Humana 2005 Annual Report Download - page 45

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On December 20, 2005, our Commercial segment acquired Corphealth, Inc., a behavioral health care
management company, for cash consideration of approximately $54.2 million, including transaction costs. This
acquisition allows Humana to integrate coverage of medical and behavior health benefits.
On February 16, 2005, we acquired CarePlus Health Plans of Florida, or CarePlus, as well as its affiliated 10
medical centers and pharmacy company for approximately $444.9 million in cash, including transaction costs,
adding approximately 50,400 Medicare Advantage members in Miami-Dade, Broward and Palm Beach counties.
This acquisition enhances our Medicare market position in South Florida.
On April 1, 2004, we acquired Ochsner Health Plan, or Ochsner, from the Ochsner Clinic Foundation for
$157.1 million in cash. Ochsner, a Louisiana health plan, added approximately 152,600 commercial medical
members, primarily in fully insured large group accounts, and approximately 33,100 members in the Medicare
Advantage program.
These transactions are more fully described in Note 3 to the consolidated financial statements included in
Item 8.—Financial Statements and Supplementary Data.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based
Payment, or SFAS 123R, which requires companies to expense the fair value of employee stock options and
other forms of stock-based compensation. This requirement represents a significant change because fixed-based
stock option awards, a predominate form of stock compensation for us, were not recognized as compensation
expense under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. SFAS
123R requires that the cost of the award, as determined on the date of grant at fair value, be recognized over the
period during which an employee is required to provide service in exchange for the award (usually the vesting
period). The grant-date fair value of the award will be estimated using option-pricing models. In addition, certain
tax effects of stock option exercises will be reported as a financing activity rather than an operating activity in the
statements of cash flows. We adopted SFAS 123R on January 1, 2006 under the retrospective transition method
using the Black-Scholes pricing model. The effect of expensing stock options under a fair value approach using
the Black-Scholes pricing model reduced diluted earnings per common share, as retroactively restated for the
adoption of SFAS 123R, by $0.08 in 2005, $0.06 in 2004, and $0.03 in 2003 as more fully disclosed in Note 2 of
the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data. In
addition, the classification of cash inflows from any excess tax benefit associated with exercising stock options
will change from an operating activity to a financing activity in the consolidated statements of cash flows with no
impact on total cash flows. We estimate the impact of this change in classification will decrease operating cash
flows (and increase financing cash flows) by approximately $15.5 million in 2005, $3.7 million in 2004, and
$15.2 million in 2003.
On February 23, 2006, the Board of Directors approved the issuance of 1,517,507 additional options and
restricted stock awards. This grant was weighted more towards awards of restricted stock than stock options as
compared to grants made in prior years. Consequently, compensation expense for 2006 is anticipated to be $0.08
per diluted common share related to stock options due to adopting SFAS 123R and $0.05 per diluted common
share related to restricted stock. These amounts, which in total are in line with previous guidance, are dependent
on certain assumptions, including additional grants during 2006. As disclosed above, the pro forma effect of
expensing stock options was $0.08 per diluted common share in 2005 and, as disclosed in Note 11 of the
consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data,
compensation expense related to restricted stock awards was $0.02 per diluted common share in 2005.
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