Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2003

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 1-5975

 


 

HUMANA INC.

(Exact name of registrant as specified in its charter)

 

Delaware   61-0647538
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification Number)

 

500 West Main Street

Louisville, Kentucky 40202

(Address of principal executive offices, including zip code)

 

(502) 580-1000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes    x     No    ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes    x     No    ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

Class of Common Stock  

Outstanding at

September 30, 2003

$0.16  2 / 3 par value

  161,094,579 shares

 



Table of Contents

Humana Inc.

FORM 10-Q

SEPTEMBER 30, 2003

 

INDEX

 

          Page

     Part I: Financial Information     
Item 1.    Financial Statements (Unaudited)     
     Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002    3
     Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2003 and 2002    4
     Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002    5
     Notes to Condensed Consolidated Financial Statements    6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    19
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    36
Item 4.    Controls and Procedures    36
     Part II: Other Information     
Item 1.    Legal Proceedings    37
Item 5.    Other Information    40
Item 6.    Exhibits and Reports on Form 8-K    40
     Signatures    41

 

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Humana Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

    

September 30,

2003


   

December 31,

2002


 
     (in thousands, except share amounts)  

A SSETS

                

Current assets:

                

Cash and cash equivalents

   $ 635,837     $ 721,357  

Investment securities

     1,682,402       1,405,833  

Receivables, less allowance for doubtful accounts of $34,097 at September 30, 2003 and $30,178 at December 31, 2002:

                

Premiums

     461,684       348,562  

Administrative services fees

     10,952       68,316  

Other

     288,836       250,857  
    


 


Total current assets

     3,079,711       2,794,925  

Property and equipment, net

     413,402       459,842  

Other assets:

                

Long-term investment securities

     320,464       288,724  

Goodwill

     776,874       776,874  

Other

     159,273       279,665  
    


 


Total other assets

     1,256,611       1,345,263  
    


 


Total assets

   $ 4,749,724     $ 4,600,030  
    


 


L IABILITIES AND S TOCKHOLDERS ’ E QUITY

                

Current liabilities:

                

Medical and other expenses payable

   $ 1,296,566     $ 1,142,131  

Trade accounts payable and accrued expenses

     438,926       552,689  

Book overdraft

     218,751       94,882  

Unearned revenues

     108,161       335,757  

Short-term debt

     —         265,000  
    


 


Total current liabilities

     2,062,404       2,390,459  

Long-term debt

     644,440       339,913  

Other long-term obligations

     283,756       263,184  
    


 


Total liabilities

     2,990,600       2,993,556  
    


 


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; 173,112,860 shares issued at September 30, 2003 and 171,334,893 shares issued at December 31, 2002

     28,854       28,556  

Capital in excess of par value

     961,015       931,089  

Retained earnings

     883,502       720,877  

Accumulated other comprehensive income

     20,086       22,455  

Unearned restricted stock compensation

     (357 )     (6,516 )

Treasury stock, at cost, 12,018,281 shares at September 30, 2003 and 8,362,537 shares at December 31, 2002

     (133,976 )     (89,987 )
    


 


Total stockholders’ equity

     1,759,124       1,606,474  
    


 


Total liabilities and stockholders’ equity

   $ 4,749,724     $ 4,600,030  
    


 


 

See accompanying notes to condensed consolidated financial statements.

 

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Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three months ended
September 30,


   Nine months ended
September 30,


     2003

   2002

   2003

   2002

     (in thousands, except per share results)

Revenues:

                           

Premiums

   $ 3,016,298    $ 2,752,336    $ 8,772,652    $ 8,137,887

Administrative services fees

     66,984      61,056      199,788      189,900

Investment and other income

     28,483      28,235      100,999      78,362
    

  

  

  

Total revenues

     3,111,765      2,841,627      9,073,439      8,406,149
    

  

  

  

Operating expenses:

                           

Medical

     2,528,123      2,301,021      7,344,534      6,811,748

Selling, general and administrative

     458,381      429,019      1,371,196      1,278,516

Depreciation and amortization

     27,112      30,523      100,232      90,556
    

  

  

  

Total operating expenses

     3,013,616      2,760,563      8,815,962      8,180,820
    

  

  

  

Income from operations

     98,149      81,064      257,477      225,329

Interest expense

     4,737      4,107      12,473      12,888
    

  

  

  

Income before income taxes

     93,412      76,957      245,004      212,441

Provision for income taxes

     31,293      24,626      82,379      67,981
    

  

  

  

Net income

   $ 62,119    $ 52,331    $ 162,625    $ 144,460
    

  

  

  

Basic earnings per common share

   $ 0.39    $ 0.32    $ 1.03    $ 0.88
    

  

  

  

Diluted earnings per common share

   $ 0.38    $ 0.31    $ 1.01    $ 0.86
    

  

  

  

 

See accompanying notes to condensed consolidated financial statements.

 

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Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    

Nine months ended

September 30,


 
     2003

    2002

 
     (in thousands)  

Cash flows from operating activities

                

Net income

   $ 162,625     $ 144,460  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

                

Depreciation and amortization

     100,232       90,556  

Writedown of property and equipment

     17,233       —    

Provision for deferred income taxes

     30,213       34,221  

Changes in operating assets and liabilities:

                

Receivables

     7,509       (231,012 )

Other assets

     (17,022 )     268  

Medical and other expenses payable

     154,435       78,045  

Other liabilities

     (85,899 )     4,742  

Unearned revenues

     (227,596 )     (235,063 )

Other

     (18,810 )     12,481  
    


 


Net cash provided by (used in) operating activities

     122,920       (101,302 )
    


 


Cash flows from investing activities

                

Purchases of property and equipment, net

     (62,497 )     (83,581 )

Divestiture

     —         1,109  

Purchases of investment securities

     (3,659,394 )     (1,639,803 )

Maturities of investment securities

     585,461       273,199  

Proceeds from sales of investment securities

     2,768,446       1,339,124  
    


 


Net cash used in investing activities

     (367,984 )     (109,952 )
    


 


Cash flows from financing activities

                

Common stock repurchases

     (44,147 )     (25,439 )

Proceeds from issuance of senior notes

     299,139       —    

Net commercial paper conduit (repayments) borrowings

     (265,000 )     2,000  

Change in book overdraft

     123,869       (48,355 )

Proceeds from swap exchange

     31,556       —    

Other

     14,127       7,364  
    


 


Net cash provided by (used in) financing activities

     159,544       (64,430 )
    


 


Decrease in cash and cash equivalents

     (85,520 )     (275,684 )

Cash and cash equivalents at beginning of period

     721,357       651,420  
    


 


Cash and cash equivalents at end of period

   $ 635,837     $ 375,736  
    


 


Supplemental cash flow disclosures:

                

Interest payments

   $ 11,324     $ 8,099  

Income tax payments, net

   $ 43,335     $ 25,552  

 

See accompanying notes to condensed consolidated financial statements.

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1) Basis of Presentation

 

The accompanying condensed consolidated financial statements are presented in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or those normally made in an Annual Report on Form 10-K. References throughout this document to “we,” “us,” “our,” the “Company,” and “Humana,” mean Humana Inc. and all entities we own. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December 31, 2002, that was filed with the Securities and Exchange Commission, or the SEC, on March 21, 2003.

 

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of medical expenses payable, the recognition of revenue related to our TRICARE contracts, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. Although our estimates are based on knowledge of current events and anticipated future events, actual results may ultimately differ materially from those estimates. Refer to “Critical Accounting Policies and Estimates” in Humana’s 2002 Annual Report on Form 10-K for information on accounting policies that the Company considers critical in preparing its Consolidated Financial Statements.

 

The financial information has been prepared in accordance with our customary accounting practices and has not been audited. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature.

 

(2) Significant Accounting Policies

 

New Accounting Standards

 

On January 1, 2003, we adopted Statement of Financial Accounting Standards No. 146, Accounting for Exit or Disposal Activities , or Statement 146. Statement 146 addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including certain lease termination costs and severance-type costs under a one-time benefit arrangement rather than an ongoing benefit arrangement or an individual deferred-compensation contract. Statement 146 requires liabilities associated with exit and disposal activities to be expensed as incurred and impacts the timing of recognition for exit or disposal activities that were initiated after December 31, 2002. The adoption of Statement 146 did not have a material impact on our consolidated financial position or results of operations.

 

In November 2002, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34, or FIN 45. FIN 45 requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 requires disclosure about each guarantee even if the likelihood of the guarantors having to make any payments under the guarantee is remote. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. Refer to Note 9 for guarantee disclosures. The adoption of the recognition provision of FIN 45 did not have a material impact on our financial position, results of operations or cash flows.

 

In January 2003, the 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). The provisions of FIN 46 as amended by FASB Staff Position 46-6, Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities are effective immediately for VIEs created after January 31, 2003 and no later than December 31, 2003 for VIEs created before February 1, 2003. In addition, FIN

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

46 requires that both the primary beneficiary and all other enterprises with a significant variable interest make additional disclosure in filings issued after January 31, 2003. The adoption of FIN 46 is not expected to have a material impact on our financial position, results of operations or cash flows.

 

Stock-Based Compensation

 

We have stock-based employee compensation plans, including stock options and restricted stock awards, which are described more fully in Note 9 to the consolidated financial statements in Humana’s 2002 Annual Report on Form 10-K.

 

We account for our stock option plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, or APB No. 25. No compensation cost is reflected in net income related to fixed-based stock option awards to employees when the option has an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation expense is recorded for restricted stock grants over their vesting periods based on fair value, which is equal to the market price of Humana common stock on the date of the grant. The following table illustrates the effects on net income and earnings per share if we had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation , to our stock-based awards.

 

     Three months ended
September 30,


    Nine months ended
September 30,


 
     2003

    2002

    2003

    2002

 
     (in thousands, except per share results)  

Net income, as reported

   $ 62,119     $ 52,331     $ 162,625     $ 144,460  

Add: Restricted stock compensation expense included in reported net income, net of related tax

     644       915       3,448       3,981  

Deduct: Total stock-based employee compensation expense determined under fair value based method for all fixed-based options and restricted stock awards, net of related tax

     (1,925 )     (2,084 )     (7,085 )     (6,913 )
    


 


 


 


Adjusted net income

   $ 60,838     $ 51,162     $ 158,988     $ 141,528  
    


 


 


 


Earnings per share:

                                

Basic, as reported

   $ 0.39     $ 0.32     $ 1.03     $ 0.88  

Basic, pro forma

   $ 0.38     $ 0.31     $ 1.00     $ 0.86  

Diluted, as reported

   $ 0.38     $ 0.31     $ 1.01     $ 0.86  

Diluted, pro forma

   $ 0.37     $ 0.31     $ 0.99     $ 0.84  

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3) Restructuring Charge

 

During the fourth quarter of 2002, we finalized a plan to realign our administrative cost structure with the consolidation of seven customer service centers into four and an enterprise-wide workforce reduction.

 

The following table presents a rollforward of the restructuring charge for the year ended December 31, 2002 and the nine months ended September 30, 2003:

 

     Severance

    Lease
Discontinuance


    Total

 
   No. of
Employees


    Cost

     
     (dollars in thousands)  

Year ended December 31, 2002

      

Provision

   2,600     $ 32,105     $ 1,324     $ 33,429  

Cash payments

   (500 )     (910 )     —         (910 )
    

 


 


 


Balance at December 31, 2002

   2,100       31,195       1,324       32,519  

Nine months ended September 30, 2003

                              

Cash payments

   (1,600 )     (16,085 )     (800 )     (16,885 )
    

 


 


 


Balance at September 30, 2003

   500     $ 15,110     $ 524     $ 15,634  
    

 


 


 


 

Severance

 

During the fourth quarter of 2002, we recorded severance and related employee benefit costs of $32.1 million ($19.6 million after tax) in connection with the customer service center consolidation and an enterprise-wide workforce reduction. Severance costs were estimated based upon the provisions of the Company’s existing employee benefit plans and policies. The plan to reduce our administrative cost structure is expected to ultimately affect approximately 2,600 positions throughout the entire organization, including customer service, claim administration, clinical operations, provider network administration, as well as other corporate and field-based positions. As of September 30, 2003, approximately 2,100 positions had been eliminated. Severance is paid biweekly resulting in payments in periods subsequent to termination. We expect additional positions will be eliminated by December 31, 2003, and the remaining positions eliminated no later than June 30, 2004.

 

(4) Long-lived Asset Charge

 

Impairment

 

Our decision to eliminate the Jacksonville, Florida, San Antonio, Texas and Madison, Wisconsin customer service centers during the fourth quarter of 2002 prompted a review for the possible impairment of long-lived assets associated with these centers. Assets under operating leases supported the Madison service center and, therefore, were not applicable to our impairment analysis. Under a transition plan, we continued to use the long-lived assets of the Jacksonville and San Antonio customer service centers until mid-2003, the completion date for consolidating these two customer service centers. The long-lived assets of our customer service centers were supported by the future cash flows expected to result from members serviced by those centers. Cash flows from members serviced by a particular service center represented the lowest level of independently identifiable cash flows. For example, cash flows from members located primarily in the state of Florida and serviced by the Jacksonville service center supported the Jacksonville center’s long-lived assets until those members’ service was transitioned elsewhere.

 

Our impairment review during the fourth quarter of 2002 indicated that estimated undiscounted cash flows expected to result from the remaining use of the San Antonio, Texas customer service center long-lived assets, primarily buildings, were insufficient to recover their carrying value. Accordingly, we reduced the carrying value of these long-lived assets to their estimated fair value resulting in a non-cash impairment charge of $2.4 million ($1.5 million after tax) during the fourth quarter of 2002.

 

Unlike our San Antonio impairment review, a greater number of more profitable members in Florida caused the estimated undiscounted cash flows expected to result from the remaining use of the Jacksonville, Florida customer service center’s long-lived assets, primarily a building, to exceed the carrying value as of the fourth quarter of 2002 impairment review. However, impairment was triggered during the first quarter of 2003 with the passage of time and the approaching date for closing the center. As members serviced by the Jacksonville, Florida customer service

 

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Table of Contents

Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

center were transferred to other service centers during 2003, the undiscounted cash flows expected from the remaining members serviced by the center fell during the first quarter of 2003 to a level no longer supporting the carrying value of the center’s long-lived assets. Accordingly, we reduced the carrying value of these long-lived assets to their estimated fair value resulting in a non-cash impairment charge of approximately $17.2 million ($10.5 million after tax) during the first quarter of 2003.

 

We used an independent third party appraisal to assist us in evaluating the fair value of the buildings. The non-cash impairment charges are included with selling, general and administrative expenses in the accompanying consolidated statements of income.

 

We are in the process of selling the buildings previously used in our Jacksonville and San Antonio customer service operations and have classified them as held for sale. The carrying amount of the buildings approximated $27.6 million at September 30, 2003 based on their fair value less estimated costs to sell the buildings. We are no longer depreciating these buildings effective July 1, 2003. The impact of ceasing depreciation of the buildings was not material to our results of operations.

 

Accelerated Depreciation

 

After finalizing plans during the first quarter of 2003 to abandon software used in the Jacksonville, Florida operations by March 2003, we reduced the estimated useful life of the software effective January 1, 2003. Accordingly, we accelerated the depreciation of the remaining software balance of approximately $13.5 million ($8.3 million after tax) during the first quarter of 2003.

 

(5) Other Intangible Assets

 

Other intangible assets primarily relate to acquired subscriber, provider, and government contracts, and the cost of acquired licenses and are included with other long-term assets on the condensed consolidated balance sheets. Amortization expense for other intangible assets was approximately $9.2 million for the nine months ended September 30, 2003, and $11.8 million for the nine months ended September 30, 2002. The following table presents our estimate of amortization expense for the remaining three months of 2003, and for each of the five succeeding fiscal years:

 

     (in thousands)

For the three month period ending December 31, 2003

   $ 2,389

For the years ending December 31,:

      

2004

   $ 9,060

2005

   $ 5,440

2006

   $ 352

2007

   $ 352

2008

   $ 227

 

The following table presents details of our other intangible assets at September 30, 2003 and December 31, 2002:

 

     September 30, 2003

   December 31, 2002

     Cost

  

Accumulated

Amortization


   Net

   Cost

  

Accumulated

Amortization


   Net

     (in thousands)

Other intangible assets:

                                         

Subscriber contracts

   $ 85,496    $ 73,466    $ 12,030    $ 85,496    $ 68,284    $ 17,212

Provider contracts

     12,128      7,468      4,660      12,128      5,644      6,484

Government contracts

     11,820      11,820      —        11,820      9,764      2,056

Licenses and other

     5,065      1,322      3,743      5,065      1,161      3,904
    

  

  

  

  

  

Total other intangible assets

   $ 114,509    $ 94,076    $ 20,433    $ 114,509    $ 84,853    $ 29,656
    

  

  

  

  

  

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(6) Comprehensive Income

 

The following table presents details supporting the computation of comprehensive income for the three and nine months ended September 30, 2003 and 2002:

 

     Three months ended
September 30,


   Nine months ended
September 30,


     2003

    2002

   2003

    2002

     (in thousands)

Net income

   $ 62,119     $ 52,331    $ 162,625     $ 144,460

Net unrealized investment (losses) gains, net of tax

     (9,753 )     17,184      (2,369 )     24,149
    


 

  


 

Comprehensive income, net of tax

   $ 52,366     $ 69,515    $ 160,256     $ 168,609
    


 

  


 

 

(7) 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. There were no adjustments required to be made to net income for purposes of computing basic or diluted earnings per common share.

