Humana 1999 Annual Report Download - page 25

HU M A N A IN C .
NOTES TO CONSOLIDATED FINANCIAL STAT E M E N T S
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8. E M P L OY EE B E N E FI T P LA NS
Employee Savings Plan
The Company has defined contribution retirement and
savings plans covering qualified employees. The
Company’s contribution to these plans are based on various
percentages of compensation, and in some instances, are
based upon the amount of the employees’ contributions to
the plans. The cost of these plans amounted to
approximately $27 million, $40 million and $24 million in
1999, 1998 and 1997, respectively, the substantial portion of
which was funded currently. The amount for 1998 includes
the $16 million one-time incentive paid to non-officer
employees discussed in Note 3.
Stock Based Compensation
The Company has plans under which restricted stock
awards and options to purchase common stock have been
granted to officers, directors and key employees. In 1998,
the Company awarded 400,000 shares of performance-
based restricted stock to officers and key employees.
The shares had the potential to vest in equal one-third
installments beginning January 1, 2000, provided the
Company met certain earnings goals. As the goal was not
met for 1999, and the awards are cumulative, two-thirds
has the potential to vest in 2000 and one-third in 2001.
Unearned compensation under the restricted stock awards
plan is amortized over the vesting period. Compensation
expense recognized related to the restricted stock award
plans was $2 million for each of the years ended December
31, 1999 and 1998 and $1 million for the year ended
December 31, 1997.
Options are granted at the average market price on the date
of grant. Exercise provisions vary, but most options vest in
whole or in part one to five years after grant and expire ten
years after grant. At December 31, 1999, there were
13,977,221 shares reserved for employee and director stock
option plans. At December 31, 1999, there were 2,658,040
shares of common stock available for future grants.
On September 17, 1998, the Company repriced 5,503,491 of
its stock options with original exercise prices ranging from
$18.31 to $26.31 to the market price of the Company’s
common stock on that date of $15.59. Outstanding stock
options with an exercise price in excess of $18.13 per share
could be exchanged in return for a reduced number of
options, with a deferred vesting date of one year after the
exchange date. The repricing resulted in the cancellation of
5,503,491 options and the granting of 4,559,438 options.
The Company’s option plan activity for the years ended
December 31, 1999, 1998 and 1997 is summarized below:
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Shares Exercise Price Weighted Average
Under Option Per Share Exercise Price
Balance, January 1, 1997 10,921,887 $ 4.32 to $ 26.94 $ 13.71
Granted 2,819,000 18.31 to 23.69 19.79
Exercised (1,247,793) 4.32 to 23.06 8.67
Canceled or lapsed (270,830) 6.56 to 23.06 17.32
Balance, December 31, 1997 12,222,264 5.80 to 26.94 15.54
Granted 6,403,788 15.59 to 26.22 17.04
Exercised (3,067,202) 5.80 to 26.31 11.72
Canceled or lapsed (6,753,198) 6.56 to 26.31 20.03
Balance, December 31, 1998 8,805,652 6.56 to 26.94 14.52
Granted 3,966,750 6.88 to 19.25 14.16
Exercised (105,232) 6.56 to 8.91 16.75
Canceled or lapsed (1,347,989) 8.00 to 26.31 18.32
Balance, December 31, 1999 11,319,181 $ 6.56 to $ 26.94 $ 14.00
Asummary of stock options outstanding and exercisable at December 31, 1999 follows:
Stock Options Outstanding Stock Options Exercisable
Weighted Average Weighted Average Weighted Average
Range of Exercise Prices Shares Remaining Contractual Life Exercise Price Shares Exercise Price
$6.56 to $ 9.64 3,820,428 6.5 years $ 8.05 1,914,178 $ 6.95
10.54 to 13.31 225,200 6.2 years 11.89 89,700 10.86
14.44 to 17.94 4,530,671 6.3 years 15.69 3,268,920 15.73
18.72 to 21.94 2,518,082 7.1 years 19.32 811,761 19.41
22.44 to 26.94 224,800 5.3 years 23.48 202,267 23.53
$ 6.56 to $ 26.94 11,319,181 6.5 years $ 14.00 6,286,826 $ 13.71
As of December 31, 1998 and 1997, there were 3,636,481 and 6,215,776 options exercisable, respectively. The weighted average
exercise price of options exercisable during 1998 and 1997 was $12.32 and $13.32, respectively. If the Company had adopted
the expense recognition provisions of SFAS 123 for purposes of determining compensation expense related to stock options
granted during the years ended December 31, 1999, 1998 and 1997, net (loss) income and (loss) earnings per common share
would have been changed to the pro forma amounts shown below:
Years Ended December 31,
(In millions, except per share results) 1999 1998 1997
Net (loss) income As reported $ (382) $ 129 $ 173
Pro forma (402) 116 159
(Loss) earnings per common share As reported $ (2.28) $ 0.77 $ 1.06
Pro forma (2.40) 0.69 0.97
(Loss) earnings per common share — As reported $ (2.28) $ 0.77 $ 1.05
assuming dilution Pro forma (2.40) 0.69 0.96
The fair value of each option granted during 1999, 1998 and 1997 was estimated on the date of grant using the Black-Scholes
pricing model with the following weighted average assumptions:
1999 1998 1997
Dividend yield None None None
Expected volatility 43.8% 40.9% 38.5%
Risk-free interest rate 5.6% 4.9% 6.1%
Expected option life (years) 8.3 6.8 5.4
Weighted average fair value at grant date $ 8.10 $ 8.59 $ 8.88
The effects of applying SFAS 123 in the pro forma disclosures are not likely to be representative of the effects on pro forma
net income for future years since variables such as option grants, exercises and stock price volatility included in the
disclosures may not be indicative of future activity.
9. ST O C K HO L DE R S ’ EQ U I T Y
The Company adopted a stockholders’ rights plan designed to deter takeover initiatives not considered to be in the best
interests of the Company’s stockholders. The rights are redeemable by action of the Company’s Board of Directors at a price
of $0.01 per right at any time prior to their becoming exercisable. Pursuant to the plan, under certain conditions, each share
of stock has a right to acquire 1/100th of a share of Series A Participating Preferred Stock at a price of $145 per share.
The plan expires in 2006.
10 . CO M MI T M E N T S AN D C O N TI NG E NC I E S
Leases
The Company leases facilities, computer hardware and other equipment under long-term operating leases that are
noncancelable and expire on various dates through 2017. Rent expense and sublease income for all operating leases are
as follows:
Years Ended December 31,
(In millions) 1999 1998 1997
Rent expense $ 61 $ 42 $ 31
Sublease rental income (25) (9) (3)
Net rent expense $ 36 $ 33 $ 28