A. JONES, JR.
Organization and Compensation Medical Affairs Committee Nominating Committee
Committee K. FRANK AUSTEN, M.D., Chairman JOHN R. HALL, Chairman
K. FRANK AUSTEN, M.D., Chairman DAVID A. JONES, JR. K. FRANK AUSTEN, M.D.
MICHAEL E. GELLERT IRWIN LERNER DAVID A. JONES, JR.
IRWIN LERNER W. ANN REYNOLDS, PH.D.
W. ANN REYNOLDS, PH.D.
<CAPTION>
CORPORATE OFFICERS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GREGORY H. WOLF
President and Chief Executive
Officer
VICTOR M. AGRUSO DAVID R. ASTAR GEORGE G. BAUERNFEIND
Vice President - Organization Vice President - Customer Service Vice President - Tax
Development and Corporate
Relations
DOUGLAS R. CARLISLE JAMES W. DOUCETTE KENNETH J. FASOLA
Vice President - Health System Vice President - Investment Vice President - Sales and Marketing
Management (Central) Management and Treasurer
ARTHUR P. HIPWELL MITZI R. KROCKOVER, M.D. JOAN O. LENAHAN
Senior Vice President and General Vice President - Women's Health Corporate Secretary
Counsel
THOMAS J. LISTON HEIDI S. MARGULIS MICHAEL B. MCCALLISTER
Vice President - Corporate Vice President - Government Affairs Senior Vice President - Health
Development System Management
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CORPORATE OFFICERS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHERI E. MITCHELL JAMES E. MURRAY WALTER E. NEELY
Vice President - Accreditation and Vice President and Chief Financial Vice President and Associate
Compliance Officer General Counsel
DAVID R. NELSON THOMAS J. NOLAND, JR. BRUCE D. PERKINS
Vice President and Chief Actuary Vice President - Corporate Senior Vice President - National
Communications Contracting
JERRY D. REEVES, M.D. GREGORY K. ROTHERHAM KIRK E. ROTHROCK
Senior Vice President and Chief Vice President and General Vice President - Specialty Products
Medical Officer Manager - Medstep and Businesses
R. EUGENE SHIELDS GEORGE W. VIETH, JR. DAVID W. WILLE
President - Humana Military Vice President - Strategy and Vice President - Actuarial Services
Healthcare Services Systems Development
TOD J. ZACHARIAS
Vice President - Product
Development
</TABLE>
<PAGE>
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
TRANSFER AGENT CORPORATE HEADQUARTERS
Bank of Louisville Humana Inc.
Security Transfer Department The Humana Building
Post Office Box 1497 500 West Main Street
Louisville, Kentucky 40201 Louisville, Kentucky 40202
(800) 925-0810 (502) 580-1000
(800) 486-2620
FORM 10-K ANNUAL MEETING
Copies of the Company's Form 10-K The Company's Annual Meeting of
filed with the Securities and Exchange Stockholders will be held on
Commission may be obtained, without Thursday, May 14, 1998, at 10:00
charge, by writing: a.m. in the Auditorium on the
25th floor of the Humana
Investor Relations Building.
Humana Inc.
Post Office Box 1438
Louisville, Kentucky 40201-1438
Copies of the Company's Form 10-K and
other Company information can also be
obtained through the Internet at the
following address:
http://www.humana.com
STOCK LISTING
The Company's common stock trades on
the New York Stock Exchange under the
symbol HUM. The following table shows
the range of high and low closing sales
prices as reported on the New York Stock
Exchange Composite Tape.
<TABLE>
<CAPTION>
1997 HIGH LOW
- ---------------------------------------
<S> <C> <C>
First Quarter 23 17-3/4
Second Quarter 24-1/4 20-1/8
Third Quarter 24-15/16 22-13/16
Fourth Quarter 24-5/8 18-7/8
1996 HIGH LOW
- ---------------------------------------
First Quarter 28-3/4 24
Second Quarter 26-1/2 17-5/8
Third Quarter 21-1/4 15-5/8
Fourth Quarter 21-1/4 17-3/4
</TABLE>
<PAGE>
EXHIBIT 21
HUMANA INC.
