UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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)
Delaware 61-0647538
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 West Main Street
Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
(502) 580-1000
(Registrants' telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Outstanding at
Class of Common Stock April 30, 1999
$.16 2/3 par value 167,569,138 shares
1 of 24
Humana Inc.
March 31, 1999
Form 10-Q
Page of
Form 10-Q
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for
the quarters ended March 31, 1999 and 1998 3
Condensed Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the
quarters ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Part II: Other Information
Items 1 to 6 22-24
Exhibits:
Exhibit 10 - Employment Agreement - Kenneth J. Fasola
Exhibit 12 - Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
2
Humana Inc.
Condensed Consolidated Statements of Operations
For the quarters ended March 31, 1999 and 1998
Unaudited
(Dollars in millions, except per share results)
<TABLE>
1999 1998
Revenues:
<S> <C> <C>
Premiums $ 2,428 $ 2,352
Interest and other income 49 50
Total revenues 2,477 2,402
Operating expenses:
Medical 2,136 1,955
Selling, general and administrative 325 324
Depreciation and amortization 31 32
Total operating expenses 2,492 2,311
(Loss) income from operations (15) 91
Interest expense 10 12
(Loss) income before income taxes (25) 79
(Benefit) provision for income taxes (9) 29
Net (loss) income $ (16) $ 50
(Loss) earnings per common share $ (.10) $ .30
(Loss) earnings per common share
- assuming dilution $ (.10) $ .30
See accompanying notes.
3
Humana Inc.
Condensed Consolidated Balance Sheets
Unaudited
(Dollars in millions, except per share amounts)
March 31, December 31,
1999 1998
Assets
Current assets:
Cash and cash equivalents $ 636 $ 913
Marketable securities 1,555 1,594
Premiums receivable, less allowance for
doubtful accounts $59 - March 31, 1999 and
$62 - December 31, 1998 278 276
Other 338 336
Total current assets 2,807 3,119
Long-term marketable securities 337 305
Property and equipment, net 430 433
Cost in excess of net assets acquired 1,180 1,188
Other 436 451
Total assets $ 5,190 $ 5,496
Liabilities and Stockholders' Equity
Current liabilities:
Medical and other expenses payable $ 1,513 $ 1,470
Trade accounts payable and accrued expenses 433 395
Book overdraft 197 234
Unearned premium revenues 66 294
Short-term debt 200 250
Total current liabilities 2,409 2,643
Long-term medical and other expenses payable 413 438
Long-term debt 579 573
Professional liability and other obligations 121 154
Total liabilities 3,522 3,808
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; issues and outstanding
167,578,638 shares - March 31, 1999 and
167,515,362 shares - December 31, 1998 28 28
Other 1,640 1,660
Total stockholders' equity 1,668 1,688
Total liabilities and stockholders' equity $ 5,190 $ 5,496
See accompanying notes.
4
Humana Inc.
Condensed Consolidated Statements of Cash Flows
For the quarters ended March 31, 1999 and 1998
Unaudited
(Dollars in millions)
1999 1998
Net cash flows from operating activities $ (192) $ (310)
Cash flows from investing activities:
Purchases of marketable securities (167) (198)
Maturities and sales of marketable securities 169 271
Purchases of property and equipment (30) (21)
Dispositions of property and equipment 25
Other (2) 2
Net cash (used in) provided by investing activities (5) 54
Cash flows from financing activities:
Repayment of line of credit (93) (300)
Net commercial paper borrowings 49 258
Change in book overdraft (37) 52
Other 1 23
Net cash (used in) provided by financing activities (80) 33
Decrease in cash and cash equivalents (277) (223)
Cash and cash equivalents at beginning of period 913 779
Cash and cash equivalents at end of period $ 636 $ 556
Interest payments $ 10 $ 11
Income tax refunds, net $ 39
</TABLE>
See accompanying notes.
5
Humana Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(A) Basis of Presentation
The accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all of the disclosures normally required by generally accepted accounting
principles or those normally made in an annual report on Form 10-K.
Accordingly, for further information, the reader of this Form 10-Q may wish
to refer to the Form 10-K of Humana Inc. (the "Company") for the year ended
December 31, 1998.
The preparation of the Company's condensed consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect (a) the reported
amounts of assets and liabilities, (b) disclosure of contingent assets and
liabilities at the date of the financial statements and (c) reported amounts
of revenues and expenditures during the reporting period. Actual results
could differ from those estimates.
The financial information has been prepared in accordance with the Company's
customary accounting practices and has not been audited. In the opinion of
management, the information presented reflects all adjustments necessary for
a fair statement of interim results. All such adjustments are of a normal
and recurring nature.
