Prepared by R.R. Donnelley Financial -- Notice & Proxy
NOTICE & PROXY STATEMENT
SCHEDULE 14A
INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities
Exchange Act of 1934
Filed by the Registrant x
Filed by a Party other than the
Registrant ¨
Check the appropriate box:
¨ Preliminary Proxy Statement ¨ CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14A-6(E)(2))
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Definitive Proxy Statement |
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Definitive Additional Materials |
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Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 |
HUMANA INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. |
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Title of each class of securities to which transaction applies: |
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Aggregate number of securities to which transaction applies: |
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Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was
determined): |
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Proposed maximum aggregate value of transaction: |
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Fee paid previously with preliminary materials. |
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form of Schedule and the date of its filing. |
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Amount Previously Paid: |
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Form, Schedule or Registration Statement No.: |
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Proposed maximum aggregate value of transaction: |
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Fee paid previously with preliminary materials. |
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form of Schedule and the date of its filing. |
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Amount Previously Paid: |
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Form, Schedule or Registration Statement No.: |
March 29, 2002
Dear Fellow
Stockholders:
We would like to invite you to attend our 2002 Annual Meeting of Stockholders of Humana Inc. to be held on Thursday, May
16, 2002, at 10:00 a.m., EDT at the Companys headquarters, 500 West Main Street, 25th Floor Auditorium, Louisville, Kentucky. At the meeting, stockholders will vote on the annual election of directors.
Enclosed are:
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Financial information about Humana and Managements Discussion and Analysis of Humanas results of operations and financial condition |
Also enclosed are the following:
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Humanas 2001 Summary Annual Report to Stockholders |
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A postage-paid envelope |
We hope you can attend the
meeting. However, if you are unable to join us, we urge you to exercise your right as a stockholder and vote. The vote of every stockholder is important.
This Proxy Statement is being mailed or transmitted to the Companys stockholders of record on or about March 29, 2002.
This Proxy Statement and the Companys Annual Report to Stockholders are available on Humanas Internet site at http://www.humana.com.
David A. Jones |
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Michael B. McCallister |
Chairman of the Board and Significant Stockholder |
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Director, President, Chief Executive Officer |
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and Significant Stockholder |
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Humana Inc.
March 29, 2002
Notice of Annual Meeting of Stockholders
Thursday,
May 16, 2002
10:00 a.m., EDT
Humana Building
25th Floor Auditorium
500 West
Main Street
Louisville, Kentucky 40202
AGENDA
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Transact any other business properly brought before the meeting. |
Stockholders of record at the close of business on March 20, 2002 will be entitled to vote.
Your vote is important so that as many shares as possible will be represented. Please vote by one of the following methods:
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BY RETURNING THE ENCLOSED PROXY CARD |
(see instructions on proxy card).
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By |
Order of the Board of Directors, |
TABLE OF CONTENTS
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When will this proxy statement be sent to stockholders? |
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This proxy statement is being sent to stockholders of record on or about March 29, 2002. It will also be available at the Companys web site: www.humana.com on that date.
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When and where is the annual meeting? |
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The Annual Meeting will be held on Thursday, May 16, 2002 at 10:00 a.m. at 500 West Main |
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Louisville, Kentucky at The Humana Building, 25th Floor.
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You are being asked to elect individuals to serve on the Board of Directors of the Company. |
The Board of Directors is not aware of any other matters to be presented for action at the Annual Meeting. However, if other matters are presented for a vote, the proxies will be voted for these matters in accordance with the
judgment of the persons acting under the proxies.
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How does the Board recommend I vote on the proposal? |
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The Board recommends that you vote FOR each of the nominees. |
All Shares of Company Common Stock that are represented at the Annual Meeting by properly executed proxies received before or at the Annual Meeting and not revoked will be voted at the Annual Meeting in accordance with the
instructions indicated in the proxies. If no instructions are indicated, the executed proxies will be voted FOR approval of the election of the Board of Directors.
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Who is entitled to vote? |
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Anyone who owns Humana Inc. Common Stock as of the close of business on March 20, 2002 (the Record Date) is entitled to vote at the Annual Meeting or any adjournment or postponement of
the meeting. |
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What if my shares are not registered in my name? |
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If you own your shares in street name, meaning that your broker is actually the record owner, you should receive proxy materials from your broker.
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How many shares can vote? |
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As of the Record Date, March 20, 2002, 168,866,651 Shares of Company Common Stock were outstanding and entitled to vote. Every stockholder is entitled to one vote for each share held.
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There are four ways that you can vote your shares. |
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Over the internet. The Web site for voting is at http: //www.ProxyVote.com. |
In order to vote on the Internet, you need the control number on your proxy card. Each stockholder has a unique control number so we can ensure all voting instructions are genuine and prevent
duplicate voting. The Internet voting system is available 24 hours a day, seven days a week, until 11:59 p.m. on Wednesday, May 15, 2002.
Once you are logged on the Internet voting system, you can record and confirm (or change) your voting instructions. If you use the Internet voting system, you do not need to return your proxy card.
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By telephone. If you are in the United States or Canada, call 1-800-690-6903, which is a toll-free number. The telephone voting system is available 24 hours a day, seven
days a week, until 11:59 p.m. on Wednesday, May 15, 2002. |
In order to vote by telephone, you need the control number
on your proxy card. Each stockholder has a unique control number so that we can ensure all voting instructions are genuine and prevent duplicate voting.
Once you are logged on the telephone voting system, a series of prompts will tell you how to record and confirm (or change) your voting instructions. If you use the telephone voting system, you do not need to return your proxy
card.
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By mail. Mark your voting instructions on, sign and date the proxy card and then return it in the postage-paid envelope provided. If you mail your proxy card, we must
receive it by 10:00 a.m. EDT the day of the Annual Meeting. |
If we receive your signed proxy card, but you do not give
voting instructions, our representatives will vote your shares for approval of the election of the Board of Directors. If any other matters arise during the meeting that require a vote, the representatives will exercise their discretion.
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In person. Attend the Annual Meeting. However, you can vote by methods 1, 2 or 3 above and still attend the Meeting. |
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How do I vote the shares held in the Humana Common Stock Fund of the Humana 401(k) plan and retirement plan (HRSP)? |
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If you have money in the Humana Common Stock Fund of the HRSP, you may vote. Under the HRSP you do have pass-through voting rights based on your interestthe amount of
money you have investedin the Humana Common Stock Fund. |
You may exercise pass-through voting rights in almost
the same way that stockholders may vote their shares, but you have an earlier deadline. If your voting instructions are received by 11:59 p.m. Eastern Time on Tuesday, May 14, 2002, the trustee will submit a proxy that reflects your instructions. If
you do not give voting instructions (or give them late), the trustee will vote your interest in the Humana Common Stock Fund.
You may send your instructions to the plan trustee by using the Internet, telephone or mail methods described on the previous page. You cannot vote in person at the Annual Meeting.
Your voting instructions will be kept confidential under the terms of the HRSP.
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How many votes are required to elect the directors? |
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The affirmative vote of a plurality of the Shares of Company Common Stock represented in person or by properly executed proxy is required to approve each of the Companys nominees
for election as a director. |
Abstentions and broker non-votes will be counted for purposes of determining whether a
quorum is present at the Annual Meeting, but will not be counted for purposes of calculating a plurality.
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A quorum is a majority of the outstanding shares. Shares may be voted at the meeting or represented by proxy. There must be a quorum for the meeting to be held. Any
stockholder of record present at the Annual Meeting, but who abstains from voting, shall be counted for purposes of determining whether a quorum is present at the Annual Meeting. |
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How do I revoke my proxy? |
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You have the right to revoke your proxy at any time before the meeting. To do so, you must give written notice of revocation to the Automatic Data Processing, Investor Communication
Services, 51 Mercedes Way, Edgewood, NY 11717 or by fax at (515) 254-7733, submit another properly signed proxy with a more recent date, or vote in person at the meeting. For written and fax notices, you must include the control number that is
printed on the upper portion of the proxy card. |
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What if I received more than one set of materials? |
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The Securities and Exchange Commission recently approved a new rule concerning the delivery of annual disclosure documents. The rule allows us to send a single set of our annual report
and proxy statement to any household at which two or more stockholders reside if we believe the stockholders are members of the same family. This rule benefits both you and Humana. It reduces the volume of duplicate information received at your
household and helps to reduce Humana expenses. The rule applies to Humanas annual reports, proxy statements or information statements. Each stockholder will continue to receive a separate proxy card or voting instruction card.
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If your household received a single set of disclosure documents for this year, but you would prefer to receive your own copy; or if
you share an address with another Humana stockholder and together both of you would like to receive only a single set of Humanas annual disclosure documents for future mailings, follow these instructions:
Please contact ADP and inform them of your request by calling them at (888) 603-5847 or writing them at Householding Department, 51 Mercedes Way, Edgewood, NY
11717. Be sure to identify Humana and include your name, address, the name of your brokerage firm (if applicable) and your account number.
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Who will count the votes? |
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Automatic Data Processing, Investor Communication Services, and D. F. King & Co., Inc. will tabulate the votes cast by proxy. In addition, the Companys Inspectors of Election
will tabulate the votes cast at the Annual Meeting together with the votes cast by proxy. |
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When are the stockholder proposals for the 2003 Annual Meeting due? |
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Stockholder proposals for inclusion in the proxy materials relating to the Annual Meeting of Stockholders to be held in May 2003 must be submitted to the Corporate Secretary in writing
no later than November 29, 2002. Proposals should be submitted to Joan O. Lenahan, Secretary, Humana Inc., 500 West Main Street, Louisville, KY 40202. |
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How much did this proxy solicitation cost? |
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D. F. King & Co., Inc. was hired to assist in the distribution of proxy materials and solicitation of votes for $10,000 plus expenses. |
The Company has also engaged ADP to assist in the distribution of proxy materials and the accumulation of votes through the Internet, telephone and coordination
of mail votes for approximately $10,000 plus expenses.
The Company will reimburse stockbrokers, other custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy and solicitation material to the stockholders.
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How can I obtain additional information about the Company? |
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We will provide a copy of our Annual Report on Form 10-K for the year ended December 31, 2001, excluding certain of its exhibits, without charge to anyone who makes a written request to
Humana Inc., Investor Relations Department, 500 West Main Street, Louisville, KY 40202. The Companys Annual Report on Form 10-K and various other filings may also be accessed via the Investor Relations page on the Companys web site at
www.humana.com. Attached as Appendix A to this Proxy Statement is much of the financial information contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2001. |
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Where can I find voting results for this Annual Meeting? |
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The voting results will be published in the Companys Form 10-Q for the period ending June 30, 2002 which will be filed with the Securities and Exchange Commission on or before
August 14, 2002. |
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The Board of Directors Recommends a Vote FOR All Nominees
The Board of Directors of Humana Inc. (the Company), in accordance with the provisions of the Companys Articles of Incorporation and Bylaws, has determined that the number of
directors to be elected at the Annual Meeting of the Company shall be eight. The directors are elected to hold office until the Annual Meeting of Stockholders in 2003 and until a successor is elected and qualified.
If any nominee becomes unable to serve for any reason (which is not anticipated), the Shares of Common Stock represented by the enclosed proxy may be voted for
the substituted nominee as may be designated by the Board of Directors.
The following table shows certain information concerning the
nominees at March 1, 2002.
Name
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Age
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Position
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First Elected Director
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David A. Jones |
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70 |
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Chairman of the Board |
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08/61 |
David A. Jones, Jr. |
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44 |
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Vice Chairman of the Board |
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05/93 |
Charles M. Brewer |
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43 |
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Director |
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07/00 |
Michael E. Gellert |
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70 |
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Director |
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02/68 |
John R. Hall |
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69 |
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Director |
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05/92 |
Irwin Lerner |
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71 |
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Director |
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11/93 |
Michael B. McCallister |
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49 |
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Director, President & Chief Executive Officer |
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02/00 |
W. Ann Reynolds, Ph.D. |
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64 |
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Director |
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01/91 |
David A. Jones has been Chairman of the Board of the Company since its inception in August
1961 (including a predecessor company) and served as Chief Executive Officer of the Company from its inception until December 1997, when he retired. Due to the resignation of the Companys former President and Chief Executive Officer in August
1999, he served as Interim Chief Executive Officer from that time until February 2000, when Mr. McCallister was elected. Mr. Jones is also a director of Abbott Laboratories.
David A. Jones, Jr. was elected Vice Chairman of the Board of the Company in September 1996. He is Chairman and Managing Director of Chrysalis Ventures, LLC, a venture capital firm in Louisville,
Kentucky, and is the son of David A. Jones, Chairman of the Board. He is Chairman of the Board of High Speed Access Corp. and a director of bCatalyst.
Charles M. Brewer joined Humana as a director in July 2000. He was formerly Chairman of EarthLink Inc., a position from which he resigned in August 2000. In February 2000, EarthLink merged with MindSpring, another leading
Internet service provider, which Mr. Brewer founded in 1994 and where he served as Chairman and Chief Executive Officer until the merger with EarthLink. Before founding MindSpring, Mr. Brewer was Chief Executive Officer of AudioFax, Inc., an Atlanta
company providing fax server software.
Michael E. Gellert is a general partner of Windcrest Partners, a private investment partnership in
New York, New York, having held that position since April 1967. From January 1958 until his retirement in October 1989, Mr. Gellert served in executive capacities with Drexel Burnham Lambert and its predecessors in New York, New York. Mr. Gellert is
also a director of Dalet SA, a publicly held French company; Devon Energy Corporation; High Speed Access Corp.; Seacor Smit Inc.; Six Flags Inc.; Smith Barney World Funds, Inc.; Travelers Series Fund, Inc. and a Member of the Putnam Trust Advisory
Board to The Bank of New York.
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John R. Hall is the retired Chairman of the Board and Chief Executive Officer of Ashland Inc., positions
he held since 1981 until his retirement in 1996. He is also a member of the American Petroleum Institute Executive Committee, a member of the Transylvania University Board of Trustees and past President of Vanderbilt University Board of Trustees and
remains a trustee. Mr. Hall retired as a director of Arch Coal, Inc. in April 1999. He was named non-executive chairman of Bank One Corporation in December 1999, a position he held for three months. He is also a director of Bank One Corporation; The
Canada Life Assurance Company; CSX Corporation; UCAR International Inc.; and United States Enrichment Corporation (USEC).
Irwin Lerner is the retired Chairman of the Board and Chairman of the Executive Committee of Hoffmann-La Roche Inc. From April 1980 to December 1992, Mr. Lerner was President and Chief Executive Officer of Hoffmann-La Roche Inc. He is a
Distinguished Executive-in-Residence at the Rutgers University Graduate School of Management. He is also the Chairman of Medarex Inc. and a director of Covance Inc., Inhale Therapeutic Systems Inc. and V. I. Technologies, Inc.
Michael B. McCallister was elected President and Chief Executive Officer of the Company in February 2000. Before that, Mr. McCallister served as Senior
Vice PresidentHealth System Management from January 1998 to February 2000. Mr. McCallister served as Division I President from July 1996 to January 1998. He joined the Company in June
1974.
W. Ann Reynolds, Ph.D. is President of the University of
Alabama at Birmingham, a position she has held since September 1997. Before that, she served as Chancellor of the City University of New York, in New York, New York for seven years and Chancellor of the California State University system for eight
years. She is also a director of Abbott Laboratories; iPhysician Net; Maytag Corporation; and Owens-Corning Fiberglass Corporation.
The
information given in this Proxy Statement concerning the nominees is based upon statements made or confirmed to the Company by or on behalf of the nominees.
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During 2001, the Board of Directors met 6 times. All directors attended at least 75% of the
scheduled Board of Directors meetings and meetings held by Committees of which they were members.
The following table shows compensation for Directors who are not employees:
Compensation
Annual Board Retainer (Except for Chairman) |
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$17,500 $25,000 Fair Market Value worth of Humana Stock first business day of January
(1) |
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Annual Stock Option Grant (2) |
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5,000 stock options |
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Annual Fee for Committee Chairperson (except Executive Committee) |
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$3,000 |
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Annual FeeExecutive Committee Members |
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$5,000 |
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Board Attendance Fee (per meeting) |
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$2,500 |
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Committee Attendance Fee (per meeting) |
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$1,000 |
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Each director except Mr. Jones received 2,165 shares in 2001. Mr. Jones does not participate due to his retainer provisions as Chairman described below. |
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The director options granted on January 2, 2001 had an exercise price of $14.7813, the fair market value on that date. |
In addition, the Company paid certain local taxes that averaged approximately $1,340 per outside director, excluding Mr. Jones amount which is described
below.
In 2001, as the Companys Chairman of the Board of Directors, Mr. Jones received a $200,000 annual cash retainer in lieu of
attendance fees and the annual board retainer fee outlined above. Mr. Jones receives the annual stock option grant described above and receives fees as an Executive Committee member. In addition to Board of Directors responsibilities, Mr.
Jones compensation reflects his continuing consultation on major initiatives of the Company and on corporate strategy and policy, and his external activities, including preserving and enhancing the image of the Company within the health care
industry. In recognition of his efforts in the industry, the Organization & Compensation Committee awarded Mr. Jones 250,000 non-qualified stock options at $11.235, the fair market value on the date of grant, which vest in equal installments
over 3 years beginning one year from date of grant. Mr. Jones was provided office space, with an annual value of approximately $43,500 and administrative and secretarial support, with an annual cost of approximately $198,000. In addition, during
2001, the Company provided Mr. Jones with life and accidental death insurance, parking, occupational tax, and membership to the Companys fitness club at a cost of $14,384. Upon his retirement in December 1997, Mr. Jones elected to receive a
lifetime annuity payment under the Officers Target Retirement Plan (OTRP). Under the OTRP, Mr. Jones received approximately $60,000 per month in 2001. Effective January 1, 2002, due to a revised annuity selection, his payments will be
$56,800 per month. The Company will continue to provide the benefits and arrangements described above to Mr. Jones for at least as long as he serves as Chairman of the
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Board. In December 1999, the Board believed it was in the best interest to set out the terms and conditions as described above in a written agreement. This agreement formalizes the terms of Mr.
Jones compensation as described herein until he no longer serves as Chairman of the Board or until December 31, 2004, whichever is longer.
In connection with his position as Vice Chairman of the Board, David A. Jones, Jr. was reimbursed $30,000 for office expenses incurred in 2001.
The following table shows benefits for Directors who are not employees:
Benefits
Charitable Contributions |
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Company matches up to $20,000 |
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Group Life and Accidental Death Insurance |
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$150,000 |
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Business Travel Accident Insurance |
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$250,000 |
Directors may elect to participate in the medical and dental benefit programs offered to
all employees of the Company at the same rate all employees pay. Two directors have elected this option.
The Company also maintains the
1989 Stock Option Plan for Non-employee Directors pursuant to which options to purchase 15,000 Shares of the Common Stock are granted at 100% of fair market value to each Non-employee Director upon his or her initial election to the Board of
Directors. In addition, options to purchase 5,000 Shares of the Common Stock are granted on the first business day of each January at 100% of fair market value to each Non-employee Director.
Non-employee Directors elected subsequent to 1998 do not receive any retirement benefits. The current directors, other than Mr. Brewer, were grandfathered under the Companys Retirement
Policy (the Policy). The Policy provides that a director who is not an employee must retire at the annual meeting following his or her seventy-third birthday. The retiring director is entitled to elect to receive either: (1) an annual
retirement benefit for the life of the director in the amount of $38,000, the annual retainer fee in effect for 1997; or (2) in lieu thereof, an actuarially equivalent joint and survivor annuity payment. In addition, each retiring director also
receives an annual matching charitable contribution benefit of 50% of the annual retirement benefit. Benefits are prorated for any retiring director who has not served at least ten years on the Board of Directors. For fiscal year 2001, the Company
paid and will continue to pay benefits under the Policy to three former directors and has a separate letter agreement that was executed with one other former director before the adoption of the Policy. The benefits under the letter agreement are
comparable to those under the Policy.