SUBSIDIARY LIST
ALABAMA
- -------
1. Humana Health Plan of Alabama, Inc.
2. QuestCare, Inc.
CALIFORNIA
- ----------
1. Centerstone Insurance and Financial Services (Marketpoint is a Division of
CFS)
a. West Coast Multiple Servs, Inc.
DELAWARE
- --------
1. EMPHESYS Financial Group, Inc.
2. Health Value Management, Inc.
3. Humana Compensation Management Source, Inc.
4. Humana HealthChicago, Inc.
5. Humana Inc.- Doing Business As:
a. H.A.C. Inc.
6. Humana Military Healthcare Services, Inc.
7. Humrealty, Inc.
8. Medstep, Inc.
9. Physician Corporation of America
FLORIDA
- -------
1. Delray Beach Health Management Associates, Inc. - Doing Business As:
a. Humana Health Care Plans-Delray
2. Family Health Plan Administrators, Inc.
3. Health Inclusive Plan of Florida, Inc. - Doing Business As:
a. Humana Health Care Plans-Century Village Palm Beach
4. Humana Health Care Plans - Davie, Inc. f/k/a Coastal Physician Group of
South Davie, Inc.
5. Humana Health Care Plans - Palm Springs, Inc. f/k/a Coastal Managed Care of
Lake Worth, Inc.
6. Humana Health Care Plans - Rolling Hills, Inc. f/k/a Coastal Physician
Group of North Davie, Inc.
7. Humana Health Care Plans - South Pembroke Pines, Inc. f/k/a Coastal
Physician Group of Pembroke Pines, Inc.
8. Humana Health Care Plans - West Palm Beach, Inc. f/k/a Coastal Managed Care
of West Palm Beach, Inc.
9. Humana Internal Medicine Associates, Inc. f/k/a Coastal Internal Medicine
Associates of Dade, Inc. - Doing Business As:
a. Humana Health Care Plans-Hialeah f/k/a Coastal Internal Medicine
Associates of Hialeah
b. Humana Health Care Plans-South Miami f/k/a Coastal Internal
Medicine Associates of Larkin
c. Humana Health Care Plans-Miami f/k/a Coastal Internal Medicine
Associates of Miami
d. Humana Health Care Plans-Miami Beach f/k/a Coastal Internal
Medicine Associates of Miami Beach
e. Humana Health Care Plans-Royal Oaks f/k/a Coastal Internal
Medicine Associates of Miami Lakes
f. Humana Health Care Plans-Miami Springs f/k/a Coastal Internal
Medicine Associates of Miami Springs
g. Humana Health Care Plans-Midway f/k/a Coastal Internal Medicine
Associates of Midway
h. Humana Health Care Plans-Boca Raton
i. Humana Health Care Plans-Century Plaza
j. Humana Health Care Plans-Coconut Creek
k. Humana Health Care Plans-Coral Springs
l. Humana Health Care Plans-Delray Harbor
m. Humana Health Care Plans-Hillsboro
n. Humana Health Care Plans-Lantana
(FL Continued on next page)
<PAGE>
FLORIDA (Cont.)
- ---------------
o. Humana Health Care Plans-Lauderdale
p. Humana Health Care Plans-Lauderdale Lakes
q. Humana Health Care Plans-North Broward
r. Humana Health Care Plans-North Federal
s. Humana Health Care Plans-Palm Beach Gardens
t. Humana Health Care Plans-Pompano Beach
u. Humana Health Care Plans-Riverland
v. Humana Health Care Plans-Tamarac
w. Humana Health Care Plans-West Boca
10. Humana Internal Medicine Associates of the Palm Beaches, Inc. f/k/a Coastal
Internal Medicine Associates of the Palm Beaches, Inc.