 

The following table presents details supporting the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2003 and 2002:

 

     Three months ended
September 30,


   Nine months ended
September 30,


     2003

   2002

   2003

   2002

     (in thousands, except per share results)

Net income available for common stockholders

   $ 62,119    $ 52,331    $ 162,625    $ 144,460

Weighted average outstanding shares of common stock used to compute basic earnings per common share

     159,454      163,933      158,202      164,348

Dilutive effect of:

                           

Stock options

     1,713      885      872      1,107

Restricted stock

     1,382      2,716      2,310      2,787
    

  

  

  

Shares used to compute diluted earnings per common share

     162,549      167,534      161,384      168,242
    

  

  

  

Basic earnings per common share

   $ 0.39    $ 0.32    $ 1.03    $ 0.88
    

  

  

  

Diluted earnings per common share

   $ 0.38    $ 0.31    $ 1.01    $ 0.86
    

  

  

  

Number of antidilutive stock options excluded from computation

     1,568      5,081      4,427      4,947

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(8) Equity

 

For the nine months ended September 30, 2003, we purchased 2.2 million shares in the open market at a cost of $20.8 million, or an average of $9.31 per share under prior authorization by the Board of Directors and 1.4 million shares in connection with employee stock plans at a cost of $23.3 million, or an average of $16.27 per share. In July 2003, the Board of Directors authorized an additional use of up to $100 million for the repurchase of our common shares exclusive of shares repurchased in connection with employee stock plans. No amounts have been repurchased under the July 2003 authorization as of September 30, 2003. The shares may be purchased from time to time at prevailing prices in the open market or in privately negotiated transactions.

 

For the nine months ended September 30, 2003, capital in excess of par value increased $16.7 million from the exercise of 1.9 million employee stock options and $13.6 million from the excess tax benefit associated with the August 7, 2003 vesting of 3.9 million shares of restricted stock and the exercise of 1.9 million employee stock options.

 

(9) Guarantees and Contingencies

 

Guarantees

 

Our 5-year and 7-year airplane operating leases provide for a residual value guarantee of no more than $13.6 million at the end of the lease terms which expire December 29, 2004 for the 5-year leases and January 1, 2010 for the 7-year lease. 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 we decide not to exercise our purchase option at the end of the lease, we must pay the lessor a maximum amount of $8.8 million related to the 5-year leases and $4.8 million related to the 7-year lease. The amount will be reduced by the net sales proceeds of the airplanes to a third party. A $1.7 million gain in connection with a 1999 sale/leaseback transaction is being deferred until the residual value guarantee is resolved at the end of the lease. After considering the current fair value of the airplanes and any deferred gain, we do not believe that we will have any exposure from the residual value guarantee at the end of the lease because we will exercise the purchase obligation, or the net proceeds from the sale of the airplanes will exceed the maximum amount payable to the lessor. During the second quarter of 2003, we terminated one 5-year airplane lease early. The impact of this transaction was not material.

 

We have $19.2 million in undrawn letters of credit outstanding at September 30, 2003. Letters of credit totaling $13.7 million have been issued to ensure our payment to a beneficiary for assumed obligations of our wholly owned captive insurance subsidiary related to pre-1993 professional liability risks for which the beneficiary remains directly liable. Other letters of credit totaling $5.5 million were issued to ensure our payment to various beneficiaries for miscellaneous contractual obligations. These letters of credit are required to be renewed automatically on an annual basis unless the beneficiary otherwise notifies us. Over the past 10 years, we have not had to fund any letters of credit.

 

Through indemnity agreements approved by the state regulatory authorities, certain of our regulated subsidiaries generally are guaranteed by Humana Inc., our parent company, in the event of insolvency for one, member coverage for which premium payment has been made prior to insolvency; two, benefits for members then hospitalized until discharged; and three, payment to providers for services rendered prior to insolvency.

 

Government Contracts

 

Our Medicare+Choice contracts with the federal government are renewed for a one-year term each December 31 unless notice of termination is received at least 90 days prior thereto. Separate legislative proposals to add a prescription drug benefit and increase private plan options for the program passed by both houses are currently being debated by House and Senate conferees. Although President Bush’s deadline for passage of this legislation has passed, negotiations are still underway. There is considerable uncertainty regarding the passage of a final bill and we are unable to predict the provisions of any final bill that would emerge from the Conference Committee or its impact on our financial position, results of operations or cash flows.

 

We have extended our current TRICARE contracts with the Department of Defense. The contract for Regions 2 and 5 was extended to April 30, 2004 and the contract for Regions 3 and 4 was extended to June 30, 2004, each subject to a one-year renewal at the Government’s option. We believe these extensions should continue our contracts until the new TRICARE transition described below.

 

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(Unaudited)

 

On August 21, 2003, the Department of Defense notified us that we were awarded the contract for the South Region, one of three newly created regions under the government’s revised TRICARE Program. The Department of Defense’s bid process provided that a bidder could be awarded only one prime contract, although a bidder would be allowed to participate in another prime contract as a subcontractor. Aetna Government Health Plans, LLC, a subsidiary of Aetna, Inc., submitted a bid for the North Region contract with us as a subcontractor. HealthNet Federal Services, Inc., a subsidiary of HealthNet, Inc., was awarded the North Region contract in August 2003.

 

Pursuant to the Department of Defense’s bid process, each of the three awards is subject to protests by unsuccessful bidders of prime contracts. Protests have been filed that affect the contract awards in each of the three regions. The transition to the new regions is not expected until at least mid to late 2004, subject to the final outcome of the pending appeals.

 

In addition, retail pharmacy benefits for TRICARE beneficiaries will be administered separately under the new Department of Defense TRICARE Retail Pharmacy Program. On September 26, 2003, we were notified that we were not awarded the retail pharmacy contract. Under government contract procurement regulations, we have the right to protest the award decision, which we did on October 14, 2003. We do not believe the loss of the retail pharmacy contract or the ultimate outcome of our appeal will have a material adverse effect on our financial position, results of operations and cash flows.

 

We currently have Medicaid contracts with the Puerto Rico Health Insurance Administration through June 30, 2005, subject to each party agreeing upon annual rates. In July 2003, we signed amendments to the Puerto Rico Medicaid contracts regarding a premium rate increase for the annual period ending June 30, 2004. Our other Medicaid contracts are in Florida and Illinois, and are annual contracts. As of September 30, 2003, Puerto Rico accounted for approximately 84% of our total Medicaid membership.

 

The loss of any of our existing 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

 

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, against 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 PCA’s workers’ compensation business. On July 24, 2002, the Court denied the defendants’ motion for summary judgment and set the case on the Court’s trial calendar for December 2, 2002. The Court subsequently postponed the trial subject to the plaintiff’s motion for class certification, which was granted on May 20, 2003. On June 4, 2003, the defendants requested the Court of Appeals for the Eleventh Circuit to grant permission to appeal the class certification order. Thereafter, the parties reached agreement to settle the case for the amount of $10.2 million. The settlement agreement is subject to notice to the class and approval by the Court. A final hearing on the settlement is scheduled for November 24, 2003. A provision for the settlement was previously made in our financial statements during the fourth quarter of 2002. The Company has pursued insurance coverage for this matter from two insurers, each of which has denied coverage. The Company intends to continue to pursue the insurance proceeds.

 

Managed Care Industry Purported Class Action Litigation

 

We have been involved in several purported class action lawsuits that are part of a wave of generally similar actions that target the health care payer industry and particularly target managed care companies. These include a lawsuit against us and nine of our competitors that purports to be brought on behalf of physicians who have treated our members. As a result of action by the Judicial Panel on Multi District Litigation, the case was consolidated in the United States District Court for the Southern District of Florida, and has been styled In re Managed Care Litigation .

 

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(Unaudited)

 

The plaintiffs assert that we and other defendants improperly paid providers’ claims and “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 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 a 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 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 defendants filed a motion to dismiss the amended complaint on April 30, 2001.

 

On September 26, 2002, the Court granted the plaintiffs’ request to file a second amended complaint, adding additional plaintiffs, including the Florida Medical Association, which purports to bring its action against all defendants. On October 21, 2002, the defendants moved to dismiss the second amended complaint. The Court has not yet ruled on that motion.

 

Also on September 26, 2002, the Court certified a global class consisting of all medical doctors who provided services to any person insured by any defendant from August 4, 1990, to September 26, 2002. The class includes two subclasses. A national subclass consists of medical doctors who provided services to any person insured by a defendant when the doctor has a claim against such defendant and is not required to arbitrate that claim. A California subclass consists of medical doctors who provided services to any person insured in California by any defendant when the doctor was not bound to arbitrate the claim. On October 10, 2002, the defendants asked the Court of Appeals for the Eleventh Circuit to review the class certification decision. On November 20, 2002, the Court of Appeals agreed to review the class issue. The appellate court heard oral argument on September 11, 2003. Discovery is ongoing, and the Court has set a trial date of June 30, 2004. In the meantime, Aetna Inc., announced on May 22, 2003, that it has entered into a settlement agreement with the plaintiffs. Another defendant, Cigna Corporation, entered into a settlement agreement September 4, 2003. The agreements have been filed with the Court and are subject to approval by the Court.

 

We intend to defend this action vigorously.

 

Other

 

The Academy of Medicine of Cincinnati, the Butler County Medical Society, the Northern Kentucky Medical Society, and several physicians filed antitrust suits in state courts in Ohio and Kentucky against Aetna Health, Inc., Humana Health Plan of Ohio, Inc., Anthem Blue Cross Blue Shield, and United Healthcare of Ohio, Inc., alleging that the defendants have violated the Ohio and Kentucky antitrust laws by conspiring to fix the reimbursement rates paid to physicians in the Greater Cincinnati and Northern Kentucky region. Each suit seeks class certification, damages and injunctive relief. Plaintiffs cite no evidence that any such conspiracy existed, but base their allegations on assertions that physicians in the Greater Cincinnati region are paid less than physicians in other major cities in Ohio and Kentucky.

 

The state courts in Ohio and Kentucky each denied motions by the defendants to compel arbitration or alternatively to dismiss. Defendants filed notices of appeal with respect to the orders denying arbitration. The Ohio court agreed to stay proceedings pending resolution of the appeal. The Kentucky court granted a similar request with respect to the physician plaintiffs, who are subject to arbitration agreements, but denied the requested stay with respect to the association plaintiffs and any physician plaintiffs whose contracts do not contain arbitration provisions. Defendants requested a stay from the Kentucky Court of Appeals pending appeal of the arbitration issue. The Court of Appeals denied the stay, and discovery began in the Kentucky action. The plaintiffs filed

 

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(Unaudited)

 

motions to certify a class in each case. The purported classes allegedly consist of all physicians who have practiced medicine at any time since January 1, 1992, in a four county region in Southwestern Ohio or a three county region in Northern Kentucky.

 

On October 23, 2003, we entered into a settlement agreement with the plaintiffs that specifies an increase in future reimbursement we pay to a class consisting of physicians in a 12-county area in Southern Ohio and Northern Kentucky over the next three years. We expect to increase the reimbursement, in the aggregate, we will pay physicians for future services over the amounts paid to them in 2003 as follows: $20 million in 2004, an additional $15 million in 2005 and an additional $10 million in 2006. The agreement also provides for a committee to monitor our contracting practices for the period 2007 through 2010, with reporting to us if any anticompetitive behavior is believed to have occurred. The agreement is subject to approval by the courts.

 

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 managed care industry purported class action litigation described above. On September 21, 2001, the Texas Attorney General initiated a similar investigation. No actions have been filed against us by either state. These investigations are ongoing, and we have cooperated with the regulators in both states.

 

On May 31, 2000, we entered into a five-year Corporate Integrity Agreement, or CIA, with the Office of Inspector General, or OIG, of the Department of Health and Human Services. Under the CIA, we are obligated to, among other things, provide training, conduct periodic audits and make periodic reports to the OIG.

 

In addition, our business practices are subject to review by various state insurance and health care regulatory authorities and federal regulatory authorities. There has been increased scrutiny by these regulators of the managed health care companies’ business practices, including claims payment practices and utilization management practices. We have been and continue to be subject to such reviews. Some of these have resulted in fines and could require changes in some of our practices and could also result in additional 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, nonacceptance or termination of providers, failure to disclose network discounts, and various other provider arrangements, as well as challenges to subrogation practices. We also are subject to claims relating to performance of contractual obligations to providers, members, and others, including failure to properly pay claims and challenges to the use of certain software products in processing claims. Pending state and federal legislative activity may increase our exposure for any of these types of claims.

 

In addition, several courts, including several federal appellate courts, recently have issued decisions which have the effect of eroding the scope of ERISA preemption for employer-sponsored health plans, thereby exposing us to greater liability for medical negligence claims. This includes decisions which hold that plans may be liable for medical negligence claims in some situations based solely on medical necessity decisions made in the course of adjudicating claims. In addition, some courts have issued rulings which make it easier to hold plans liable for medical negligence on the part of network providers on the theory that providers are agents of the plans and that the plans are therefore vicariously liable for the injuries to members by providers.

 

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 has become increasingly costly and may become unavailable or prohibitively expensive in the future. On January 1, 2002, and again on January 1, 2003, we reduced the amount of coverage purchased from third party insurance carriers and increased the amount of risk we retain due to substantially higher insurance rates.

 

We do not believe that any pending or threatened legal actions against us or any pending or threatened audits or investigations by state or federal regulatory 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, or governmental investigations, cannot be accurately predicted with certainty. In addition, the increased litigation, which has accompanied the negative publicity and public perception of our industry, adds to this uncertainty. Therefore, such legal actions and governments audits and investigations could have a material adverse effect on our financial position, results of operations, and cash flows.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(10) Segment Information

 

We manage our business with 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 programs, and includes three lines of business: Medicare+Choice, Medicaid, and TRICARE. We identified our segments in accordance with the aggregation provisions of Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information, which is consistent with information used by our Chief Executive Officer in managing our business. The segment information aggregates products with similar economic characteristics. These characteristics include the nature of customer groups and pricing, benefits and underwriting requirements.

 

The results of each segment are measured by income before income taxes. We allocate all selling, general and administrative expenses, investment and other income, interest expense, and goodwill, but no other assets or liabilities, 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.

 

Our segment results for the three and nine months ended September 30, 2003 and 2002 are as follows:

 

     Commercial Segment

    

Three months ended

September 30,


  

Nine months ended

September 30,


     2003

   2002

   2003

   2002

     (in thousands)

Revenues:

                           

Premiums:

                           

Fully insured

                           

HMO

   $ 710,491    $ 656,803    $ 2,174,539    $ 1,936,472

PPO

     856,793      723,094      2,481,317      2,139,959
    

  

  

  

Total fully insured

     1,567,284      1,379,897      4,655,856      4,076,431

Specialty

     81,199      84,806      238,737      251,347
    

  

  

  

Total premiums

     1,648,483      1,464,703      4,894,593      4,327,778

Administrative services fees

     31,035      26,567      90,981      77,290

Investment and other income

     24,700      23,594      83,451      60,145
    

  

  

  

Total revenues

     1,704,218      1,514,864      5,069,025      4,465,213
    

  

  

  

Operating expenses:

                           

Medical

     1,379,781      1,235,141      4,046,845      3,608,662

Selling, general and administrative

     277,981      253,737      838,061      748,691

Depreciation and amortization

     16,442      18,052      66,941      52,682
    

  

  

  

Total operating expenses

     1,674,204      1,506,930      4,951,847      4,410,035
    

  

  

  

Income from operations

     30,014      7,934      117,178      55,178

Interest expense

     4,062      3,394      10,230      9,650
    

  

  

  

Income before income taxes

   $ 25,952    $ 4,540    $ 106,948    $ 45,528
    

  

  

  

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     Government Segment

    

Three months ended

September 30,


  

Nine months ended

September 30,


     2003

   2002

   2003

   2002

     (in thousands)

Revenues:

                           

Premiums:

                           

Medicare+Choice

   $ 626,840    $ 647,265    $ 1,893,114    $ 1,981,931

TRICARE

     620,477      521,466      1,627,212      1,484,789

Medicaid

     120,498      118,902      357,733      343,389
    

  

  

  

Total premiums

     1,367,815      1,287,633      3,878,059      3,810,109

Administrative services fees

     35,949      34,489      108,807      112,610

Investment and other income

     3,783      4,641      17,548      18,217
    

  

  

  

Total revenues

     1,407,547      1,326,763      4,004,414      3,940,936
    

  

  

  

Operating expenses:

                           

Medical

     1,148,342      1,065,880      3,297,689      3,203,086

Selling, general and administrative

     180,400      175,282      533,135      529,825

Depreciation and amortization

     10,670      12,471      33,291      37,874
    

  

  

  

Total operating expenses

     1,339,412      1,253,633      3,864,115      3,770,785
    

  

  

  

Income from operations

     68,135      73,130      140,299      170,151

Interest expense

     675      713      2,243      3,238
    

  

  

  

Income before income taxes

   $ 67,460    $ 72,417    $ 138,056    $ 166,913
    

  

  

  

 

As discussed in Note 4, we recorded non-cash pretax charges related to the writedown and accelerated depreciation of certain long-lived assets of $30.8 million for the nine months ended September 30, 2003. The following table details the impact of these charges on our Commercial and Government segments:

 

     For the nine months ended September 30,
2003


     Commercial

   Government

   Total

     (in thousands)

Line item affected:

                    

Selling, general and administrative

   $ 4,325    $ 12,908    $ 17,233

Depreciation and amortization

     13,527      —        13,527
    

  

  

Total pretax impact

   $ 17,852    $ 12,908    $ 30,760
    

  

  

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(11) Debt

 

The following table presents our short-term and long-term debt outstanding at September 30, 2003 and December 31, 2002:

 

    

September 30,

2003


  

December 31,

2002


     (in thousands)

Short-term debt:

             

Conduit commercial paper financing program

   $ —      $ 265,000
    

  

Long-term debt:

             

6.30% senior, unsecured notes due 2018, net of unamortized discount of $852 at September 30, 2003

   $ 299,148    $ —  

7.25% senior, unsecured notes due 2006, net of unamortized discount of $412 at September 30, 2003 and $521 at December 31, 2002

     299,588      299,479

Fair value of interest rate swap agreements

     12,047      34,889

Deferred gain from interest rate swap exchange

     28,578      —  
    

  

Total senior notes

     639,361      334,368

Other long-term borrowings

     5,079      5,545
    

  

Total long-term debt

   $ 644,440    $ 339,913
    

  

 

Senior Notes

 

On August 5, 2003, we issued $300 million 6.30% senior notes due August 1, 2018. Our net proceeds, reduced for the cost of the offering, were approximately $295.7 million. The net proceeds are being used for general corporate purposes, including the funding of our short term cash needs.

