Humana 2004 Annual Report Download - page 77

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Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2004 2003 2002
(in thousands, except per share
results)
Net income, as reported ........................................... $280,012 $228,934 $142,755
Add: Stock-based employee compensation expense included in reported net
income, net of related tax ........................................ 2,456 3,872 5,798
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax ............... (12,521) (9,067) (9,701)
Adjusted net income .............................................. $269,947 $223,739 $138,852
Earnings per share:
Basic, as reported ............................................ $ 1.75 $ 1.44 $ 0.87
Basic, pro forma ............................................. $ 1.68 $ 1.41 $ 0.85
Diluted, as reported .......................................... $ 1.72 $ 1.41 $ 0.85
Diluted, pro forma ........................................... $ 1.66 $ 1.38 $ 0.83
The weighted average fair value of each option granted during 2004, 2003 and 2002 is provided below. The
fair value was estimated on the date of grant using the Black-Scholes pricing model with the following weighted
average assumptions for the years ended December 31, 2004, 2003 and 2002:
2004 2003 2002
Weighted average fair value at grant date .................................... $ 9.95 $ 5.33 $ 6.26
Dividend yield ......................................................... None None None
Expected volatility ...................................................... 44.6% 44.5% 44.9%
Risk-free interest rate ................................................... 3.4% 3.4% 4.9%
Expected option life (years) .............................................. 6.0 6.5 5.6
Earnings Per Common Share
We compute basic earnings per common share on the basis of the weighted average number of unrestricted
common shares outstanding. Diluted earnings per common share is computed on the basis of the weighted
average number of unrestricted common shares outstanding plus the dilutive effect of outstanding employee
stock options and restricted shares using the treasury stock method.
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB 51, or FIN 46. The primary objectives of
FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other
than through voting rights (variable interest entities, or VIEs) and how to determine when and which business
enterprise should consolidate the VIE (the primary beneficiary). In December 2003, the FASB issued FIN 46-R,
Consolidation of Variable Interest Entities—an interpretation of ARB 51 (revised December 2003), which
amended certain provisions of FIN 46 and delayed implementation for entities that are not considered special
purpose entities until the first quarter of 2004.
As part of our ongoing business, we do not participate or knowingly seek to participate in transactions that
generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or SPEs, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As of December 31, 2004, we are not involved
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