Doing Business As:
a. Humana Health Care Plans-Lake Worth f/k/a Coastal Internal
Medicine Associates of JFK Circle
b. Humana Health Care Plans-Flagler f/k/a Coastal Internal Medicine
Associates of North Dixie Highway
c. Humana Health Care Plans-Riverbridge f/k/a Coastal Internal
Medicine Associates at Riverbridge
d. Humana Health Care Plans-Palm Beach f/k/a Coastal Internal
Medicine Associates of South Dixie Highway
e. Humana Health Care Plans-Boynton Beach
11. Humana Health Insurance Company of Florida, Inc.
12. Humana Medical Plan, Inc. - Doing Business As:
a. Atlantic Family Practice
b. Coastal Pediatric-Ormond
c. Community Medical Associates
d. Daytona Gastroenterology
e. Deland Family Health Care
f. Flagler Family Practice
g. Florida Dermatology Center
h. Internal Medicine of Daytona
i. Ormond Primary Care
j. Personal Care Physicians of Apopka
k. Personal Care Physicians of Casselberry
l. Personal Care Physicians of Orlando
m. Personal Care Physicians of Lake Mary
n. Sugar Mill Medical Associates
o. Suncoast Medical Associates
p. Urological Associates-Ormond Beach
q. Orange Park Family Health Care
r. St. Augustine Family Health Center
s. Urological Associates-Daytona
13. Humana Workers' Compensation Services, Inc. (FQ)
14. Lakeside Medical Center Management, Inc. - Doing Business As:
a. University Medical Center
15. PCA Family Health Plan, Inc.
16. PCA Health Plans of Florida, Inc.
17. PCA Life Insurance Company
18. PCA Options, Inc.
19. PCA Property & Casualty Insurance Co.
GEORGIA
- -------
1. Humana Employers Health Plan of Georgia, Inc. f/k/a Emphesys Healthcare of
Georgia, Inc.
2. Humana Health Plan of Georgia, Inc.
ILLINOIS
- --------
1. Health Direct, Inc. - Doing Business As:
a. Behavioral Health Direct (IL)
2. Humana Health Direct Insurance, Inc.
3. Humana HealthChicago Insurance Company - Doing Business As:
a. Goldcare 65
4. The Dental Concern, Ltd.- Doing Business As:
a. TDC (MO)
<PAGE>
KENTUCKY
- --------
1. ChoiceCare Medical Group, Inc.
2. HMPK, INC.
3. HPLAN, INC.
4. Humana Broadway Corp.
5. Humana Health Plan, Inc.- Doing Business As:
a. Bluegrass Family Practice (KY)
b. Central Kentucky Family Practice (KY)
c. Franklin Medical Center (KY)
d. Humana MedFirst (KY)
e. Humana Health Care Plans of Indiana (IN)
f. Madison Family and Industrial Medicine (KY)
g. Humana Health Care Plans- Broadway Center (KY)
h. Humana Health Care Plans-Floyd Health Care (IN)
I. Humana Health Care Plans-Greentree Center (IN)
j. Humana Health Care Plans- Jeffersontown Center (KY)
k. Humana Health Care Plans- Middletown Center (KY)
l. Humana Health Care Plans- Newburg Center (KY)
m. Humana Health Care Plans- Preston Center (KY)
n. Humana Health Care Plans- Somerset (KY)
o. Humana Health Care Plans- Southwest Center (KY)