 

In order to hedge the risk of changes in the fair value of our $300 million 6.30% senior notes and our $300 million 7.25% 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. Changes in the fair value of the 6.30% or 7.25% 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 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 interest rate swap agreements are estimated based on quoted market prices of comparable agreements, and reflect the amounts we would receive (or pay) to terminate the agreements at the reporting date.

 

Our interest rate swap agreements exchange the fixed interest rate under our 6.30% and 7.25% senior notes for a variable interest rate. At September 30, 2003, the variable interest rate was 2.04% for the 6.30% senior notes and 6.27% for the 7.25% senior notes. The $300 million swap agreements for the 6.30% senior notes mature on August 1, 2018, and the $300 million swap agreements for the 7.25% senior notes mature on August 1, 2006, and each has the same critical terms as the related senior notes.

 

In June 2003, we recorded a deferred gain and received proceeds of $31.6 million in exchange for new swap agreements having current market terms related to our 7.25% senior notes. The new swap agreements have the same critical terms as our 7.25% senior notes. The corresponding deferred swap gain of $31.6 million is being amortized to reduce interest expense over the remaining term of the 7.25% senior notes. The carrying value of our 7.25% senior notes has been increased $28.6 million by the remaining deferred swap gain balance at September 30, 2003.

 

At September 30, 2003, the $12.0 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 $12.0 million to its fair value. The counterparties to our swap agreements are major financial institutions with which we also have other financial relationships.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Credit Agreements

 

We maintain two 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. A one year term out option converts the outstanding borrowings, if any, under the credit agreement to a one year term loan upon expiration. The 4-year revolving credit agreement expires in October 2005. In October 2003, for the second time, we renewed the 364-day revolving credit agreement which expires in October 2004, unless extended.

 

There were no balances outstanding under either agreement at September 30, 2003. Under these agreements, at our option, we can borrow on either a competitive advance basis or a revolving credit basis. The revolving credit portion of both 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 credit agreement 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, and the agreement relating to the conduit commercial paper program described below, contain customary restrictive and financial covenants as well as customary events of default, including financial covenants regarding the maintenance of net worth, and minimum interest coverage and maximum leverage ratios. At September 30, 2003, we were in compliance with all applicable financial covenant requirements. 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 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.

 

Commercial Paper Programs

 

We maintain 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. At September 30, 2003, we had no conduit commercial paper borrowings outstanding.

 

We also maintain and may issue short-term debt securities under a commercial paper program when market conditions allow. The program is backed by our credit agreements described above. Under the terms of our credit agreements, aggregate borrowings under both the credit agreements and commercial paper program cannot exceed $530 million.

 

Other Borrowings

 

Other borrowings of $5.1 million at September 30, 2003 represent financing for the renovation of a building, bear interest at 2%, are collateralized by the building, and are payable in various installments through 2014.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The consolidated financial statements of Humana Inc. in this document present the Company’s 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 is one of the nation’s largest publicly traded health benefits companies, based on our 2002 revenues of $11.3 billion. We offer coordinated health insurance coverage and related services through a variety of traditional and Internet-based plans for employer groups, government-sponsored programs, and individuals. As of September 30, 2003, we had approximately 6.6 million members in our medical insurance programs, as well as approximately 1.6 million members in our specialty products programs.

 

We manage our business with 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 programs, and includes three lines of business: Medicare+Choice, Medicaid, and TRICARE. We identified our segments in accordance with the aggregation provisions of Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information , which is consistent with information used by our Chief Executive Officer in managing our business. The segment information aggregates products with similar economic characteristics. These characteristics include the nature of customer groups and pricing, benefits and underwriting requirements.

 

The results of each segment are measured by income before income taxes. We allocate all selling, general and administrative expenses, investment and other income, interest expense, and goodwill, but no other assets or liabilities, 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.

 

Our business strategy centers on increasing Commercial segment profitability while maintaining our existing strength in the Government segment. Our strategy to increase Commercial segment profitability focuses on providing solutions for employers to the rising cost of health care through the use of innovative and consumer-centric product designs which are supported by service excellence and advanced electronic capabilities, including education, tools and technologies for our members provided primarily through the Internet. The intent of our Commercial segment strategy is to enable us to further penetrate commercial markets with potential for profitable growth and to transform the traditional consumer experience for both employers and members to result in a high degree of consumer engagement, satisfaction, loyalty and brand awareness.

 

Restructuring Charge

 

During the fourth quarter of 2002, we finalized a plan to realign our administrative cost structure with the consolidation of seven customer service centers into four and an enterprise-wide workforce reduction.

 

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Table of Contents

The following table presents a rollforward of the restructuring charge for the year ended December 31, 2002 and the nine months ended September 30, 2003:

 

     Severance

             
     No. of
Employees


    Cost

    Lease
Discontinuance


    Total

 
Year ended December 31, 2002    (dollars in thousands)  

Provision

   2,600     $ 32,105     $ 1,324     $ 33,429  

Cash payments

   (500 )     (910 )     —         (910 )
    

 


 


 


Balance at December 31, 2002

   2,100       31,195       1,324       32,519  

Nine months ended September 30, 2003

                              

Cash payments

   (1,600 )     (16,085 )     (800 )     (16,885 )
    

 


 


 


Balance at September 30, 2003

   500     $ 15,110     $ 524     $ 15,634  
    

 


 


 


 

Severance

 

During the fourth quarter of 2002, we recorded severance and related employee benefit costs of $32.1 million ($19.6 million after tax) in connection with the customer service center consolidation and an enterprise-wide workforce reduction. Severance costs were estimated based upon the provisions of the Company’s existing employee benefit plans and policies. The plan to reduce our administrative cost structure is expected to ultimately affect approximately 2,600 positions throughout the entire organization, including customer service, claim administration, clinical operations, provider network administration, as well as other corporate and field-based positions. As of September 30, 2003, approximately 2,100 positions had been eliminated. Severance is paid biweekly resulting in payments in periods subsequent to termination. We expect additional positions will be eliminated by December 31, 2003, and the remaining positions eliminated no later than June 30, 2004.

 

Long-lived Asset Charge

 

Impairment

 

Our decision to eliminate the Jacksonville, Florida, San Antonio, Texas and Madison, Wisconsin customer service centers during the fourth quarter of 2002 prompted a review for the possible impairment of long-lived assets associated with these centers. Assets under operating leases supported the Madison service center and, therefore, were not applicable to our impairment analysis. Under a transition plan, we continued to use the long-lived assets of the Jacksonville and San Antonio customer service centers until mid-2003, the completion date for consolidating these two customer service centers. The long-lived assets of our customer service centers were supported by the future cash flows expected to result from members serviced by those centers. Cash flows from members serviced by a particular service center represented the lowest level of independently identifiable cash flows. For example, cash flows from members located primarily in the state of Florida and serviced by the Jacksonville service center supported the Jacksonville center’s long-lived assets until those members’ service was transitioned elsewhere.

 

Our impairment review during the fourth quarter of 2002 indicated that estimated undiscounted cash flows expected to result from the remaining use of the San Antonio, Texas customer service center long-lived assets, primarily buildings, were insufficient to recover their carrying value. Accordingly, we reduced the carrying value of these long-lived assets to their estimated fair value resulting in a non-cash impairment charge of $2.4 million ($1.5 million after tax) during the fourth quarter of 2002.

 

Unlike our San Antonio impairment review, a greater number of more profitable members in Florida caused the estimated undiscounted cash flows expected to result from the remaining use of the Jacksonville, Florida customer service center’s long-lived assets, primarily a building, to exceed the carrying value as of the fourth quarter of 2002 impairment review. However, impairment was triggered during the first quarter of 2003 with the passage of time and the approaching date for closing the center. As members serviced by the Jacksonville, Florida customer service center were transferred to other service centers during 2003, the undiscounted cash flows expected from the remaining members serviced by the center fell during the first quarter of 2003 to a level no longer supporting the carrying value of the center’s long-lived assets. Accordingly, we reduced the carrying value of these long-lived assets to their estimated fair value resulting in a non-cash impairment charge of approximately $17.2 million ($10.5 million after tax) during the first quarter of 2003.

 

We used an independent third party appraisal to assist us in evaluating the fair value of the buildings. The non-cash impairment charges are included with selling, general and administrative expenses in the accompanying consolidated statements of income.

 

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Table of Contents

We are in the process of selling the buildings previously used in our Jacksonville and San Antonio customer service operations and have classified them as held for sale. The carrying amount of the buildings approximated $27.6 million at September 30, 2003 based on their fair value less estimated costs to sell the buildings. We are no longer depreciating these buildings effective July 1, 2003. The impact of ceasing depreciation of the buildings was not material to our results of operations.

 

Accelerated Depreciation

 

After finalizing plans during the first quarter of 2003 to abandon software used in the Jacksonville, Florida operations by March 2003, we reduced the estimated useful life of the software effective January 1, 2003. Accordingly, we accelerated the depreciation of the remaining software balance of approximately $13.5 million ($8.3 million after tax) during the first quarter of 2003.

 

The following table details the impact of the non-cash pretax charges related to the writedown and accelerated depreciation of certain long-lived assets on our Commercial and Government segments for the nine months ended September 30, 2003:

 

     For the nine months ended September 30, 2003

     Commercial

   Government

   Total

     (in thousands)

Line item affected:

                    

Selling, general and administrative

   $ 4,325    $ 12,908    $ 17,233

Depreciation and amortization

     13,527      —        13,527
    

  

  

Total pretax impact

   $ 17,852    $ 12,908    $ 30,760
    

  

  

 

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Table of Contents

Comparison of Results of Operations

 

The following table presents certain consolidated financial data for our two segments for the three and nine months ended September 30, 2003 and 2002:

 

     Three months ended
September 30,


    Nine months ended
September 30,


 
     2003

    2002

    2003

    2002

 
     (in thousands, except ratios)  

Premium revenues:

                                

Fully insured

   $ 1,567,284     $ 1,379,897     $ 4,655,856     $ 4,076,431  

Specialty

     81,199       84,806       238,737       251,347  
    


 


 


 


Total Commercial

     1,648,483       1,464,703       4,894,593       4,327,778  
    


 


 


 


Medicare+Choice

     626,840       647,265       1,893,114       1,981,931  

TRICARE

     620,477       521,466       1,627,212       1,484,789  

Medicaid

     120,498       118,902       357,733       343,389  
    


 


 


 


Total Government

     1,367,815       1,287,633       3,878,059       3,810,109  
    


 


 


 


Total

   $ 3,016,298     $ 2,752,336     $ 8,772,652     $ 8,137,887  
    


 


 


 


Administrative services fees:

                                

Commercial

   $ 31,035     $ 26,567     $ 90,981     $ 77,290  

Government

     35,949       34,489       108,807       112,610  
    


 


 


 


Total

   $ 66,984     $ 61,056     $ 199,788     $ 189,900  
    


 


 


 


Medical expense ratios:

                                

Commercial

     83.7 %     84.3 %     82.7 %     83.4 %

Government

     84.0 %     82.8 %     85.0 %     84.1 %
    


 


 


 


Total

     83.8 %     83.6 %     83.7 %     83.7 %
    


 


 


 


SG&A expense ratios:

                                

Commercial

     16.6 %     17.0 %     16.8 %     17.0 %

Government

     12.9 %     13.3 %     13.4 %     13.5 %
    


 


 


 


Total

     14.9 %     15.2 %     15.3 %     15.4 %
    


 


 


 


Income before income taxes:

                                

Commercial

   $ 25,952     $ 4,540     $ 106,948     $ 45,528  

Government

     67,460       72,417       138,056       166,913  
    


 


 


 


Total

   $ 93,412     $ 76,957     $ 245,004     $ 212,441  
    


 


 


 


 

The following table presents a comparison of our medical membership at September 30, 2003 and 2002:

 

     September 30,

   Change

 
     2003

   2002

   Members

    Percentage

 

Commercial segment medical members:

                      

Fully insured

   2,324,600    2,323,600    1,000     0.0 %

ASO

   711,800    658,600    53,200     8.1 %
    
  
  

 

Total Commercial

   3,036,400    2,982,200    54,200     1.8 %
    
  
  

 

Government segment medical members:

                      

Medicare+Choice

   324,600    349,000    (24,400 )   (7.0 )%

Medicaid

   460,800    506,100    (45,300 )   (9.0 )%

TRICARE

   1,746,300    1,755,700    (9,400 )   (0.5 )%

TRICARE ASO

   1,057,000    1,038,400    18,600     1.8 %
    
  
  

 

Total Government

   3,588,700    3,649,200    (60,500 )   (1.7 )%
    
  
  

 

Total medical membership

   6,625,100    6,631,400    (6,300 )   (0.1 )%
    
  
  

 

 

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Table of Contents

The following discussion deals with our results of operations for the three months ended September 30, 2003, or the 2003 quarter, and the three months ended September 30, 2002, or the 2002 quarter, as well as the nine months ended September 30, 2003, or the 2003 period, and the nine months ended September 30, 2002, or the 2002 period.

 

Overview

 

Net income was $62.1 million, or $0.38 per diluted share in the 2003 quarter compared to $52.3 million, or $0.31 per diluted share in the 2002 quarter. Net income was $162.6 million, or $1.01 per diluted share in the 2003 period compared to $144.5 million, or $0.86 per diluted share in the 2002 period. The increase in net income was driven by the improvement in our Commercial segment. Included in net income for the 2003 period was the previously discussed $18.8 million after tax, or $0.12 per diluted share, non-cash charge related to long-lived assets and accelerated depreciation of software partially offset by a $10.1 million after tax gain, or $0.06 per diluted share, from the sale of an interest in a privately held venture capital investment. The net impact of these items reduced net income for the 2003 period by $8.7 million, or $0.05 per diluted share.

 

Premium Revenues and Medical Membership

 

Premium revenues increased 9.6% to $3.02 billion for the 2003 quarter, compared to $2.75 billion for the 2002 quarter. For the 2003 period, premium revenues were $8.77 billion, an increase of 7.8% compared to $8.14 billion for the 2002 period. Higher premium revenues resulted primarily from increasing fully insured commercial per member premiums. Items impacting per member premiums include changes in premium and government reimbursement rates, as well as changes in the geographic mix of membership, the mix of product offerings, and the mix of benefit plans selected by our membership.

 

Commercial segment premium revenues increased 12.5% to $1.65 billion for the 2003 quarter, compared to $1.46 billion for the 2002 quarter. For the 2003 period, commercial segment premium revenues were $4.89 billion, an increase of 13.1% compared to $4.33 billion for the 2002 period. These increases resulted from higher per member premiums on our fully insured commercial business, which were in the 12% to 14% range.

 

We expect Commercial fully insured and ASO medical membership to achieve a combined increase for all of 2003 in the range of 2% to 3%. We also expect growth of Commercial fully insured per member premiums to range from 12% to 14% for 2003.

 

Government segment premium revenues increased 6.2% to $1.37 billion for the 2003 quarter, compared to $1.29 billion for the 2002 quarter. For the 2003 period, government segment premium revenues were $3.88 billion, a increase of 1.8% compared to $3.81 billion for the 2002 period. These increases primarily were attributable to our TRICARE business, partially offset by a reduction in our Medicare+Choice membership. Our annual renewal increased rates under our base TRICARE contract and led to an increase in TRICARE premium revenues of $99.0 million or 19.0% for the 2003 quarter compared to the 2002 quarter and $142.4 million or 9.6% for the 2003 period compared to the 2002 period. Medicare+Choice membership was 324,600 at September 30, 2003, compared to 349,000 at September 30, 2002, a decline of 24,400 members, or 7.0%. This decline was due to our exit of various counties on January 1, 2003, as well as attrition of some members leaving our plans in certain markets as a result of new benefit designs. Medicare+Choice per member premiums increased in the 4% to 6% range. We expect Medicare+Choice per member premiums to continue to increase in the 4% to 6% range for 2003 with membership falling to between 325,000 to 330,000 by December 31, 2003.