(B) Additional Medical Claims Expense and Tangible Asset Gain
The Company recorded $90 million ($57 million after tax, or $.34 per share)
in additional medical claims expense during the first quarter of 1999.
Included in this expense were approximately $50 million related to a
provision for probable future losses (premium deficiencies), $35 million to
strengthen medical claims payable and $5 million for a payment to Columbia/HCA
Healthcare Corporation ("Columbia/HCA") to resolve certain contractual issues.
The premium deficiency was the result of management's regular assessment of
the profitability of its contracts for providing health care services to its
members. Contributing to the premium deficiency was the impact from a
March 31, 1999, Columbia/HCA contract for hospital services in certain Florida
markets, as well as increasing medical costs in markets where the Company had
been sharing medical cost risk with providers. The $35 million medical
claims payable strengthening resulted from higher than expected medical cost
trends in the Company's preferred provider organization ("PPO") products and
Medicare business identified by the Company's analysis of February and
March, 1999, claims payments, concluded in April 1999. Partially offsetting
these additional medical costs was a $5 million ($3 million after tax, or
$.02 per share) favorable claim liability development in the Company's
run-off workers' compensation business. Also during the first quarter of
1999, the Company recorded a $12 million ($8 million after tax, or $.04 per
share) gain on the sale of a tangible asset which has been included in
interest and other income in the accompanying condensed consolidated
statements of operations.
6
Humana Inc.
Notes to Condensed Consolidated Financial Statements, continued
Unaudited
(C) Contingencies
The Company's Medicare HMO contracts with the federal government are renewed
for a one-year term each December 31 unless terminated 90 days prior thereto.
Legislative proposals are being considered which may revise the Medicare
program's current support of the use of managed health care for Medicare
beneficiaries and future reimbursement rates thereunder. 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's Medicaid contracts are generally annual contracts with various
states except for the two-year contract with the Commonwealth of Puerto Rico.
The Company previously announced its intention to close this market when the
contract expired on April 30, 1999, because it did not expect to be able to
renew the contract under favorable terms. The Company is currently in
discussion with the Puerto Rico Health Insurance Administration regarding
maintaining its presence in Puerto Rico at premium rates which would allow a
reasonable margin. Although an agreement has not been reached, the Company
is continuing to provide services for its Puerto Rico members under the
existing agreement. Additionally, the Company's TRICARE contract is a
one-year contract renewable annually for up to two additional years. The
loss of these contracts (other than the contract in Puerto Rico) 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. In
addition, the Company continually contracts and seeks to renew contracts
with providers at rates designed to ensure adequate profitability. To the
extent the Company is unable to obtain such rates, its financial position,
results of operations and cash flows could be adversely impacted.
The Company reached an agreement in principle with the United States Justice
Department and the Department of Health and Human Services on a settlement
relating to Medicare premium overpayments. The settlement, totaling $15
million, arises out of the erroneous designation of certain Medicare
enrollees as eligible for Medicaid, resulting in higher payments to the
Company by the federal government related in large part to the years 1991
and 1992. The Company had established adequate liabilities for the
resolution of this issue and, therefore, the settlement did not have a
material impact on the Company's financial position or its results of
operations.
During the ordinary course of business, the Company is subject to pending
and threatened legal actions and audits by the agencies that regulate the
Company. 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.
7
Humana Inc.
Notes to Condensed Consolidated Financial Statements, continued
Unaudited
(D) Earnings Per Common Share
Detail supporting the computation of earnings or loss per common share
follows:
<TABLE>
Dollars in millions, except per share results
Net (Loss) Per Share
<S> <C> <C> <C>
Quarter Ended March 31, 1999 Income Shares Results
Loss per common share $ (16) 167,559,428 $ (.10)
Effect of dilutive stock options -
Loss per common share - assuming dilution $ (16) 167,559,428 $ (.10)
Quarter Ended March 31, 1998
Earnings per common share $ 50 164,857,526 $ .30
Effect of dilutive stock options 2,331,930
Earnings per common share -
assuming dilution $ 50 167,189,456 $ .30
</TABLE>
For the quarter ended March 31, 1999, all outstanding options to purchase
shares of 10,473,660 were excluded from the computation given the Company's
net loss for the quarter. Options to purchase 2,015,160 shares for the
quarter ended March 31, 1998 were excluded 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.
(E) Comprehensive Income or Loss
Comprehensive loss totaled $22 million for the quarter ended March 31, 1999
and was comprised of net loss of $16 million and net unrealized investment
losses of $6 million. Comprehensive income totaled $51 million for the
quarter ended March 31, 1998 and was comprised of net income of $50 million
and net unrealized investment gains of $1 million.