The Company has Audit, Executive, Investment, Medical Affairs, Nominating & Corporate
Governance, and Organization & Compensation Committees of its Board of Directors. The Company has adopted written charters for each of the Board Committees. The members of the Audit and Organization & Compensation Committees are independent
outside directors as defined by the New York Stock Exchange and the Securities and Exchange Commission, respectively. The Company believes that the Nominating Committee is comprised solely of independent directors, none of whom have any relationship
with the Company that would interfere with his or her ability to exercise independent judgement in nominating candidates for
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Board membership. Additional information regarding the Audit Committee and the Organization & Compensation Committee is included in this Proxy Statement under the caption Audit
Committee Report and Organization & Compensation Committee Report. The number of meetings held in 2001, and membership as of the Record Date were as follows:
Current Committee Membership and Meetings Held During 2001 |
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Audit |
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Executive |
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Investment |
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Medical Affairs |
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Nominating & Corporate Governance |
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Organization & Compensation |
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Meetings Held In 2001 |
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David A. Jones |
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Charles M. Brewer |
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Michael E. Gellert |
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John R. Hall |
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David A. Jones, Jr. |
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Irwin Lerner |
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Michael B. McCallister |
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W. Ann Reynolds, Ph.D. |
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The primary functions of each Board Committee are as follows:
Audit Committee
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Recommends to the Board the appointment of the Companys independent accountants; |
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Meets with the independent accountants and financial management of the Company to review the scope of the proposed audit for the current year and the audit procedures to be utilized and,
at the conclusion, reviews such audit; |
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Reviews with the independent accountants, the Companys Internal Audit Department, and financial and accounting personnel, the effectiveness of the accounting and financial controls
of the Company and makes recommendations for the improvement of such internal control procedures; |
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|
Reviews the internal audit function of the Company including the independence and authority of its reporting obligations, the proposed audit plans for the coming year, and the
coordination of such plans with the independent accountants; |
|
|
Receives prior to each meeting, a summary of findings from completed internal audits and progress reports on the internal audit plan; |
|
|
Reviews the financial statements contained in the annual report and other reports to stockholders with management and the independent accountants to determine that the external auditors
are satisfied with the disclosure and content of the financial statements to be presented to the stockholders and reviews any changes in accounting principles; |
|
|
Provides the opportunity to confer independently with the internal auditors and the independent accountants; and |
|
|
Determines the appropriateness of fees for audit and non-audit services performed by the independent accountants. |
Executive Committee
|
|
Exercises all the powers of the Board of Directors except as otherwise provided by Delaware law and the Companys Bylaws during intervals between meetings of the Board.
|
9
Investment Committee
|
|
Establishes investment objectives and policies for the various investment portfolios of the Company and investment options available under various employee benefit plans; and
|
|
|
Analyzes and ratifies the investment decisions. |
Medical Affairs Committee
|
|
Identifies members needs in the facilitation of health services and oversees their implementation; |
|
|
Reviews the effectiveness of the functions which form managed care affiliations with physicians and which develop medical management processes designed to improve the quality of care
delivered to the Companys members; and |
|
|
Reviews processes which allow the Company to maintain accreditation and meet quality-based and privacy regulatory requirements. |
Nominating & Corporate Governance Committee
|
|
Recommends to the full Board criteria for the selection and qualification of the members of the Board; |
|
|
Evaluates and recommends for nomination by the Board candidates to be proposed for election by the stockholders at each annual meeting; |
|
|
Seeks out possible candidates and aids in attracting highly qualified candidates to serve on the Board; |
|
|
Recommends for Board approval, candidates to fill vacancies on the Board which occur between annual meetings; |
|
|
Studies and reviews with management the overall effectiveness of the organization of the Board and the conduct of its business, and makes appropriate recommendations to the Board; and
|
|
|
Considers the overall relationship of the Board and management. |
Organization
& Compensation Committee
|
|
Reviews and approves compensation for the Chief Executive Officer of the Company; |
|
|
Administers the Companys equity compensation plans; |
|
|
Reports to the Board regarding performance appraisals and compensation guidelines concerning the Chief Executive Officer and other executive officers; |
|
|
Reviews and recommends to the Board additional executive compensation and employee benefit programs, including incentive-based compensation programs, non-cash compensation programs,
retirement and savings plans, severance programs, and any material changes to existing programs; and |
|
|
Reviews and approves changes required by law to be made to existing employee benefit programs. |
The Boards corporate governance guidelines incorporate principles by which the Board
operates. These are not a set of legally binding obligations, but guidelines within which the Board may conduct its business. They should be interpreted in the context of all applicable laws and the Companys articles of incorporation, bylaws
and other governing legal documents. The guidelines are as follows:
|
|
Established the Nominating & Corporate Governance Committee of the Board; |
|
|
A majority of the Directors should come from outside the Company and independence is important in the selection of new candidates. The Board selects candidates and extends invitations to
join the Board; |
10
|
|
The Board of Directors meets regularly on a bi-monthly basis. Special sessions are scheduled as required. The Chairman and the President set the agenda, and directors may suggest items
for inclusion. Information is made available to the Board of Directors a reasonable period of time before each meeting; |
|
|
Only independent outside directors serve on the Companys Audit and Organization & Compensation Committees; |
|
|
All directors stand for election every year; |
|
|
Directors have an annual written self-evaluation process; |
|
|
Outside directors meet in executive session as required; and |
|
|
Every year the Board of Directors reviews and approves a one-year operating plan for the Company. |
Organization & Compensation Committee Interlocks and Insider Participation
All members of the
Organization & Compensation Committee are non-employee directors and no member has any direct or indirect material interest in, or a relationship with, the Company, other than stockholdings as discussed herein and as related to his or her
position as director. During 2001, no member of the Organization & Compensation Committee had a relationship that would constitute an interlocking relationship with executive officers or directors of another entity.
11
STOCK OWNERSHIP INFORMATION
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (Exchange Act) requires the Companys directors and executive officers, and persons who beneficially own more than ten percent of a registered class of the Companys
equity securities, to file with the Securities and Exchange Commission and the New York Stock Exchange, reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Executive officers,
directors and greater than ten percent stockholders are required to furnish the Company with copies of all the forms they file.
During
the year ended December 31, 2001, based upon the Companys knowledge of stock transfers, review of copies of these reports and written representations by these persons furnished to the Company, all executive officers, directors and greater than
ten percent beneficial owners of the Companys Common Stock complied with Section 16(a) filing requirements applicable to the Company.
The Company has a program to oversee the compliance of its officers and directors in their reporting obligations.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMPANY COMMON STOCK
Principal Stockholders of the Company
The following table shows certain data with respect to those persons known by the
Company to be the beneficial owners of 5% or more of the outstanding Common Stock of the Company as of the Record Date.
Dreman Value Management, L.L.C. 10 Exchange Place Jersey City, NJ 07302 |
|
15,419,463 shares |
|
9.1%(1)(2) |
Wellington Management Company, LLP 75 State
Street Boston, MA 02109 |
|
14,019,300 shares |
|
8.3%(1)(3) |
Scudder Kemper Investments, Inc. 345 Park
Avenue New York, NY 10154 |
|
13,481,765 shares |
|
8.0%(1)(4) |
Vanguard Specialized Funds Vanguard Health Care
Fund P.O. Box 2600V37 Valley Forge, PA 19482 |
|
11,495,000 shares |
|
6.8%(1)(5) |
David A. Jones Chairman of the Board
|
|
8,692,963 shares |
|
5.1%(1)(6) |
12
(1) |
|
The percentage is based on 168,866,651 shares outstanding on the Record Date. |
(2) |
|
Based upon a Form 13G/A filed with the Commission for the year ended December 31, 2001, Dreman Value Management, L.L.C. has sole power to vote 1,834,688 shares; has no shared power to
vote any shares; has sole power to dispose of 15,419,463 shares; and has no shared power to dispose of any shares. |
(3) |
|
Based upon a Form 13G/A filed with the Commission for the year ended December 31, 2001, Wellington Management Company, LLP has shared power to vote 1,855,100 shares; has shared
dispositive power over 14,019,300 shares; and no sole power to vote or dispose of any shares. |
(4) |
|
Based upon a Form 13G/A filed with the Commission for the year ended December 31, 2001, Scudder Kemper Investments, Inc. has sole power to vote 60,500 shares; has sole power to dispose
of 65,899 shares; and has shared power to vote or dispose of 13,415,866 shares. |
(5) |
|
Based upon a Form 13G/A filed with the Commission for the year ended December 31, 2001, Vanguard Specialized Funds-Vanguard Health Care Fund has sole power to vote 11,495,000 shares; has
shared power to dispose of 11,495,000 shares; and has no shared power to vote or dispose of any shares. |
(6) |
|
Based upon information available to Company as of March 20, 2002, the Record Date. Includes 20,000 shares which may be acquired through the exercise of currently exercisable options and
excludes 31,385 shares held by Mr. Jones wife directly and by a trust for her behalf. |
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table shows stock ownership by each of
the Companys nominees for directors, each Named Executive Officer, and by the directors and executive officers as a group as of March 20, 2002, unless otherwise indicated.
|
|
Company Common Stock Beneficially Owned as of March 20, 2002 (1) (2)
|
|
Percent of Class (3)
|
David A. Jones(4) |
|
8,692,963 |
|
5.1 |
Charles M. Brewer |
|
25,620 |
|
|
Michael E. Gellert |
|
170,082 |
|
|
John R. Hall |
|
74,970 |
|
|
David A. Jones, Jr. |
|
482,095 |
|
|
Irwin Lerner |
|
75,382 |
|
|
Michael B. McCallister |
|
1,087,130 |
|
|
W. Ann Reynolds, Ph.D. |
|
53,982 |
|
|
James E. Murray |
|
536,304 |
|
|
Kenneth J. Fasola |
|
502,697 |
|
|
Jonathan T. Lord, M.D. |
|
200,038 |
|
|
James H. Bloem |
|
91,701 |
|
|
All directors and executive officers as a group (19 in number, including those named above (Group) ) |
|
13,365,822 |
|
7.9 |
(1) |
|
Beneficial ownership of Shares of Company Common Stock, for purposes of this Proxy Statement, includes Shares of Company Common Stock as to which a person has or shares voting and/or
investment power. Therefore, all restricted stock for which a person has voting power and all shares in the Humana Retirement and Savings Plan (the HRSP) are included. See the Summary Compensation Table in the Proxy Statement for
additional
|
13
|
information. |
|
These footnotes describe whenever an individual shares voting and/or investment power over the Shares of Company Common Stock beneficially owned by them. |
The number of Shares of Company Common Stock listed includes:
|
(a) |
|
Certain Shares of Company Common Stock held for the benefit of the individuals in the HRSP as of February 1, 2002, over which the employee participant has voting power and investment
power. They are as follows: |
Michael B. McCallister |
|
38,542 |
James E. Murray |
|
12,967 |
Kenneth J. Fasola |
|
24,341 |
James H. Bloem |
|
34 |
Jonathan T. Lord, M.D. |
|
38 |
Group |
|
107,691 |
|
(b) |
|
Shares of Company Common Stock which may be acquired by these individuals through the exercise of options, which are exercisable currently or within 60 days after March 20, 2002 under
the Companys 1989 Stock Option Plan for Employees, the 1989 Stock Option Plan for Non-employee Directors and the 1996 Stock Incentive Plan for Employees (collectively the Stock Option Plans). They are as follows:
|
David A. Jones |
|
20,000 |
Charles M. Brewer |
|
20,000 |
Michael E. Gellert |
|
40,000 |
John R. Hall |
|
55,000 |
David A. Jones, Jr. |
|
255,000 |
Irwin Lerner |
|
50,000 |
Michael B. McCallister |
|
795,241 |
W. Ann Reynolds, Ph.D. |
|
40,000 |
James E. Murray |
|
350,472 |
Kenneth J. Fasola |
|
306,107 |
Jonathan T. Lord, M.D. |
|
100,000 |
James H. Bloem |
|
16,667 |
Group |
|
2,677,085 |
(2) |
|
Excludes Shares of Company Common Stock held by directors spouses and/or family trusts for which they disclaim beneficial ownership: |
David A. Jones |
|
31,385 |
Michael E. Gellert |
|
2,700 |
W. Ann Reynolds, Ph.D. |
|
87 |
(3) |
|
Unless indicated, less than 1% of the class. |
(4) |
|
In March 2001, Mr. Jones entered into a Forward Agreement covering 451,700 of his shares of Company Common Stock. Upon expiration, Mr. Jones, at his election, may settle the Forward
Agreement in either cash or stock. Depending upon the price at expiration, he must relinquish up to 451,700 shares of Company Common Stock. This Forward Agreement expires in March 2004. In March 2002, Mr. Jones entered into Section 10b5-1 Trading
Plans covering up to 80,000 shares of Humana Common Stock per month for a one-year period. Mr. Jones ownership excludes Shares of Company Common Stock owned by the adult children of Mr. Jones over which Mr. Jones has no voting or investment
power. |
14
EXECUTIVE COMPENSATION OF THE COMPANY
The following Summary Compensation Table shows the compensation earned
for the time period served as an executive officer during the past three years by: (1) the President and Chief Executive Officer; and (2) each of the four other highest compensated executive officers of the Company serving at December 31, 2001,
(collectively, the Named Executive Officers).
Summary Compensation Table
|
|
|
|
Annual Compensation
|
|
Long Term Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Restricted Stock at Date of Grant(2) $
|
|
Number of Securities Underlying Options #
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards(2) #
|
|
|
|
|
Name and Principal Position
|
|
|
|
|
|
|
|
Other Annual Compensation(1) $
|
|
|
|
|
All Other Compensation(1) $
|
|
Year
|
|
Salary $
|
|
Bonus $
|
|
|
|
|
|
Michael B. McCallister |
|
2001 |
|
655,890 |
|
819,863 |
|
44,176 |
|
|
|
|
|
|
|
102,677 |
President & Chief |
|
2000 |
|
624,590 |
|
390,369 |
|
46,793 |
|
225,000 |
|
1,589,063 |
|
500,000 |
|
76,189 |
Executive O fficer |
|
1999 |
|
350,000 |
|
250,000 |
|
75,247 |
|
|
|
|
|
130,000 |
|
97,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James E. Murray |
|
2001 |
|
470,000 |
|
470,000 |
|
29,265 |
|
|
|
|
|
|
|
87,934 |
Chief Operating |
|
2000 |
|
469,590 |
|
235,000 |
|
31,504 |
|
150,000 |
|
1,059,375 |
|
|
|
58,932 |
OfficerService |
|
1999 |
|
320,000 |
|
175,000 |
|
18,996 |
|
|
|
|
|
130,000 |
|
78,579 |
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth J. Fasola |
|
2001 |
|
470,000 |
|
470,000 |
|
41,396 |
|
|
|
|
|
|
|
36,000 |
Chief Operating |
|
2000 |
|
470,000 |
|
235,000 |
|
28,615 |
|
150,000 |
|
1,059,375 |
|
|
|
116,638 |
OfficerMarket |
|
1999 |
|
432,578 |
|
235,000 |
|
27,884 |
|
|
|
|
|
130,000 |
|
73,991 |
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonthan T. Lord, M.D. |
|
2001 |
|
425,000 |
|
361,250 |
|
20,011 |
|
|
|
|
|
|
|
|
Sr. Vice President |
|
2000 |
|
291,462 |
|
180,625 |
|
60,731 |
|
100,000 |
|
706,250 |
|
150,000 |
|
4,615 |
& Chief Clinical |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategy and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innovation Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James H. Bloem |
|
2001 |
|
332,370 |
|
249,277 |
|
51,369 |
|
75,000 |
|
852,500 |
|
75,000 |
|
|
Sr. Vice President |
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
& Chief Financial |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(elected February 2001) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts listed under Other Annual Compensation include Company provided transportation, executive insurance, relocation expenses, and miscellaneous items, which are listed in the
table below. The amounts listed under All Other Compensation represent amounts contributed or accrued to the HRSP and contributions and earnings related to the Supplemental Executive Retirement Plan and Thrift Excess Plan (collectively Long
Term Benefit Plans). The breakdown is listed in the table below. |
15
|
|
Other Annual Compensation
|
|
All Other Compensation Long Term Benefit Plan
|
|
|
|
Year
|
|
Transportation $
|
|
Exec. Ins. $
|
|
Relocation/Misc. $
|
|
Contributions $
|
|
Earnings/(Losses) $
|
|
Michael B. McCallister |
|
2001 |
|
40,279 |
|
2,198 |
|
1,699 |
|
112,802 |
|
(10,125 |
) |
|
|
2000 |
|
44,693 |
|
2,100 |
|
|
|
65,672 |
|
10,517 |
|
|
|
1999 |
|
14,196 |
|
1,176 |
|
59,875 |
|
89,430 |
|
8,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James E. Murray |
|
2001 |
|
25,987 |
|
1,579 |
|
1,699 |
|
75,489 |
|
12,445 |
|
|
|
2000 |
|
29,925 |
|
1,579 |
|
|
|
49,172 |
|
9,760 |
|
|
|
1999 |
|
17,921 |
|
1,075 |
|
|
|
72,637 |
|
5,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth J. Fasola |
|
2001 |
|
38,118 |
|
1,579 |
|
1,699 |
|
75,489 |
|
(39,489 |
) |
|
|
2000 |
|
27,036 |
|
1,579 |
|
|
|
49,807 |
|
66,831 |
|
|
|
1999 |
|
26,437 |
|
1,447 |
|
|
|
91,633 |
|
(17,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan T. Lord, M.D. |
|
2001 |
|
17,612 |
|
1,428 |
|
971 |
|
|
|
|
|
|
|
2000 |
|
6,865 |
|
952 |
|
52,914 |
|
4,615 |
|
|
|
|
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James H. Bloem |
|
2001 |
|
9,289 |
|
1,116 |
|
40,964 |
|
|
|
|
|
|
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
The Value of the Restricted Stock at Date of Grant is calculated based on the average of the high and low trading prices of the Company Common Stock (fair market value) on
the date of grant, less amounts paid by the recipient. The aggregate number of shares and the value at December 31, 2001 of all restricted shares (including the 1998 awards listed below) held by the Named Executive Officers are as follows:
|
Michael B. McCallister |
|
237,000 shares |
|
$2,824,225 |
James E. Murray |
|
165,000 shares |
|
$1,965,125 |
Kenneth J. Fasola |
|
165,000 shares |
|
$1,965,125 |
Jonathon T. Lord, M.D. |
|
100,000 shares |
|
$1,192,500 |
James H. Bloem |
|
75,000 shares |
|
$ 894,375 |
These amounts are based on the fair market value of the Company Common Stock of $11.9250 as
of December 31, 2001. The 2000 restricted stock awards for Messrs. McCallister, Murray, Fasola, Dr. Lord and the 2001 restricted stock awards for Mr. Bloem contain a non-compete provision. The 2000 restricted stock awards will vest on August 7, 2003
if each is still employed by the Company on such date. Mr. Bloems 2001 restricted stock awards will vest three years from the date of grants (February 1, 2001 and July 12, 2001) if he remains with the Company until then. The 1998 restricted
stock awards vested in February 2002, based on achievement of the Companys 2001 management incentive plan goal as follows:
Michael B. McCallister |
|
12,000 shares |
James E. Murray |
|
15,000 shares |
Kenneth J. Fasola |
|
15,000 shares |
The Company does not pay any dividends, but holders of restricted stock would be entitled
to dividends, if paid.
16
The following table provides information on stock options granted to the Named
Executive Officers during the year ended December 31, 2001.
|
|
Date of Award
|
|
Number of Securities Underlying Options Granted (1) #
|
|
% of Total Options Granted To Employees In 2001 %
|
|
Exercise Price Per Share (2) $
|
|
Expiration Date
|
|
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation For Option Term (3)
5% 10%
|
|
|
|
|
|
|
|
$
|
|
$
|
Michael B. McCallister |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James E. Murray |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth J. Fasola |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan T. Lord, M.D. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James H. Bloem |
|
2/01/2001 |
|
50,000 |
|
7.7 |
|
12.20 |
|
2/01/2011 |
|
383,626 |
|
972,183 |
|
|
7/12/2001 |
|
25,000 |
|
3.9 |
|
9.70 |
|
7/12/2011 |
|
152,507 |
|
386,483 |
(1) |
|
Mr. Bloems February 2001 options were granted to him upon his election as Senior Vice President and Chief Financial Officer. His July 2001 options were granted upon recognition of
his contributions to the Company. All of Mr. Bloems options become exercisable in equal annual one-third installments from date of grant. In the event of a Change in Control of the Company, all outstanding stock options become fully vested and
immediately exercisable in their entirety. In addition, during the 60-day period following the Change in Control, any stock option (or portion thereof) may generally be surrendered for cancellation for a payment of the difference between the fair
market value and option price as more fully described in the 1996 Plan. |
(2) |
|
The exercise price per share for the options is equal to the fair market value of the Common Stock on the date of grant. The exercise price may be paid in cash or, at the discretion of
the Organization & Compensation Committee, in Shares of Company Common Stock valued at the fair market value on the date immediately preceding the date of exercise, or any combination thereof. |
(3) |
|
The dollar amounts in this table represent the potential realizable value of the stock options granted, assuming that the market price of the Shares of Company Common Stock appreciate in
value from the date of grant to the end of the option term at annualized rates of 5% and 10%. Therefore, these amounts are not the actual value of the options granted and are not intended to forecast possible future appreciation, if any, of Company
Common Stock prices. No assurances can be given that the stock price will appreciate at these rates or experience any appreciation at all. The fair market value of the Companys Common Stock was $11.9250 on December 31, 2001.
|
17
2001 OPTION EXERCISES AND YEAR-END VALUES
The following table provides information on the value of stock
options exercised during the year-ended December 31, 2001 and the year-end values of unexercised options for the Named Executive Officers.
|
|
|
|
|
|
Number of Securities Underlying Unexercised Options at Year End
|
|
Value of Unexercised In-the-Money Options at Year End (1)
|
|
|
Shares Acquired On Exercise #
|
|
Value Realized $
|
|
Exercisable #
|
|
Unexercisable #
|
|
Exercisable $
|
|
Unexercisable $
|
Michael B. McCallister |
|
3,000 |
|
10,396 |
|
618,574 |
|
384,286 |
|
1,803,846 |
|
1,821,437 |
James E. Murray |
|
5,000 |
|
16,651 |
|
340,472 |
|
43,333 |
|
967,394 |
|
148,539 |
Kenneth J. Fasola |
|
|
|
|
|
296,107 |
|
43,333 |
|
297,081 |
|
148,539 |
Jonathan T. Lord, M.D. |
|
|
|
|
|
50,000 |
|
100,000 |
|
265,000 |
|
530,000 |
James H. Bloem |
|
|
|
|
|
|
|
75,000 |
|
|
|
55,625 |
(1) |
|
The Value of Unexercised In-the-Money Options is based on the difference between the December 31, 2001 fair market value of the Companys Common Stock of $11.9250 as
reported on the New York Stock Exchange Composite Tape, and the exercise price of the options. If the December 31, 2001 price of $11.9250 is less than the per share exercise price, no amounts are shown. |
18
OFFICERS TARGET RETIREMENT PLAN
The Company has in effect the OTRP, which is a non-qualified, unfunded
plan providing supplemental retirement benefits to each elected Company officer, including the Named Executive Officers, and other designated key employees.