6. Humco, Inc. (shell corporation-keep active until 12/31/99 per Escrow Agmt.)
7. The Dental Concern, Inc. (f/k/a Randmark, Inc.)
8. The Dental Concern Insurance Company
LOUISIANA
- ---------
1. Humana Health Plan of Louisiana, Inc.
2. Humana Workers' Compensation Services of Louisiana, Inc.
MISSOURI
- --------
1. Humana Kansas City, Inc.- Doing Business As:
a. Humana Prime Health Plan
2. Humana Insurance Company- Doing Business As:
a. Dental Care Affiliates (GA)
b. Managed Prescription Services (CA)
c. Managed Prescription Services (MO)
d. Managed Prescription Services, Inc. (NJ)
3. Humana/Med-Pay, Inc.
NEVADA
- ------
1. Humana Health Insurance of Nevada, Inc.
OHIO
- ----
1. ChoiceCare Corporation
2. ChoiceCare Health Plans, Inc.
3. Humana Health Plan of Ohio, Inc.
OKLAHOMA
- --------
1. Commonwealth Management, Inc.
PUERTO RICO
- -----------
1. PCA Health Plans of Puerto Rico, Inc.
2. PCA Insurance Group of Puerto Rico, Inc.
TEXAS
- -----
1. Humana HMO Texas, Inc.
2. Humana Health Plan of Texas, Inc. - Doing Business As:
a. Humana Health Plan of San Antonio
b. Humana Regional Service Center
c. Leon Valley Health Center
(TX Continued on next page)
<PAGE>
TEXAS (Continued)
- -----------------
d. Lincoln Heights Medical Center
e. MedCentre Plaza Health Center
f. Perrin Oaks Health Center
g. Val Verde Health Center
h. West Lakes Health Center
i. Wurzbach Family Medical Center
3. PCA Health Plans of Texas, Inc.
4. PCA Life Insurance Company of Texas, Inc.
5. PCA Provider Organization, Inc.
UTAH
- ----
1. Humana Health Plan of Utah, Inc.
VERMONT
- -------
1. Managed Care Indemnity, Inc. - Doing Business As:
a. Witherspoon Parking Garage (KY)
VIRGINIA
- --------
1. Humana Group Health Plan, Inc.(Note: Assets sold to Kaiser Permanente
1/31/97)
WASHINGTON
- ----------
1. Humana Health Plan of Washington, Inc.
WISCONSIN
- ---------
1. CareNetwork, Inc. - Doing Business As:
a. CARENETWORK
2. EMPHESYS Wisconsin Insurance Company
3. Employers Health Insurance Company
4. Humana Wisconsin Health Organization Insurance Corporation - Doing Business
As:
a. WHOIC
b. WHO
5. Independent Care, Inc.
6. Network EPO, Inc.
7. Wisconsin Employers Group, Inc.
FOREIGN
- -------
BERMUDA
- -------
1. Hallmark RE Ltd.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Humana Inc. on Form S-8 (Registration No. 2-39061, No. 2-79239, No. 2-96154, No.
33-33072, No. 33-49305, No. 33-52593, No. 33-54455, No. 33-04435) of our report
dated February 10, 1998, on our audits of the consolidated financial statements
of Humana Inc. as of December 31, 1997 and 1996 and for each of the three years
in the period ended December 31, 1997, which report is incorporated by reference
in this Annual Report on Form 10-K. We further consent to the incorporation by
reference of our report on our audits of the financial statement schedules of
Humana Inc. as of December 31, 1997 and 1996 and for each of the three years in
the period ended December 31, 1997, which report is included in this Annual
Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Louisville, Kentucky
February 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Humana
Inc.'s form 10-K for the twelve months ended December 31, 1997, and is qualified
in its entirety by reference to such financial statement.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 627
<SECURITIES> 1,507
<RECEIVABLES> 399
<ALLOWANCES> 48
<INVENTORY> 5
<CURRENT-ASSETS> 2,750
<PP&E> 728
<DEPRECIATION> 308
<TOTAL-ASSETS> 5,418
<CURRENT-LIABILITIES> 2,263
<BONDS> 889
0
0
<COMMON> 27
<OTHER-SE> 1,474
<TOTAL-LIABILITY-AND-EQUITY> 5,418
<SALES> 7,880
<TOTAL-REVENUES> 8,036
<CGS> 6,522
<TOTAL-COSTS> 7,746
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 270
<INCOME-TAX> 97
<INCOME-CONTINUING> 173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.05
</TABLE>