 

Administrative Services Fees

 

Our administrative services fees for the 2003 quarter were $67.0 million, an increase of $5.9 million, or 9.7%, from $61.1 million for the 2002 quarter. For the 2003 period, our administrative services fees were $199.8 million, an increase of $9.9 million, or 5.2%, compared to the 2002 period. For the Commercial segment, administrative services fees increased $4.4 million, or 16.8%, from $26.6 million for the 2002 quarter to $31.0 million for the 2003 quarter, and increased $13.7 million, or 17.7%, from $77.3 million to $91.0 million when comparing the 2003 period with the 2002 period. These increases reflect a higher average fee per member and growth in ASO membership of 8.1%, which was 711,800 members at September 30, 2003, compared to 658,600 members at September 30, 2002. Administrative services fees for the Government segment increased $1.5 million, or 4.2%, when comparing the 2003 quarter with the 2002 quarter, and decreased $3.8 million, or 3.4%, when comparing the 2003 period with the 2002 period. The changes in Government segment administrative services fees primarily were due to the timing of contractual adjustments related to TRICARE for Life, a program for seniors where we provide medical benefit administrative services.

 

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Table of Contents

Investment and Other Income

 

Investment and other income totaled $28.5 million for the 2003 quarter, an increase of $0.3 million from $28.2 million for the 2002 quarter, as higher average invested balances compensated for lower investment yields. For the 2003 period, investment and other income totaled $101.0 million, an increase of $22.6 million from $78.4 million for the 2002 period. This increase in the 2003 period primarily resulted from an increase in capital gains consisting primarily of the $15.2 million pretax gain from the sale of an interest in a privately held venture capital investment.

 

Medical Expense

 

The medical expense ratio, or MER, is computed by taking total medical expenses as a percentage of premium revenues. MER for the 2003 quarter was 83.8%, increasing 20 basis points from the 2002 quarter of 83.6%. For the 2003 period, our medical expense ratio was 83.7%, which was the same as the 2002 period.

 

The Commercial segment’s MER for the 2003 quarter was 83.7%, a decrease of 60 basis points from the 2002 quarter of 84.3%. Likewise, the 2003 period’s MER decreased 70 basis points to 82.7% from 83.4% in the 2002 period. The improvement in MER primarily resulted from pricing discipline and attrition of groups with a high medical expense ratio. Pricing discipline produces the delivery of premium rate increases commensurate with underlying claims costs to ensure margins.

 

The Government segment’s 84.0% MER for the 2003 quarter increased 120 basis points compared to 82.8% in the 2002 quarter. For the 2003 period, the ratio was 85.0%, an increase of 90 basis points when compared to the 2002 period of 84.1%. The MER increase for the 2003 quarter and 2003 period was primarily due to TRICARE. Our MER for TRICARE was higher than the prior year due primarily to increases in utilization of services. The increase in utilization was largely attributable to an increase in activity and deployments surrounding the military conflicts in the Middle East.

 

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 the 2003 quarter was 14.9%, a decrease of 30 basis points from the 2002 quarter of 15.2%. For the 2003 period, the SG&A expense ratio was 15.3%, a decrease of 10 basis points when compared to the 2002 period of 15.4%. The 2003 period included $17.2 million of costs associated with a building writedown in connection with our service center closures, increasing the SG&A ratio 20 basis points.

 

The SG&A expense ratio for the Commercial segment decreased 40 basis points and 20 basis points, respectively in the 2003 quarter and period compared to the 2002 quarter and period. Likewise, the Government segment’s SG&A expense ratio decreased 40 basis points and 10 basis points, respectively, in the 2003 quarter and period compared to the 2002 quarter and period. These decreases were attributable to operational efficiencies gained from completing the consolidation of service centers by the end of the second quarter of 2003. We expect our Commercial segment SG&A ratio to range from 16.5% to 16.9% and our Government segment SG&A ratio to range from 12.8% to 13.2% for the 2003 year.

 

Depreciation and amortization for the 2003 quarter totaled $27.1 million compared to $30.5 million for the 2002 quarter, a decrease of $3.4 million, or 11.2%. For the 2003 period, depreciation and amortization totaled $100.2 million compared to $90.6 million for the 2002 period, an increase of $9.6 million, or 10.7%. The decrease in the 2003 quarter primarily was due to lower amortization related to other intangible assets as costs associated with an acquired government contract became fully amortized in the second quarter of 2003. The increase in the 2003 period versus the 2002 period is due to the previously discussed accelerated depreciation of software recorded in the first quarter of 2003 of $13.5 million.

 

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Table of Contents

Interest Expense

 

Interest expense was $4.7 million for the 2003 quarter, compared to $4.1 million for the 2002 quarter, an increase of $0.6 million, or 15.3%. For the 2003 period, interest expense was $12.5 million, compared to $12.9 million for the 2002 period, a decrease of $0.4 million, or 3.2%. The increase in the 2003 quarter compared to the 2002 quarter primarily was due to the issuance of $300 million senior notes in August 2003 while the decrease in the 2003 period versus the 2002 period primarily resulted from lower interest rates.

 

Income Taxes

 

Our effective tax rate for the 2003 quarter and period was approximately 34% compared to 32% for the 2002 quarter and period. The higher effective tax rate in the 2003 quarter and period resulted primarily from a lower proportion of tax-exempt investment income to pretax income.

 

Membership

 

The following table presents our medical and specialty membership at September 30, 2003, June 30, 2003, March 31, 2003, and at the end of each quarter in 2002:

 

     2003

   2002

     Sept. 30

   June 30

   March 31

   Dec. 31

   Sept. 30

   June 30

   March 31

Medical Membership:

                                  

Commercial segment:

                                  

Fully insured

   2,324,600    2,350,400    2,348,800    2,340,300    2,323,600    2,319,600    2,332,400

ASO

   711,800    670,300    654,600    652,200    658,600    627,500    621,800
    
  
  
  
  
  
  

Total Commercial

   3,036,400    3,020,700    3,003,400    2,992,500    2,982,200    2,947,100    2,954,200
    
  
  
  
  
  
  

Government segment:

                                  

Medicare+Choice

   324,600    324,200    327,100    344,100    349,000    354,100    363,700

Medicaid

   460,800    492,700    491,400    506,000    506,100    487,900    476,800

TRICARE

   1,746,300    1,750,800    1,752,500    1,755,800    1,755,700    1,761,000    1,742,300

TRICARE ASO

   1,057,000    1,052,500    1,050,800    1,048,700    1,038,400    1,021,900    997,900
    
  
  
  
  
  
  

Total Government

   3,588,700    3,620,200    3,621,800    3,654,600    3,649,200    3,624,900    3,580,700
    
  
  
  
  
  
  

Total medical members

   6,625,100    6,640,900    6,625,200    6,647,100    6,631,400    6,572,000    6,534,900
    
  
  
  
  
  
  

Specialty Membership:

                                  

Commercial segment

   1,639,100    1,642,000    1,650,100    1,640,000    1,629,400    1,638,200    1,659,300
    
  
  
  
  
  
  

 

Liquidity

 

Cash flows provided by operating activities of $122.9 million for the 2003 period improved from cash flows used in operating activities of $101.3 million for the 2002 period by $224.2 million. This increase primarily was attributable to an improvement in earnings and collections of receivables primarily associated with our TRICARE business.

 

The timing of Medicare+Choice premium receipts significantly impacts cash flows from operations. This timing resulted in only eight monthly Medicare+Choice premium receipts during the 2003 and 2002 periods rather than a normal nine. The Medicare+Choice premium receipt is payable to us on the first day of each month. When the first day of a month falls on a weekend or holiday, we receive this payment at the end of the previous month. This receipt is significant, the timing of which causes material fluctuation in operating cash flows. The Medicare+Choice premium receipts for January 2003 of $205.8 million and for January 2002 of $216.6 million were received early in December 2002 and December 2001, respectively, because January 1 is always a holiday.

 

Medical and other expenses payable increased $154.4 million from $1,142.1 million at December 31, 2002 to $1,296.6 million at September 30, 2003 primarily due to higher medical claims trend and membership levels.

 

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Table of Contents

Total net premium and ASO receivables increased $55.7 million, or 13.4%, from $416.9 million at December 31, 2002 to $472.6 million at September 30, 2003, as presented in the following table:

 

    

September 30,

2003


   

December 31,

2002


    Change

 
       Dollars

    Percentage

 
     (in thousands)  

TRICARE:

                              

Base receivable

   $ 275,578     $ 197,544     $ 78,034     39.5 %

Bid price adjustments (BPAs)

     55,141       104,044       (48,903 )   (47.0 )%

Change orders

     2,370       57,630       (55,260 )   (95.9 )%
    


 


 


 

       333,089       359,218       (26,129 )   (7.3 )%

Less: long-term portion of BPAs

     —         (86,471 )     86,471     100.0 %
    


 


 


 

TRICARE subtotal

     333,089       272,747       60,342     22.1 %

Commercial

     173,644       174,309       (665 )   (0.4 )%

Allowance for doubtful accounts

     (34,097 )     (30,178 )     (3,919 )   (13.0 )%
    


 


 


 

Total net receivables

   $ 472,636     $ 416,878     $ 55,758     13.4 %
    


 


 


 

 

TRICARE base receivables are collected monthly in the ordinary course of business. The timing of BPA collections occurs at contractually specified intervals, typically in excess of 6 months after the end of a contract year. At December 31, 2002, we classified $86.5 million of the BPA receivables associated with our Regions 3 and 4 TRICARE contract as long-term because the federal government was not contractually obligated to pay us the amounts until January 2004. As of September 30, 2003, since the receivable was due within 12 months, these amounts were classified into current assets and included with premium receivables at September 30, 2003. We also had a net BPA amount, payable within one year under the Regions 3 and 4 contract, of $23.3 million at December 31, 2002, which required classification in trade accounts payable and accrued expenses in our consolidated balance sheet. As of September 30, 2003, we had a net BPA receivable, rather than payable, under the Regions 3 and 4 contract. Thus, excluding the impact of changes in balance sheet classifications, TRICARE receivables decreased $2.8 million and total receivables decreased $7.5 million. Collections of BPA and change order receivables during the 2003 period contributed to the reduction.

 

Book overdraft increased $123.9 million to $218.8 million at September 30, 2003. The timing of normal check processing procedures caused a higher number of claim checks to be outstanding at September 30, 2003 than at December 31, 2002.

 

Capital Expenditures

 

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 were $62.5 million for the 2003 period, compared to $83.6 million for the 2002 period. We expect our total capital expenditures for the full 2003 year to be approximately $95 million, most of which will be used for our technology initiatives and improvement of administrative facilities.

 

Stock Repurchase Plan

 

For the nine months ended September 30, 2003, we purchased 2.2 million shares in the open market at a cost of $20.8 million, or an average of $9.31 per share under prior authorization by the Board of Directors and 1.4 million shares in connection with employee stock plans at a cost of $23.3 million, or an average of $16.27 per share. In July 2003, the Board of Directors authorized an additional use of up to $100 million for the repurchase of our common shares exclusive of shares repurchased in connection with employee stock plans. No amounts have been repurchased under the July 2003 authorization as of September 30, 2003. The shares may be purchased from time to time at prevailing prices in the open market or in privately negotiated transactions.

 

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Table of Contents

Debt

 

The following table presents our short-term and long-term debt outstanding at September 30, 2003 and December 31, 2002:

 

    

September 30,

2003


  

December 31,

2002


     (in thousands)

Short-term debt:

             

Conduit commercial paper financing program

   $ —      $ 265,000
    

  

Long-term debt:

             

6.30% senior, unsecured notes due 2018, net of unamortized discount of $852 at September 30, 2003

   $ 299,148    $ —  

7.25% senior, unsecured notes due 2006, net of unamortized discount of $412 at September 30, 2003 and $521 at December 31, 2002

     299,588      299,479

Fair value of interest rate swap agreements

     12,047      34,889

Deferred gain from interest rate swap exchange

     28,578      —  
    

  

Total senior notes

     639,361      334,368

Other long-term borrowings

     5,079      5,545
    

  

Total long-term debt

   $ 644,440    $ 339,913
    

  

 

Senior Notes

 

On August 5, 2003, we issued $300 million 6.30% senior notes due August 1, 2018. Our net proceeds, reduced for the cost of the offering, were approximately $295.7 million. The net proceeds are being used for general corporate purposes, including the funding of our short term cash needs.

 

In order to hedge the risk of changes in the fair value of our $300 million 6.30% senior notes and our $300 million 7.25% 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. Changes in the fair value of the 6.30% or 7.25% 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 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 interest rate swap agreements are estimated based on quoted market prices of comparable agreements, and reflect the amounts we would receive (or pay) to terminate the agreements at the reporting date.

 

Our interest rate swap agreements exchange the fixed interest rate under our 6.30% and 7.25% senior notes for a variable interest rate. At September 30, 2003, the variable interest rate was 2.04% for the 6.30% senior notes and 6.27% for the 7.25% senior notes. The $300 million swap agreements for the 6.30% senior notes mature on August 1, 2018, and the $300 million swap agreements for the 7.25% senior notes mature on August 1, 2006, and each has the same critical terms as the related senior notes.

 

In June 2003, we recorded a deferred gain and received proceeds of $31.6 million in exchange for new swap agreements having current market terms related to our 7.25% senior notes. The new swap agreements have the same critical terms as our 7.25% senior notes. The corresponding deferred swap gain of $31.6 million is being amortized to reduce interest expense over the remaining term of the 7.25% senior notes. The carrying value of our 7.25% senior notes has been increased $28.6 million by the remaining deferred swap gain balance at September 30, 2003.

 

At September 30, 2003, the $12.0 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 $12.0 million to its fair value. The counterparties to our swap agreements are major financial institutions with which we also have other financial relationships.

 

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Credit Agreements

 

We maintain two 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. A one year term out option converts the outstanding borrowings, if any, under the credit agreement to a one year term loan upon expiration. The 4-year revolving credit agreement expires in October 2005. In October 2003, for the second time, we renewed the 364-day revolving credit agreement which expires in October 2004, unless extended.

 

There were no balances outstanding under either agreement at September 30, 2003. Under these agreements, at our option, we can borrow on either a competitive advance basis or a revolving credit basis. The revolving credit portion of both 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 credit agreement 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, and the agreement relating to the conduit commercial paper program described below, contain customary restrictive and financial covenants as well as customary events of default, including financial covenants regarding the maintenance of net worth, and minimum interest coverage and maximum leverage ratios. At September 30, 2003, we were in compliance with all applicable financial covenant requirements. 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 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.

 

Commercial Paper Programs

 

We maintain 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. At September 30, 2003, we had no conduit commercial paper borrowings outstanding.

 

We also maintain and may issue short-term debt securities under a commercial paper program when market conditions allow. The program is backed by our credit agreements described above. Under the terms of our credit agreements, aggregate borrowings under both the credit agreements and commercial paper program cannot exceed $530 million.

 

Other Borrowings

 

Other borrowings of $5.1 million at September 30, 2003 represent financing for the renovation of a building, bear interest at 2%, are collateralized by the building, and are payable in various installments through 2014.

 

Shelf Registration

 

On April 1, 2003, our universal shelf registration became effective with the Securities and Exchange Commission. This allows us to register debt or equity securities, from time to time, with the amount, price and terms to be determined at the time of the sale. After the issuance of our $300 million, 6.30% senior notes, we have up to $300 million remaining from a total of $600 million under the universal shelf registration. The universal shelf registration allows us to use the net proceeds from any future sales of our securities for our operations and for other general corporate purposes, including repayment or refinancing of borrowings, working capital, capital expenditures, investments, acquisitions, or the repurchase of our outstanding securities.

 

Regulatory Requirements

 

Certain of our subsidiaries operate in states that regulate the payment of dividends, loans or other cash transfers 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 entity’s level of statutory income and statutory capital and surplus. In most states, prior notification is provided before paying a dividend even if approval is not required. During the 2003 period, dividends of $121 million were paid to Humana Inc. by these subsidiaries.

 

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As of September 30, 2003, we maintained aggregate statutory capital and surplus of an estimated $1,057 million in our state regulated health insurance subsidiaries. Each of these subsidiaries was in compliance with applicable statutory requirements, which aggregated approximately $612 million. 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 entity’s 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 September 30, 2003, each of our subsidiaries would be in compliance, and we would have an estimated $377 million of aggregate capital and surplus above any of the levels that require corrective action under RBC.

 

One TRICARE subsidiary under the Regions 3 and 4 contract with the Department of Defense is required to maintain current assets at least equivalent to its current liabilities. We were in compliance with this requirement at September 30, 2003.

 

Future Liquidity Needs

 

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 together with the ability to issue securities under the shelf registration statement are adequate to allow us to fund selected expansion opportunities, as well as to fund capital requirements.

 

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 highly complicated, 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 estimates of medical claim reserves based upon our estimates of future medical claims 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 some centralized expenses and various other costs incurred to provide health insurance coverage to our members. These costs also include 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, including claim inventory levels and claim receipt patterns, and other relevant factors. We also 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, increases in the use or cost of services by our members, competition, government regulations and many 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 medical facilities and services, including prescription drugs;

 

  increased cost of such services;

 

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  termination of capitation arrangements resulting in the transfer of membership to fee-for-service arrangements;

 

  changes or reductions of our utilization management functions such as preauthorization of services, concurrent review or requirements for physician referrals;

 

  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 terrorist threats, including bioterrorism.

 

Failure to adequately price our products or estimate sufficient medical claim reserves may result in a material adverse effect on our financial position, results of operations and cash flows.

 

If we do not design and price our products properly and competitively, our membership and profitability could decline.

 

We are in a highly competitive industry. 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 some markets. In addition, other companies may enter our markets in the future. Contracts for the sale of commercial products are generally bid upon or renewed annually. 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. In addition to the challenge of controlling health care costs, we face competitive pressure to contain premium prices.