(F) Long-Term Debt
The Company maintains a revolving credit agreement ("Credit Agreement")
which provides liquidity under a line of credit of up to $1.5 billion. The
Company also maintains a commercial paper program and issues debt securities
thereunder. Commercial paper borrowings outstanding at March 31, 1999, were
$779 million and are backed by the Credit Agreement. The Credit Agreement
contains usual and customary covenants including, but not limited to,
financial tests for interest coverage and leverage ratios. As of
March 31, 1999, the Company was in compliance with these covenants. The
average interest rate on commercial paper borrowings was 5.5 percent for the
quarter ended March 31, 1999.
8
Humana Inc.
Notes to Condensed Consolidated Financial Statements, continued
Unaudited
The Company intends to pay an additional $200 million of its outstanding debt
with proceeds from operating subsidiary dividends expected to be received
during 1999. Borrowings under the commercial paper program, except the
planned 1999 payments, have been classified as long-term debt based on
management's ability and intent to refinance borrowings on a long-term basis.
(G) Segment Information
The segment results for the quarters ended March 31, 1999 and 1998 are as
follows:
<TABLE>
<S> <C> <C>
Dollars in millions 1999 1998
Premium revenues:
Commercial $ 1,351 $ 1,290
Public sector 877 877
TRICARE 200 185
Total for reportable segments 2,428 2,352
Non-allocated revenues - interest and other income 49 50
Total consolidated revenues $ 2,477 $ 2,402
Underwriting margin:
Commercial $ 180 $ 235
Public sector 72 125
TRICARE 40 37
Total for reportable segments 292 397
Other, non-allocated revenues and expenses:
Interest and other income 49 50
Selling, general and administrative (325) (324)
Depreciation and amortization (31) (32)
Interest expense (10) (12)
Total consolidated (loss) income before income taxes $ (25) $ 79
</TABLE>
Commercial and Public Sector underwriting margin include $49 million and
$41 million of additional medical claims expense recorded during the quarter
ended March 31, 1999, respectively.
9
Humana Inc.
Notes to Condensed Consolidated Financial Statements, continued
Unaudited
(H) Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). In general,
SFAS 133 requires that all derivatives be recognized as either assets or
liabilities in the balance sheet at their fair value, and sets forth the
manner in which gains or losses thereon are to be recorded. The treatment
of such gains or losses is dependent upon the type of exposure, if any, for
which the derivative is designated as a hedge. This statement is effective
for periods beginning after June 15, 1999. Management of the Company
anticipates that, due to its limited use of derivative instruments, the
adoption of SFAS 133 will not have a significant effect on the Company's
results of operations or its financial position.
(I) Reclassifications
Certain reclassifications have been made to the prior year's condensed
consolidated financial statements to conform with the current year
presentation.
10
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion and analysis contains both historical and forward-looking
information. The forward-looking statements may be significantly impacted by
risks and uncertainties, and are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. There can be no
assurance that anticipated future results will be achieved because actual
results may differ materially from those projected in the forward-looking
statements. Readers are cautioned that a number of factors, which are
described herein and in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, 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, changes in the Medicare
reimbursement system, medical and pharmacy cost trends, the ability of health
care providers (including physician practice management companies) to comply
with current contract terms, renewal of the Company's Medicare contracts with
the federal government, renewal of the Company's contract with the federal
government to administer the TRICARE program and renewal of the Company's
Medicaid contracts with various state governments. Such factors also
include 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 and yield changes,
retrospective premium adjustments relating to federal government contracts,
changes in commercial and Medicare HMO membership, operating subsidiary
capital requirements, the effect of provider contract rate negotiations,
compliance with debt covenants, 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 is a health services company that facilitates the delivery of
health care services through networks of providers to its approximately 6.1
million medical members. The Company's products are marketed primarily
through health maintenance organizations ("HMOs") and preferred provider
organizations ("PPOs") that encourage or require the use of contracted
providers. HMOs and PPOs control health care costs by various means,
including pre-admission approval for hospital inpatient services,
pre-authorization of outpatient surgical procedures, and risk-sharing
arrangements with providers. These providers may share medical cost risk or
have other incentives to deliver quality medical services in a cost-effective
manner. The Company also offers various specialty products to employers,
including dental, group life and workers' compensation, and administrative
services ("ASO") to those 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 21 percent of its membership in
the state of Florida.
The Company markets and distributes its products to three distinct customer
groups and, therefore, reports operations in three business segments.
Results of each segment are measured based on premium revenues and
underwriting margin (premium revenues less medical expenses). The
11
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Company does not allocate assets or administrative costs to the segments and,
therefore, does not measure results based on segment assets or pretax profits.