The following table illustrates the estimated maximum annual benefit which would be payable at age 65 to a participant, at various average compensation levels for specified years of credited service, under the OTRP:
Estimated OTRP Maximum Annual Benefit at Age 65
For Years of Credited
Service Shown (1)(2)
Average Rate of Compensation
|
|
10 Years
|
|
15 Years
|
|
20 Years
|
|
25 Years
|
|
30 Years
|
$ 100,000 |
|
$ 16,700 |
|
$ 25,050 |
|
$ 33,400 |
|
$ 41,750 |
|
$ 50,000 |
200,000 |
|
33,400 |
|
50,100 |
|
66,800 |
|
83,500 |
|
100,000 |
300,000 |
|
50,100 |
|
75,150 |
|
100,200 |
|
125,250 |
|
150,000 |
400,000 |
|
66,800 |
|
100,200 |
|
133,600 |
|
167,000 |
|
200,000 |
500,000 |
|
83,500 |
|
125,250 |
|
167,000 |
|
208,750 |
|
250,000 |
600,000 |
|
100,200 |
|
150,300 |
|
200,400 |
|
250,500 |
|
300,000 |
700,000 |
|
116,900 |
|
175,350 |
|
233,800 |
|
292,250 |
|
350,000 |
1,000,000 |
|
167,000 |
|
250,500 |
|
334,000 |
|
417,500 |
|
500,000 |
1,500,000 |
|
250,500 |
|
375,750 |
|
501,000 |
|
626,250 |
|
750,000 |
2,000,000 |
|
334,000 |
|
501,000 |
|
668,000 |
|
835,000 |
|
1,000,000 |
(1) |
|
These estimates are based on the assumption that (a) the OTRP will be continued under its present terms; (b) the participant will continue with the Company until, and retire at, age 65;
and (c) the participant elects to receive an annual distribution instead of a lump sum payment. |
(2) |
|
The amounts shown are the total targeted retirement benefit and are reduced with respect to benefits received under the Retirement Account in the HRSP, the Supplemental Executive
Retirement Plan and Social Security benefits. |
The maximum years of service credited under the OTRP are 30 years,
unless otherwise changed by the Board of Directors. As of January 1, 2002, the years of service for each of the Named Executive Officers are as follows: Michael B. McCallister28; James E. Murray12; Kenneth J. Fasola12; Jonathan T.
Lord, M.D.2 and James H. Bloem0.90.
AGREEMENTS WITH DIRECTORS AND OFFICERS
In September 2000, the Company entered into an agreement with Mr.
McCallister (the McCallister Agreement) pursuant to which he: (1) serves as President and Chief Executive Officer of the Company at an annual base salary in an amount not less than $650,000; (2) participates in an incentive plan
providing for a target incentive compensation amount of not less than 125% of his base salary; and (3) is eligible for participation in all benefit plans and programs made available by the Company for its executive employees.
In the event of termination of employment without Good Cause (as defined in the McCallister Agreement), or with Good Cause under certain circumstances
as set out in the McCallister Agreement, or pursuant to disability or death, the Company will pay to him or his
19
estate a prorated bonus calculated on the basis of 100% of base salary, plus a severance amount equal to his annual base salary plus bonus calculated at 100% of his base salary. He is also
entitled to continue his coverage under the Companys life, health and disability plans for a 12-month period upon the same terms and costs for other employees of the Company. Additionally, all of his stock options shall become fully vested and
shall be exercisable for a two-year period following his termination.
In the event of termination of employment with Good Cause, Mr.
McCallister would receive an amount equal to his then current base salary earned but not yet paid and shall have a period of 90 days to exercise any vested options. Mr. McCallister would forfeit any unvested options or restricted shares.
In the event of termination of employment because Mr. McCallister gives notice of termination of the McCallister Agreement, or because
Mr. McCallister voluntarily terminates his employment during the Employment Period, then the Company shall pay to him an amount equal to his then current base salary. Any bonus payable shall be prorated. He shall have two years to exercise any
vested options. He is also entitled to continue his coverage for a 12-month period under the Companys life, health and disability plans upon the same terms and costs for other similarly situated employees of the Company.
In the event of termination of employment following a Change in Control, as defined in the McCallister Agreement, then Mr. McCallister shall receive:
(1) 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 a prorated bonus calculated at 125% of
his Higher Annual Base Salary; (2) an amount equal to two and one-half times the sum of the Higher Annual Base Salary plus the maximum target incentive compensation which could have been earned; (3) continued coverage for a two-year period, at the
Companys expense, under all life, health, dental, accidental death and dismemberment and disability insurance; and (4) a gross up amount for any payments that constitute an excess parachute payment.
The McCallister Agreement also contains provisions not to compete or solicit for a 12-month period following termination.
In March 1999, the Company entered into an agreement with Mr. Fasola pursuant to which he: (1) serves as a senior officer of the Company at an annual base salary
in an amount not less than $470,000; (2) participates in an incentive plan providing for a target incentive compensation amount of not less than 75% of his base salary; and (3) is eligible for participation in all benefit plans and programs made
available by the Company for its executive employees (the Fasola Agreement).
In the event of termination of employment
without Good Cause (as defined in the Fasola Agreement), or pursuant to disability or death, the Company will pay to him or his estate a prorated bonus calculated on the basis of 100% of base salary, plus a severance amount equal to his annual base
salary. He is also entitled to continue his coverage under the Companys life, health and disability plans for a 12-month period upon the same terms and costs for other employees of the Company. Additionally, all stock options shall become
fully vested and shall be exercisable for a two-year period following his termination.
In the event of termination of employment with
Good Cause, Mr. Fasola would receive an amount equal to his then current base salary earned but not yet paid and shall have a period of 90 days to exercise any vested options. Mr. Fasola would forfeit any unvested options or restricted shares.
20
In the event of termination of employment because Mr. Fasola gives notice of termination of the Fasola
Agreement, because Mr. Fasola voluntarily terminates his employment during the Employment Period, or with Good Cause under certain circumstances as set out in the Fasola Agreement, the Company shall pay to him an amount equal to his base salary. Any
bonus payable shall be prorated. He is also entitled to continue his coverage for a 12-month period under the Companys life, health and disability plans upon the same terms and costs for other similarly situated employees of the Company.
In the event of termination of employment following a Change in Control, as defined in the Fasola Agreement, Mr. Fasola shall receive:
(1) 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 incentive compensation which has
been earned; (2) an amount equal to one and one-half times the sum of the Higher Annual Base Salary plus the maximum target incentive compensation which could have been earned; and (3) continued coverage for a two-year period, at the Companys
expense, under all life, health, dental, accidental death and dismemberment and disability insurance.
The Fasola Agreement also contains
a covenant not to compete for a 12-month period following termination.
In December 1999, the Company entered into an agreement with Mr.
Jones (the Jones Agreement) formalizing the payments he receives as Chairman of the Board. See Director Compensation for a description of the terms of the Jones Agreement.
All officers elected by the Board of Directors, including the Named Executive Officers, generally receive health benefits upon termination for themselves and their eligible dependents at a
predetermined rate until the earlier of attainment of age 65 or obtaining other coverage.
The Company has entered into agreements with
all other officers, including Mr. Murray, Dr. Lord, and Mr. Bloem and key management employees, which for a two-year period following a Change in Control provide certain benefits upon termination. Such termination shall be involuntary or shall
be due to a resignation as a result of a change in responsibilities or compensation. Under these agreements, these individuals would be entitled to receive severance pay which generally is determined by multiplying the sum of each individuals
annual base salary, and the maximum incentive compensation payable to the individual, by a multiple ranging from one to one and one-half.
In addition, in the event of a Change in Control of the Company, benefits are payable under the Companys Stock Option and Restricted Stock Plans, and health, life and disability insurance coverage are available.
21
CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS
In 1994, the Company entered into an agreement with JAPC, Inc.
(JAPC), which is owned by David A. Jones. The Company provides hangar space, pilot services and maintenance for an airplane owned by JAPC, and the Company may also use the JAPC pilots to fly Company aircraft. The rate paid for the hangar
space is at least as favorable to the Company as market rates for comparable space. The Company is fully reimbursed for the cost of airplane maintenance. Either party upon 30 days written notice generally may terminate the agreement. For the
year ended December 31, 2001, the Company was reimbursed $54,875 by JAPC.
Effective January 1998, the Company entered into an Aircraft
Interchange Agreement with JAPC. Under the terms of the Agreement, the Company leases its aircraft to JAPC and JAPC leases its aircraft to the Company. The lessee exchanges with the lessor equal time on the lessees aircraft. The Company and
JAPC each bill the other for any flights that occurred in the preceding month. Any difference in number of hours is carried over to succeeding months and is offset against flight hours on aircraft of the other party. Either party upon 60 days
written notice generally may terminate the agreement. For the year ended December 31, 2001 the Company used JAPCs aircraft 40.3 hours and JAPC used the Companys aircraft 37.5 hours.
In 1995, the Company completed a commitment to invest $1 million in the African-American Venture Capital Fund, LLC, a Kentucky Limited Liability Company (Fund). In 2000 the
Company invested an additional $250,000 in the Fund. In 2002, the Company intends to invest an additional $175,000 in the Fund. These investments make the Company a greater than 10% stockholder of the Fund. David A. Jones has a similar investment in
the Fund and is also a greater than 10% stockholder of the Fund. David A. Jones, Jr. is a director of the Fund. The Fund was established to provide capital and management resources to enhance the growth and development of businesses owned by
African-Americans living in the metropolitan Louisville, Kentucky area.
During 2001, a subsidiary of the Company (Subsidiary)
renewed a one year contract with Main Street Realty, Inc. (Main Street) of which Mr. Jones is Chairman, Director and sole owner, to provide health insurance benefits to employees of Main Street. The terms of the contract, including the
premiums charged and benefits provided, are comparable to those extended to other non-affiliated customers of Subsidiary in the area. During 2001, Subsidiary received payments from Main Street of approximately $78,961.
22
The Audit Committee, or the Committee, of the Company is currently
comprised of four directors. All members are independent and financially literate as defined in the New York Stock Exchange listing standards. The Board of Directors has adopted a written charter for the Committee that was included as Appendix A to
the Proxy Statement filed for the meeting held May 17, 2001.
The Committee reviews Humanas financial reporting processes on behalf
of the Board of Directors. In fulfilling its responsibilities, the Committee has reviewed and discussed the audited financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2001 with Humanas management
and its independent auditors, PricewaterhouseCoopers LLP (PwC). Management is responsible for the financial statements and the reporting process, including the system of internal controls. PwC is responsible for expressing an opinion on
the conformity of those audited financial statements with accounting principles generally accepted in the United States of America. Management has represented to PwC and the Committee that the Companys consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the United States of America. The Committee discussed with PwC the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit
Committees, as amended. In addition, the Committee has discussed with PwC, the auditors independence from Humana and its management including the matters in the written disclosures required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees. In this regard, the Committee also reviewed the fees paid by Humana to PwC for the year ended December 31, 2001. During that year, Humana paid PwC a total of $2,465,900, consisting of $882,800
for Audit Fees and $1,583,100 for All Other Fees. Fees included in All Other Fees total $1,138,000 for the audits of Humanas statutory subsidiaries as required by State Departments of Insurance, mandated regulatory and compliance
reviews, and tax services. No amounts were paid for Financial Systems Design and Implementation.
The Committee discussed with
Humanas internal auditors and with PwC the overall scope and plans for their respective audits. The Committee is provided the opportunity to meet with the internal auditors and with PwC with and without management present to discuss the
results.
In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors, and the Board
has approved, that the audited financial statements be included in the Humana Annual Report on Form 10-K for the year ended December 31, 2001. Copies of the audited financial statements are also included in this Proxy Statement under the caption
Appendix ASupplemental Information.
All members of the Audit Committee of Humana whose members are as follows submit
the foregoing report:
AUDIT COMMITTEE
Michael E. Gellert, Chairman
Charles M. Brewer
John R. Hall
Irwin Lerner
23
APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors, in accordance with the recommendation of its
Audit Committee, has appointed PricewaterhouseCoopers LLP as independent accountants to audit the consolidated financial statements of the Company for the year ending December 31, 2002. Representatives of PricewaterhouseCoopers LLP will be present
at the Annual Meeting and will be afforded the opportunity to make a statement if they desire to do so and to respond to appropriate questions.
24
ORGANIZATION & COMPENSATION COMMITTEE REPORT
Executive Officer Compensation Policy
The Organization & Compensation Committee (the Committee) administers the Companys executive officer compensation program, the key
components of which are base salary, incentive compensation and equity compensation (stock option and restricted stock awards). Each member of the Committee is an independent non-employee director who has never been an employee of the Company.
The executive officer compensation program rewards executive officers for short and long-term performance. In addition to base salary,
executive officers are compensated on a performance-oriented basis through the use of incentive compensation linking both short and long-term results. One component, the annual incentive bonus, permits team and individual performance to be
recognized on an annual basis and is based, in part, on an evaluation of the contribution made by the officer to Company performance. Equity compensation awards are included in the compensation program to reward executive officers for longer-term
strategic actions that increase Company value and thus stockholder value. This use of equity compensation directly relates a significant portion of each executive officers long-term remuneration to the Companys stock price, and thus
aligns the executives compensation with the interests of the Companys other stockholders. The granting of stock options, as well as the more limited use of restricted stock, is used to: (1) recognize promotions of executives into
positions of significant responsibilities; (2) recognize significant accomplishments of executives, particularly as the accomplishments impact growth, profits and/or competitive positioning; and (3) as an additional incentive to attract and retain
high level executive talent. The Committee uses outside consultants to assist it in evaluating the various components of executive officer compensation.
The executive officer compensation program is designed to allow the Company to be competitive in the marketplace in attracting, motivating and retaining key executive officers. The marketplace is defined as both publicly traded
companies approximating the Companys revenue and employee size, and specific companies in the health care industry. Although data from specific competitors in the managed care industry is used in the compensation analysis, the Company uses a
health care index in its Stock Performance graph instead of a specific peer group. The Committee believes this definition of the marketplace provides a good benchmark for analyzing the competitiveness of the Companys executive compensation
program. The Committee considers the overall compensation package when setting any one component of compensation.
Base Compensation
Base compensation for executive officers is determined by an assessment of overall company performance, executive officer performance, changes in
executive officer responsibilities and relevant industry survey findings. While many aspects of performance can be measured in financial terms, the Committee also evaluates senior management in areas of performance that are more subjective. These
areas include the development and execution of strategic plans, the exercise of leadership in the development of management and other associates, innovation and improvement in the Companys products and processes, as well as the
executives involvement in industry groups and in the communities that the Company serves. The Companys policy is to target executive base salaries to be at the 50th percentile of the marketplace as defined above. Individual salaries are generally established in alignment with this target to ensure the attraction, development and retention of superior talent and in relation
to individual executive performance.
25
Incentive Compensation
The Companys incentive compensation plans are designed to reward officers and other designated key associates for the attainment of financial goals and other performance objectives approved annually by the Committee.
Incentive compensation objectives are constructed to encourage responsible and profitable growth while taking into account non-routine factors that may be integral to the success of the Company. During 2001, the Company had four incentive
compensation plans that covered its executive officers. Since his election to President and Chief Executive Officer in February 2000, Mr. McCallister has participated in the Humana Inc. Executive Management Incentive Compensation PlanGroup A
providing for an award based solely on the attainment of pre-established Company consolidated net income objectives, with a maximum potential payment of 125% of base pay.
All other executive officers, including Messrs. Murray and Fasola, Dr. Lord and Mr. Bloem were included in other management incentive plans (MIPs) which based awards on the attainment
of certain earnings and growth goals for 2001 with a potential target payment ranging from 75% to 100% of base pay. The 2001 earnings goals under the MIPs for the Named Executive Officers were met and the Named Executive Officers received payment
pursuant to the previously approved plans.
Equity Compensation
The Company uses stock options and, in limited instances, restricted stock awards to reward executive officers and other key associates for long-term performance and as a method to attract, motivate, and retain key employees.
The use of equity based compensation provides a vital, long-term link between the results achieved for the Companys stockholders and the rewards provided to executive officers and other associates.
All stock options are granted at the fair market value of the Companys stock on the date of grant. The Committee, through review of, among other things,
stock programs at comparable companies, determines the aggregate amounts, terms and timing of stock option and restricted stock awards with, from time to time, the assistance of outside consultants. The number of shares covered by each award
reflects the executives level of responsibility along with past and anticipated future contributions to the Company.
In 1998, the
Company awarded performance-based, restricted stock to 86 employees, including the Named Executive Officers, other than Dr. Lord and Mr. Bloem. This award vested in 2002, based upon the achievement by the Company of its performance objectives in
2001.
In 2001, the Committee granted options totaling approximately 0.55% of the Companys outstanding Common Stock to its
associates. During 2001, stock options generally were only granted to new hires and for promotions. As an inducement to Mr. Bloem to join the Company, he was granted options for 50,000 shares and was awarded 50,000 shares of Restricted Stock which
will vest three years from the date of grant. In July, Mr. Bloem was granted an option for 25,000 shares and was awarded 25,000 shares of Restricted Stock that will vest three years from the date of grant. The second awards were granted to Mr. Bloem
in recognition of his contribution in implementing Company initiatives in the financial operations area. No other Named Executive Officer received a stock option grant in 2001.
See Summary Compensation Table, and 2001 Stock Option Grants for additional information on the management incentive plan payments and the equity awards.
26
Chief Executive Officer Compensation
In November 2001, Mr. McCallister received an increase in his base salary of Fifty Thousand Dollars ($50,000) bringing his base salary to Seven Hundred Thousand Dollars ($700,000) in recognition
of his achievements and the progress in the Companys operational initiatives. The Company has previously entered into an Employment Agreement with Mr. McCallister that is more fully described in this Proxy Statement under Executive
Compensation of the CompanyCertain Agreements.
Executive Compensation Tax Deductibility
The Omnibus Budget Reconciliation Act of 1993 amended the Code to generally provide that compensation paid by publicly-held corporations to the chief executive officer and the four most
highly paid executive officers in excess of $1 million per year per executive will be deductible by the Company only if paid pursuant to qualifying performance-based compensation plans approved by stockholders of the Company. Compensation as defined
by the Code includes, among other things, base salary, incentive compensation and gains on stock options and restricted stock. It is the Committees policy to maximize the effectiveness of the Companys executive compensation plans. In
that regard, the Committee intends to maintain flexibility to take actions which it deems to be in the best interest of the Company and its stockholders. Such actions may not always qualify for tax deductibility under the Code. The Company believes
it has taken the necessary steps to qualify the Companys performance-based compensation plans for tax deductibility. The Company also believes that all executive compensation paid for 2001 will be deductible for federal income tax purposes.
All members of the Organization & Compensation Committee of the Company whose members are as follows submit the foregoing report:
ORGANIZATION & COMPENSATION COMMITTEE
Irwin Lerner, Chairman
Charles M. Brewer
Michael E. Gellert
John R. Hall
The foregoing reports of the Audit Committee and the Organization & Compensation Committee shall not be deemed incorporated by reference by any general statement incorporating by reference the
Proxy Statement into any filing under the Securities Act of 1933 or the Exchange Act, and shall not otherwise be deemed filed under such Acts except to the extent that the Company specifically incorporates this information by reference.
27
COMPANY STOCK PERFORMANCE
The following graph compares the performance of the Companys Common Stock to
the Standard & Poors Composite 500 Stock Index (S&P 500) and the Morgan Stanley Healthcare Payor Index for the 60 months ended December 31, 2001. The graph assumes an investment of $100 in each of the Companys Common
Stock, the Standard & Poors Composite 500 Stock Index, and the Morgan Stanley Healthcare Payor Index on December 31, 1996, and also assumes reinvestment of all dividends.
|
|
12/31/96
|
|
12/31/97
|
|
12/31/98
|
|
12/31/99
|
|
12/31/00
|
|
12/31/01
|
Humana Inc. |
|
$ |
100 |
|
$ |
109 |
|
$ |
94 |
|
$ |
43 |
|
$ |
80 |
|
$ |
62 |
S&P 500 |
|
$ |
100 |
|
$ |
131 |
|
$ |
166 |
|
$ |
198 |
|
$ |
178 |
|
$ |
155 |
Morgan Stanley Healthcare Payor Index |
|
$ |
100 |
|
$ |
104 |
|
$ |
110 |
|
$ |
98 |
|
$ |
213 |
|
$ |
194 |
28
The audited financial statements of the Company for the year ended December 31, 2001,
Managements Discussion and Analysis of Financial Condition and Results of Operations and certain other information are included as supplemental information to this Proxy Statement.