 

Premium increases, introduction of new product designs, and our relationship with our providers in various markets, among other issues, could affect our membership levels. Other actions that could affect membership levels include the possible exit of or entrance to Medicare+Choice or Commercial markets. If we do not compete effectively in our markets, if we set rates too high or too low in highly competitive markets to keep or increase our market share, if membership does not increase as we expect, or if it declines, or if we lose accounts with favorable medical cost experience while retaining accounts with unfavorable medical cost experience, our business and results of operations could be materially adversely affected.

 

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 team’s ability to execute our strategy to position the company for the future. This strategy includes the growth of our Commercial segment business, introduction of new products and benefit designs, including our Smart products, the successful implementation of our e-business initiatives and the selection and adoption of new technologies. We believe that the adoption of new technologies will contribute toward a reduction in administrative costs as we more closely align our workforce with our membership. Additionally, we have consolidated our service centers and their related systems as part of our operational 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.

 

If we fail to continue to properly maintain the integrity of our data or to strategically implement new information systems, our business could be materially adversely affected.

 

Our business depends significantly on effective information systems and the integrity and timeliness of the data we use to run our business. Our business strategy involves providing members and providers with easy to use products that leverage our information to meet their needs. Our ability to adequately price our products and services, provide effective and efficient service to our customers, and to accurately report our financial results depends significantly on the integrity of the data in our information systems. As a result of our past acquisition activities, we have acquired additional systems. We have been taking steps to reduce the number of systems we operate, have upgraded and expanded our information systems capabilities, and are gradually migrating existing business to fewer systems. If the information we rely upon to run our businesses was found to be inaccurate or unreliable or if we fail to maintain effectively our information systems and data integrity, we could have operational disruptions, have problems in determining medical cost estimates and establishing appropriate pricing, have customer and physician

 

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and other health care provider disputes, have regulatory problems, have increases in operating expenses, lose existing customers, have difficulty in attracting new customers, or suffer other adverse consequences. Our information systems require an ongoing commitment of significant resources to maintain and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards, and changing customer preferences.

 

We depend on independent third parties for significant portions of our systems-related support, equipment, facilities, and certain data, including data center operations, data network, voice communication services and pharmacy data processing. This dependence makes our operations vulnerable to such third parties’ failure to perform adequately under the contract, due to internal or external factors. Due to continued consolidation in the industry, there are a limited number of service organizations with the size, scale and capabilities to effectively provide certain of these services, especially with regard to pharmacy benefits processing and management, we believe that other organizations could provide similar services on comparable terms. A change in service providers, however, could result in a decline in service quality and effectiveness or less favorable contract terms which could adversely affect our operating results.

 

There can be no assurance that our process of improving existing systems, developing new systems to support our operations and improving service levels will not be delayed or that additional systems issues will not arise in the future. Failure to adequately maintain the integrity of our information systems and data may result in a material adverse effect on our financial positions, 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 to 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 have implemented multi-tiered copayment benefit designs for prescription drugs, including our four-tiered copayment benefit design, Rx4 and an Rx allowance program. We are also evaluating other multi-tiered designs. 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.

 

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, including employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, and tort claims.

 

We and some of our competitors in the health benefits business are defendants in a number of purported class action lawsuits. These include an action against us and nine of our competitors that purports to be brought on behalf of health care providers. This suit alleges breaches of federal statutes, including ERISA and 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 methodologies for calculating premiums;

 

  claims relating to the denial of health care benefits;

 

  challenges to the use of some software products used in administering claims;

 

  medical malpractice actions based on our medical necessity decisions or brought against us on the theory that we are liable for our providers’ alleged malpractice;

 

  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 some business practices; and

 

  claims relating to customer audits and contract performance.

 

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In some cases, substantial non-economic or punitive damages as well as treble damages under the federal False Claims Act, RICO and other statutes 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, some types of damages, like 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” of Item 1 in Part II. 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, including some that erode protections under the Employee Retirement Income Security Act, or ERISA, 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.

 

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 TRICARE, Medicare+Choice, and Medicaid programs. These programs involve various risks, including:

 

  the possibility of reduced or insufficient government reimbursement in the future;

 

  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 that 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. We have extended our current TRICARE contracts with the Department of Defense. The contract for Regions 2 and 5 was extended to April 30, 2004 and the contract for Regions 3 and 4 was extended to June 30, 2004, each subject to a one-year renewal at the Government’s option. We believe these extensions should continue our contracts until the new TRICARE program transition. On August 21, 2003, the Department of Defense notified us that we were awarded the contract for the South Region, one of three newly created regions under the government’s revised TRICARE Program. The Department of Defense’s bid process provided that a bidder could be awarded only one prime contract, although a bidder would be allowed to participate in another prime contract as a subcontractor. Aetna Government Health Plans, LLC, a subsidiary of Aetna, Inc., submitted a bid for the North Region contract with us as a subcontractor. HealthNet Federal Services, Inc., a subsidiary of HealthNet, Inc. was awarded the North Region contract in August 2003. Pursuant to the Department of Defense’s bid process, each of the three awards is subject to protests by unsuccessful bidders of prime contracts. Protests have been filed that affect the contract awards in each of the three regions. The transition to the new regions is not expected until at least mid to late 2004, subject to the final outcome of the pending appeals. In addition, retail pharmacy benefits for TRICARE beneficiaries will be administered separately under the new Department of Defense TRICARE Retail Pharmacy Program. On September 26, 2003, we were notified that we were not awarded the retail pharmacy contract. Under government contract procurement regulations, we have the right to protest the award decision, which we did on October 14, 2003. We do not believe the loss of the retail pharmacy contract or the ultimate outcome of our appeal will have a material adverse effect on our financial position, results of operations and cash flows.

 

  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 our current TRICARE contracts, or an unsuccessful outcome of the protests for the South region would have a material adverse effect on our financial position, results of operations and cash flows;

 

  at September 30, 2003, under one of our contracts with the Centers for Medicare and Medicaid Services, or CMS, we provided health insurance coverage to approximately 227,400 members in Florida. This contract accounted for approximately 15% of our total premiums and ASO fees for the nine months ended September 30, 2003. The loss of this and other CMS contracts or significant changes in the Medicare+Choice program as a result of legislative action, including reductions in payments to us or increases in benefits to members without corresponding increases in payments, may have a material adverse effect on our financial condition, results of operations and cash flows;

 

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  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; and

 

  the possibility of temporary or permanent suspension from participating in government health care programs, including Medicare and Medicaid, if we are convicted of fraud or other criminal conduct in the performance of a health care program or if there is an adverse decision against us under the federal False Claims Act.

 

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 health management organizations, or HMOs, and preferred provider organizations, or 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;

 

  member disclosure;

 

  premium rates; and

 

  periodic examinations by state and federal agencies.

 

State regulations require our licensed, operating subsidiaries to maintain minimum net worth requirements and restrict some 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, including a Medicare pharmacy benefit or discount card;

 

  rules tightening time periods in which claims must be paid;

 

  medical malpractice reform;

 

  defining medical necessity;

 

  health insurance access;

 

  provider compensation and contract language;

 

  disclosure of provider fee schedules and other data impacting payments to providers;

 

  disclosure of provider quality information;

 

  health plan liability to members who fail to receive appropriate care;

 

  disclosure and composition of physician networks;

 

  formation of regional/national association health plans for small employers

 

  physicians’ ability to collectively negotiate contract terms with carriers, including fees; and

 

  mental health parity.

 

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All of these proposals could apply to us.

 

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.

 

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, payer 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 technological solutions. The compliance and enforcement date for standard transactions and code sets rules was October 16, 2003. We have continued to be in compliance with this regulation. However, as many providers indicated that they could not yet comply, CMS stated that covered entities making a good faith effort to comply with HIPAA transactions and code-set standards would be allowed to implement contingency plans to maintain their operations and cash flows. On October 15, 2003, we announced implementation of a contingency plan to accept non-compliant electronic transactions from our providers. We will continue to accept and process transactions sent in pre-HIPAA electronic formats from providers who are showing a good-faith effort until all providers and clearinghouses are capable of transmitting fully compliant standards transactions as defined in the HIPAA implementation guidelines or until CMS begins enforcement of the HIPAA Electronic Data Interchange regulations. Management believes that the implementation of our contingency plans will minimize any disruptions in our business operations during this transition. However, if entities with which we do business do not ultimately comply with the HIPAA transactions and code set standards, it could result in disruptions of certain of our business operations.

 

Additionally, under the new HIPAA privacy rules, which became effective on April 14, 2003, we must now 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. Regulations issued in February 2003 set standards for the security of electronic health information requiring compliance by April 21, 2005. Violations of these rules will subject us to significant penalties. Compliance with HIPAA regulations requires significant systems enhancements, training and administrative 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 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.

 

Separate legislative proposals to add a prescription drug benefit and increase private plan options for the program passed by both houses are currently being debated by House and Senate conferees. Although President Bush’s deadline for passage of this legislation has passed, negotiations are still underway. There is considerable uncertainty regarding the passage of a final bill and we are unable to predict the provisions of any final bill that would emerge from the Conference Committee or its impact on our financial position, results of operations or cash flows.

 

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,

 

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the Office of Personnel Management, the Department of Justice, the Department of Labor, 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.

 

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, some 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.

 

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 an amount to provide all required medical services to our members (i.e. capitation). The inability of providers to properly manage costs under these capitation arrangements can result in the financial instability of these providers and the termination of their relationship with us. In addition, payment or other disputes between a primary care provider and specialists with whom the primary care provider contracts can result in a disruption in the provision of services to our members or a reduction in the services available to our members. The financial instability or failure of a primary care provider to pay other providers for services rendered could lead those other providers 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. Any of these events could have an adverse effect on the provision of services to our members and our operations.

 

Our ability to obtain funds from our subsidiaries is restricted.

 

Because we operate as a holding company, we are dependent upon dividends and administrative expense reimbursements from our subsidiaries to fund the obligations of Humana Inc., the parent company. These subsidiaries generally are regulated by state Departments of Insurance. In most states, we are required to seek prior approval by these state regulatory authorities before we transfer money or pay dividends from these subsidiaries that exceed specified amounts, or, in some states, any amount. In addition, we normally notify the state Departments of Insurance prior to making payments that do not require approval. We are also required by law to maintain specific prescribed minimum amounts of capital in these subsidiaries. One TRICARE subsidiary under the Regions 3 and 4 contract with the Department of Defense is required to maintain assets at least equivalent to its current liabilities.

 

Increased litigation and negative publicity could increase our cost of doing business.

 

The health benefits industry continues to receive significant negative publicity reflecting the public perception of the industry. This publicity and perception have been accompanied by increased litigation, including some large jury awards, 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, may increase the regulatory burdens under which we operate and may require us to pay large judgments or fines. 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.

 

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

We are exposed to market risks, such as changes in interest rates. To manage the volatility relating to these exposures, we net the exposures on a consolidated basis to take advantage of natural offsets. A portion of our natural offsets changed when we issued $300 million 7.25% senior notes during 2001 and $300 million 6.30% senior notes during 2003. This change was mitigated when we entered into interest rate swap agreements as discussed in Management’s Discussion and Analysis herein. Changes in the fair value of the 7.25% and 6.30% 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 hedge ineffectiveness.

 

No material changes have occurred in our exposures to market risk since the date of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

 

Item 4. Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of the design and operation of our disclosure controls and procedures including our internal controls over financial reporting for the quarter ended September 30, 2003.

 

The company’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures including our internal controls over financial reporting will prevent all error and all fraud. However, they have been designed to give reasonable assurance about the effectiveness of the design and operation of our disclosure controls and procedures including our internal controls over financial reporting. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Control system limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures including our internal controls over financial reporting are effective in timely alerting them to material information required to be included in our periodic SEC reports. There have been no significant changes in our internal controls over financial reporting or in other factors that are reasonably likely to affect those controls over financial reporting during the Company’s quarter ended September 30, 2003.

 

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Part II. Other Information

 

Item 1: Legal Proceedings

 

Securities Litigation

 

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, against 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 PCA’s workers’ compensation business. On July 24, 2002, the Court denied the defendants’ motion for summary judgment and set the case on the Court’s trial calendar for December 2, 2002. The Court subsequently postponed the trial subject to the plaintiff’s motion for class certification, which was granted on May 20, 2003. On June 4, 2003, the defendants requested the Court of Appeals for the Eleventh Circuit to grant permission to appeal the class certification order. Thereafter, the parties reached agreement to settle the case for the amount of $10.2 million. The settlement agreement is subject to notice to the class and approval by the Court. A final hearing on the settlement is scheduled for November 24, 2003. A provision for the settlement was previously made in our financial statements during the fourth quarter of 2002. The Company has pursued insurance coverage for this matter from two insurers, each of which has denied coverage. The Company intends to continue to pursue the insurance proceeds.

 

Managed Care Industry Purported Class Action Litigation

 

We have been involved in several purported class action lawsuits that are part of a wave of generally similar actions that target the health care payer industry and particularly target managed care companies. These include a lawsuit against us and nine of our competitors that purports to be brought on behalf of physicians who have treated our members. As a result of action by the Judicial Panel on Multi District Litigation, the case was consolidated in the United States District Court for the Southern District of Florida, and has been styled In re Managed Care Litigation .

 

The plaintiffs assert that we and other defendants improperly paid providers’ claims and “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 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 a 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 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 defendants filed a motion to dismiss the amended complaint on April 30, 2001.

 

On September 26, 2002, the Court granted the plaintiffs’ request to file a second amended complaint, adding additional plaintiffs, including the Florida Medical Association, which purports to bring its action against all defendants. On October 21, 2002, the defendants moved to dismiss the second amended complaint. The Court has not yet ruled on that motion.

 

Also on September 26, 2002, the Court certified a global class consisting of all medical doctors who provided services to any person insured by any defendant from August 4, 1990, to September 26, 2002. The class includes two subclasses. A national subclass consists of medical doctors who provided services to any person insured by a defendant when the doctor has a claim against such defendant and is not required to arbitrate that claim. A California subclass consists of medical doctors who provided services to any person insured in California by any defendant when the doctor was not bound to arbitrate the claim. On October 10, 2002, the defendants asked the Court of Appeals for the Eleventh Circuit to review the class certification decision. On November 20, 2002, the Court of Appeals agreed to review the class issue. The appellate court heard oral argument on September 11, 2003.

 

37


Table of Contents

Discovery is ongoing, and the Court has set a trial date of June 30, 2004. In the meantime, Aetna Inc., announced on May 22, 2003, that it has entered into a settlement agreement with the plaintiffs. Another defendant, Cigna Corporation, entered into a settlement agreement September 4, 2003. The agreements have been filed with the Court and are subject to approval by the Court.

 

We intend to defend this action vigorously.

 

Other

 

The Academy of Medicine of Cincinnati, the Butler County Medical Society, the Northern Kentucky Medical Society, and several physicians filed antitrust suits in state courts in Ohio and Kentucky against Aetna Health, Inc., Humana Health Plan of Ohio, Inc., Anthem Blue Cross Blue Shield, and United Healthcare of Ohio, Inc., alleging that the defendants have violated the Ohio and Kentucky antitrust laws by conspiring to fix the reimbursement rates paid to physicians in the Greater Cincinnati and Northern Kentucky region. Each suit seeks class certification, damages and injunctive relief. Plaintiffs cite no evidence that any such conspiracy existed, but base their allegations on assertions that physicians in the Greater Cincinnati region are paid less than physicians in other major cities in Ohio and Kentucky.

 

The state courts in Ohio and Kentucky each denied motions by the defendants to compel arbitration or alternatively to dismiss. Defendants filed notices of appeal with respect to the orders denying arbitration. The Ohio court agreed to stay proceedings pending resolution of the appeal. The Kentucky court granted a similar request with respect to the physician plaintiffs, who are subject to arbitration agreements, but denied the requested stay with respect to the association plaintiffs and any physician plaintiffs whose contracts do not contain arbitration provisions. Defendants requested a stay from the Kentucky Court of Appeals pending appeal of the arbitration issue. The Court of Appeals denied the stay, and discovery began in the Kentucky action. The plaintiffs filed motions to certify a class in each case. The purported classes allegedly consist of all physicians who have practiced medicine at any time since January 1, 1992, in a four county region in Southwestern Ohio or a three county region in Northern Kentucky.

 

On October 23, 2003, we entered into a settlement agreement with the plaintiffs that specifies an increase in future reimbursement we pay to a class consisting of physicians in a 12-county area in Southern Ohio and Northern Kentucky over the next three years. We expect to increase the reimbursement, in the aggregate, we will pay physicians for future services over the amounts paid to them in 2003 as follows: $20 million in 2004, an additional $15 million in 2005 and an additional $10 million in 2006. The agreement also provides for a committee to monitor our contracting practices for the period 2007 through 2010, with reporting to us if any anticompetitive behavior is believed to have occurred. The agreement is subject to approval by the courts.

 

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 managed care industry purported class action litigation described above. On September 21, 2001, the Texas Attorney General initiated a similar investigation. No actions have been filed against us by either state. These investigations are ongoing, and we have cooperated with the regulators in both states.

 

On May 31, 2000, we entered into a five-year Corporate Integrity Agreement, or CIA, with the Office of Inspector General, or OIG, of the Department of Health and Human Services. Under the CIA, we are obligated to, among other things, provide training, conduct periodic audits and make periodic reports to the OIG.