Members from all three segments generally utilize the same medical provider
networks, enabling the Company to obtain more favorable contract terms with
providers. As a result, the profitability of each segment is somewhat
interdependent. In the Commercial segment, the Company markets and
distributes its fully-insured HMO, PPO, and specialty and its ASO products
to large group employers (over 100 employees) and small group employers.
Premium revenue pricing to large group employers has historically been
more competitive than that to small group employers, resulting in less
favorable underwriting margins for large groups. In the Public Sector
segment, the Company markets and distributes its Medicare and Medicaid
products to individuals eligible for these government-sponsored programs.
The Medicare HMO product provides health care services that include all
Medicare benefits and, in certain circumstances, additional services. The
Company's third segment is TRICARE. In this segment, the Company facilitates
health care services for the dependents of active military personnel and
retired military personnel and their dependents located in the Southeastern
United States. The Company is in the third year of its contract with the
United States Department of Defense, which is renewable annually for up to
two additional years. As encouraged by government regulation, TRICARE is
managed by a separate management team and is more autonomous than the
Company's Commercial and Public Sector segments, which generally share sales,
marketing, customer service, medical management and claims processing
functions of the Company.
Additional Medical Claims Expense and Tangible Asset Gain
The Company recorded $90 million ($57 million after tax, or $.34 per share)
in additional medical claims expense during the first quarter of 1999.
Included in this expense were approximately $50 million related to a
provision for probable future losses (premium deficiencies), $35 million to
strengthen medical claims payable and $5 million for a payment to
Columbia/HCA to resolve certain contractual issues. The premium deficiency
was the result of management's regular assessment of the profitability of its
contracts for providing health care services to its members. Contributing to
the premium deficiency was the impact from a March 31, 1999, Columbia/HCA
contract for hospital services in certain Florida markets, as well as
increasing medical costs in markets where the Company had been sharing
medical cost risk with providers. The $35 million medical claims payable
strengthening resulted from higher than expected medical cost trends in the
Company's PPO products and Medicare business identified by the Company's
analysis of February and March, 1999, claims payments, concluded in April 1999.
Partially offsetting these additional medical costs was a $5 million
($3 million after tax, or $.02 per share) favorable claim liability
development in the Company's run-off workers' compensation business. Also
during the first quarter of 1999, the Company recorded a $12 million
($8 million after tax, or $.04 per share) gain on the sale of a tangible
asset which has been included in interest and other income in the
accompanying condensed consolidated statements of operations.
12
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Comparison of Results of Operations
In order to enhance comparability, and to present an estimated baseline
against which historical and prospective periods should be measured, the
following discussion comparing results for the quarters ended March 31, 1999,
and March 31, 1998, excludes the impact of the $90 million additional medical
claims expense and a tangible asset gain discussed previously, but includes
the beneficial effect of the premium deficiency included therein and the
$5 million run-off workers' compensation reserve adjustment. The beneficial
effect from the premium deficiency for the quarter ended March 31, 1999, was
approximately $6 million ($4 million after tax, or $.02 per share).
Income before income taxes totaled $53 million for the quarter ended
March 31, 1999 (the "1999 quarter"), compared to $79 million for the quarter
ended March 31, 1998 (the "1998 quarter"). Net income was $33 million or
$.20 per share in the 1999 quarter, compared to $50 million or $.30 per share
in the 1998 quarter. The decrease in earnings was primarily the result of
medical cost increases exceeding the related premium increases for the
Company's commercial and Medicare lines of business and lower realized
investment gains and other income. Partially offsetting these items was
lower administrative cost spending.
The Company's premium revenues grew $76 million or 3 percent from the 1998
quarter. Combined commercial and Medicare premium yield resulted in a 4
percent increase which was partially offset by a decline in membership in
both lines of business. Commercial premium yields increased 6.3 percent
while Medicare HMO premium yields increased 2.1 percent. The Company's
fully-insured commercial membership declined 89,800 members during the 1999
quarter, reflecting the effects of the Company's premium pricing discipline
intended to maintain profitability. Medicare HMO membership declined 21,300
during the 1999 quarter, the result of closing the Treasure Coast and
Sarasota, Florida, markets. For the remainder of 1999, commercial membership
is expected to increase 3 percent to 5 percent, while Medicare membership is
expected to be flat to slightly down. Medicaid membership was about flat with
year-end. The Company is currently in discussions with the Puerto Rico
Health Insurance Administration regarding maintaining its presence in
Puerto Rico at premium rates which would allow a reasonable margin. Although
a new contract has not been renegotiated, the Company has agreed to continue
to provide services to its members under the existing agreement.