The Company will provide a copy of our Annual Report on Form 10-K for the year ended December 31, 2001, excluding certain of its exhibits, without charge to anyone who makes a written request to
Humana Inc., Investor Relations Department, 500 West Main Street, Louisville, KY 40202. The Companys Annual Report on Form 10-K and various other filings may also be accessed via the Investor Relations page on the Companys web site at
www.humana.com.
|
By |
Order of the Board of Directors, |
|
Jo |
an O. Lenahan, Secretary |
29
HUMANA INC.
SUPPLEMENTAL INFORMATION
TO PROXY STATEMENT FOR MAY 16, 2002 ANNUAL MEETING
INDEX TO SUPPLEMENTAL INFORMATION
|
|
A-2 |
|
|
|
A-3 |
|
|
|
A-37 |
|
|
|
A-38 |
|
|
|
A-39 |
|
|
|
A-40 |
|
|
|
A-41 |
|
|
|
A-65 |
|
|
|
A-66 |
Humana Inc.
|
|
2001
|
|
|
2000
|
|
|
1999 (a)
|
|
|
1998 (b)
|
|
|
1997 (c)
|
|
|
|
(in thousands, except per share results, membership and ratios) |
|
Summary of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
$ |
9,938,961 |
|
|
$ |
10,394,631 |
|
|
$ |
9,958,582 |
|
|
$ |
9,597,749 |
|
|
$ |
7,880,314 |
|
Administrative services fees |
|
|
137,090 |
|
|
|
86,298 |
|
|
|
97,940 |
|
|
|
84,546 |
|
|
|
68,868 |
|
Investment and other income |
|
|
118,835 |
|
|
|
115,021 |
|
|
|
155,013 |
|
|
|
183,885 |
|
|
|
155,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
10,194,886 |
|
|
|
10,595,950 |
|
|
|
10,211,535 |
|
|
|
9,866,180 |
|
|
|
8,104,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical |
|
|
8,279,844 |
|
|
|
8,781,998 |
|
|
|
8,533,090 |
|
|
|
8,040,951 |
|
|
|
6,521,866 |
|
Selling, general and administrative |
|
|
1,545,129 |
|
|
|
1,524,799 |
|
|
|
1,466,181 |
|
|
|
1,413,329 |
|
|
|
1,185,610 |
|
Depreciation and amortization |
|
|
161,531 |
|
|
|
146,548 |
|
|
|
123,858 |
|
|
|
127,662 |
|
|
|
107,675 |
|
Asset impairments and other charges |
|
|
|
|
|
|
|
|
|
|
459,852 |
|
|
|
34,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,986,504 |
|
|
|
10,453,345 |
|
|
|
10,582,981 |
|
|
|
9,616,125 |
|
|
|
7,815,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
208,382 |
|
|
|
142,605 |
|
|
|
(371,446 |
) |
|
|
250,055 |
|
|
|
289,746 |
|
Interest expense |
|
|
25,302 |
|
|
|
28,615 |
|
|
|
33,393 |
|
|
|
46,972 |
|
|
|
19,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
183,080 |
|
|
|
113,990 |
|
|
|
(404,839 |
) |
|
|
203,083 |
|
|
|
270,129 |
|
Provision (benefit) for income taxes |
|
|
65,909 |
|
|
|
23,938 |
|
|
|
(22,419 |
) |
|
|
74,126 |
|
|
|
96,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
117,171 |
|
|
$ |
90,052 |
|
|
$ |
(382,420 |
) |
|
$ |
128,957 |
|
|
$ |
173,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
0.71 |
|
|
$ |
0.54 |
|
|
$ |
(2.28 |
) |
|
$ |
0.77 |
|
|
$ |
1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
$ |
0.70 |
|
|
$ |
0.54 |
|
|
$ |
(2.28 |
) |
|
$ |
0.77 |
|
|
$ |
1.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments |
|
$ |
2,321,336 |
|
|
$ |
2,306,148 |
|
|
$ |
2,778,546 |
|
|
$ |
2,843,423 |
|
|
$ |
2,828,264 |
|
Total assets |
|
|
4,403,638 |
|
|
|
4,306,978 |
|
|
|
4,899,845 |
|
|
|
5,495,605 |
|
|
|
5,600,444 |
|
Medical and other expenses payable |
|
|
1,086,386 |
|
|
|
1,181,027 |
|
|
|
1,756,227 |
|
|
|
1,908,175 |
|
|
|
2,074,934 |
|
Debt |
|
|
578,489 |
|
|
|
599,952 |
|
|
|
686,213 |
|
|
|
822,977 |
|
|
|
889,195 |
|
Stockholders equity |
|
|
1,507,949 |
|
|
|
1,360,421 |
|
|
|
1,268,009 |
|
|
|
1,688,363 |
|
|
|
1,501,315 |
|
|
Operating Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical expense ratio |
|
|
83.3 |
% |
|
|
84.5 |
% |
|
|
85.7 |
% |
|
|
83.8 |
% |
|
|
82.8 |
% |
SG&A expense ratio |
|
|
15.3 |
% |
|
|
14.5 |
% |
|
|
14.6 |
% |
|
|
14.6 |
% |
|
|
14.9 |
% |
|
Medical Membership by Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully insured |
|
|
2,301,300 |
|
|
|
2,545,800 |
|
|
|
3,083,600 |
|
|
|
3,261,500 |
|
|
|
3,258,600 |
|
Administrative services only |
|
|
592,500 |
|
|
|
612,800 |
|
|
|
648,000 |
|
|
|
646,200 |
|
|
|
651,200 |
|
Medicare supplement |
|
|
|
|
|
|
|
|
|
|
44,500 |
|
|
|
56,600 |
|
|
|
68,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial |
|
|
2,893,800 |
|
|
|
3,158,600 |
|
|
|
3,776,100 |
|
|
|
3,964,300 |
|
|
|
3,978,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare+Choice |
|
|
393,900 |
|
|
|
494,200 |
|
|
|
488,500 |
|
|
|
502,000 |
|
|
|
480,800 |
|
Medicaid |
|
|
490,800 |
|
|
|
575,600 |
|
|
|
616,600 |
|
|
|
643,800 |
|
|
|
635,200 |
|
TRICARE |
|
|
1,714,600 |
|
|
|
1,070,300 |
|
|
|
1,058,000 |
|
|
|
1,085,700 |
|
|
|
1,112,200 |
|
TRICARE ASO |
|
|
942,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Government |
|
|
3,542,000 |
|
|
|
2,140,100 |
|
|
|
2,163,100 |
|
|
|
2,231,500 |
|
|
|
2,228,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Medical Membership |
|
|
6,435,800 |
|
|
|
5,298,700 |
|
|
|
5,939,200 |
|
|
|
6,195,800 |
|
|
|
6,206,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Specialty Membership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental |
|
|
1,690,700 |
|
|
|
1,665,900 |
|
|
|
1,628,200 |
|
|
|
1,375,500 |
|
|
|
936,400 |
|
Other |
|
|
571,300 |
|
|
|
678,900 |
|
|
|
1,333,100 |
|
|
|
1,257,800 |
|
|
|
1,504,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty membership |
|
|
2,262,000 |
|
|
|
2,344,800 |
|
|
|
2,961,300 |
|
|
|
2,633,300 |
|
|
|
2,440,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes charges of $584.8 million pretax ($499.3 million after tax, or $2.97 per diluted share) primarily related to goodwill impairment, losses on non core asset sales, professional
liability reserve strengthening, premium deficiency and medical reserve strengthening. |
(b) |
|
Includes charges of $132.4 million pretax ($84.1 million after tax, or $0.50 per diluted share) primarily related to the costs of certain market exits and product discontinuances, asset
impairments, premium deficiency and a one-time non-officer employee incentive. |
(c) |
|
Includes the operations of the following entities since the dates we acquired them: Health Direct, Inc., February 28, 1997; Physician Corporation of America, September 8, 1997; and
ChoiceCare Corporation, October 17, 1997. |
A-2
Humana Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The consolidated financial statements of Humana Inc. in this document present the Companys financial position, results of operations and cash flows, and should be read in conjunction with
the following discussion and analysis. References to we, us, our, Company, and Humana mean Humana Inc. and its subsidiaries. This discussion includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. When used in this filing and in future filings with the Securities and Exchange Commission, in our press releases, investor presentations, and in oral statements made by or with the
approval of one of our executive officers, the words or phrases like expects, anticipates, intends, likely will result, estimates, projects or variations of such words and
similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things,
information set forth in the Cautionary Statements section of this document. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document might not occur. There may also be other risks
that we are unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward-looking statements.
Introduction
Headquartered in Louisville, Kentucky, Humana Inc. is one of the nations
largest publicly traded health benefits companies, based on our 2001 revenues of $10.2 billion. We offer coordinated health insurance coverage and related services through a variety of traditional and Internet-based plans for employer groups, and
government-sponsored programs. As of December 31, 2001, we had approximately 6.4 million members in our medical insurance programs, as well as approximately 2.3 million members in our specialty products programs. We have approximately 400,000
contracts with physicians, hospitals, dentists and other providers to provide health care to our members. In 2001, over 70% of our premiums and administrative services fees were derived from members located in Florida, Illinois, Texas, Kentucky, and
Ohio.
During the first quarter of 2001, we realigned our management to better reflect our focus on the consumer. As part of this
management realignment, we redefined our business into two segments, Commercial and Government. The Commercial segment consists of members enrolled in products marketed to employer groups and individuals, and includes three lines of business: fully
insured medical, administrative services only, or ASO, and specialty. The Government segment consists of members enrolled in government-sponsored plans, and includes three lines of business: Medicare+Choice, Medicaid, and TRICARE. Results of each
segment are measured by income before income taxes. We allocate all selling, general and administrative expenses, investment and other income, and interest expense, but not assets, to our segments. Members served by our two segments generally
utilize the same medical provider networks, enabling us to obtain more favorable contract terms with providers. Our segments also share overhead costs and assets. As a result, the profitability of each segment is interdependent.
We recently concluded a two-year process of divesting those products and markets that either lacked the prospect for long-term profitability or no
longer fit our strategic focus. During 2000 and 2001, we completed transactions to divest our workers compensation business and our Medicaid businesses in north Florida, Milwaukee, Wisconsin, and Austin, Houston and San
A-3
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Antonio, Texas. We also exited numerous counties in our Medicare+Choice business, reinsured with third parties substantially all of our Medicare supplement business, and discontinued aspects of
our product line focusing on small group commercial business in 17 states.
Our core strategy currently focuses on growth. The cornerstone
of our commercial growth strategy is the offering of innovative products which are supported by technology and service excellence. During the past two years, we developed an expansive range of consumer-directed products and developed
industry-leading electronic self-service capabilities. Within the Commercial segment during 2001, we experienced membership declines primarily as a result of exercising a rigorous pricing discipline in small group accounts located in geographic
markets that are not considered key to our long-term growth strategy. Although we will continue to employ pricing discipline, we anticipate growth in our commercial membership during 2002 as a result of this consumer-directed approach and our
commitment to provide excellent customer service.
Within our Government segment, we acquired 1.2 million eligible TRICARE members on May
31, 2001. TRICARE is the U.S. Department of Defenses health benefits program for military dependents and retirees. Humana has been the TRICARE contractor for Regions 3 and 4 since 1996. The 1.2 million additional TRICARE members, from Regions
2 and 5, brought total Humana TRICARE membership to 2.7 million members, making us the leading national contractor for this program. Additionally, during 2001, a new government program, called TRICARE for Life, became effective allowing
beneficiaries to continue in the TRICARE program even after becoming eligible for Medicare. Under the TRICARE for Life program, we provide administrative services only, for a fee, while the Department of Defense retains the risk of financing the
costs of benefits. As of December 31, 2001, TRICARE ASO membership was 0.9 million of the total 2.7 million TRICARE members, including 0.6 million members in Regions 2 and 5 acquired in 2001.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition
and results of operations is based upon our consolidated financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements and accompanying notes requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, we evaluate our estimates and those critical
accounting policies related primarily to revenue and medical cost recognition. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ from those estimates. We
believe the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We generally establish one-year commercial membership
contracts with employer groups, subject to cancellation by the employer groups written notice. Our TRICARE contracts with the federal government and various state Medicaid programs are generally multi-year contracts. Our Medicare+Choice
contracts with the federal government renew annually. We bill and collect
A-4
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
premium remittances from employer groups and some individual Medicare+Choice members monthly. We receive monthly premiums from the federal government and various states according to government
specified reimbursement rates and various contractual terms.
Premium revenues are recognized as income in the period members are entitled
to receive services, and are net of estimated uncollectible amounts and retroactive membership adjustments. Retroactive membership adjustments result from enrollment changes not yet processed, or not reported by an employer group or the government.
We routinely monitor these trends, as well as prevailing and anticipated economic conditions, and any required adjustments are reflected in current operations. Premiums and operating expenses may also include adjustments attributable to our TRICARE
contracts, which generally reflect variation in healthcare experience and change orders for services not originally specified in the contracts. Our TRICARE contracts are subject to adjustments resulting from negotiations with the federal government.
Revenues and corresponding expenses for these adjustments generally are recognized when a settlement becomes known and the collectibility reasonably assured.
Administrative services fees are earned as services are performed. Administrative services generally include the processing of claims, offering access to our provider networks and clinical programs, and responding to customer
services inquiries from members of self-funded employers. Under ASO contracts, self-funded employers and, for TRICARE ASO, the Department of Defense, retain the risk of financing the cost of health benefits.
Premiums receivable are shown net of an allowance for estimated uncollectible accounts and retroactive membership adjustments based on historical trends. Premiums
received prior to the period members are entitled to receive services are recorded as unearned premium revenues.
Medical Cost
Recognition
Medical costs include claim payments, capitation payments, allocations of certain centralized expenses and various other
costs incurred to provide health insurance coverage 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 contractual fees
disbursed to primary care physicians and other providers who are responsible for providing medical care to members. We estimate the costs of our future medical claims and other expense payments using actuarial methods and assumptions based upon
claim payment patterns, medical cost inflation, historical developments such as claim inventory levels and claim receipt patterns, and other relevant factors, and record medical claims reserves for future payments. We continually review estimates of
future payments relating to medical claims costs for services incurred in the current and prior periods and make necessary adjustments to our reserves.
We reassess the profitability of our contracts for providing health insurance coverage to our members when current operating results or forecasts indicate probable future losses. We establish a premium deficiency liability in
current operations to the extent that the sum of a markets expected future medical costs, claim adjustment expenses, and maintenance costs exceeds related future premiums under contract. Anticipated investment income is not considered for
purposes of computing the premium deficiency. Losses recognized as a premium
A-5
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
deficiency result in a beneficial effect in subsequent periods as operating losses under these contracts are charged to the liability previously established. At December 31, 2001, there were no
premium deficiency liabilities. Because the majority of our member contracts renew annually, we do not anticipate recording a premium deficiency liability, except when unanticipated adverse events or changes in circumstances indicate otherwise.
Medical cost inflation, among other items, may significantly impact our estimate of medical costs. Medical cost inflationary trends today
are substantially higher than other segments of the economy and are increasing at an accelerating rate. In the early 1990s employer-driven migration to HMO enrollment was popular and resulted in several years of very low medical cost trends.
Today, there are very few economic forces existing to mitigate increases in the utilization of hospital and physician services, prescription drugs and new medical technologies, and the inflationary trend on the cost per unit for each of these
expense components. Other factors which could contribute to fluctuations in cost trends are government mandated benefits or other regulatory changes, catastrophes and epidemics.
We believe our medical and other expenses payable are adequate to cover future claims payments required. However, a relatively small variance between our estimates of medical cost trends and
actual trends could have a material impact, either favorable or unfavorable, on the adequacy of our medical claims reserves and our overall financial position. For example, a 10 basis point change in the estimate of our medical and other expenses
payable at December 31, 2001, which represents 38% of total liabilities, would require an adjustment of $10.9 million in a future period in which the revision in the estimate becomes known. A 100 basis point change in estimated medical expense
trends would have changed annual pretax results of our Commercial segment by $43.6 million and our Government segment by $39.2 million in 2001.
Recent
Transactions
Acquisitions
On May 31, 2001, we acquired the outstanding shares of common stock of a newly-formed Anthem Health Insurance Company subsidiary responsible for administering TRICARE benefits in Regions 2 and 5 for $43.5 million in cash, net
of direct transaction costs.
During 2000, we acquired a Houston-based health plan, two operating shell entities for future business
initiatives, and a hospital in-patient management services firm for $76.3 million in cash, net of direct transaction costs.
On June 1,
1999, we reached an agreement with FPA Medical Management, Inc., or FPA, FPAs lenders and a federal bankruptcy court under which we acquired the operations of 50 medical centers from FPA for approximately $14.8 million in cash, net of direct
transaction costs. We subsequently transferred operating responsibility for all acquired FPA medical centers under long-term provider agreements.
We accounted for each of these acquisitions under the purchase method of accounting and accordingly, our consolidated results of operations include the results of the acquired businesses from the date of acquisition. For each acquisition,
we allocated the purchase price to net tangible and identifiable intangible assets based upon their fair values. Any remaining value not assigned to net tangible or identifiable intangible assets was then allocated to goodwill.
A-6
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Identifiable intangible assets primarily relate to government, subscriber and provider contracts and the cost of the acquired licenses. Goodwill and identifiable intangible assets recorded in
connection with the acquisitions were $44.8 million in 2001, $52.1 million in 2000, and $16.5 million in 1999. The identifiable intangible assets are being amortized over periods ranging from 2 to 20 years, with a weighted average life of 5.7 years,
while goodwill is being amortized over periods ranging from 6 to 20 years, with a weighted average life of 17.0 years. Unaudited pro forma results of operations information have not been presented because the effects, individually or in the
aggregate, of these acquisitions were not significant to our results of operations or financial position.
Effective January 1, 2000, we
adopted a 20-year amortization period from the date of acquisition for goodwill previously amortized over 40 years. As further discussed in the Recently Issued Accounting Pronouncements section of this document, we ceased amortizing
goodwill subject to an annual impairment test upon adopting Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002.
Divestitures
During 2000, we completed transactions to divest our
workers compensation, north Florida Medicaid and Medicare supplement businesses. We estimated and recorded a $117.2 million loss in 1999 related to these divestitures. There was no change in the estimated loss during 2000. Divested assets,
consisting primarily of investment securities and reinsurance recoverables, totaled $651.9 million. Divested liabilities, consisting primarily of workers compensation and other reserves, totaled $437.6 million. Cash proceeds were $97.1
million, net of direct transaction costs for 2000. Revenue and pretax results associated with these businesses for the years ended December 31, 2000, and 1999 were as follows:
|
|
For the year ended December 31,
|
|
|
|
2000
|
|
|
1999
|
|
|
|
(in thousands) |
|
Revenues |
|
$ |
102,939 |
|
|
$ |
218,090 |
|
Pretax results |
|
$ |
(8,359 |
) |
|
$ |
(12,889 |
) |
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement No. 141, Business Combinations, or Statement 141, and Statement No. 142, Goodwill and Other Intangible
Assets, or Statement 142.
Statement 141 requires that all business combinations initiated after June 30, 2001 be accounted for
using the purchase method. Use of the pooling-of-interest method is no longer permitted.
Statement 142 requires that goodwill no longer
be amortized to earnings, but instead be reviewed at least annually for impairment using a two-step process. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. Impairment losses that
arise from completing a transitional impairment test during 2002 are to be reported as the cumulative effect of a change in accounting principle at the beginning of the
A-7
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
year. Subsequent impairments, if any, would be classified as an operating expense. Statement 142 also specifies the types of acquired intangible assets that are required to be recognized and
reported separately from goodwill.
At December 31, 2001, goodwill and identifiable intangible assets represented 19% of total assets and
55% of total stockholders equity. In 2001, amortization expense was $55.1 million for goodwill and $13.5 million for identifiable intangible assets. Effective January 1, 2002, we ceased amortizing goodwill upon adopting Statement 142.
Statement 142 requires completion of the first step of the transitional impairment test by June 30, 2002. Completion of the second step, if necessary, is required as soon as possible upon completing the first step but no later than December 31,
2002. We are currently in the process of completing the transitional impairment test. This test requires fair value measurements. We expect to use a discounted cash flow analysis and other valuation methodologies which utilize many assumptions and
estimates in determining an impairment loss including assumptions and estimates related to future earnings. Until we complete our analysis, no assurances can be given that we will or will not have an impairment.
In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or Statement 144. Statement 144
develops a single accounting model for long-lived assets to be disposed of by sale, and addresses significant implementation issues related to previous guidance. Statement 144 requires that long-lived assets to be disposed of by sale be measured at
the lower of their carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Statement 144 also broadens the reporting of discontinued operations by potentially qualifying more disposal
transactions for discontinued operations reporting. Generally, the provisions of Statement 144 are to be applied prospectively beginning on January 1, 2002.
Other
No related party transactions had a material effect on our financial position, results of operations or cash flows.
Certain immaterial related party transactions are discussed herein in the Proxy Statementsee Certain Transactions with Management and Others.