 

In addition, our business practices are subject to review by various state insurance and health care regulatory authorities and federal regulatory authorities. There has been increased scrutiny by these regulators of the managed health care companies’ business practices, including claims payment practices and utilization management practices. We have been and continue to be subject to such reviews. Some of these have resulted in fines and could require changes in some of our practices and could also result in additional 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, nonacceptance or termination of providers, failure to disclose network discounts, and various other provider arrangements, as well as challenges to subrogation practices. We also are subject to claims relating to performance of contractual obligations to providers, members, and others, including failure to properly pay claims and challenges to the use of certain software products in processing claims. Pending state and federal legislative activity may increase our exposure for any of these types of claims.

 

38


Table of Contents

In addition, several courts, including several federal appellate courts, recently have issued decisions which have the effect of eroding the scope of ERISA preemption for employer-sponsored health plans, thereby exposing us to greater liability for medical negligence claims. This includes decisions which hold that plans may be liable for medical negligence claims in some situations based solely on medical necessity decisions made in the course of adjudicating claims. In addition, some courts have issued rulings which make it easier to hold plans liable for medical negligence on the part of network providers on the theory that providers are agents of the plans and that the plans are therefore vicariously liable for the injuries to members by providers.

 

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 has become increasingly costly and may become unavailable or prohibitively expensive in the future. On January 1, 2002, and again on January 1, 2003, we reduced the amount of coverage purchased from third party insurance carriers and increased the amount of risk we retain due to substantially higher insurance rates.

 

We do not believe that any pending or threatened legal actions against us or any pending or threatened audits or investigations by state or federal regulatory 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, or governmental investigations, cannot be accurately predicted with certainty. In addition, the increased litigation, which has accompanied the negative publicity and public perception of our industry, adds to this uncertainty. Therefore, such legal actions and government audits and investigations could have a material adverse effect on our financial position, results of operations, and cash flows.

 

39


Table of Contents

Part II. Other Information, continued

 

Item 2:

   Changes in securities
     None.

Item 3:

   Defaults Upon Senior Securities
     None.

Item 4:

   Submission of Matters to a Vote of Security Holders
     None.

Item 5:

   Other Information
     In September 2003, the Company appointed Frank A. D’Amelio to its Board of Directors.

Item 6:

   Exhibits and Reports on Form 8-K
     (a)    Exhibit Index:
    

4.1

   Indenture dated as of August 2003 covering the Company’s 6.30% Senior Notes due 2018.
    

4.2

   First Supplemental Indenture covering the Company’s 6.30% Senior Notes due 2018.
    

10.1

   Amended and Restated 364-Day Credit Agreement, dated as of October 2003.
    

10.2

   Amended and Restated RFC Loan Agreement, dated as of October 2003.
    

10.3

   Summary of changes to Humana Inc. Retirement Plans.
    

12

   Computation of ratio of earnings to fixed charges.
    

31.1

   CEO certification pursuant to Section 302 of Sarbanes - Oxley Act of 2002.
    

31.2

   CFO certification pursuant to Section 302 of Sarbanes - Oxley Act of 2002.
    

32

   CEO and CFO certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.
     (b)    Reports on Form 8-K
         

(1)    On July 28, 2003, we furnished a report regarding our second quarter of 2003 earnings release.

         

(2)    On August 5, 2003, we filed reports regarding the issuance of our $300 million 6.30% senior notes due 2018 and certain related exhibits.

         

(3)    On August 22, 2003, we filed a report regarding the TRICARE South region bid announcement.

         

(4)    On September 26, 2003, we filed reports regarding the TRICARE retail pharmacy contract bid announcement.

         

(5)    On October 15, 2003, we filed a report concerning our contingency plans related to the Health Insurance Portability and Accountability Act.

         

(6)    On October 23, 2003, we filed a report regarding the settlement of litigation in Cincinnati, Ohio.

         

(7)    On October 27, 2003, we furnished a report regarding our third quarter of 2003 earnings release.

 

40


Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

                    HUMANA INC.
                    (Registrant)

Date:

 

November 5, 2003

         

By:

 

/ S /    J AMES H. B LOEM        


                   

James H. Bloem

Senior Vice President

And Chief Financial Officer

(Principal Accounting Officer)

Date:

 

November 5, 2003

         

By:

 

/ S /    A RTHUR P. H IPWELL        


                   

Arthur P. Hipwell

Senior Vice President and

General Counsel

 

41

Exhibit 4.1

 

HUMANA INC.,

 

Issuer

 

THE BANK OF NEW YORK,

 

Trustee

 


 

INDENTURE

 

Dated as of August 5, 2003

 


 

Senior Debt Securities

 

HUMANA INC.

 

Reconciliation and tie showing the location in the Indenture dated as of August 5, 2003 of the provisions inserted pursuant to Sections 310 to 318(a), inclusive, of the Trust Indenture Act of 1939, as amended.

 

Trust Indenture Act Section


  

Indenture

Section


Section 310 (a)(1)

   609

(a)(2)

   609

(a)(3)

   Not Applicable

(a)(4)

   Not Applicable

(b)

   608 and 610(d)

(c)

   Not Applicable

 

Page 1 of 94


Section 311 (a)

   613(a) and 613(c)

(b)

   613(b) and 613(c)

(c)

   Not Applicable

Section 312 (a)

   701 and 702(a)

(b)

   702(b)

(c)

   702(c)

Section 313 (a)

   703(a)

(b)

   703(b)

(c)

   703(a) and 703(b)

(d)

   703(d)

Section 314 (a)

   704

(b)

   Not Applicable

(c)

   102

(c)(1)

   102

(c)(2)

   102

(c)(3)

   Not Applicable

(d)

   Not Applicable

(e)

   102

Section 315 (a)

   601(a)

(b)

   602 and 703(a)(7)

(c)

   601(b)

(d)

   601(c)

(d)(1)

   601(a)(1)

(d)(2)

   601(c)(2)

(d)(3)

   601(c)(3)

(e)

   514

Section 316 (a)(1)(A)

   502 and 512

(a)(1)(B)

   513

 

Page 2 of 94


(a)(2)

   Not Applicable

(b)

   508

Section 317 (a)(1)

   503

(a)(2)

   504

(b)

   1003

Section 318 (a)

   107

NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture.

 

TABLE OF CONTENTS

 

      PARTIES

   8

      RECITALS

   8

      ARTICLE 1 Definitions and Other Provisions of General Application

   8

Section 101. Definitions

   8

Section 102. Compliance Certificates and Opinions

   18

Section 103. Form of Documents Delivered to Trustee

   18

Section 104. Acts of Holders

   19

Section 105. Notices, Etc., to Trustee and the Company

   20

Section 106. Notice to Holders; Waiver

   21

Section 107. Conflict with Trust Indenture Act

   21

Section 108. Effect of Headings and Table of Contents

   22

Section 109. Successors and Assigns

   22

Section 110. Separability Clause

   22

Section 111. Benefits of Indenture

   22

Section 112. Governing Law

   22

Section 113. Non-Business Day

   22

Section 114. Immunity of Incorporators, Stockholders, Directors and Officers

   22

Section 115. Certain Matters Relating to Currencies

   23

 

Page 3 of 94


Section 116. Language of Notices, Etc.

   23

      ARTICLE 2 Security Forms

   23

Section 201. Forms of Securities

   23

Section 202. Form of Trustee’s Certificate of Authentication

   24

Section 203. Securities in Global Form

   24

Section 204. CUSIP Numbers

   25

      ARTICLE 3 The Securities *

   25

Section 301. Title; Payment and Terms

   25

Section 302. Denominations and Currencies

   29

Section 303. Execution, Authentication, Delivery and Dating

   29

Section 304. Temporary Securities and Exchange of Securities

   30

Section 305. Registration, Registration of Transfer and Exchange

   34

Section 306. Mutilated, Destroyed, Lost and Stolen Securities and Coupons

   37

Section 307. Payment of Interest; Interest Rights Preserved

   38

Section 308. Persons Deemed Owners

   39

Section 309. Cancellation

   40

Section 310. Computation of Interest

   41

Section 311. Currency and Manner of Payments in Respect of Securities

   41

Section 312. Appointment and Resignation of Currency Determination Agent

   43

Section 313. Ranking

   44

      ARTICLE 4 Satisfaction and Discharge

   44

Section 401. Option to Effect Legal Defeasance or Covenant Defeasance

   44

Section 402. Legal Defeasance and Discharge

   44

Section 403. Covenant Defeasance

   45

Section 404. Conditions to Legal or Covenant Defeasance

   45

Section 405. Satisfaction and Discharge of Indenture

   46

Section 406. Survival of Certain Obligations

   47

Section 407. Acknowledgment of Discharge by Trustee

   47

 

Page 4 of 94


Section 408. Application of Trust Moneys

   48

Section 409. Repayment to the Company; Unclaimed Money

   48

Section 410. Reinstatement

   49

      ARTICLE 5 Remedies

   49

Section 501. Events of Default

   49

Section 502. Acceleration of Maturity; Rescission and Annulment

   50

Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee

   51

Section 504. Trustee May File Proofs of Claim

   52

Section 505. Trustee May Enforce Claims Without Possession of Securities or Coupons

   53

Section 506. Application of Money Collected

   53

Section 507. Limitation on Suits

   53

Section 508. Unconditional Right of Holders to Receive Principal (and Premium, if any) and Interest, if any

   54

Section 509. Restoration of Rights and Remedies

   54

Section 510. Rights and Remedies Cumulative

   54

Section 511. Delay or Omission Not Waiver

   55

Section 512. Control by Holders

   55

Section 513. Waiver of Past Defaults

   55

Section 514. Undertaking for Costs

   55

Section 515. Waiver of Stay or Extension Laws

   56

Section 516. Judgment Currency

   56

      ARTICLE 6 The Trustee

   56

Section 601. Certain Duties and Responsibilities

   56

Section 602. Notice of Defaults

   57

Section 603. Certain Rights of Trustee

   58

Section 604. Not Responsible for Recitals or Issuance of Securities

   59

Section 605. May Hold Securities

   59

Section 606. Money Held in Trust

   59

Section 607. Compensation and Reimbursement

   59

 

Page 5 of 94


Section 608. Disqualification; Conflicting Interests

   60

Section 609. Corporate Trustee Required; Different Trustees for Different Series; Eligibility

   60

Section 610. Resignation and Removal; Appointment of Successor

   61

Section 611. Acceptance of Appointment by Successor

   62

Section 612. Merger, Conversion, Consolidation or Succession to Business

   63

Section 613. Preferential Collection of Claims Against Company

   63

Section 614. Authenticating Agents

   63

      ARTICLE 7 Holders’ Lists and Reports by Trustee and the Company

   65

Section 701. Company to Furnish Trustee Names and Addresses of Holders

   65

Section 702. Preservation of Information; Communications to Holders

   65

Section 703. Reports by Trustee

   66

Section 704. Reports by Company

   66

      ARTICLE 8 Consolidation, Merger, Conveyance or Transfer

   67

Section 801. Company May Consolidate, Etc., Only on Certain Terms

   67

Section 802. Successor Person Substituted

   68

      ARTICLE 9 Supplemental Indentures

   68

Section 901. Supplemental Indentures Without Consent of Holders

   68

Section 902. Supplemental Indentures With Consent of Holders

   70

Section 903. Execution of Supplemental Indentures

   71

Section 904. Effect of Supplemental Indentures

   71

Section 905. Conformity With Trust Indenture Act

   71

Section 906. Reference in Securities to Supplemental Indentures

   71

      ARTICLE 10 Covenants

   71

Section 1001. Payment of Principal (and Premium, if any) and Interest, if any

   71

Section 1002. Maintenance of Office or Agency

   72

Section 1003. Money for Securities Payments To Be Held in Trust

   73

Section 1004. [Intentionally Omitted]

   74

Section 1005. Statements as to Compliance

   74

 

Page 6 of 94


Section 1006. Corporate Existence

   74

Section 1007. [Intentionally Omitted]

   75

Section 1008. Waiver of Certain Covenants

   75

Section 1009. Payment of Additional Amounts

   75

Section 1010. Calculation of Original Issue Discount

   77

Section 1011. Statement by Officers as to Default

   77

      ARTICLE 11 Redemption of Securities

   77

Section 1101. Applicability of This Article

   77

Section 1102. Election to Redeem; Notice to Trustee

   78

Section 1103. Selection by Trustee of Securities to Be Redeemed

   78

Section 1104. Notice of Redemption

   78

Section 1105. Deposit of Redemption Price

   79

Section 1106. Securities Payable on Redemption Date

   79

Section 1107. Securities Redeemed in Part

   80

Section 1108. Tax Redemption; Special Tax Redemption

   81

      ARTICLE 12 Sinking Funds

   83

Section 1201. Applicability of This Article

   83

Section 1202. Satisfaction of Sinking Fund Payments With Securities

   84

Section 1203. Redemption of Securities for Sinking Fund

   84

      ARTICLE 13 Meetings of Holders of Securities

   84

Section 1301. Purposes for Which Meetings May Be Called

   84

Section 1302. Call, Notice and Place of Meetings

   84

Section 1303. Persons Entitled to Vote at Meetings

   85

Section 1304. Quorum; Action

   85

Section 1305. Determination of Voting Rights; Conduct and Adjournment of Meetings

   86

Section 1306. Counting Votes and Recording Action of Meetings

   86

 

EXHIBITS

 

Page 7 of 94


EXHIBIT A. Form of Certificate To Be Delivered to Euroclear or Clearstream Banking by a Beneficial Owner of Securities in Order to Receive a Definitive Bearer Security in Exchange for an Interest in a Temporary Global Security or to Exchange an Interest in a Temporary Global Security for an Interest in a Permanent Global Security.

 

EXHIBIT B. Form of Certificate To Be Given to the Appropriate Trustee by Euroclear or Clearstream Banking Regarding the Exchange of a Temporary Global Security for Definitive Securities or for a Portion of a Permanent Global Security.

 

EXHIBIT C. Form of Certificate To Be Delivered to Euroclear or Clearstream Banking by a Beneficial Owner of Securities in Order to Receive Payment on a Temporary Global Security.

 

EXHIBIT D. Form of Certificate To Be Given to the Appropriate Trustee by Euroclear or Clearstream Banking Regarding Payment on a Temporary Global Security.

 

INDENTURE dated as of August 5, 2003, between HUMANA INC., a corporation duly incorporated and existing under the laws of Delaware and having its principal executive office at 500 West Main Street, Louisville, Kentucky 40202 (hereinafter called “the Company”), and THE BANK OF NEW YORK, a New York banking corporation, as Trustee (hereinafter called the “Trustee”).

 

RECITALS OF THE COMPANY

 

The Company deems it necessary to issue from time to time for its lawful purposes securities (hereinafter called the “Securities”) evidencing its senior unsecured indebtedness and has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of the Securities, unlimited as to principal amount, to have such titles, to bear such rates of interest, to mature at such time or times and to have such other provisions as shall be fixed as hereinafter provided.

 

All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done, and the Company proposes to do all things necessary to make the Securities, when executed by the Company and authenticated and delivered by the Trustee hereunder and duly issued by the Company, the valid obligations of the Company as hereinafter provided.

 

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

 

For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities or series thereof, as follows:

 

I.

Definitions and Other Provisions of General Application

 

  1. Definitions.

 

For all purposes of this Indenture and all Securities issued hereunder, except as otherwise expressly provided or unless the context otherwise requires:

 

  1. the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular;

 

  2. all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein;

 

Page 8 of 94


  3. all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles in the United States, and the term “generally accepted accounting principles” with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted in the United States at the date or time of such computation; and

 

  4. the words “ herein”, “hereof ” and “ hereunder ” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.

 

Certain terms, used principally in Article Three and Article Six, are defined in those Articles.

 

Act ”, when used with respect to any Holder, has the meaning specified in Section 104.

 

Affiliate ” means, with respect to a specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control”, when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

 

Authenticating Agent ” means any Person authorized to authenticate and deliver Securities on behalf of the Trustee for the Securities of any series pursuant to Section 614.

 

Authorized Newspaper ” means a newspaper customarily published at least once a day for at least five days in each calendar week and of general circulation in New York City, in London and, to the extent the Securities are listed on the Luxembourg Stock Exchange and the Luxembourg Stock Exchange shall so require, in Luxembourg or, if it shall be impracticable in the opinion of the Trustee for the Securities of the appropriate series to make such publication, in another capital city in Western Europe. Such publication (which may be in different newspapers) is expected to be made in the Eastern edition of The Wall Street Journal , in the London edition of the Financial Times and, if applicable, in the Luxemburger Wort .

 

Bearer Security ” means any Security established pursuant to Section 201 which is payable to bearer.

 

Board of Directors ” means, when used with reference to the Company, either the board of directors or any duly authorized committee of that board or any director or directors and/or officer or officers to whom that board or committee shall have duly delegated its authority, of the Company.

 

Page 9 of 94


Board Resolution ” means, when used with reference to the Company, (1) a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company, as the case may be, to have been duly adopted by its Board of Directors and to be in full force and effect on the date of such certification, or (2) a certificate signed by the director or directors or officer or officers to whom the Board of Directors of the Company shall have duly delegated its authority, and delivered to the Trustee for the Securities of any series.

 

Business Day ” means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or executive order to close in The City of New York; provided, however, that, with respect to Securities not denominated in Dollars, the day is also not a day on which commercial banks are authorized or required by law, regulation or executive order to close in the Principal Financial Center of the country issuing the Foreign Currency or currency unit or, if the Foreign Currency or currency unit is euro, the day is also a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) System is open; provided, further, that, with respect to LIBOR Securities, the day is also a London Business Day.