The Company's medical expense ratio for the 1999 quarter was 84.3 percent,
increasing from 83.1 percent from the same period in 1998. The higher
medical expense ratio was the result of medical cost trends exceeding
premium yield increases in the Company's commercial and Medicare lines of
business. Commercial cost trends of 8.3 percent primarily result from higher
hospital outpatient and pharmacy costs which have increased 11 percent and
21 percent, respectively. Increased inpatient hospital cost per day and
increased pharmacy costs have caused a 3.1 percent increase in Medicare
medical costs. Also contributing to the medical expense ratio increase was
the inability of certain capitated risk-sharing providers to manage medical
costs within their contractual obligations.
13
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
As a result, the higher actual claim costs incurred by these risk-sharing
providers has been recognized as expense by the Company rather than the
capitated contract amount. There can be no assurance that the medical cost
trends will not continue to increase.
Partially offsetting the increasing medical cost trends is a favorable claim
liability development in the Company's run-off workers' compensation business
acquired in connection with its acquisition of Physician Corporation of
America ("PCA") in 1997. After evaluating the workers' compensation claim
liabilities against claim payments and file closings, the Company reduced
these liabilities by $5 million ($3 million after tax, or $.02 per share)
during the quarter.
As more fully described previously, the medical expense ratio discussion
excludes the impact of the additional $90 million medical claims expense.
Including this item increases the 1999 quarter medical expense ratio from
84.3 percent to 88.0 percent.
During the 1999 quarter, the Company's administrative cost ratio improved to
14.7 percent from 15.2 percent in the 1998 quarter. This year-over-year
improvement in the administrative cost ratio reflects efforts to streamline
the organization, as well as synergy savings from the acquisition of PCA and
ChoiceCare Corporation in 1997.
Interest income totaled $34 million and $41 million for the 1999 and 1998
quarters, respectively. The decrease is primarily attributable to realized
investment gains included in the 1998 quarter. The tax equivalent yield on
invested assets approximated 6.7 percent and 8.5 percent for the 1999 and
1998 quarters, respectively.
Business Segment Information
Commercial premium revenues increased 4.7 percent for the 1999 quarter as a
result of premium yield increases of 6.3 percent partially offset by a 89,800
decline in fully-insured membership. The membership decline was the result
of the Company's commitment to price its commercial products commensurate
with the underlying risk. The Commercial segment medical expense ratio for
the 1999 quarter was 83.0 percent, increasing from 81.8 percent in the 1998
quarter. The medical expense ratio increase was the result of premium yield
increases being insufficient to offset medical cost trend increases.
Increased medical costs were noted in hospital outpatient and pharmacy costs.
As more fully discussed previously, the medical expense ratio discussion
excludes a portion of the $90 million additional medical claims expense.
Including $49 million of the additional medical expense related to the
Commercial segment results in a medical expense ratio of 86.7 percent for the
1999 quarter.
Public Sector premium revenues for the 1999 quarter were generally flat with
the 1998 quarter. A 2.1 percent Medicare HMO premium yield increase was
offset by a decline in membership. The premium yield increase was slightly
higher than the 2 percent statutory increase as a result of the
14
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
changing geographic mix of membership toward higher reimbursement areas.
This change was due in large part to closing the Treasure Coast and Sarasota,
Florida, markets. Medicare HMO membership declined 21,300 during the quarter
primarily from closing these under-performing markets in Florida. The Public
Sector medical expense ratio for the 1999 quarter was 87.1 percent,
increasing from 85.7 percent for the 1998 quarter. The medical expense ratio
increase was primarily the result of Medicare HMO premium yield increases
being insufficient to offset medical cost trend increases. Increased medical
costs were noted in inpatient hospital rates and pharmacy costs. As more
fully discussed previously, the medical expense ratio discussion excludes a
portion of the $90 million additional medical claims expense. Including $41
million of the additional medical expense related to the Public Sector
segment results in a medical expense ratio of 91.8 percent for the 1999
quarter.
TRICARE premiums increased 8.1 percent for the 1999 quarter on stable
membership due to contract modifications. TRICARE's medical expense ratio
did not change significantly from the 1998 quarter.
Liquidity
During the 1999 quarter, $192 million was used in the Company's operating
activities, compared to $310 million being used in operations in the 1998
quarter. This net cash used in operations during the 1999 and 1998 quarters
can be attributed to the following:
<TABLE>
1999 1998
<S> <C> <C>
Cash used in operating activities $ (192) $ (310)
Timing of Medicare premium receipts 234 235
Workers' compensation claim payments 28 30
Paydown of medical claim backlogs
related to acquired companies 50
Severance payments related to acquired companies 25
Pro forma operating cash flows $ 70 $ 30
</TABLE>
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' abilities to obtain regulatory
approval to pay dividends.
The National Association of Insurance Commissioners has recommended that
states adopt a risk-based capital ("RBC") formula for companies established
as HMO entities. The RBC provisions may require new minimum capital and
surplus levels for some of the Company's HMO subsidiaries. The Company does
not expect that the RBC provisions will have a material impact on its
financial position, results of operations or cash flows.