A-8
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Comparison of Results of Operations for 2001 and 2000
The following table presents certain financial data for our two segments for the years ended December 31, 2001 and 2000:
|
|
For the year ended December 31,
|
|
|
|
2001
|
|
|
2000
|
|
|
|
(in thousands, except ratios) |
|
Premium revenues: |
|
|
|
|
|
|
|
|
Fully insured |
|
$ |
4,941,888 |
|
|
$ |
5,263,602 |
|
Specialty |
|
|
304,714 |
|
|
|
291,315 |
|
|
|
|
|
|
|
|
|
|
Total Commercial |
|
|
5,246,602 |
|
|
|
5,554,917 |
|
|
|
|
|
|
|
|
|
|
Medicare+Choice |
|
|
2,909,478 |
|
|
|
3,286,351 |
|
TRICARE |
|
|
1,341,557 |
|
|
|
892,375 |
|
Medicaid |
|
|
441,324 |
|
|
|
660,988 |
|
|
|
|
|
|
|
|
|
|
Total Government |
|
|
4,692,359 |
|
|
|
4,839,714 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,938,961 |
|
|
$ |
10,394,631 |
|
|
|
|
|
|
|
|
|
|
Administrative services fees: |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
84,204 |
|
|
$ |
86,298 |
|
Government |
|
|
52,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
137,090 |
|
|
$ |
86,298 |
|
|
|
|
|
|
|
|
|
|
Medical expense ratios: |
|
|
|
|
|
|
|
|
Commercial |
|
|
83.1 |
% |
|
|
83.6 |
% |
Government |
|
|
83.6 |
% |
|
|
85.5 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
83.3 |
% |
|
|
84.5 |
% |
|
|
|
|
|
|
|
|
|
SG&A expense ratios: |
|
|
|
|
|
|
|
|
Commercial |
|
|
17.6 |
% |
|
|
17.2 |
% |
Government |
|
|
12.8 |
% |
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
15.3 |
% |
|
|
14.5 |
% |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
(2,013 |
) |
|
$ |
(7,954 |
) |
Government |
|
|
185,093 |
|
|
|
121,944 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
183,080 |
|
|
$ |
113,990 |
|
|
|
|
|
|
|
|
|
|
The following table presents our medical membership at December 31, 2001 and 2000:
|
|
December 31,
|
|
Change
|
|
|
|
2001
|
|
2000
|
|
Members
|
|
|
Percentage
|
|
Commercial segment medical members: |
|
|
|
|
|
|
|
|
|
|
Fully insured |
|
2,301,300 |
|
2,545,800 |
|
(244,500 |
) |
|
(9.6 |
)% |
ASO |
|
592,500 |
|
612,800 |
|
(20,300 |
) |
|
(3.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total Commercial |
|
2,893,800 |
|
3,158,600 |
|
(264,800 |
) |
|
(8.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Government segment medical members: |
|
|
|
|
|
|
|
|
|
|
Medicare+Choice |
|
393,900 |
|
494,200 |
|
(100,300 |
) |
|
(20.3 |
)% |
Medicaid |
|
490,800 |
|
575,600 |
|
(84,800 |
) |
|
(14.7 |
)% |
TRICARE |
|
1,714,600 |
|
1,070,300 |
|
644,300 |
|
|
60.2 |
% |
TRICARE ASO |
|
942,700 |
|
|
|
942,700 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Government |
|
3,542,000 |
|
2,140,100 |
|
1,401,900 |
|
|
65.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total medical membership |
|
6,435,800 |
|
5,298,700 |
|
1,137,100 |
|
|
21.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
A-9
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Overview
Net income was $117.2 million, or $0.70 per diluted share in 2001, compared to net income of $90.1 million, or $0.54 per diluted share in 2000. This increase in earnings occurred despite an
increase in our effective income tax rate from 21% in 2000 to 36% in 2001. The earnings increase resulted primarily from significant Medicare+Choice benefit reductions, improvements in determining appropriate premiums for our fully insured
commercial medical membership (a process we refer to as pricing discipline) and divestitures of those products and markets that either lacked the prospect for long-term profitability or no longer fit our strategic focus.
Premium Revenues and Medical Membership
Premium revenues decreased 4.4% to $9.9 billion for 2001, compared to $10.4 billion for 2000. This decrease was due to medical membership reductions from exiting numerous markets and products, partially offset by higher premium revenues
from our TRICARE acquisition on May 31, 2001, and premium yields in our commercial and Medicare+Choice products. Premium yield represents the percentage increase in the average premium per member over the comparable period in the prior year. Items
impacting premium yield include changes in premium rates, changes in government reimbursement rates, changes in the geographic mix of membership, and changes in the mix of benefit plans selected by our membership.
Commercial segment premium revenues decreased 5.6% to $5.2 billion for 2001, compared to $5.6 billion for 2000. This decrease was due to membership reductions
partially offset by premium yields on our fully insured commercial business. Our fully insured commercial medical membership decreased 9.6% or 244,500 members, to 2,301,300 at December 31, 2001 compared to 2,545,800 at December 31, 2000, as we
continued to focus on opportunities that satisfy our pricing criteria, and exit non-core businesses.
Government segment premium revenues
decreased 3.0% to $4.7 billion for 2001, compared to $4.8 billion for 2000. This decrease was primarily attributable to reductions in our Medicare+Choice and Medicaid membership partially offset by higher Medicare+Choice premium yield in 2001, and
higher premium revenues from our TRICARE acquisition on May 31, 2001. Medicare+Choice membership was 393,900 at December 31, 2001 compared to 494,200 at December 31, 2000, a decline of 100,300 members, or 20.3%. This decline in membership primarily
was attributable to the exits from 45 Medicare counties on January 1, 2001. Medicaid membership was 490,800 at December 31, 2001 compared to 575,600 at December 31, 2000, a decline of 84,800 members. This decline resulted primarily from the
divestiture of our north Florida, Milwaukee, Wisconsin, and Austin, San Antonio and Houston, Texas Medicaid businesses. For 2001, TRICARE premiums were $1.3 billion compared to $892.4 million for 2000, an increase of $449.2 million. Fully insured
TRICARE membership increased by 644,300 members, or 60.2%, to 1,714,600 at December 31, 2001 compared to 1,070,300 at December 31, 2000 due to the TRICARE Regions 2 and 5 acquisition on May 31, 2001. This acquisition increased TRICARE fully insured
medical members by approximately 648,000 members.
For the Commercial segment, we are expecting net growth in medical membership for 2002.
However, we are anticipating that the most significant gains in Commercial membership will occur in the first quarter of 2002, since that is when most of our large group customers renew their contracts with us, and most prospective large group
customers select new health
A-10
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
benefit carriers. For our Government segment, we are expecting our Medicare+Choice membership to decline to approximately 365,000 members at the end of the first quarter of 2002, due to our exit
of 5 counties on January 1, 2002, where we served approximately 14,000 members as well as the attrition of some members selecting other plans in various markets as a result of new January 1, 2002 benefit designs.
Administrative Services Fees
Administrative
services fees for 2001 were $137.1 million, an increase of $50.8 million from $86.3 million for 2000. This increase primarily was due to the TRICARE Regions 2 and 5 acquisition, and servicing medical and pharmacy benefits in an administrative
capacity under the new TRICARE program for seniors, called TRICARE for Life.
Investment and Other Income
Investment and other income totaled $118.8 million in 2001, an increase of $3.8 million from $115.0 million in 2000. The increased investment and other income
resulted from higher average invested balances partially offset by lower interest rates.
Medical Expense
Total medical expenses as a percentage of premium revenues, or medical expense ratio, for 2001 was 83.3%, decreasing 120 basis points from 84.5% for 2000. The
improvement in the medical expense ratio primarily was due to significant benefit reductions in our Medicare+Choice product effective January 1, 2001, continued discipline in commercial pricing, and the exit of numerous higher cost markets and
products during 2000.
The Commercial segment medical expense ratio for 2001 was 83.1%, decreasing 50 basis points from 83.6% for 2000.
Our improving Commercial medical expense ratio results primarily from exercising pricing discipline in our fully insured accounts.
The
Government segment medical expense ratio for 2001 was 83.6%, decreasing 190 basis points from 85.5% for 2000. This improvement primarily resulted from exiting 45 non-core counties in our Medicare+Choice business with higher medical expense ratios on
January 1, 2001, coupled with significant benefit design changes which also became effective on that date.
SG&A Expense
Total selling, general and administrative, or SG&A, expenses as a percentage of premium revenues and administrative services
fees, or SG&A expense ratio, for 2001 was 15.3%, increasing 80 basis points from 14.5% for 2000. Similar increases occurred in the SG&A expense ratios of our Commercial and Government segments as indicated in the preceding table. These
increases resulted from an increase in the mix of ASO membership, primarily from the TRICARE acquisition, and planned spending on infrastructure and technology initiatives. For 2002, we are expecting the SG&A ratio to be in the 15% to 16% range
as the percentage of revenues we derive from administrative services fees increases throughout the year.
Depreciation and amortization
was $161.5 million in 2001, an increase of $15.0 million, or 10.2%, from $146.5 million in 2000. This increase was the result of increased capital
A-11
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
expenditures primarily related to our technology initiatives and the TRICARE acquisition on May 31, 2001.
Interest Expense
Interest expense was $25.3 million in 2001, a decrease of $3.3 million from $28.6 million
in 2000. This decline was attributable to the impact from lower interest rates that were offset by higher daily average outstanding borrowings. A greater proportion of total debt outstanding during 2001 resulted from borrowings under our credit
agreement, and later in the year under the 5-year senior notes issued in August 2001. These borrowings have longer maturities than borrowings under our commercial paper program, resulting in higher daily average outstanding borrowings in 2001
compared to 2000. As a result of this changing debt mix, daily cash in excess of our funding requirements was invested, causing higher average invested balances described above.
Income Taxes
Our effective tax rate in 2001 was approximately 36% compared to
a 21% effective tax rate in 2000. The lower effective tax rate in 2000 was the result of recognizing the benefit of capital loss carryforwards resulting from the sale of our workers compensation business.
Comparison of Results of Operations for 2000 and 1999
In order to
enhance comparability as well as to provide a baseline against which historical and prospective periods can be measured, the following discussion comparing results for the year ended December 31, 2000 and 1999, excludes the 1999 charges described
below, but does include in our 1999 financial results, the beneficial effect from losses charged to premium deficiency liabilities. There were no adjustments to the results for 2000.
1999 Asset Impairments and Operational Charges
The following table presents
the components of the asset impairments and operational charges and their respective classifications in the 1999 Consolidated Statement of Operations:
|
|
Medical
|
|
Selling, General and Administrative
|
|
Asset Impairments and Other
|
|
Total
|
|
|
(in thousands) |
Premium deficiency |
|
$ |
50,000 |
|
$ |
|
|
$ |
|
|
$ |
50,000 |
Reserve strengthening |
|
|
35,000 |
|
|
|
|
|
|
|
|
35,000 |
Provider costs |
|
|
5,000 |
|
|
|
|
|
|
|
|
5,000 |
Long-lived asset impairment |
|
|
|
|
|
|
|
|
342,607 |
|
|
342,607 |
Losses on non-core asset sales |
|
|
|
|
|
|
|
|
117,245 |
|
|
117,245 |
Professional liability reserve strengthening and other costs |
|
|
|
|
|
34,926 |
|
|
|
|
|
34,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset impairments and operational charges |
|
$ |
90,000 |
|
$ |
34,926 |
|
$ |
459,852 |
|
$ |
584,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
A-12
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Premium Deficiency, Reserve Strengthening and Provider Costs
As a result of an assessment of the profitability of our contracts for providing health insurance coverage to our members in certain markets, we recorded a
provision for probable future losses, or premium deficiency, of $50.0 million during the first quarter of 1999. Ineffective provider risk-sharing contracts and the impact of the March 31, 1999 HCAThe Healthcare Company, formerly Columbia/HCA
Healthcare Corporation, or HCA, hospital agreement in Florida on current and projected future medical costs contributed to the premium deficiency. The beneficial effect from losses charged to the premium deficiency liability in 1999 was $50.0
million.
Prior period adverse claims development primarily in our PPO and Medicare products initially identified during an analysis of
February and March 1999 medical claims resulted in the $35.0 million reserve strengthening. In addition, we paid HCA $5.0 million to settle certain contractual issues associated with the March 31, 1999 hospital agreement in Florida.
Long-Lived Asset Impairment
Historical and current period operating losses in certain of our markets prompted a review during the fourth quarter of 1999 for the possible impairment of long-lived assets. This review indicated that estimated future undiscounted cash
flows were insufficient to recover the carrying value of long-lived assets, primarily goodwill, associated with our Austin, Dallas and Milwaukee markets. Accordingly, we adjusted the carrying value of these long-lived assets to their estimated fair
value resulting in a non-cash impairment charge of $342.6 million. Estimated fair value was based on discounted cash flows.
The
long-lived assets associated with the Austin and Dallas markets primarily resulted from our 1997 acquisition of Physician Corporation of America, or PCA. Operating losses in Austin and Dallas were related to the deterioration of risk-sharing
arrangements with providers and the failure to effectively convert the PCA operating model and computer platform to ours. The long-lived assets associated with the Milwaukee market primarily resulted from our 1994 acquisition of CareNetwork, Inc.
Operating losses in the Milwaukee market were the result of competitor pricing strategies resulting in lower premium levels to large employer groups as well as market dynamics dominated by limited provider groups causing higher than expected medical
costs.
In conjunction with our 1999 goodwill impairment, we also reviewed the estimated life assigned to goodwill. Effective January 1,
2000, we adopted a 20-year amortization period from the date of acquisition for goodwill previously amortized over 40 years.
Losses on
Non-Core Asset Sales
Between December 30, 1999 and February 4, 2000, we entered into definitive agreements to sell our workers
compensation, Medicare supplement and north Florida Medicaid businesses. Since the carrying value of the net assets of these businesses exceeded the estimated fair value, we recorded a $117.2 million loss in 1999. The estimated fair value was
established based upon definitive sale agreements, net of direct transaction costs. During the first half of 2000, we completed the divestiture of these businesses. There was no change in the estimated loss during 2000.
A-13
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Professional Liability Reserve Strengthening and Other Costs
We insure substantially all professional liability risks through a wholly owned captive insurance subsidiary, or the Subsidiary. The Subsidiary recorded an
additional $24.9 million expense during the fourth quarter of 1999 primarily related to expected claim and legal costs.
Additionally,
other expenses of $10.0 million were recorded during the fourth quarter of 1999 related to a claim payment dispute with a contracted provider and government audits.
The following table reconciles the 1999 results reported in the consolidated statement of operations, or reported results, to the results contained in the following discussion, or adjusted
results:
|
|
1999 Reported Results
|
|
|
1999 Excluded Charges (a)
|
|
|
1999 Adjusted Results
|
|
|
(in thousands, except per share results) |
Consolidated Statement of Operations caption items that are adjusted: |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
Medical |
|
$ |
8,533,090 |
|
|
$ |
(90,000 |
) |
|
$ |
8,443,090 |
Selling, general and administrative |
|
|
1,466,181 |
|
|
|
(34,926 |
) |
|
|
1,431,255 |
Depreciation and amortization |
|
|
123,858 |
|
|
|
|
|
|
|
123,858 |
Asset impairments and other charges |
|
|
459,852 |
|
|
|
(459,852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
10,582,981 |
|
|
|
(584,778 |
) |
|
|
9,998,203 |
(Loss) income from operations |
|
|
(371,446 |
) |
|
|
584,778 |
|
|
|
213,332 |
(Loss) income before income taxes |
|
|
(404,839 |
) |
|
|
584,778 |
|
|
|
179,939 |
Net (loss) income |
|
$ |
(382,420 |
) |
|
$ |
499,338 |
|
|
$ |
116,918 |
Basic (loss) earnings per common share |
|
$ |
(2.28 |
) |
|
$ |
2.97 |
|
|
$ |
0.69 |
Diluted (loss) earnings per common share |
|
$ |
(2.28 |
) |
|
$ |
2.97 |
|
|
$ |
0.69 |
|
|
1999 Reported Ratios
|
|
|
Ratio Effect of Excluded Charges (a)
|
|
|
1999 Adjusted Ratios
|
|
Medical expense ratios: |
|
|
|
|
|
|
|
|
|
Commercial |
|
84.9 |
% |
|
(1.0 |
)% |
|
83.9 |
% |
Government |
|
86.7 |
% |
|
(0.7 |
)% |
|
86.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
85.7 |
% |
|
(0.9 |
)% |
|
84.8 |
% |
|
|
|
|
|
|
|
|
|
|
SG&A expense ratios: |
|
|
|
|
|
|
|
|
|
Commercial |
|
17.4 |
% |
|
(0.3 |
)% |
|
17.1 |
% |
Government |
|
10.9 |
% |
|
(0.3 |
)% |
|
10.6 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
14.6 |
% |
|
(0.4 |
)% |
|
14.2 |
% |
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects the previously discussed medical expenses of $90.0 million, SG&A expenses of $34.9 million and asset impairments and other charges of $459.9 million.
|
A-14
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
The following table presents certain financial data for our two segments for the years ended
December 31, 2000 and 1999:
|
|
For the year ended December 31,
|
|
|
|
2000
|
|
|
1999 (a)
|
|
|
|
(in thousands, except ratios) |
|
Premium revenues: |
|
|
|
|
|
|
|
|
Fully insured |
|
$ |
5,263,602 |
|
|
$ |
5,290,651 |
|
Specialty |
|
|
291,315 |
|
|
|
277,200 |
|
|
|
|
|
|
|
|
|
|
Total Commercial |
|
|
5,554,917 |
|
|
|
5,567,851 |
|
|
|
|
|
|
|
|
|
|
Medicare+Choice |
|
|
3,286,351 |
|
|
|
2,920,829 |
|
TRICARE |
|
|
892,375 |
|
|
|
866,882 |
|
Medicaid |
|
|
660,988 |
|
|
|
603,020 |
|
|
|
|
|
|
|
|
|
|
Total Government |
|
|
4,839,714 |
|
|
|
4,390,731 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,394,631 |
|
|
$ |
9,958,582 |
|
|
|
|
|
|
|
|
|
|
Administrative services fees: |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
86,298 |
|
|
$ |
97,940 |
|
Government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
86,298 |
|
|
$ |
97,940 |
|
|
|
|
|
|
|
|
|
|
Medical expense ratios: |
|
|
|
|
|
|
|
|
Commercial |
|
|
83.6 |
% |
|
|
83.9 |
% |
Government |
|
|
85.5 |
% |
|
|
86.0 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
84.5 |
% |
|
|
84.8 |
% |
|
|
|
|
|
|
|
|
|
SG&A expense ratios: |
|
|
|
|
|
|
|
|
Commercial |
|
|
17.2 |
% |
|
|
17.1 |
% |
Government |
|
|
11.5 |
% |
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
14.5 |
% |
|
|
14.2 |
% |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
(7,954 |
) |
|
$ |
35,850 |
|
Government |
|
|
121,944 |
|
|
|
144,089 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
113,990 |
|
|
$ |
179,939 |
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes the previously discussed medical expenses of $90.0 million, SG&A expenses of $34.9 million, and asset impairments and other charges of $459.9 million.
|
The following table presents our medical membership at December 31, 2000 and 1999:
|
|
December 31,
|
|
Change
|
|
|
|
2000
|
|
1999
|
|
Members
|
|
|
Percentage
|
|
Commercial segment medical members: |
|
|
|
|
|
|
|
|
|
|
Fully insured |
|
2,545,800 |
|
3,083,600 |
|
(537,800 |
) |
|
(17.4 |
)% |
ASO |
|
612,800 |
|
648,000 |
|
(35,200 |
) |
|
(5.4 |
)% |
Medicare supplement |
|
|
|
44,500 |
|
(44,500 |
) |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Commercial |
|
3,158,600 |
|
3,776,100 |
|
(617,500 |
) |
|
(16.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Government segment medical members: |
|
|
|
|
|
|
|
|
|
|
Medicare+Choice |
|
494,200 |
|
488,500 |
|
5,700 |
|
|
1.2 |
% |
Medicaid |
|
575,600 |
|
616,600 |
|
(41,000 |
) |
|
(6.6 |
)% |
TRICARE |
|
1,070,300 |
|
1,058,000 |
|
12,300 |
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Government |
|
2,140,100 |
|
2,163,100 |
|
(23,000 |
) |
|
(1.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total medical membership |
|
5,298,700 |
|
5,939,200 |
|
(640,500 |
) |
|
(10.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
A-15
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Overview
Net income was $90.1 million, or $0.54 per diluted share in 2000, compared to adjusted net income of $116.9 million, or $0.69 per diluted share in 1999. This decrease in earnings occurred despite
a decrease in our effective income tax rate from 35% in 1999 to 21% in 2000. The earnings decline resulted primarily from favorable adjustments recorded during 1999, including premium deficiency and workers compensation reserve adjustments and
a gain from the sale of a tangible asset.
Premium Revenues and Medical Membership
Premium revenues increased 4.4% to $10.4 billion for 2000 compared to $10.0 billion for 1999. Higher premium revenues resulted primarily from strong premium
yields partially offset by a decline in commercial membership. Due to the impact the premium increases had on fully insured commercial medical member retention, total medical membership declined 640,500, or 10.8%, to 5,298,700.