 

Capital Stock ” means, with respect to any Person, shares, interests, rights to purchase, warrants, options, participation or other equivalents of or interests in (however designated) equity of such Person, including any preferred stock, but excluding any debt securities convertible into such equity.

 

Certificate of a Firm of Independent Public Accountants ” means a certificate signed by any firm of independent public accountants of recognized standing selected by the Company. The term “independent” when used with respect to any specified firm of public accountants means such a firm which (1) is in fact independent, (2) does not have any direct financial interest or any material indirect financial interest in the Company or in any other obligor upon the Securities of any series or in any affiliate of the Company or of such other obligor, and (3) is not connected with the Company or such other obligor or any affiliate of the Company or of such other obligor, as an officer, employee, promoter, underwriter, trustee, partner, director or person performing similar functions, but such firm may be the regular auditors employed by the Company. Whenever it is herein provided that any Certificate of a Firm of Independent Public Accountants shall be furnished to the Trustee for Securities of any series, such Certificate shall state that the signer has read this definition and that the signer is independent within the meaning hereof.

 

Code ” means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

 

Clearstream Banking ” means Clearstream Banking S.A. or its successor.

 

Commission ” means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date.

 

Page 10 of 94


Company ” means the Person named as the “Company” in the first paragraph of this instrument until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Company” shall mean such successor corporation.

 

Company Request ” and “ Company Order ” mean a written request or order signed in the name of the Company, as the case may be by (1) the Chairman of the Board, a Vice Chairman of the Board, the President or a Vice President and by the Treasurer, an Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or an Assistant Secretary of the Company, as the case may be, or (2) by any two Persons designated in a Company Order previously delivered to the Trustee for Securities of any series by any two of the foregoing officers and delivered to the Trustee for Securities of any series.

 

Component Currency ” has the meaning specified in Section 311(e).

 

Conversion Event ” means the unavailability of any Foreign Currency or currency unit due to the imposition of exchange controls or other circumstances beyond the Company’s control.

 

Corporate Trust Office ” means the office of the Trustee for Securities of any series at which at any particular time its corporate trust business shall be principally administered, which office of The Bank of New York, at the date of the execution of this Indenture, is located at 101 Barclay Street, New York, New York 10286, Attention: Corporate Trust Department, or such other address as the Trustee may designate from time to time by notice to the Holders and the Company, or the principal corporate trust office of any successor Trustee (or such other address as such successor Trustee may designate from time to time by notice to the Holders and the Company).

 

corporation ” includes corporations, limited liability companies, associations, companies and business trusts.

 

coupon ” means any interest coupon appertaining to a Bearer Security.

 

Currency Determination Agent ” means, with respect to Securities of any series, unless otherwise specified in the Securities of any series, a New York Clearing House bank designated pursuant to Section 301 or Section 312.

 

Defaulted Interest ” has the meaning specified in Section 307.

 

Depositary ” means, with respect to the Securities of any series issuable or issued in the form of a Global Security, the Person designated as Depositary by the Company pursuant to Section 301 until a successor Depositary shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Depositary” shall mean or include each Person who is then a Depositary hereunder, and if at any time there is more than one such Person, “Depositary” as used with respect to the Securities of any such series shall mean the Depositary with respect to the Securities of that series.

 

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Determination Notice ” has the meaning specified in Section 1108(b).

 

Dollars ” and the sign “ $ ” mean the currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts.

 

Election Date ” has the meaning specified in Section 311(e).

 

Euroclear ” means Euroclear Bank S.A./N.V. or its successor.

 

Event of Default ” has the meaning specified in Section 501.

 

Exchange Act ” means the Securities Exchange Act of 1934, as amended, as in force at the date as of which this Indenture was executed; provided, however, that in the event the Securities Exchange Act of 1934 is amended after such date, “Exchange Act” means, to the extent required by any such amendment, the Securities Exchange Act of 1934 as so amended.

 

Exchange Date ” has the meaning specified in Section 304.

 

Foreign Currency ” means a currency issued and actively maintained as a country’s recognized unit of domestic exchange by the government of any country other than the United States or by any recognized confederation or association of such governments, and such term shall include, without limitation, the euro.

 

Global Exchange Agent ” has the meaning specified in Section 304.

 

Global Securities ” means Securities in global form.

 

Government Obligations ” means securities which are (i) direct obligations of the government which issued the currency in which the Securities of a particular series are payable (except as provided in Sections 311(b) and 311(d), in which case with respect to Securities for which an election has occurred pursuant to Section 311(b), or a Conversion Event has occurred as provided in Section 311(d), such obligations shall be issued in the currency or currency unit in which such Securities are payable as a result of such election or Conversion Event) or (ii) obligations of a Person controlled or supervised by or acting as an agency or instrumentality of the government which issued the currency in which the Securities of such series are payable (except as provided in Sections 311(b) and 311(d), in which case with respect to Securities for which an election has occurred pursuant to Section 311(b), or a Conversion Event has occurred as provided in Section 311(d)), such obligations shall be issued in the currency or currency unit in which such Securities are payable as a result of such election or Conversion Event), the payment of which is unconditionally guaranteed by such government, which, in either case, are full faith and credit obligations of such government payable in such currency and are not callable or redeemable at the option of the issuer thereof.

 

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Holder ” means, when used with respect to any Security, in the case of a Registered Security, the Person in whose name a Security is registered in the Security Register, and in the case of a Bearer Security, the bearer thereof and, when used with respect to any coupon, means any bearer thereof.

 

Identifying Numbers ” has the meaning specified in Section 204.

 

Incur ” means issue, create, assume, guarantee, incur or otherwise become liable for; and the terms “Incurred” and “Incurrence” have meanings correlative to the foregoing.

 

Indenture ” means this instrument as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of a particular series of Securities established as contemplated by Section 301.

 

Indexed Security ” means any Security as to which the amount of payments of principal (and premium, if any) and/or interest, if any, due thereon is determined with reference to the rate of exchange between the currency or currency unit in which the Security is denominated and any other specified currency or currency unit, to the relationship between two or more currencies or currency units, to the price of one or more specified securities or commodities, to one or more securities or commodities exchange indices or other indices or by other similar methods or formulas, all as specified in accordance with Section 301.

 

interest ” means, when used with respect to an OID Security which by its terms bears interest only after Maturity, interest payable after Maturity.

 

Interest Payment Date ” means, when used with respect to any Security, the Stated Maturity of an installment of interest on such Security.

 

Issue Date ” means the date on which the Securities of a particular series are originally issued under this Indenture.

 

Judgment Date ” has the meaning specified in Section 516.

 

LIBOR ” means, with respect to any series of Securities, the rate specified as LIBOR for such Securities in accordance with Section 301.

 

LIBOR Currency ” means the currency specified pursuant to Section 301 as to which LIBOR will be calculated or, if no currency is specified pursuant to Section 301, Dollars.

 

LIBOR Security ” means any Security which bears interest at a floating rate calculated with reference to LIBOR.

 

London Business Day ” means, with respect to any LIBOR Security, a day on which commercial banks are open for business, including dealings in the LIBOR Currency, in London.

 

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Luxembourg Stock Exchange ” means, unless specified with respect to any particular series of Securities, the Luxembourg Stock Exchange.

 

Market Exchange Rate ” means, with respect to any Foreign Currency or currency unit on any date, unless otherwise specified in accordance with Section 301, the noon buying rate in The City of New York for cable transfers in such Foreign Currency or currency unit as certified for customs purposes by the Federal Reserve Bank of New York for such Foreign Currency or currency unit.

 

Maturity ” means, when used with respect to any Security, the date on which the principal (or, if the context so requires, in the case of an OID Security, a lesser amount or, in the case of an Indexed Security, an amount determined in accordance with the specified terms of that Security) of that Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption, request for redemption, repayment at the option of the holder, pursuant to any sinking fund or otherwise.

 

Notice of Default ” has the meaning specified in Section 501(3).

 

Officers’ Certificate ” means, when used with reference to the Company, a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the Chief Executive Officer, the President or a Vice President (any reference herein to a Vice President of the Company, as the case may be, shall be deemed to include any Vice President of the Company, as the case may be, whether or not designated by a number or a word or words added before or after the title “Vice President”), and by the Treasurer, an Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or an Assistant Secretary of the Company, as the case may be, and delivered to the Trustee for the Securities of any series.

 

Opinion of Counsel ” means, for purposes of Section 1108, a written opinion of independent legal counsel of recognized standing and, for all other purposes hereof, means a written opinion of counsel, who may be an employee of or counsel to the Company or may be other counsel satisfactory to the Trustee for the Securities of any series.

 

OID Security ” means a Security which provides for an amount (excluding any amounts attributable to accrued but unpaid interest thereon) less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502.

 

Outstanding ” means, when used with respect to Securities, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except:

 

  1. Securities theretofore cancelled by the Trustee for such Securities or delivered to such Trustee for cancellation;

 

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  2. Securities or portions thereof for whose payment or redemption money in the necessary amount and in the required currency or currency unit has been theretofore deposited with the Trustee for such Securities or any Paying Agent (other than the Company or any other obligor upon the Securities) in trust or set aside and segregated in trust by the Company or any other obligor upon the Securities (if the Company or any other obligor upon the Securities shall act as its own Paying Agent) for the Holders of such Securities; provided, however , that, if such Securities or portions thereof are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture, or provision therefor satisfactory to such Trustee has been made; and

 

  3. Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented proof satisfactory to the Trustee for such Securities that any such Securities are held by a bona fide holder in due course;

 

provided, however , that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder or are present at a meeting of Holders for quorum purposes, (a) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee for such Securities shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which such Trustee actually knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of such Trustee the pledgee’s right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor, (b) the principal amount of an OID Security that shall be deemed to be Outstanding for such purposes shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration pursuant to Section 502 and (c) the principal amount of a Security denominated in a Foreign Currency or currency unit that shall be deemed to be outstanding for such purposes shall be determined in accordance with Section 115.

 

Paying Agent ” means The Bank of New York or any other Person authorized by the Company to pay the principal of (and premium, if any) or interest, if any, on any Securities of any series on behalf of the Company.

 

Person ” means any individual, firm, corporation, partnership, association, joint venture, tribunal, limited liability company, trust, government or political subdivision or agency or instrumentality thereof, or any other entity or organization.

 

Place of Payment ” means, when used with respect to the Securities of any particular series, the place or places where the principal of (and premium, if any) and interest, if any, on the Securities of that series are payable, as contemplated by Section 301 and 1002.

 

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Predecessor Security ” means, with respect to any particular Security, every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security, and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security or a Security to which a mutilated, destroyed, lost or stolen coupon appertains shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Security or the Security to which the mutilated, destroyed, lost or stolen coupon appertains, as the case may be.

 

Principal Financial Center ” means, unless otherwise specified in accordance with Section 301:

 

  1. the capital city of the country issuing the Foreign Currency or currency unit, except that with respect to Dollars, Australian dollars, Canadian dollars, Deutsche marks, Dutch guilders, South African rand and Swiss francs, the “Principal Financial Center” will be The City of New York, Sydney and Melbourne, Toronto, Frankfurt, Amsterdam, Johannesburg and Zurich, respectively; or

 

  2. the capital city of the country to which the LIBOR Currency relates, except that with respect to Dollars, Canadian dollars, Deutsche marks, Dutch guilders, Portuguese escudos, South African rand and Swiss francs, the “Principal Financial Center” will be The City of New York, Toronto, Frankfurt, Amsterdam, London, Johannesburg and Zurich, respectively.

 

Property ” means any asset, revenue or any other property, including Capital Stock, whether tangible or intangible, real or personal, including, without limitation, any right to receive income.

 

Redemption Date ” means, when used with respect to any Security to be redeemed in whole or in part, the date fixed for such redemption by or pursuant to this Indenture.

 

Redemption Price ” means, when used with respect to any Security to be redeemed, the price at which it is to be redeemed pursuant to the terms of this Indenture or in any Security issued hereunder.

 

Registered Security ” means any Security established pursuant to Section 201 which is registered in the Security Register.

 

Regular Record Date ” means, with respect to the interest payable on any Interest Payment Date on the Registered Securities of any series, the date, if any, specified for that purpose as contemplated by Section 301 whether or not a Business Day.

 

Responsible Officer ” means, when used with respect to the Trustee for any series of Securities, (i) any vice president, assistant vice president, treasurer, assistant treasurer or any trust officer of the Trustee or (ii) any other officer of the Corporate Trust Department of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject and who is charged with the administration of this Indenture.

 

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Securities ” means securities evidencing unsecured indebtedness of the Company authenticated and delivered under this Indenture.

 

Security Register ” and “ Security Registrar ” have the respective meanings specified in Section 305.

 

series ” of Securities means all Securities denoted as part of the same series authorized by or pursuant to a particular Board Resolution.

 

Special Record Date ” means, with respect to the payment of any Defaulted Interest on the Registered Securities of any series, a date fixed by the Trustee for such series pursuant to Section 307.

 

Stated Maturity ” means, when used with respect to any Security or any installment of principal thereof or interest thereon, the date specified in such Security or a coupon representing such installment of interest as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable.

 

Subsidiary ” means, with respect to any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of capital stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person.

 

Substitute Date ” has the meaning specified in Section 516.

 

Trust Indenture Act ” means the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990, as in force at the date as of which this Indenture was executed; provided , however , that in the event the Trust Indenture Act is amended after such date, “Trust Indenture Act” means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended.

 

Trustee ” means the Person named as the “ Trustee ” in the first paragraph of this instrument and, subject to the provisions of Article Six hereof, shall also include its successors and assigns as Trustee hereunder. If there shall be at one time more than one Trustee hereunder, “ Trustee ” shall mean each such Trustee and shall apply to each such Trustee only with respect to those series of Securities with respect to which it is serving as Trustee.

 

United States ” means, unless otherwise specified with respect to Securities of any series, the United States of America (including the states and the District of Columbia), its territories, its possessions (which include, at the date of this Indenture, Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands) and other areas subject to its jurisdiction.

 

United States Alien ” has the meaning specified in Section 1009.

 

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Yield to Maturity ” means, when used with respect to any OID Security, the yield to maturity, if any, set forth on the face thereof.

 

  2. Compliance Certificates and Opinions .

 

Upon any application or request by the Company to the Trustee for any series of Securities to take any action under any provision of this Indenture or any supplement hereto, the Company shall furnish to such Trustee an Officers’ Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished.

 

Every certificate (other than certificates provided pursuant to Section 1005) or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include:

 

  1. a statement that each individual signing such certificate or opinion has read such condition or covenant and the definitions herein relating thereto;

 

  2. a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

 

  3. a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such condition or covenant has been complied with; and

 

  4. a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with.

 

  3. Form of Documents Delivered to Trustee .

 

In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.

 

Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon an Opinion of Counsel, or a certificate or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the opinion, certificate or representations with respect to matters upon which his certificate or opinion is based are erroneous.

 

Any such Opinion of Counsel or certificate or representations may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous.

 

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Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.

 

  4. Acts of Holders .

 

  a. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing. If Securities of a series are issuable as Bearer Securities, any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders of such series may, alternatively, be embodied in and evidenced by the record of Holders of Securities of such series voting in favor thereof, either in person or by proxies duly appointed in writing, at any meeting of Holders of Securities of such series duly called and held in accordance with the provisions of Article Thirteen, or a combination of such instruments and any such record. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record or both are delivered to the Trustee for the appropriate series of Securities and, where it is hereby expressly required, to the Company. Such instrument or instruments and any such record (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments or so voting at any such meeting. Proof of execution of any such instrument or of a writing appointing any such agent, or of the holding by any Person of a Security, shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee for the appropriate series of Securities and the Company and any agent of such Trustee or the Company, if made in the manner provided in this Section. The record of any meeting of Holders of Securities shall be proved in the manner provided in Section 1306.

 

The Company may at its discretion set a record date for purposes of determining the identity of Holders of Registered Securities entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture, but the Company shall have no obligation to do so. If not set by the Company prior to the first solicitation of Holders of Registered Securities of a particular series made by any Person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote shall be 30 days prior to the first solicitation of such vote or consent. Upon the fixing of such a record date, those persons who were Holders of Registered Securities at such record date (or their duly designated proxies), and only those persons, shall be entitled with respect to such Registered Securities to take such action by vote or consent or to revoke any vote or consent previously given, whether or not such persons continue to be Holders after such record date.

 

  b. The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by the certificate of any notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by an officer of a corporation or association or a member of a partnership, or an official of a public or governmental body, on behalf of such corporation, association, partnership or public or governmental body or by a fiduciary, such certificate or affidavit shall also constitute sufficient proof of his authority.

 

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  c. The fact and date of the execution by any Person of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee for the appropriate series of Securities deems reasonably sufficient.

 

  d. The principal amount and serial numbers of Registered Securities held by any Person, and the date of holding the same, shall be proved by the Security Register.

 

  e. The principal amount and serial numbers of Bearer Securities held by any Person, and the date of holding the same, may be proved by the production of such Bearer Securities or by a certificate executed, as depositary, by any trust company, bank, banker or other depositary, wherever situated, if such certificate shall be deemed by the Trustee for such Securities to be satisfactory, showing that at the date therein mentioned such Person had on deposit with such depositary, or exhibited to it, the Bearer Securities therein described; or such facts may be proved by the certificate or affidavit of the Person holding such Bearer Securities, if such certificate or affidavit is deemed by such Trustee to be satisfactory. The Trustee for such Securities and the Company may assume that such ownership of any Bearer Security continues until (1) another certificate or affidavit bearing a later date issued in respect of the same Bearer Security is produced, (2) such Bearer Security is produced to such Trustee by some other Person, (3) such Bearer Security is surrendered in exchange for a Registered Security, or (4) such Bearer Security is no longer Outstanding. The principal amount and serial numbers of Bearer Securities held by any Person, and the date of holding the same, may also be proved in any other manner which the Company and the Trustee for such Securities deem sufficient.