15
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
The Company maintains a revolving credit agreement ("Credit Agreement") which
provides liquidity under a line of credit of up to $1.5 billion. The Company
also maintains a commercial paper program and issues debt securities
thereunder. Commercial paper borrowings outstanding at March 31, 1999, were
$779 million and are backed by the Credit Agreement. The Credit Agreement
contains usual and customary covenants including, but not limited to,
financial tests for interest coverage and leverage ratios. As of
March 31, 1999, the Company was in compliance with these covenants.
The average interest rate on commercial paper borrowings was 5.5 percent for
the quarter ended March 31, 1999.
The Company intends to pay an additional $200 million of its outstanding debt
with the proceeds from operating subsidiary dividends expected to be received
during 1999. Borrowings under the commercial paper program, except the
planned 1999 payments, 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 fund capital requirements.
Capital Resources
The Company's ongoing capital expenditures relate primarily to administrative
facilities and related information systems necessary for activities such as
claims processing, billing and collections, medical utilization review and
customer service. Planned capital spending in 1999 will approximate $80 to
$90 million for the expansion and improvement of these items.
The Company's Y2K Readiness Disclosure Statement
The Company operates one of the largest managed care data centers in the
nation. The primary computing facility is located in Louisville, Kentucky.
The Company's application systems are largely developed and maintained
in-house by a staff of 400 application programmers who are versed in the use
of state-of-the-art technology. All application systems are fully integrated
and automatically pass data through various system processes. The
information systems support marketing, sales, underwriting, contract
administration, billing, financial, and other administrative functions as
well as customer service, authorization and referral management, concurrent
review, physician capitation and claims administration, provider management,
quality management and utilization review.
The Year 2000 issue is the result of two potential malfunctions that may have
an impact on the Company's systems and equipment. The first potential
malfunction is the result of computers being programmed to use two rather
than four digits to define the applicable year. The second potential
16
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
malfunction arises where embedded microchips and micro-controllers have been
designed using two rather than four digits to define the applicable year. As
a result, certain of the Company's date-sensitive computer programs, building
infrastructure components and medical devices, may recognize a date using
"00" as the year 1900 rather than the year 2000. If uncorrected, the problem
may result in computer system and program failures or equipment malfunctions
that could result in a disruption of business operations (such as the payment
of medical claims, premium billing and collection, and membership enrollment
verification).
Humana's Information Systems organization operates in a centralized manner.
The Company's data center and the majority of its programming and support
staff are located at its corporate offices in Louisville, Kentucky. A Year
2000 project management office is in place to oversee the progress made in
the assessment and correction of the Company's Year 2000 exposures.
In general, the Company's Year 2000 project consists of four phases -
assessment, remediation, validation, and implementation - and is categorized
into the following four components:
Information Technology (IT) - software essential for day-to-day operations
including both internally developed software and third party software which
interfaces therewith.
IT Infrastructure - mainframe, network, telecommunications interfaces and
self-contained operating systems.
Third party business partners and intermediaries - entities on which the
Company relies for transmission and receipt of claims, and encounter,
membership and payment information, including federal and state governmental
agencies such as the Health Care Financing Administration.
Non-IT Infrastructure - telecommunications equipment, elevators, public
safety equipment (i.e., security and fire), medical equipment and HVAC
systems.
The Company commenced the assessment of its Year 2000 exposures in 1996.
Remediation efforts of internally developed software and third party software
applications are almost fully complete. As of March 31, 1999, the Company
had remediated 95% of its core systems identified in the assessment. These
systems are currently operating in the production environment using the
updated Year 2000 logic. The Company's plan is to have all production
applications fully remediated by the end of the third quarter of 1999.
In addition, the Company is in the process of contacting vendors, third party
business partners and intermediaries in an effort to ascertain their Year
2000 readiness. The Company anticipates completing, in all material respects,
its Year 2000 project by the end of the third quarter of 1999. The Company's
efforts are currently progressing on plan.
The Year 2000 project is currently estimated to have a minimum total cost of
approximately $26 million. Project to date costs total $21.7 million,
including $4.1 million during the quarter ended
17
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
March 31, 1999. Year 2000 expenses are projected to represent less than
6 percent of the Information Systems budget during 1999. Year 2000 costs are
expensed as incurred and funded through operating cash flow.
The extent and magnitude of the Year 2000 project, as it will affect the
Company both before and for some period after January 1, 2000, are difficult
to predict or quantify. As part of the Company's Year 2000 readiness, it has
undertaken the development of business continuity and contingency plans.