Commercial segment premium revenues were $5.6 billion in both 2000 and 1999, as membership reductions in 2000 offset significantly higher premium
yields. Fully insured commercial medical premium yield of 12.5% in 2000 increased from 7.4% in 1999, reflecting improved pricing. The improved pricing during 2000 resulted primarily from higher renewal rates as well as accelerated rate increases in
Colorado and Texas where higher than expected medical cost trends had been experienced. Fully insured commercial medical membership fell 17.4% to 2,545,800 during 2000. The decrease in the number of members was caused primarily by our pricing
actions, the termination of a large unprofitable account in Texas, and the exit of the small group product in 17 states.
Government
segment premium revenues increased 10.2% to $4.8 billion in 2000 compared to $4.4 billion in 1999. Medicare+Choice premiums increased 12.5% to $3.3 billion in 2000 due to higher premium yields and increased membership. Medicare+Choice premium yield
increased to 6.1% during 2000 from the implementation of additional member premiums for many Medicare+Choice members and a higher proportion of members in markets with higher Centers for Medicare and Medicaid Services, or CMS, reimbursement rates.
Medicare+Choice membership increased 5,700 members, or 1.2%, despite the exit from 29 non-core counties in our Medicare+Choice business on January 1, 2000. Total Government segment membership declined as a result of a transaction in 2000 to divest
the north Florida Medicaid business.
Administrative Services Fees
Administrative services fees in 2000 were $86.3 million, a decrease of $11.6 million from $97.9 million in 1999. This decrease was primarily due to the sale of our workers compensation
business in 1999.
Investment and Other Income
Investment and other income totaled $115.0 million in 2000, compared to $155.0 million in 1999, a decline of $40 million. This decrease resulted from a lower average invested balance caused
primarily by the sale of the workers compensation business, lower realized investment gains and a non-recurring $11.5 million gain in 1999 from the sale of a tangible asset.
A-16
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Medical Expense
Medical expense as a percentage of premium revenues, or medical expense ratio, for 2000 was 84.5%, improving 30 basis points compared to an adjusted medical expense ratio of 84.8% for 1999. The
1999 ratio includes the beneficial effect of losses charged to premium deficiency liabilities and favorable workers compensation liability adjustments recorded in 1999 but not recorded in 2000. Improving fully insured commercial medical claims
experience from lower pharmacy cost trends and the reduction of higher cost, non-core membership was partially offset by higher Medicare+Choice utilization in the 45 Medicare counties we exited on January 1, 2001. Fully insured commercial medical
pharmacy cost trends improved in 1999 primarily as a result of the conversion of members to a three-tier pharmacy benefit plan.
The
Commercial segment medical expense ratio was 83.6% in 2000 compared to an adjusted medical expense ratio of 83.9% in 1999. This 30 basis point improvement resulted from declining pharmacy cost trends, corrective pricing related to higher cost, open
access products and the reduction of higher cost, non-core membership. We reduced higher cost, non-core membership when we terminated a large unprofitable account in Texas, exited our small group product in 17 unprofitable states and reinsured
substantially all of our Medicare supplement business. Fully insured commercial medical pharmacy cost trends improved in 1999, from the conversion of members to a three-tier pharmacy benefit plan. Partially offsetting the improvement in the medical
expense ratio were the beneficial effect from losses charged to premium deficiency liabilities and favorable workers compensation liability adjustments recorded in 1999 but not in 2000.
The Government segment medical expense ratio decreased 50 basis points to 85.5% from 86.0% in 1999. This decrease resulted primarily from divesting higher cost, non-core Medicaid membership
in north Florida, and improving TRICARE results partially offset by higher than expected utilization in the 45 Medicare counties we exited on January 1, 2001.
SG&A Expense
Total selling, general and administrative, or SG&A, expense as a percentage of premium
revenues and administrative services fees, or SG&A expense ratio, increased 30 basis points to 14.5% in 2000 from an adjusted ratio of 14.2% in 1999. Contributing to this increase were planned investments in infrastructure and technology
initiatives and a lower ratio of members to employees.
Depreciation and amortization was $146.5 million in 2000, an increase of $22.6
million from $123.9 million in 1999. This increase was primarily the result of the change to a 20-year life for goodwill previously amortized over 40 years.
Interest Expense
Interest expense totaled $28.6 million in 2000, compared to $33.4 million in 1999. This
$4.8 million decline was primarily the result of lower average outstanding borrowings during 2000 compared to 1999 as we used a portion of the proceeds from the sale of the workers compensation business to reduce debt.
A-17
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Income Taxes
Our effective tax rate in 2000 was approximately 21% compared to an adjusted 35% effective tax rate in 1999. The lower effective tax rate in 2000 was primarily the result of recognizing the
benefit of capital loss carryforwards resulting from the sale of our workers compensation business.
Liquidity
Our operating cash flows were $149.0 million in 2001, compared to operating cash flows of $40.4 million in 2000, an increase of $108.6 million. This increase
primarily was attributable to higher net income in 2001 compared to 2000 and a reduction in workers compensation claims payments from the sale of this business on March 31, 2000.
Our operating cash flows were impacted by a decline in medical and other expenses payable of $179.5 million in 2001 and $195.9 million in 2000. This decline was principally a result of two
actions: reductions in membership levels and reductions in claim inventories on-hand. Reductions in membership levels were attributable to our strategy of exiting certain products and markets that either lacked the prospect for long-term
profitability or no longer fit our strategic focus. Reductions of claim inventories on-hand are a direct result of our focused effort to attain service and operational excellence. We implemented many new technologies and substantial process
improvements in our customer service centers to improve claim processing speed and administrative efficiency.
The following table
presents the impact these two actions had on the medical and other expenses payable for the years ended December 31, 2001 and 2000:
|
|
For the year ended December 31,
|
|
|
|
2001
|
|
|
2000
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Reductions in IBNR due to membership decline (a) |
|
$ |
(109,752 |
) |
|
$ |
(106,863 |
) |
Reductions in claim inventories on-hand |
|
|
(131,959 |
) |
|
|
(55,955 |
) |
All other, net (b) |
|
|
62,172 |
|
|
|
(33,073 |
) |
|
|
|
|
|
|
|
|
|
The total change in medical and other expenses payable as shown on the consolidated cash flow statement |
|
$ |
(179,539 |
) |
|
$ |
(195,891 |
) |
|
|
|
|
|
|
|
|
|
(a) |
|
The largest component of medical and other expenses payable represents the liability established for those services incurred during the current period but for which the claim invoice had
not yet been received as of the balance sheet date. This liability is commonly known as IBNR (incurred but not reported). This liability will increase or decrease with corresponding membership levels. |
(b) |
|
All other, net items consist primarily of changes in provider balances from risk sharing arrangements due to the timing of settlements with providers. |
A-18
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
The following table presents the approximate number of claims on-hand and their estimated
aggregate valuation. Claims on hand represent the number of provider requests for reimbursement that have been received but not yet processed and paid.
|
|
Number of Claims On-hand
|
|
Estimated Valuation
|
|
|
|
|
(in thousands) |
December 31, 2001 |
|
518,100 |
|
$ |
125,448 |
December 31, 2000 |
|
1,157,900 |
|
$ |
257,407 |
December 31, 1999 |
|
1,398,300 |
|
$ |
313,362 |
In addition to membership and claim inventory reductions, we accelerated the claim
submission cycle time during 2001 by increasing electronic connectivity with providers which increased the percentage of claims received electronically. Other items which may significantly impact medical claims and other expenses payable are
primarily the timing of a bi-weekly reimbursement to our pharmacy benefits management vendor, the timing of periodic settlements with providers, medical cost inflation and our mix of membership between products.
Our provision for doubtful accounts of $4.0 million in 2001 declined from $10.9 million in 2000 and $12.6 million in 1999. Our allowance for doubtful accounts of
$38.5 million at December 31, 2001 likewise declined from $42.0 million at December 31, 2000. This decline resulted from a reduction in past due accounts and improved collections, primarily attributable to a new billing system and related process
improvements implemented since the first quarter of 2000. The timing of TRICARE collections increased premiums receivable, net of the effects of the acquisition.
Debt
The following table presents our short-term, long-term and total debt
outstanding at December 31, 2001 and 2000:
|
|
December 31,
|
|
|
2001
|
|
2000
|
|
|
(in thousands) |
Short-term debt: |
|
|
|
|
|
|
Credit agreements |
|
$ |
|
|
$ |
520,000 |
Conduit commercial paper financing program |
|
|
263,000 |
|
|
|
Commercial paper program |
|
|
|
|
|
79,952 |
|
|
|
|
|
|
|
Total short-term debt |
|
|
263,000 |
|
|
599,952 |
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
Senior notes |
|
$ |
309,789 |
|
$ |
|
Other long-term borrowings |
|
|
5,700 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
315,489 |
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
578,489 |
|
$ |
599,952 |
|
|
|
|
|
|
|
A-19
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Senior Notes
On August 7, 2001, we issued $300 million 7¼% senior, unsecured notes due August 1, 2006 at 99.759% for proceeds of $299.3 million. The proceeds from this offering were used to repay a
portion of the amounts outstanding under our credit facility that existed at that time.
In order to hedge the risk of changes in the fair
value of our $300 million 7¼% senior notes attributable to fluctuations in interest rates, we entered into interest rate swap agreements. Interest rate swap agreements, which are considered derivatives, are contracts that exchange interest
payments on a specified principal amount, or notional amount, for a specified period. Our interest rate swap agreements exchange the 7¼% fixed interest rate under our senior notes for a variable interest rate, which was 3.56% at December 31,
2001. The $300 million swap agreements mature on August 1, 2006, and have the same critical terms as our senior notes. Changes in the fair value of the 7¼% senior notes and the swap agreements due to changing interest rates are assumed to
offset each other completely, resulting in no impact to earnings from any hedge ineffectiveness.
Our swap agreements are recognized in
our consolidated balance sheet at fair value with an equal and offsetting adjustment to the carrying value of our senior notes. The fair value of our swap agreements are estimated based on quoted market prices of comparable agreements and reflects
the amounts we would receive (or pay) to terminate the agreements at the reporting date. At December 31, 2001, the $10.5 million fair value of our swap agreements is included in other long-term assets. Likewise, the carrying value of our senior
notes has been increased $10.5 million to its fair value. The counterparties to our swap agreements are major financial institutions with which we also have other financial relationships.
Credit Agreements
On October 11, 2001, we replaced our existing credit
agreement with two new unsecured revolving credit agreements consisting of a $265 million, 4-year revolving credit agreement and a $265 million, 364-day revolving credit agreement with a one-year term out option. Under these new agreements, at our
option, we can borrow on either a competitive advance basis or a revolving credit basis. The revolving credit portion of both the 4-year and 364-day agreements bear interest at either a fixed rate or floating rate based on LIBOR plus a spread. The
spread, which varies depending on our credit ratings, ranges from 80 to 125 basis points for our 4-year agreement, and 85 to 137.5 basis points for our 364-day agreement. We also pay an annual facility fee regardless of utilization. This facility
fee, currently 25 basis points, may fluctuate between 15 and 50 basis points, depending upon our credit ratings. The competitive advance portion of any borrowings under either the 4-year or 364-day revolving credit agreements will bear interest at
market rates prevailing at the time of borrowing on either a fixed rate or a floating rate basis, at our option.
These credit agreements
contain customary restrictive and financial covenants as well as customary events of defaults, including financial covenants regarding the maintenance of net worth, and minimum interest coverage and maximum leverage ratios. The terms of each of
these credit agreements also include standard provisions related to conditions of borrowing, including a customary material adverse effect clause which could limit our ability to borrow. We have not experienced a material adverse effect and we know
of no circumstances or events
A-20
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
which would be reasonably likely to result in a material adverse effect. We do not believe the material adverse effect clause poses a material funding risk to Humana in the future. The minimum
net worth requirement was $1,091.2 million at December 31, 2001 and increases by 50% of consolidated net income each quarter. The minimum interest coverage ratio is generally calculated by dividing interest expense into earnings before interest
and tax expense, or EBIT. The maximum leverage ratio is generally calculated by dividing debt into earnings before interest, taxes, depreciation and amortization expense, or EBITDA. EBIT and EBITDA used to calculate compliance with these financial
covenants is based upon four consecutive quarters. The current minimum interest coverage ratio of 3.0, increases to 3.5 effective December 31, 2002, and to 4.0 effective December 31, 2003. The current maximum leverage ratio of 3.0 declines to 2.75
effective December 31, 2002, and to 2.5 effective December 31, 2003. We were in compliance with all covenants at December 31, 2001, including the more restrictive future minimum interest coverage and maximum leverage requirements.
Commercial Paper Programs
We
maintain and issue short-term debt securities under a commercial paper program. The program is backed by our credit agreements described above. Aggregate borrowing under both the credit agreement and commercial paper program cannot exceed $530
million. Since the fourth quarter of 2000, reduced direct access to the commercial paper market has resulted in fewer borrowings under this program. As part of our 2001 refinancing, we increased our indirect access to the commercial paper market
through our conduit commercial paper financing program. Under this program, a third party issues commercial paper and loans the proceeds of those issuances to us so that the interest and principal payments on the loans match those on the underlying
commercial paper. The $265 million, 364-day revolving credit agreement supports the conduit commercial paper financing program of up to $265 million. The weighted average interest rate on our conduit commercial paper borrowings was 2.51% at December
31, 2001. The carrying value of these borrowings approximates fair value as the interest rate on the borrowings varies at market rates.
Other Borrowings and Letters of Credit
Other borrowings of $5.7 million at December 31, 2001 represent low-interest
financing for the renovation of a building payable in various installments beginning, generally, in 2003 through 2011. Issued and undrawn letters of credit total $25.4 million at December 31, 2001. These letters of credit were issued primarily to
support obligations of our wholly owned captive insurance subsidiary related to our professional liability risks. These letters of credit renew automatically on an annual basis unless the beneficiary is otherwise notified. Over the past 5 years, we
have not had to fund any letters of credit.
A-21
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Operating Leases
We lease facilities, computer hardware, and other equipment under long-term operating leases that are noncancelable and expire on various dates through 2017. Future annual minimum payments due
subsequent to December 31, 2001 under all of our noncancelable operating leases in excess of one year are as follows:
|
|
(in thousands)
|
2002 |
|
$ |
72,596 |
2003 |
|
|
58,572 |
2004 |
|
|
44,453 |
2005 |
|
|
35,268 |
2006 |
|
|
26,103 |
Thereafter |
|
|
66,252 |
|
|
|
|
Total minimum lease payments |
|
|
303,244 |
Less: minimum sublease rental payments |
|
|
85,302 |
|
|
|
|
Net minimum lease payments |
|
$ |
217,942 |
|
|
|
|
Certain 5-year airplane operating leases included above provide for a residual value
guarantee of no more than $13.1 million on December 29, 2004, the end of the lease term. We have the right to exercise a purchase option with respect to the leased equipment or the equipment can be sold to a third party. If the fair value of the
airplanes, which was $20.3 million at lease inception, falls between a range of $5.0 million and $18.1 million at the end of the lease term, we would be obligated to pay the difference between $18.1 million and the fair value at the end of the lease
term up to a maximum payment of $13.1 million. A $3.5 million gain in connection with the 1999 sale/leaseback transaction is being deferred until the residual value guarantee is resolved at the end of the lease term. The estimated fair market value
at December 31, 2001 of the airplanes exceeds the residual value guarantee, therefore, we have not accrued for any loss.
Other
Liquidity Factors
Our investment grade credit rating at December 31, 2001 was Baa3 according to Moodys Investors Services,
Inc., or Moodys and BBB, according to Standard & Poors Corporation, or S&P. A downgrade to Ba2 or lower by Moodys and BB or lower by S&P would give the counterparty of one of our interest rate swap agreements with a
$100 million notional amount, the right, but not the obligation, to cancel the interest rate swap agreement. If cancelled, we would pay or receive an amount based on the fair market value of the swap agreement. Assuming this swap agreement had been
cancelled on December 31, 2001, we would have received $3.5 million. Other than the swap agreement, adverse changes in our credit ratings will not create, increase, or accelerate any liabilities. Adverse changes in our credit rating will increase
the rate of interest we pay and may impact the amount of credit available to us in the future.
We do not have any unconsolidated special
purpose entities and, other than the leases described above, we do not have any material off-balance sheet arrangements.
A-22
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Regulatory Requirements
Certain of our subsidiaries operate in states that regulate the payment of dividends to Humana Inc., our parent company, require minimum levels of equity, and limit investments to approved
securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without prior approval by state regulatory authorities, is limited based on the entitys level of statutory income and statutory capital and surplus. In
most states, prior notification is provided before paying a dividend that does not require approval.
At December 31, 2001, our regulated
health insurance subsidiaries, other than our federally regulated TRICARE subsidiaries, maintained aggregate statutory capital and surplus of $1,079.9 million. Each of these subsidiaries was in compliance with applicable statutory requirements,
which aggregated $521.9 million in total. Although the minimum required levels of equity are largely based on premium volume, product mix and the quality of assets held, minimum requirements can vary significantly at the state level. Certain states
rely on risk-based capital requirements, or RBC, to define the required levels of equity. RBC is a model developed by the National Association of Insurance Commissioners to monitor an entitys solvency. This calculation indicates recommended
minimum levels of required capital and surplus and signals regulatory measures should actual surplus fall below these recommended levels. Some states are in the process of phasing in these RBC requirements over a number of years. If RBC were fully
implemented by all states at December 31, 2001, each of our subsidiaries would be in compliance and we would have $494.4 million of aggregate capital and surplus above the minimum level required under RBC.
Stock Repurchase Plan
In 2000, our Board of
Directors authorized the repurchase of up to five million of our common shares. In 2001, we repurchased 187,500 shares of our common stock for approximately $1.9 million. Under this authorization, as of December 31, 2001, we have repurchased a total
of approximately 3.6 million of our common shares for an aggregate purchase price of $28.3 million, at an average cost of $7.82 per share.
We believe that funds from future operating cash flows and funds available under our credit agreements and commercial paper program are sufficient to meet future liquidity needs. We also believe these sources of funds are adequate to allow
us to fund selected expansion opportunities, as well as to fund capital requirements.
Market Risk-Sensitive Financial Instruments and Positions
The level of our pretax earnings is subject to risk due to changes in investment income from our fixed income portfolio which is
partially offset by both our debt position and the short-term duration of the fixed income investment portfolio.
We evaluated the impact
on our investment income and debt expense resulting from a hypothetical change in interest rates of 100, 200 and 300 basis points over the next twelve-month period, as reflected in the following table. In the past ten years, annual changes in
commercial paper or LIBOR rates have exceeded 300 basis points twice, have changed between 200 and 300 basis points once and have changed between 100 and 200 basis points three times. The modeling technique used to calculate the pro forma net change
considered the cash flows
A-23
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
related to fixed income investments and debt, which are subject to interest rate changes during a prospective twelve-month period. LIBOR was 1.88% at December 31, 2001. Our model assumed the
maximum possible reduction in LIBOR could not exceed 188 basis points.
|
|
Increase (decrease) in pretax earnings given an interest rate decrease of X basis points
|
|
|
Increase (decrease) in pretax earnings given an interest rate increase of X basis points
|
|
|
|
(300)
|
|
|
(200)
|
|
|
(100)
|
|
|
100
|
|
|
200
|
|
|
300
|
|
|
|
(in thousands) |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income portfolio |
|
$ |
(15,216 |
) |
|
$ |
(11,578 |
) |
|
$ |
(5,496 |
) |
|
$ |
5,528 |
|
|
$ |
11,102 |
|
|
$ |
16,655 |
|
Debt |
|
|
7,238 |
|
|
|
7,238 |
|
|
|
3,822 |
|
|
|
(3,822 |
) |
|
|
(7,645 |
) |
|
|
(11,467 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(7,978 |
) |
|
$ |
(4,340 |
) |
|
$ |
(1,674 |
) |
|
$ |
1,706 |
|
|
$ |
3,457 |
|
|
$ |
5,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income portfolio |
|
$ |
(15,087 |
) |
|
$ |
(10,098 |
) |
|
$ |
(5,062 |
) |
|
$ |
5,098 |
|
|
$ |
10,258 |
|
|
$ |
15,444 |
|
Debt |
|
|
12,975 |
|
|
|
8,650 |
|
|
|
4,325 |
|
|
|
(4,325 |
) |
|
|
(8,650 |
) |
|
|
(12,975 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(2,112 |
) |
|
$ |
(1,448 |
) |
|
$ |
(737 |
) |
|
$ |
773 |
|
|
$ |
1,608 |
|
|
$ |
2,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the hypothetical change in fair market values of the common
marketable equity securities we held at December 31, 2001 and 2000, which are sensitive to changes in stock market values. These common marketable equity securities are held for purposes other than trading.
|
|
Decrease in valuation of security given an X% decrease in each equity securitys value
|
|
|
Fair Value at Dec. 31,
|
|
Increase in valuation of security given an X% decrease in each equity securitys value
|
|
|
(30%)
|
|
|
(20%)
|
|
|
(10%)
|
|
|
|
|
10%
|
|
20%
|
|
30%
|
|
|
(in thousands) |
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common marketable equity securities |
|
$ |
(4,830 |
) |
|
$ |
(3,220 |
) |
|
$ |
(1,610 |
) |
|
$ |
16,101 |
|
$ |
1,610 |
|
$ |
3,220 |
|
$ |
4,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common marketable equity securities |
|
$ |
(6,920 |
) |
|
$ |
(4,614 |
) |
|
$ |
(2,307 |
) |
|
$ |
23,068 |
|
$ |
2,307 |
|
$ |
4,614 |
|
$ |
6,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual changes in equity valuations (based upon the Standard & Poors 500 stock
index) over the past 10 years which were in excess of 30% occurred four times, between 20% and 30% occurred three times and between 10% and 20% also occurred three times.
Capital Resources
Our ongoing capital expenditures relate primarily to our technology initiatives and administrative
facilities necessary for activities such as claims processing, billing and collections, medical utilization review and customer service. Total capital expenditures, excluding acquisitions, were $115.0 million in 2001, $135.1 million in 2000, and
$88.9 million in 1999. Excluding acquisitions, we expect our total capital expenditures in 2002 will be approximately $115 million, most of which will be used for our technology initiatives and expansion and improvement of administrative facilities.
A-24
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Government Contracts
Our operations are regulated by various state and federal government agencies. Actuarially determined premium rate increases for commercial products generally are approved by the respective state insurance commissioners, while
increases in premiums for Medicaid and Medicare+Choice products are established by various state governments and CMS. Premium rates under our TRICARE contract with the United States Department of Defense for Regions 3 and 4 is adjusted every 12
months, and for Regions 2 and 5, every three months, to reflect inflation, changes in the workload volumes of military medical facilities and contract modifications.
Our Medicare+Choice contracts with the federal government are renewed for a one-year term each December 31 unless terminated 90 days prior thereto. Increased funding beginning March 1, 2001
specific to the Medicare, Medicaid and State Childrens Health Insurance Benefits Improvement and Protection Act, or BIPA, is being used to provide additional funding under contracts with our providers and to lower member premiums in certain
markets. Our 2002 average rate of statutory increase under the Medicare+Choice contracts, including the March 1, 2001 BIPA increase, is approximately 5.0%. Over the last five years, annual increases have ranged from as low as the January 1998
increase of 1.8% to as high as 5.0% in January 2002, with an average of approximately 2.6%. Legislative proposals are being considered which may revise the Medicare+Choice programs current support of the use of managed health care for
Medicare+Choice beneficiaries and future reimbursement rates. We are unable to predict the outcome of these proposals or the impact they may have on our financial position, results of operations, or cash flows.
Effective July 1, 2001, our TRICARE contract for Regions 3 and 4 was renewed for up to two additional years subject to annual renewal at the option of the
Department of Defense. The Department of Defense has notified us of its intent to renew the TRICARE contract for Regions 2 and 5 that we acquired from Anthem through April 30, 2003.
Our Medicaid contracts in Puerto Rico, Florida and Illinois generally are annual contracts. The two contracts with the Health Insurance Administration in Puerto Rico expire on June 30, 2002,
unless extended. Both parties have agreed to use good faith efforts to extend for a period of no less than 12 months covering no fewer beneficiaries than the current contracts. We believe that at the end of the current contract period this contract
will be renewed.
The loss of any of these government contracts or significant changes in these programs as a result of legislative
action, including reductions in premium payments to us, or increases in member benefits without corresponding increases in premium payments to us, may have a material adverse effect on our financial position, results of operations, and cash flows.
Legal Proceedings
Securities Litigation
Six purported class action complaints were filed in 1999 in the United States District Court for the Western District of Kentucky at
Louisville by purported stockholders of the Company against the Company and certain of its current and former directors and officers. The complaints
A-25
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
contained the same or substantially similar allegations; namely, that the Company and the individual defendants knowingly or recklessly made false or misleading statements in press releases and
public filings concerning the Companys financial condition, primarily with respect to the impact of negotiations over renewal of the Companys contract with HCA-The Healthcare Company, formerly Columbia/HCA Healthcare Corporation, which
took effect April 1, 1999. The complaints allege violations of Section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act) and SEC Rule 10b-5 and Section 20(a) of the 1934 Act. They seek certification of a class of stockholders
who purchased shares of Humana common stock starting either (in four complaints) in late October 1998 or (in two complaints) on February 9, 1999, and ending (in all complaints) on April 8, 1999. Plaintiffs moved for consolidation of the actions, now
styled In Re Humana Inc. Securities Litigation, and filed a consolidated Complaint. On April 28, 2000, the defendants filed a motion requesting dismissal of the Consolidated Complaint. On November 7, 2000, the United States District Court for
the Western District of Kentucky issued a Memorandum Opinion and Order dismissing the action. On November 30, 2000, the plaintiffs filed a notice of appeal to the Court of Appeals for the Sixth Circuit. Oral argument is scheduled for June 11, 2002.
The Company believes the above allegations are without merit and intends to continue to pursue defense of the action.
In late 1997, three
purported class action complaints were filed in the United States District Court for the Southern District of Florida by former stockholders of Physician Corporation of America, or PCA, and certain of its former directors and officers. We acquired
PCA by a merger that became effective on September 8, 1997. The three actions were consolidated into a single action entitled In re Physician Corporation of America Securities Litigation. The consolidated complaint alleges 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 PCAs workers compensation business. On May 5, 1999,
plaintiffs moved for certification of the purported class, and on August 25, 2000, the defendants moved for summary judgment. On January 31, 2001, defendants were granted leave to file a third-party complaint for declaratory judgment on insurance
coverage. The defendants seek a determination that the defense costs and liability, if any, resulting from the class action defense are covered by an insurance policy issued by one insurer and, in the alternative, declaring that there is coverage
under policies issued by two other insurers. Defendants have moved for summary judgment on the third-party complaint, and the third-party defendants have moved to dismiss or stay the third-party complaint. On March 6, 2002, the Court, while not
dismissing the matter, ordered mediation of the insurance coverage issue in accordance with the requirements of one of the insurance contracts.
Managed Care Industry Class Action Litigation
We are involved in several purported class action lawsuits that are part of
a wave of generally similar actions that target the health care payor industry and particularly target managed care companies. As a result of action by the Judicial Panel on Multi District Litigation, most of the cases against us, as well as similar
cases against other companies in the industry, have been consolidated in the United States District Court for the Southern District of Florida, or the Court, and are now styled In re Managed Care Litigation. The cases include separate suits
against us and five other managed care companies that purport to have been brought on behalf of members, which are referred to as the subscriber track cases, and a single action against us and seven other companies that purports to have been brought
on behalf of providers, which is referred to as the provider track case.
A-26
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
In the subscriber track cases, the plaintiffs seek a recovery under RICO for all persons who
are or were subscribers at any time during the four-year period prior to the filing of the complaints. Plaintiffs also seek to represent a subclass of policyholders who purchased insurance through their employers health benefit plans governed
by ERISA, and who are or were subscribers at any time during the six-year period prior to the filing of the complaints. The complaints allege, among other things, that we intentionally concealed from members certain information concerning the way in
which we conduct business, including the methods by which we pay providers. The plaintiffs do not allege that any of the purported practices resulted in denial of any claim for a particular benefit, but instead, claim that we provided the purported
class with health insurance benefits of lesser value than promised. The complaints also allege an industry-wide conspiracy to engage in the various alleged improper practices. The plaintiffs seek certification of a class consisting of all members of
our medical plans, excluding Medicare and Medicaid plans, for the period from 1990 to 1999. We filed our opposition to the motion for class certification on November 15, 2000. A hearing on the class certification issue was conducted on July 24,
2001. No ruling has been issued on that issue.
On February 20, 2002, the Court issued its ruling on the defendants motions to
dismiss the Second Consolidated Amended Complaint (the Amended Complaint). The Amended Complaint was filed on June 29, 2001, after the Court dismissed most of the claims in the original complaints, but granted leave to refile. In its
February 20, 2002, ruling, the Court dismissed the RICO claims of ten of the sixteen named plaintiffs, including three of the four involving us, on the ground that the McCarran-Ferguson Act prohibited their claims because they interfered with the
state regulatory processes in the states in which they resided (Florida, New Jersey, California and Virginia). With respect to ERISA, the Court dismissed the misrepresentation claims of current members, finding that they have adequate remedies under
the law and failed to exhaust administrative remedies. Claims for former members were not dismissed. The Court also refused to dismiss claims by all members for breach of fiduciary duty arising from alleged interference with the doctor-patient
relationship by the use of so-called gag clauses that assertedly prohibited doctors from freely communicating with members. On March 1, 2002, we and other defendants requested that the Court allow us to ask the United States Court of
Appeals for the Eleventh Circuit to review the Courts refusal to follow the decision by the Court of Appeals for the Third Circuit in Maio v. Aetna that would have resulted in dismissal of the RICO claims. On March 4, 2002, the
defendants filed a Motion for Partial Reconsideration of the February 20, 2002, Dismissal Order.
In the provider track case, the
plaintiffs assert that we and other defendants improperly (i) paid providers claims and (ii) downcoded their claims by paying lesser amounts than they submitted. The complaint alleges, among other things, multiple violations under
RICO as well as various breaches of contract and violations of regulations governing the timeliness of claim payments. We moved to dismiss the provider track complaint on September 8, 2000, and the other defendants filed similar motions thereafter.
On March 2, 2001, the Court dismissed certain of the plaintiffs claims pursuant to the defendants several motions to dismiss. However, the Court allowed the plaintiffs to attempt to correct the deficiencies in their complaint with an
amended pleading with respect to all of the allegations except the claim under the federal Medicare regulations, which was dismissed with prejudice. The Court also left undisturbed the plaintiffs claims for breach of contract. On March 26,
2001, the plaintiffs filed their amended complaint which, among other things, added four state or county medical associations as additional plaintiffs. Two of those, the Denton County Medical Society and the Texas Medical
A-27
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Association, purport to bring their actions against us, as well as against several other defendant companies. The Medical Association of Georgia and the California Medical Association purport to
bring their actions against various other defendant companies. The associations seek injunctive relief only. The Florida Medical Association has also announced its intent to join the action. The defendants filed a motion to dismiss the amended
complaint on April 30, 2001. On October 27, 2000, the plaintiffs filed a motion for class certification. We filed our opposition to that motion on November 17, 2000. Oral argument on the motion for class certification was conducted May 7, 2001. No
ruling has been issued.
Some defendants filed appeals to the United States Court of Appeals for the Eleventh Circuit from a ruling by the
district court that refused to enforce several arbitration clauses in the provider agreements with the defendants in certain respects. On March 14, 2002, the Court of Appeals upheld the district courts rulings on the arbitration issues.
We intend to continue to defend these actions vigorously.
Chipps v. Humana Health Insurance Company of Florida, Inc.
On January 4,
2000, a jury in Palm Beach County, Florida, rendered an approximately $80 million verdict against us in a case arising from removal of an insured from a special case management program. The award included approximately $78.5 million of punitive
damages, $1 million of damages for emotional distress and $29,000 of damages for contractual benefits. On September 19, 2001, the Court of Appeals overturned the verdict, citing numerous errors by the trial court, and remanded for a new trial. The
plaintiff filed a Motion for Rehearing EnBanc with the Court of Appeals on October 3, 2001. The Court of Appeals modified its ruling somewhat, but affirmed its reversal of the verdict. The case subsequently was settled in the first quarter of 2002
for approximately $2.2 million. This settlement was fully reserved at December 31, 2001.
Government Audits and Other Litigation
and Proceedings
In July 2000, the Office of the Florida Attorney General initiated an investigation, apparently relating to some of
the same matters that are involved in the purported class action lawsuits described above. While the Attorney General has filed no action against us, he has indicated that he may do so in the future. On September 21, 2001, the Texas Attorney General
initiated a similar investigation. These investigations are ongoing, and we have cooperated with the regulators in both states.
In
addition, our business practices are subject to review by various state insurance and health care regulatory authorities and federal regulatory authorities. Recently, there has been increased scrutiny by these regulators of the managed health care
companies business practices, including claims payment practices and utilization management. We have been and continue to be subject to such reviews. Some of these could require changes in some of our practices and could also result in fines
or other sanctions.
We also are involved in other lawsuits that arise in the ordinary course of our business operations, including claims
of medical malpractice, bad faith, failure to properly pay claims, nonacceptance or termination of providers, failure to disclose network discounts and various provider arrangements, challenges to subrogation practices, and claims relating to
performance of contractual obligations to providers and others. Recent court decisions and pending state and federal legislative activity may increase our exposure for any of these types of claims.
A-28
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
Personal injury claims and claims for extracontractual damages arising from medical benefit
denials are covered by insurance from our wholly owned captive insurance subsidiary and excess carriers, except to the extent that claimants seek punitive damages, which may not be covered by insurance in certain states in which insurance coverage
for punitive damages is not permitted. In addition, insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future. In 2002, we increased the retention limits with respect to our wholly owned
captive insurance subsidiary as a result of substantially higher insurance rates.
We do not believe that any pending or threatened legal
actions against us or audits by agencies will have a material adverse effect on our financial position, results of operations, or cash flows. However, the likelihood or outcome of current or future suits, like the purported class action lawsuits
described above, cannot be accurately predicted with certainty. In addition, the increased litigation which has accompanied the recent negative publicity and public perception of our industry adds to this uncertainty. Therefore, such legal actions
could have a material adverse effect on our financial position, results of operations and cash flows.
Cautionary Statements
This document includes both historical and forward-looking statements. The forward-looking statements are made within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of
1995, and we are including this statement for purposes of complying with these safe harbor provisions. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements
are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, the information discussed below. In making these statements, we are not undertaking to address or update each factor in
future filings or communications regarding our business or results. Our business is complicated, highly regulated and competitive with many different factors affecting results.
If the premiums we charge are insufficient to cover the cost of health care services delivered to our members, or if our reserves are inadequate, our profitability could decline.
We use a significant portion of our revenues to pay the costs of health care services delivered to our members. These costs include
claims payments, capitation payments, allocations of certain centralized expenses and various other costs incurred to provide health insurance coverage to our members, as well as estimates of future payments to hospitals and others for medical care
provided to our members. Generally, premiums in the health care business are fixed for one-year periods. Accordingly, costs we incur in excess of our medical cost projections generally are not recovered in the contract year through higher premiums.
We estimate the costs of our future medical claims and other expenses using actuarial methods and assumptions based upon claim payment patterns, medical inflation, historical developments such as claim inventory levels and claim receipt patterns,
and other relevant factors, and record medical claims reserves for future payments. We continually review estimates of future payments relating to medical claims costs for services incurred in the current and prior periods and make necessary
adjustments to our reserves. However, competition, government
A-29
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
regulations and other factors may and often do cause actual health care costs to exceed what was estimated and reflected in premiums.
These factors may include:
|
|
|
increased use of services, including prescription drugs; |
|
|
|
increased cost of individual services; |
|
|
|
catastrophes or epidemics; |
|
|
|
the introduction of new or costly treatments, including new technologies; |
|
|
|
medical cost inflation; |
|
|
|
new government mandated benefits or other regulatory changes; and |
|
|
|
increased use of health care, including doctors office visits and prescriptions resulting from terrorists attacks and subsequent terrorists threats, including bioterrorism.
|
Failure to adequately price our products or develop sufficient reserves may result in a material adverse effect on our
financial position, results of operations and cash flows.
If we fail to manage prescription drug costs successfully, our financial
results could suffer.
In general, prescription drug costs have been rising over the past few years. These increases are due to the
introduction of new drugs costing significantly more than existing drugs, direct consumer advertising by the pharmaceutical industry that creates consumer demand for particular brand-name drugs, and members seeking medications to address lifestyle
changes. In order to control prescription drug costs, we introduced Rx4, our four-tiered copayment benefit design for prescription drugs. We cannot assure that these efforts will be successful in controlling costs. Failure to control these costs
could have a material adverse effect on our financial position, results of operations and cash flows.
If competitive pressures
restrict or lower the premiums we receive, our financial results could suffer.
In addition to the challenge of controlling health
care costs, we face competitive pressure to contain premium prices. The managed health care industry is highly competitive and contracts for the sale of commercial products are generally bid upon or renewed annually. Many of our competitors are more
established in the health care industry and have a larger market share and greater financial resources than we do in certain markets. In addition, other companies may enter our markets in the future. While health plans compete on the basis of many
factors, including service and the quality and depth of provider networks, we expect that price will continue to be a significant basis of competition. Failure to compete effectively in our markets could have a material adverse effect on our
financial position, results of operations and cash flows.
We are involved in various legal actions, which, if resolved unfavorably to
us, could result in substantial monetary damages.
We are a party to a variety of legal actions that affect our business, such as
employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, tort claims, and shareholder suits, including securities fraud.
A-30
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
A number of purported class action lawsuits have been filed against us and some of our
competitors in the health benefits business. The suits are purported class actions on behalf of all of our managed care members and network providers for alleged breaches of federal statutes, including Employee Retirement Income Security Act, as
amended, or ERISA, and Racketeer Influenced and Corrupt Organizations Act, or RICO.
In addition, because of the nature of the health care
business, we are subject to a variety of legal actions relating to our business operations, including the design, management and offering of products and services. These include and could include in the future:
|
|
|
claims relating to the denial of health care benefits; |
|
|
|
medical malpractice actions; |
|
|
|
allegations of anti-competitive and unfair business activities; |
|
|
|
provider disputes over compensation and termination of provider contracts; |
|
|
|
disputes related to self-funded business, including actions alleging claim administration errors; |
|
|
|
claims related to the failure to disclose certain business practices; and |
|
|
|
claims relating to customer audits and contract performance. |
In some cases, substantial non-economic or punitive damages, or treble damages, may be sought. While we currently have insurance coverage for some of these potential liabilities, other potential liabilities may not be covered by insurance,
insurers may dispute coverage, or the amount of insurance may not be enough to cover the damages awarded.
In addition, certain types of
damages, such as punitive damages, may not be covered by insurance, particularly in those jurisdictions in which coverage of punitive damages is prohibited. Insurance coverage for all or some forms of liability may become unavailable or
prohibitively expensive in the future.
A description of material legal actions in which we are currently involved is included under
Legal Proceedings. We cannot predict the outcome of these suits with certainty, and we are incurring expenses in the defense of these matters. In addition, recent court decisions and legislative activity may increase our exposure for any
of these types of claims. Therefore, these legal actions could have a material adverse effect on our financial position, results of operations, and cash flows.
Increased litigation and negative publicity could increase our cost of doing business.
The managed care
industry continues to receive significant negative publicity and has been the subject of large jury awards that have affected or reflected public perception of the industry. This publicity and perception have been accompanied by increased
litigation, legislative activity, regulation and governmental review of industry practices. These factors may adversely affect our ability to market our products or services, may require us to change our products or services, and may increase the
regulatory burdens under which we operate. Any combination of these factors could further increase our cost of doing business and adversely affect our financial position, results of operations and cash flows.
A-31
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
If we fail to effectively implement our operational and strategic initiatives, our business could be materially adversely
affected.
Our future performance depends in large part upon our management teams ability to execute our strategy to position
the company for the future. This strategy involves, among other things, the introduction of new products and benefit designs, the successful implementation of our e-business initiatives and the selection and adoption of new technologies. We believe
we have experienced, capable management and technical staff who are capable of implementing this strategy. However, the market for management and technical staff in the health care industry is competitive. Loss of key employees could adversely
affect the implementation of our initiatives. There can be no assurance that we will be able to successfully implement our operational and strategic initiatives that are intended to position the company for future growth. Failure to implement this
strategy may result in a material adverse effect on our financial position, results of operations and cash flows.
Our industry is
currently subject to substantial government regulation, which, along with possible increased governmental regulation or legislative reform, increases our costs of doing business and could adversely affect our profitability.
The health care industry in general, and HMOs and PPOs in particular, are subject to substantial federal and state government regulation, including:
|
|
|
regulation relating to minimum net worth; |
|
|
|
licensing requirements; |
|
|
|
approval of policy language and benefits; |
|
|
|
mandated benefits and processes; |
|
|
|
provider compensation arrangements; |
|
|
|
periodic examinations by state and federal agencies. |
State regulations require our HMO and insurance subsidiaries to maintain minimum net worth requirements and restrict certain investment activities. Additionally, those regulations restrict the ability of our subsidiaries to make dividend
payments, loans, loan repayments or other payments to us.
In recent years, significant federal and state legislation affecting our
business has been enacted. State and federal governmental authorities are continually considering changes to laws and regulations applicable to us and are currently considering regulations relating to:
|
|
|
mandatory benefits and products, such as a Medicare pharmacy benefit; |
|
|
|
defining medical necessity; |
|
|
|
health insurance access; |
|
|
|
provider compensation and contract terms; |
|
|
|
health plan liability to members who fail to receive appropriate care; |
|
|
|
disclosure and composition of physician networks; |
|
|
|
physicians ability to collectively negotiate contract terms with carriers, including fees; |
|
|
|
rules tightening time periods in which claims must be paid; and |
All of these proposals could
apply to us.
A-32
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
There can be no assurance that we will be able to continue to obtain or maintain required
governmental approvals or licenses or that legislative or regulatory changes will not have a material adverse effect on our business. Delays in obtaining or failure to obtain or maintain required approvals, or moratoria imposed by regulatory
authorities, could adversely affect our revenue or the number of our members, increase costs or adversely affect our ability to bring new products to market as forecasted.
The National Association of Insurance Commissioners, or NAIC, has adopted risk-based capital requirements, also known as RBC, which is subject to state-by-state adoption and to the extent
implemented, sets minimum capitalization requirements for insurance and HMO companies. The NAIC recommendations for life insurance companies were adopted in all states and the prescribed calculation for HMOs has been adopted in most states in which
we operate. The HMO rules may increase the minimum capital required for some of our subsidiaries. See Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity above.