These plans will be in place to mitigate issues that arise in the event that
the Year 2000 project is not completed in an accurate or timely manner, or
third party constituents have failures due to the millennium change. The
Company has identified six major functional areas, covering 22 operational
subdivisions, that will require contingency plans. The six major functional
areas are: providers, service centers, suppliers and vendors, customers and
brokers, banking and finance, and legal services. The Company's business
continuity and contingency planning efforts, which encompasses alternate
operating procedures, are anticipated to be complete by the end of the third
quarter of 1999.
While the Company presently believes that the timely completion of its
Year 2000 project will limit exposure so that the Year 2000 will not pose
material operational problems, the Company does not control third party
systems. Although the Company is contacting third parties, the Company has
not received assurances that all third parties and/or their interfaces will
be converted in a timely manner. Additionally, if Year 2000 modifications or
upgrades are not accomplished in a timely manner or proper contingency plans
are not implemented, Year 2000 failures which may result could have a
material adverse impact on the Company's results of operations or its
financial position.
The costs of the Year 2000 project and the date on which the Company plans to
complete Year 2000 modifications are based on management's best estimates,
considering assumptions of future events including the continued availability
of certain resources and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from
plan. 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, and
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.
Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). In general,
SFAS 133 requires that all derivatives be recognized as either assets or
liabilities in the balance sheet at their fair value, and sets forth the
manner in which gains or losses thereon are to be recorded. The treatment of
such gains or losses is dependent upon the type of
18
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
exposure, if any, for which the derivative is designated as a hedge. This
statement is effective for periods beginning after June 15, 1999. Management
of the Company anticipates that, due to its limited use of derivative
instruments, the adoption of SFAS 133 will not have a significant effect on
the Company's results of operations or its financial position.
19
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
<TABLE>
<S> <C> <C>
Quarterly Membership 1999 1998
Commercial:
Fully-insured members at:
March 31 3,171,700 3,249,600
June 30 3,260,700
September 30 3,235,800
December 31 3,261,500
Administrative services members at:
March 31 617,900 682,200
June 30 693,400
September 30 673,900
December 31 646,200
Total Commercial members at:
March 31 3,789,600 3,931,800
June 30 3,954,100
September 30 3,909,700
December 31 3,907,700
Pubic Sector:
Medicare HMO members at:
March 31 480,700 495,800
June 30 501,000
September 30 502,800
December 31 502,000
Medicaid and other members at:
March 31 704,300 696,800
June 30 692,000
September 30 696,500
December 31 700,400
Total Public Sector members at:
March 31 1,185,000 1,192,600
June 30 1,193,000
September 30 1,199,300
December 31 1,202,400
TRICARE:
TRICARE eligible members at:
March 31 1,085,700 1,103,500
June 30 1,096,300
September 30 1,090,400
December 31 1,085,700
Total medical members at:
March 31 6,060,300 6,227,900
June 30 6,243,400
September 30 6,199,400
December 31 6,195,800
Specialty members at:
March 31 2,771,900 2,647,800
June 30 2,477,800
September 30 2,597,800
December 31 2,633,300
</TABLE>
20
Humana Inc.
Item 3. Quantitative and Qaulitative Disclosures about Market Risk
Since the date of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, no material changes have occurred in the
Company's exposure to market risk associated with the Company's investments
in market risk sensitive financial instruments, as set forth in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in such Form 10-K.
21
Humana Inc.
Part II: Other Information
Item 1: Legal Proceedings
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 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. On February 19, 1999,
the U.S. District Court denied PCA's motion to dismiss. This matter has
been set for trial beginning January, 2001. 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 Company's wholly-owned captive insurance 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.
Government regulators conduct reviews from time to time to audit compliance
with government regulations and statutes, and those reviews may result in
fines or other payments.
Management does not believe that any pending and threatened legal actions and
audits by agencies that regulate the Company will have a material adverse
effect on the Company's financial position, results of operations or cash
flows.
Items 2 - 3:
None.
22
Humana Inc.
Part II: Other Information, continued
Item 4: Submission of Matters to a Vote of Security Holders
(a) The regular annual meeting of stockholders of Humana Inc. was held in
Louisville, Kentucky on May 6, 1999, for the purpose of electing the
Board of Directors.
(b) Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934 and there was no solicitation in
opposition to management's solicitations. All of management's nominees
for directors were elected.
(c) One proposal was submitted to a vote of security holders as follows:
(1) The stockholders approved the election of the following persons as
directors of the Company:
<TABLE>
Name For Withheld
<S> <C> <C>
K. Frank Austen, M.D. 136,398,798 14,868,526
Michael E. Gellert 136,391,376 14,875,948
John R. Hall 136,394,172 14,873,152
David A. Jones 136,431,940 14,835,384
David A. Jones, Jr. 136,430,260 14,837,064
Irwin Lerner 136,393,668 14,873,656
W. Ann Reynolds, Ph.D. 136,437,727 14,829,597
Gregory H. Wolf 136,400,536 14,866,788
</TABLE>
Item 5:
None.