Congress is considering significant changes to Medicare, including a pharmacy benefit requirement. In 2002, President Bush announced a revised
prescription drug discount plan for Medicare-eligible seniors and Congress is continuing to examine the proposal. We are unable to determine what effect, if any, the prescription drug discount plan will have on our products or our operating results.
Congress is also considering proposals relating to health care reform, including a comprehensive package of requirements for managed care
plans called the Patient Bill of Rights, or PBOR, legislation. During the summer of 2001, the House and Senate both passed versions of PBOR legislation that must now be reconciled. Due to the tragic events of September 11, 2001, enactment of PBOR
legislation is being delayed. The reconciliation of the Senate and House bills may be further complicated since 2002 is an election year. If PBOR legislation becomes law, it could expose us to significant increased costs and additional litigation
risks. Although we could attempt to mitigate our ultimate exposure from these costs through increases in premiums or changes in benefits, there can be no assurance that we will be able to mitigate or cover the costs stemming from any PBOR
legislation or the other costs incurred in connection with complying with any PBOR or similar legislation.
The Health Insurance
Portability and Accountability Act of 1996, or HIPAA, includes administrative provisions directed at simplifying electronic data interchange through standardizing transactions, establishing uniform health care provider, payor and employer
identifiers and seeking protections for confidentiality and security of patient data. Under the new HIPAA standard transactions and code sets rules, we must make significant systems enhancements and invest in new technical solutions. The standard
transactions and code sets rules compliance date may be extended by any covered entity until October 17, 2003 by submitting a request to the Secretary of Health and Human Services by October 16, 2002. We intend to file for the extension. Under the
new HIPAA privacy rules, we must comply with a variety of requirements concerning the use and disclosure of individuals protected health information, establish rigorous internal procedures to protect health information and enter into business
associate contracts with those companies to whom protected health information is disclosed. Violations of these rules will subject us to significant penalties. Compliance with HIPAA regulations requires significant systems enhancements, training and
administrative
A-33
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
effort. The final rules do not provide for complete federal preemption of state laws, but rather preempt all inconsistent state laws unless the state law is more stringent. HIPAA could also
expose us to additional liability for violations by our business associates.
Another area receiving increased focus in 2002 is the time
in which various laws require the payment of health care claims. Many states already have legislation in place covering payment of claims within a specific number of days. However, due to provider groups advocating for laws or regulations
establishing even stricter standards, procedures and penalties, we expect additional regulatory scrutiny and supplemental legislation with respect to claims payment practices. The provider-sponsored bills are characterized by stiff penalties for
late payment, including high interest rates payable to providers and costly fines levied by state insurance departments and attorneys general. This legislation and possible future regulation and oversight could expose our Company to additional
liability and penalties.
On November 21, 2000, the Department of Labor published its final regulation on claims review procedures under
the Employee Retirement Security Act of 1974, or ERISA. The claims procedure regulation applies to all employee benefit plans governed by ERISA, whether benefits are provided through insurance products or are self-funded. As a result, the new claims
review regulation impacts nearly all employer and union-sponsored health and disability plans, except church and government plans. Similar to legislation recently passed by many states, the new ERISA claims procedures impose shorter and more
detailed procedures for processing and reviewing claims and appeals. According to the Department of Labor, however, its ERISA claims regulation does not preempt state insurance and utilization review laws that impose different procedures or time
lines, unless complying with the state law would make compliance with the new ERISA regulation impossible. Unlike its state counterparts, the ERISA claims rule does not provide for independent external review to decide disputed medical questions.
Instead, the federal regulation will generally make it easier for claimants to avoid state-mandated internal and external review processes and to file suit in federal court. Because the processes and timelines established by the new ERISA claims
rules are similar to existing state requirements, although different in many of their particulars, it is difficult to estimate the cost of bringing the Companys claims procedures into compliance. Pending outcome of litigation currently pending
before the U. S. Supreme Court, it is also difficult to predict the impact that the new ERISA rules will have on state external review laws. The United States Supreme Court has a number of cases before it addressing the preemptive effect of ERISA on
state laws, and may issue important decisions on these cases in 2002. The new ERISA claims rules generally become effective July 1, 2002 or the first day of the first plan year beginning after July 1, 2002, whichever is later. In any case, health
plans must comply with the new rules with respect to all claims filed on or after January 1, 2003.
We are also subject to various
governmental audits and investigations. These can include audits and investigations by state attorneys general, CMS, the Office of the Inspector General of Health and Human Services, the Office of Personnel Management, the Department of Justice and
state Departments of Insurance and Departments of Health. These activities could result in the loss of licensure or the right to participate in various programs, or the imposition of fines, penalties and other sanctions. In addition, disclosure of
any adverse investigation or audit results or sanctions could negatively affect our reputation in various markets and make it more difficult for us to sell our products and services.
A-34
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
As a government contractor, we are exposed to additional risks that could adversely affect
our business or our willingness to participate in government health care programs.
A significant portion of our revenues relates to
federal, state and local government health care coverage programs, including the Medicare+Choice, Medicaid and TRICARE programs. These programs involve various risks, including:
|
|
|
the possibility of reduced or insufficient government reimbursement in the future; |
|
|
|
higher comparative medical costs; |
|
|
|
government regulatory and reporting requirements; |
|
|
|
higher marketing and advertising costs per member as a result of marketing to individuals as opposed to groups; |
|
|
|
state budget constraints; |
|
|
|
the possibility that we will not be able to extend or renew any of the contracts relating to these programs. These contracts also are generally subject to frequent change, including
changes which may reduce the number of persons enrolled or eligible to enroll, reduce the revenue we receive or increase our administrative or health care costs under those programs. In the event government reimbursement were to decline from
projected amounts, our failure to reduce the health care costs associated with these programs could have a material adverse effect on our business. Changes to these government programs in the future may also affect our ability or willingness to
participate in these programs. 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, may have a
material adverse effect on our financial condition, results of operations and cash flows; and |
|
|
|
in addition at December 31, 2001, under one of our CMS contracts, we provided health insurance coverage to approximately 232,500 members in Florida. This contract accounted for
approximately 16.9% of our total premiums and ASO fees for 2001. The termination of this contract would likely have a material adverse effect upon our financial condition, results of operations, and cash flows. |
If we fail to maintain satisfactory relationships with the providers of care to our members, our business could be adversely affected.
We contract with physicians, hospitals and other providers to deliver health care to our members. Our products encourage or require
our customers to use these contracted providers. These providers may share medical cost risk with us or have financial incentives to deliver quality medical services in a cost-effective manner.
In any particular market, providers could refuse to contract with us, demand higher payments, or take other actions that could result in higher health care costs for us, less desirable
products for customers and members, or difficulty meeting regulatory or accreditation requirements. In some markets, certain providers, particularly hospitals, physician/hospital organizations or multi-specialty physician groups, may have
significant market positions and negotiating power. In addition, physician or practice management companies, which aggregate physician practices for administrative efficiency and marketing leverage, may, in some cases, compete directly with us. If
these providers refuse to contract with us, use their market position to negotiate favorable contracts, or place us at a competitive disadvantage, our ability to market products or to be profitable in those areas could be adversely affected.
A-35
Managements Discussion and Analysis of
Financial Condition and Results
of Operations(Continued)
In some situations, we have contracts with individual or groups of primary care physicians
for an actuarially determined, fixed, per-member-per-month fee under which physicians are paid a fixed amount to provide all required medical services to our members. The inability of providers to properly manage costs under these arrangements can
result in the financial instability of such providers and the termination of their relationship with us. In addition, payment or other disputes between the primary care provider and specialists with whom it contracts can result in a disruption in
the provision of services to our members or a reduction in the services available. A primary care providers financial instability or failure to pay other providers for services rendered could lead that provider to demand payment from us, even
though we have made our regular fixed payments to the primary provider. There can be no assurance that providers with whom we contract will properly manage the costs of services, maintain financial solvency or avoid disputes with other providers,
the failure of any of which could have an adverse effect on the provision of services to our members and our operations.
A-36
Humana Inc.
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
|
|
2001
|
|
|
2000
|
|
|
|
(in thousands, except share amounts) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
651,420 |
|
|
$ |
657,562 |
|
Investment securities |
|
|
1,389,596 |
|
|
|
1,408,522 |
|
Premiums receivable, less allowance for doubtful accounts of $38,539 in 2001, and $42,005 in 2000 |
|
|
322,064 |
|
|
|
205,260 |
|
Deferred income taxes |
|
|
64,221 |
|
|
|
67,205 |
|
Other |
|
|
195,637 |
|
|
|
195,517 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,622,938 |
|
|
|
2,534,066 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
461,761 |
|
|
|
434,620 |
|
Other assets: |
|
|
|
|
|
|
|
|
Long-term investment securities |
|
|
280,320 |
|
|
|
240,064 |
|
Goodwill |
|
|
776,874 |
|
|
|
789,541 |
|
Deferred income taxes |
|
|
36,582 |
|
|
|
102,767 |
|
Other |
|
|
225,163 |
|
|
|
205,920 |
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
1,318,939 |
|
|
|
1,338,292 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,403,638 |
|
|
$ |
4,306,978 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Medical and other expenses payable |
|
$ |
1,086,386 |
|
|
$ |
1,181,027 |
|
Trade accounts payable and accrued expenses |
|
|
479,996 |
|
|
|
428,556 |
|
Book overdraft |
|
|
152,757 |
|
|
|
148,563 |
|
Unearned premium revenues |
|
|
325,040 |
|
|
|
333,305 |
|
Short-term debt |
|
|
263,000 |
|
|
|
599,952 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,307,179 |
|
|
|
2,691,403 |
|
Long-term debt |
|
|
315,489 |
|
|
|
|
|
Professional liability risks |
|
|
241,431 |
|
|
|
219,768 |
|
Other long-term liabilities |
|
|
31,590 |
|
|
|
35,386 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,895,689 |
|
|
|
2,946,557 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $1 par; 10,000,000 shares authorized; none issued |
|
|
|
|
|
|
|
|
Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 170,692,520 shares issued in 2001, and 170,889,142 shares issued in
2000 |
|
|
28,449 |
|
|
|
28,482 |
|
Capital in excess of par value |
|
|
922,439 |
|
|
|
922,621 |
|
Retained earnings |
|
|
578,122 |
|
|
|
460,951 |
|
Accumulated other comprehensive income (loss) |
|
|
11,670 |
|
|
|
(8,509 |
) |
Unearned restricted stock compensation |
|
|
(17,882 |
) |
|
|
(29,177 |
) |
Treasury stock, at cost, 1,880,619 shares in 2001, and 1,823,348 shares in 2000 |
|
|
(14,849 |
) |
|
|
(13,947 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,507,949 |
|
|
|
1,360,421 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
4,403,638 |
|
|
$ |
4,306,978 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
A-37
Humana Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For the year ended December 31,
|
|
|
|
2001
|
|
2000
|
|
1999
|
|
|
|
(in thousands, except per share results) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
Premiums |
|
$ |
9,938,961 |
|
$ |
10,394,631 |
|
$ |
9,958,582 |
|
Administrative services fees |
|
|
137,090 |
|
|
86,298 |
|
|
97,940 |
|
Investment and other income |
|
|
118,835 |
|
|
115,021 |
|
|
155,013 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
10,194,886 |
|
|
10,595,950 |
|
|
10,211,535 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
Medical |
|
|
8,279,844 |
|
|
8,781,998 |
|
|
8,533,090 |
|
Selling, general and administrative |
|
|
1,545,129 |
|
|
1,524,799 |
|
|
1,466,181 |
|
Depreciation and amortization |
|
|
161,531 |
|
|
146,548 |
|
|
123,858 |
|
Asset impairments and other charges |
|
|
|
|
|
|
|
|
459,852 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,986,504 |
|
|
10,453,345 |
|
|
10,582,981 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
208,382 |
|
|
142,605 |
|
|
(371,446 |
) |
Interest expense |
|
|
25,302 |
|
|
28,615 |
|
|
33,393 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
183,080 |
|
|
113,990 |
|
|
(404,839 |
) |
Provision (benefit) for income taxes |
|
|
65,909 |
|
|
23,938 |
|
|
(22,419 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
117,171 |
|
$ |
90,052 |
|
$ |
(382,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
0.71 |
|
$ |
0.54 |
|
$ |
(2.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
$ |
0.70 |
|
$ |
0.54 |
|
$ |
(2.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
A-38
Humana Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
Common Stock
|
|
|
Capital in Excess of Par Value
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
Unearned Restricted Stock Compensation
|
|
|
|
|
|
Total Stockolders Equity
|
|
|
|
Issued Shares
|
|
|
Amount
|
|
|
|
Retained Earnings
|
|
|
|
|
Treasury Stock
|
|
|
|
|
(in thousands) |
|
Balances, January 1, 1999 |
|
167,540 |
|
|
$ |
27,923 |
|
|
$ |
902,711 |
|
|
$ |
753,798 |
|
|
$ |
12,771 |
|
|
$ |
(8,814 |
) |
|
$ |
|
|
|
$ |
1,688,389 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(382,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(382,420 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment losses, net of $26,269 tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,261 |
) |
|
|
|
|
|
|
|
|
|
|
(41,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(423,681 |
) |
Restricted stock grants (forfeitures), net |
|
(43 |
) |
|
|
(7 |
) |
|
|
(910 |
) |
|
|
|
|
|
|
|
|
|
|
(150 |
) |
|
|
|
|
|
|
(1,067 |
) |
Restricted stock amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,104 |
|
|
|
|
|
|
|
3,104 |
|
Restricted stock market value adjustment |
|
|
|
|
|
|
|
|
|
(4,350 |
) |
|
|
|
|
|
|
|
|
|
|
4,350 |
|
|
|
|
|
|
|
|
|
Stock option exercises |
|
112 |
|
|
|
19 |
|
|
|
859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878 |
|
Stock option tax benefit |
|
|
|
|
|
|
|
|
|
388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 1999 |
|
167,609 |
|
|
|
27,935 |
|
|
|
898,698 |
|
|
|
371,378 |
|
|
|
(28,490 |
) |
|
|
(1,510 |
) |
|
|
|
|
|
|
1,268,011 |
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
90,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,052 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gains, net of $12,721 tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,981 |
|
|
|
|
|
|
|
|
|
|
|
19,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,033 |
|
Common stock repurchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,432 |
) |
|
|
(26,432 |
) |
Restricted stock grants (forfeitures), net |
|
2,990 |
|
|
|
498 |
|
|
|
20,525 |
|
|
|
(479 |
) |
|
|
|
|
|
|
(33,029 |
) |
|
|
12,485 |
|
|
|
|
|
Restricted stock amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,069 |
|
|
|
|
|
|
|
7,069 |
|
Restricted stock market value adjustment |
|
|
|
|
|
|
|
|
|
1,707 |
|
|
|
|
|
|
|
|
|
|
|
(1,707 |
) |
|
|
|
|
|
|
|
|
Stock option exercises |
|
290 |
|
|
|
49 |
|
|
|
1,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,617 |
|
Stock option tax benefit |
|
|
|
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2000 |
|
170,889 |
|
|
|
28,482 |
|
|
|
922,621 |
|
|
|
460,951 |
|
|
|
(8,509 |
) |
|
|
(29,177 |
) |
|
|
(13,947 |
) |
|
|
1,360,421 |
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
117,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,171 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gains, net of $12,847 tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,179 |
|
|
|
|
|
|
|
|
|
|
|
20,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,350 |
|
Common stock repurchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,867 |
) |
|
|
(1,867 |
) |
Restricted stock grants (forfeitures), net |
|
(433 |
) |
|
|
(72 |
) |
|
|
(1,699 |
) |
|
|
|
|
|
|
|
|
|
|
815 |
|
|
|
956 |
|
|
|
|
|
Restricted stock amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,492 |
|
|
|
|
|
|
|
9,492 |
|
Restricted stock market value adjustment |
|
|
|
|
|
|
|
|
|
(988 |
) |
|
|
|
|
|
|
|
|
|
|
988 |
|
|
|
|
|
|
|
|
|
Stock option exercises |
|
237 |
|
|
|
39 |
|
|
|
2,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
2,292 |
|
Stock option tax benefit |
|
|
|
|
|
|
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2001 |
|
170,693 |
|
|
$ |
28,449 |
|
|
$ |
922,439 |
|
|
$ |
578,122 |
|
|
$ |
11,670 |
|
|
$ |
(17,882 |
) |
|
$ |
(14,849 |
) |
|
$ |
1,507,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
A-39
Humana Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the year ended December 31,
|
|
|
2001
|
|
2000
|
|
1999
|
|
|
(in thousands) |
Cash flows from operating activities |
|
|
|
|
|
|
Net income (loss) |
|
$117,171 |
|
$90,052 |
|
$(382,420) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
161,531 |
|
146,548 |
|
123,858 |
Amortization of restricted stock |
|
9,492 |
|
7,069 |
|
3,104 |
Gain on sale of property and equipment, net |
|
|
|
(3,373) |
|
(11,652) |
Gain on sale of investment securities, net |
|
(13,853) |
|
(6,615) |
|
(10,641) |
Provision for deferred income taxes |
|
56,104 |
|
19,287 |
|
4,974 |
Provision for doubtful accounts |
|
4,039 |
|
10,927 |
|
12,644 |
Payment of government audit settlement |
|
(8,000) |
|
(14,526) |
|
|
Asset impairments and other charges |
|
|
|
|
|
459,852 |
Changes in operating assets and liabilities excluding the effects of acquisitions and divestitures: |
|
|
|
|
|
|
Premiums receivable |
|
(22,836) |
|
(994) |
|
38,593 |
Other assets |
|
8,184 |
|
(8,234) |
|
53,940 |
Medical and other expenses payable |
|
(179,539) |
|
(195,891) |
|
(22,949) |
Workers compensation liabilities |
|
|
|
(30,064) |
|
(150,245) |
Other liabilities |
|
27,456 |
|
39,020 |
|
43,218 |
Unearned premium revenues |
|
(13,397) |
|
(16,050) |
|
55,601 |
Other |
|
2,606 |
|
3,248 |
|
(142) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
148,958 |
|
40,404 |
|
217,735 |
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
Acquisitions, net of cash and cash equivalents acquired |
|
(29,359) |
|
(12,910) |
|
(14,810) |
Divestitures, net of cash and cash equivalents disposed |
|
1,470 |
|
28,517 |
|
|
Purchases of property and equipment |
|
(114,971) |
|
(135,067) |
|
(88,930) |
Dispositions of property and equipment |
|
|
|
21,163 |
|
53,833 |
Purchases of investment securities |
|
(1,874,482) |
|
(1,205,129) |
|
(796,026) |
Maturities of investment securities |
|
626,369 |
|
543,062 |
|
391,440 |
Proceeds from sales of investment securities |
|
1,272,166 |
|
582,339 |
|
472,272 |
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
(118,807) |
|
(178,025) |
|
17,779 |
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
Revolving credit agreement (repayments) borrowings |
|
(520,000) |
|
520,000 |
|
(93,000) |
Net conduit commercial paper borrowings |
|
263,000 |
|
|
|
|
Net commercial paper repayments |
|
(79,952) |
|
(606,261) |
|
(43,763) |
Proceeds from issuance of senior notes |
|
299,277 |
|
|
|
|
Proceeds from other borrowings |
|
5,700 |
|
|
|
|
Debt issue costs |
|
(7,116) |
|
|
|
|
Change in book overdraft |
|
4,194 |
|
(66,618) |
|
(19,243) |
Common stock repurchases |
|
(1,867) |
|
(26,432) |
|
|
Other |
|
471 |
|
(3,793) |
|
(13,800) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
(36,293) |
|
(183,104) |
|
(169,806) |
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
(6,142) |
|
(320,725) |
|
65,708 |
Cash and cash equivalents at beginning of period |
|
657,562 |
|
978,287 |
|
912,579 |
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$651,420 |
|
$657,562 |
|
$978,287 |
|
|
|
|
|
|
|
Supplemental cash flow disclosures: |
|
|
|
|
|
|
Interest payments |
|
$23,663 |
|
$25,190 |
|
$33,187 |
Income tax payments (refunds), net |
|
$11,413 |
|
$(35,182) |
|
$(58,375) |
Details of businesses acquired in purchase transactions: |
|
|
|
|
|
|
Fair value of assets acquired, net of cash acquired |
|
$154,684 |
|
$125,816 |
|
$20,157 |
Less: liabilities assumed |
|
(125,325) |
|
(112,906) |
|
(5,347) |
|
|
|
|
|
|
|
Cash paid for acquired businesses, net of cash acquired |
|
$29,359 |
|
$12,910 |
|
$14,810 |
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
A-40
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Reporting Entity
Nature of Operations
Headquartered in Louisville, Kentucky, Humana Inc. is
one of the nations largest publicly traded health benefits companies, based on our 2001 revenues of $10.2 billion. References throughout this document to we, us, our, Company, and
Humana, mean Humana Inc. and all entities we own. We offer coordinated health insurance coverage and related services through a variety of traditional and Internet-based plans for employer groups and government-sponsored programs. In
2001, over 70% of our premiums and administrative services fees resulted from members located in Florida, Illinois, Texas, Kentucky and Ohio. We derived approximately 44% of our premiums and a