Item 6: Exhibits and Report on Form 8-K
(a) Exhibits:
Exhibit 10 - Employment Agreement - Kenneth J. Fasola dated
March 29, 1999, filed herewith.
Exhibit 12 - Statement re: Computation of Ratio of Earnings to Fixed
Charges, filed herewith.
Exhibit 27 - Financial Data Schedule
(b) On April 8, 1999, the Company filed a report on Form 8-K regarding its
intention to record $90 million additional medical claims expense
during the first quarter, as discussed in both Items 1 and 2 of this
Form 10-Q.
23
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUMANA INC.
Date: May 17, 1999 /s/ James E. Murray
James E. Murray
Chief Financial Officer
(Principal Accounting Officer)
Date: May 17, 1999 /s/ Kathleen Pellegrino
Kathleen Pellegrino
Vice President and
Associate General Counsel
24
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of March 29, 1999 by
and between HUMANA INC. (hereinafter "Company"), a
Delaware corporation having its principal place of
business in Louisville, Kentucky, and Kenneth J. Fasola
(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 Senior Vice President of Company 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 March 29, 1999 and extending through
March 29, 2001. 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 Senior Vice
President of the Company. Nothing herein
contained shall preclude 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 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 was 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 Four
Hundred and Seventy Thousand Dollars
($470,000) 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 seventy-five percent
(75%) of his Annual Base Salary. Employee
shall be guaranteed a minimum of fifty
percent (50%) of base salary as bonus for the
1999 Performance Year.
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 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,
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.
(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 terminated 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.
(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 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 a 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;
(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
one and one-half (1.5) times the amount equal to the sum
of (1) the Employee's Annual Base Salary plus (2) the
maximum target 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 participates.
If there is no incentive compensation plan in effect as
of the 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 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 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 terms "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 Company and, in any event,
upon the termination of employment hereunder, Employee
shall surrender to the Company all memoranda, notes,
records, plans, manuals or other 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 whatever
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, broker, 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) 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 Board 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 Chief
Executive Officer of Humana Inc., or if
mailed, certified or registered mail
postage prepaid, to Humana Inc., 500
West Main Street, Louisville, Kentucky
40202; 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
Kenneth J. Fasola at 7407 Pine Knoll
Circle, Prospect, Kentucky 40059.
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.
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.
/s/Kathleen Pellegrino BY:/s/Gregory H. Wolf
Kathleen Pellegrino Gregory H. Wolf
Vice President and Chief Executive Officer
Assistant Secretary Humana Inc.
/s/Kathleen Pellegrino /s/Kenneth J. Fasola
Kathleen Pellegrino Kenneth J. Fasola
Witness "EMPLOYEE"
Exhibit 12
<TABLE>
Humana Inc.
Ratio of Earnings to Fixed Charges
For the quarters ended March 31, 1999 and 1998
Unaudited
(Dollars in millions)
1999 1998
<S> <C> <C>
Earnings (Loss):
(Loss) income before income taxes $ (25) $ 79
Fixed charges 13 15
$ (12) $ 94
Fixed charges:
Interest charged to expense $ 10 $ 12
One-third of rent expense 3 3
$ 13 $ 15
Ratio of earnings to fixed charges (a) 6.1
</TABLE>
The one-third of rent expense included in fixed charges is that proportion
deemed representative of the interest portion.
(a) Earnings (loss) for the quarter ended March 31, 1999 were not adequate to
cover fixed charges. Exclusive of the additional medical claims expense
of $90 million ($57 million after tax, or $.34 per share) and a $12
million ($8 million after tax, or $.04 per share) gain on the sale of a
tangible asset, the ratio of earnings to fixed charges for the quarter
would have been 5.0.
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-START> JAN-01-1999
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 636
<SECURITIES> 1,555
<RECEIVABLES> 337
<ALLOWANCES> 59
<INVENTORY> 6
<CURRENT-ASSETS> 2,807
<PP&E> 802
<DEPRECIATION> 372
<TOTAL-ASSETS> 5,190
<CURRENT-LIABILITIES> 2,409
<BONDS> 579
0
0
<COMMON> 28
<OTHER-SE> 1,640
<TOTAL-LIABILITY-AND-EQUITY> 5,190
<SALES> 2,428
<TOTAL-REVENUES> 2,477
<CGS> 2,136
<TOTAL-COSTS> 2,492
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (25)
<INCOME-TAX> (9)
<INCOME-CONTINUING> (16)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