 

  f. Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee for such Securities, the Security Registrar, any Paying Agent or the Company in reliance thereon, whether or not notation of such action is made upon such Security.

 

  5. Notices, Etc., to Trustee and the Company .

 

Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other documents provided or permitted by this Indenture to be made upon, given or furnished to, or filed with,

 

  1. the Trustee for a series of Securities by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with such Trustee at its Corporate Trust Office, Attention: Corporate Trust Administration Re: Humana Inc., or if sent by facsimile transmission, to a facsimile number provided by the Trustee, with a copy mailed, first class postage prepaid to the Trustee addressed to it as provided above, or

 

  2. the Company by such Trustee or by any Holder shall be sufficient for every purpose hereunder (except as provided in paragraph (3) of Section 501) if furnished in writing and mailed, first class postage prepaid, addressed in the case of the Company to it, to the attention of the Chief Financial Officer, at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to such Trustee by the Company, or if sent by facsimile transmission, to a facsimile number provided to the Trustee by the Company, with a copy mailed, first class postage prepaid, to the Company addressed to it as provided above.

 

 

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  6. Notice to Holders; Waiver .

 

Where this Indenture provides for notice to Holders of any event, (1) such notice shall be sufficiently given (unless otherwise herein expressly provided) to Holders of Registered Securities if in writing and mailed, first class postage prepaid, to each Holder affected by such event, at his or her address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice; and (2) such notice shall be sufficiently given (unless otherwise herein expressly provided) to Holders of Bearer Securities if published in (a) an Authorized Newspaper on a Business Day or (b) an electronic medium easily accessible by the Holders as may be specified by the Company to such Holders, such publication to be not earlier than the earliest date, and not later than the latest date, prescribed herein for the giving of such notice. Any such notice by publication shall be deemed to have been given on the date of such publication or, if published more than once, on the date of the first publication.

 

In any case where notice to Holders of Registered Securities is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder of a Registered Security shall affect the sufficiency of such notice with respect to other Holders of Registered Securities or the sufficiency of any notice to Holders of Bearer Securities given as provided herein. Any notice mailed in the manner prescribed by this Indenture shall be conclusively deemed to have been given whether or not received by any particular Holder. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice to Holders of Registered Securities by mail, then such notification as shall be made with the reasonable approval of the Trustee for such Securities shall constitute a sufficient notification for every purpose hereunder.

 

In case by reason of the suspension of any Authorized Newspaper or Authorized Newspapers or by reason of any other cause it shall be impracticable to publish any notice to Holders of Bearer Securities as provided above, then such notification to Holders of Bearer Securities as shall be made with the reasonable approval of the Trustee for such Securities shall constitute sufficient notice to such Holders for every purpose hereunder. Neither the failure to give notice by publication to Holders of Bearer Securities as provided above, nor any defect in any notice so published, shall affect the sufficiency of any notice to Holders of Registered Securities given as provided herein.

 

Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee for such Securities, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.

 

  7. Conflict with Trust Indenture Act .

 

If any provision hereof limits, qualifies or conflicts with the duties imposed by any of Sections 310 through 317, inclusive, of the Trust Indenture Act through the operation of Section 318(c) thereof, such imposed duties shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the provision shall be deemed to apply to this Indenture as so modified or excluded, as the case may be.

 

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  8. Effect of Headings and Table of Contents .

 

The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.

 

  9. Successors and Assigns .

 

All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.

 

  10. Separability Clause .

 

In case any provision in this Indenture or in the Securities or coupons shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

 

  11. Benefits of Indenture .

 

Nothing in this Indenture or in the Securities or in any coupons appertaining thereto, expressed or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Security Registrar, an Authenticating Agent and their successors hereunder and the Holders of Securities or coupons, any benefit or any legal or equitable right, remedy or claim under this Indenture.

 

  12. Governing Law .

 

This Indenture and the Securities shall be governed by, and construed in accordance with, the laws of the State of New York.

 

  13. Non-Business Day .

 

Unless otherwise stated with respect to Securities of any series, in any case where any Interest Payment Date, Redemption Date or Stated Maturity of a Security of any particular series shall not be a Business Day at any Place of Payment with respect to Securities of that series, then (notwithstanding any other provision of this Indenture or of the Securities or coupons) payment of principal of (and premium, if any) and interest, if any, with respect to such Security need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity, provided that no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be.

 

  14. Immunity of Incorporators, Stockholders, Directors and Officers .

 

No recourse shall be had for the payment of the principal of (and premium, if any), or the interest, if any, on any Security or coupon of any series, or for any claim based thereon, or

 

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upon any obligation, covenant or agreement of this Indenture, against any incorporator, stockholder, director, officer or employee, as such, past, present or future, of the Company or of any successor corporation, either directly or indirectly through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment of penalty or otherwise; it being expressly agreed and understood that this Indenture and all the Securities and coupons of each series are solely corporate obligations, and that no personal liability whatever shall attach to, or is incurred by, any incorporator, stockholder, director, officer or employee, past, present or future, of the Company or of any successor corporation, either directly or indirectly through the Company or any successor corporation, because of the incurring of the indebtedness hereby authorized or under or by reason of any of the obligations, covenants or agreements contained in this Indenture or in any of the Securities or coupons of any series, or to be implied herefrom or therefrom; and that all such personal liability is hereby expressly released and waived as a condition of, and as part of the consideration for, the execution of this Indenture and the issuance of the Securities and coupons of each series.

 

  15. Certain Matters Relating to Currencies .

 

Subject to Section 311, each reference to any currency or currency unit in any Security, or in the Board Resolution or supplemental indenture relating thereto, shall mean only the referenced currency or currency unit and no other currency or currency unit.

 

The Trustee shall segregate moneys, funds and accounts held by the Trustee in one currency or currency unit from any moneys, funds or accounts held in any other currencies or currency units, notwithstanding any provision herein which would otherwise permit the Trustee to commingle such amounts.

 

Whenever any action or Act is to be taken hereunder by the Holders of Securities denominated in a Foreign Currency or currency unit, then for purposes of determining the principal amount of Securities held by such Holders, the aggregate principal amount of the Securities denominated in a Foreign Currency or currency unit shall be deemed to be that amount of Dollars that could be obtained for such principal amount on the basis of a spot rate of exchange specified to the Trustee for such series in an Officers’ Certificate for such Foreign Currency or currency unit into Dollars as of the date the taking of such action or Act by the Holders of the requisite percentage in principal amount of the Securities is evidenced to such Trustee.

 

  16. Language of Notices, Etc .

 

Any request, demand, authorization, direction, notice, consent or waiver required or permitted under this Indenture shall be in the English language, and any published notice may also be in an official language of the country of publication.

 

II .

 

Security Forms

 

  1. Forms of Securities .

 

The Registered Securities, if any, of each series and the Bearer Securities, if any, of each series and related coupons shall be in such form or forms (including global form) as shall be

 

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established by or pursuant to a Board Resolution of the Company, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture or any indenture supplemental hereto and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as the Company may reasonably deem appropriate and as may be required to comply with any law, with any rule or regulation made pursuant thereto, with any rules of any securities exchange, automated quotation system or clearing agency or to conform to usage, as may, consistently herewith, be determined by the officers executing such Securities or coupons, as evidenced by their execution of such Securities or coupons. If temporary Securities of any series are issued in global form as permitted by Section 304, the form thereof shall be established as provided in the preceding sentence.

 

Unless otherwise specified as contemplated by Section 301, Bearer Securities shall have interest coupons attached.

 

The definitive Securities and coupons, if any, shall be printed, lithographed or engraved or produced by any combination of these methods on a steel engraved border or steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities or coupons, as evidenced by their execution thereof.

 

  2. Form of Trustee’s Certificate of Authentication .

 

Subject to Section 614, the Certificate of Authentication on all Securities shall be in substantially the following form:

 

“This is one of the Securities of the series designated therein described in the within-mentioned Indenture.

 

                          The Bank Of New York,

                          as Trustee

                          By

                          Authorized Signatory

 

  3. Securities in Global Form .

 

If any Security of a series is issuable in global form, such Security may provide that it shall represent the aggregate amount of Outstanding Securities from time to time endorsed thereon and may also provide that the aggregate amount of Outstanding Securities represented thereby may from time to time be increased or reduced to reflect exchanges. Any endorsement of a Security in global form to reflect the amount, or any increase or decrease in the amount, of Outstanding Securities represented thereby shall be made by the Trustee and in such manner as shall be specified in such Security. Any instructions by the Company with respect to a Security in global form, after its initial issuance, shall be in writing but need not comply with Section 102.

 

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Global Securities may be issued in either registered or bearer form and in either temporary or permanent form.

 

Any Security issued in global form shall bear the following legend:

 

THIS NOTE IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TRUST COMPANY (THE “DEPOSITARY”) TO A NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF          OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT IS MADE TO          OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF,         , HAS AN INTEREST HEREIN.

 

  4. CUSIP Numbers.

 

The Company in issuing the Securities may use “CUSIP” numbers (if then generally in use) or other identifying numbers (“Identifying Numbers”) and, if so, the Trustee shall use such Identifying Numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such Identifying Numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identifying numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the Identifying Numbers.

 

III .

 

The Securities

 

  1. Title; Payment and Terms.

 

The aggregate principal amount of Securities which may be authenticated and delivered and Outstanding under this Indenture is unlimited. The Securities may be issued up to the aggregate principal amount of Securities from time to time authorized by or pursuant to Board Resolutions of the Company.

 

The Securities may be issued in one or more series, each of which shall be issued pursuant to Board Resolutions of the Company. There shall be established in one or more Board Resolutions or pursuant to one or more Board Resolutions of the Company and, subject to

 

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Section 303, set forth in, or determined in the manner provided in, an Officers’ Certificate of the Company, or established in one or more supplemental indentures hereto, prior to the issuance of Securities of any series all or any of the following, as applicable (each of which, if so provided, may be determined from time to time by the Company with respect to unissued Securities of that series and set forth in the Securities of that series when issued from time to time):

 

  1. the title of the Securities of that series (which shall distinguish the Securities of that series from all other series of Securities);

 

  2. any limit upon the aggregate principal amount of the Securities of that series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of that series pursuant to Section 304, 305, 306, 906 or 1107) and whether that series may be reopened for additional Securities of that series; in the event that such series of Securities may be reopened from time to time for issuance of additional Securities of such series, the terms thereof shall indicate whether any such additional Securities shall have the same terms as the prior Securities of such series or whether the Company may establish additional or different terms with respect to such additional Securities;

 

  3. whether Securities of that series are to be issuable as Registered Securities, Bearer Securities or both and any restrictions on the exchange of one form of Securities for another and on the offer, sale and delivery of the Securities in either form;

 

  4. the date or dates (or manner of determining the same) on which the principal of the Securities of that series is payable (which, if so provided in such Board Resolutions, may be determined by the Company from time to time and set forth in the Securities of the series issued from time to time);

 

  5. the rate or rates (or the manner of calculation thereof) at which the Securities of that series shall bear interest (if any), the date or dates from which such interest shall accrue, the Interest Payment Dates on which such interest shall be payable (or manner of determining the same) and the Regular Record Date for the interest payable on any Registered Securities on any Interest Payment Date and the extent to which, or the manner in which, any interest payable on a temporary Global Security on an Interest Payment Date will be paid if other than in the manner provided in Section 307;

 

  6. the place or places where, subject to the provisions of Section 1002, the principal of (and premium, if any) and interest, if any, on Securities of that series shall be payable, any Registered Securities of that series may be surrendered for registration of transfer, any Securities of that series may be surrendered for exchange, and notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served;

 

  7. the period or periods within which (or manner of determining the same), the price or prices at which (or manner of determining the same), the currency or currency unit in which, and the terms and conditions upon which Securities of that series may be redeemed, in whole or in part, at the option of the Company, and any remarketing arrangements with respect to the Securities of that series;

 

  8. the obligation, if any, of the Company to redeem, repay or purchase Securities of that series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof, and the period or periods within which (or manner of determining the same), the price or prices at which (or manner of determining the same), the currency or currency unit in which, and the terms and conditions upon which, Securities of that series shall be redeemed or purchased, in whole or in part, pursuant to such obligation;

 

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  9. if the currency in which the Securities of that series shall be issuable is Dollars, the denominations in which any Registered Securities of that series shall be issuable, if other than denominations of $1,000 and any integral multiple thereof, and the denominations in which any Bearer Securities of that series shall be issuable, if other than the denomination of $5,000;

 

  10. if other than the principal amount thereof, the portion of the principal amount of Securities of that series which shall be payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502;

 

  11. the inapplicability of any Event of Default or covenant set forth in Article 10 hereof to the Securities of that series, or the applicability of any other Events of Defaults or covenants in addition to the Events of Default or covenants set forth herein to Securities of that series;

 

  12. if a Person other than The Bank of New York is to act as Trustee for the Securities of that series, the name and location of the Corporate Trust Office of such Trustee;

 

  13. if other than Dollars, the currency or currency unit in which payment of the principal of (and premium, if any) or interest, if any, on the Securities of that series shall be made or in which the Securities of that series shall be denominated and the particular provisions applicable thereto in accordance with, in addition to or in lieu of the provisions of Section 311;

 

  14. if the principal of (and premium, if any) and interest, if any, on the Securities of that series are to be payable, at the election of the Company or a Holder thereof, in a currency or currency unit other than that in which such Securities are denominated or stated to be payable, in accordance with provisions in addition to or in lieu of, or in accordance with the provisions of, Section 311, the period or periods within which (including the Election Date), and the terms and conditions upon which, such election may be made, and the time and manner of determining the exchange rate between the currency or currency unit in which such Securities are denominated or stated to be payable and the currency or currency unit in which such Securities are to be so payable;

 

  15. the designation of the original Currency Determination Agent, if any;

 

  16. if the Securities of such series are issuable as Indexed Securities, the manner in which the amount of payments of principal of (and premium, if any) and interest, if any, on that series shall be determined;

 

  17. if the Securities of that series do not bear interest, the applicable dates for purposes of Section 701;

 

  18. if other than as set forth in Article Four, provisions for the satisfaction and discharge of this Indenture with respect to the Securities of that series;

 

  19. the date as of which any Bearer Securities of that series and any Global Security representing Outstanding Securities of that series shall be dated if other than the date of original issuance of the first Security of that series to be issued;

 

  20. the application, if any, of Section 1009 to the Securities of that series;

 

  21. whether the Securities of the series shall be issued in whole or in part in the form of a Global Security or Securities and, in such case, the Depositary and Global Exchange Agent, if any, for such Global Security or Securities, whether such global form shall be permanent or temporary and, if applicable, the Exchange Date;

 

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  22. if Securities of the series are to be issuable initially in the form of a temporary Global Security, the circumstances under which the temporary Global Security can be exchanged for definitive Securities and whether the definitive Securities will be Registered Securities and/or Bearer Securities and will be in global form and whether interest in respect of any portion of such Global Security payable in respect of an Interest Payment Date prior to the Exchange Date shall be paid to any clearing organization with respect to a portion of such Global Security held for its account and, in such event, the terms and conditions (including any certification requirements) upon which any such interest payment received by a clearing organization will be credited to the Persons entitled to interest payable on such Interest Payment Date if other than as provided in this Article Three;

 

  23. the extent and manner, if any, to which payment on or in respect of Securities of that series will be subordinated to the prior payment of other liabilities and obligations of the Company;

 

  24. whether payment of any amount due under such Securities will be guaranteed by one or more guarantors, including Subsidiaries of the Company;

 

  25. the forms of the Securities of that series; and

 

  26. any other terms of that series (which terms shall not be inconsistent with the requirements of the Trust Indenture Act).

 

All Securities of any particular series and the coupons appertaining to any Bearer Securities of such series shall be substantially identical except as to denomination, rate of interest, Stated Maturity and the date from which interest, if any, shall accrue, and except as may otherwise be provided in or pursuant to such Board Resolutions and set forth in such Officer’s Certificate relating thereto or provided in or pursuant to any supplemental indenture hereto. The terms of such Securities, as set forth above, may be determined by the Company from time to time if so provided in or established pursuant to the authority granted in Board Resolutions. All Securities of any one series need not be issued at the same time, and unless otherwise provided, a series may be reopened for issuance of additional Securities of such series.

 

Prior to the delivery of a Security of any series in any such form to the Trustee for the Securities of such series for authentication, the Company shall deliver to such Trustee the following:

 

  1. The Board Resolutions of the Company by or pursuant to which such form of Security have been approved and, if applicable, the supplemental indenture by or pursuant to which such form of Security has been approved;

 

  2. An Officers’ Certificate of the Company dated the date such Certificate is delivered to such Trustee satisfying the requirements of Sections 102 and 103, and stating that all conditions precedent provided for in this Indenture relating to the authentication and delivery of Securities in such forms have been complied with; and

 

  3.

An Opinion of Counsel satisfying the requirements of Sections 102 and 103 substantially to the effect that Securities in such forms, together with any coupons appertaining thereto, when (a) completed by appropriate insertions and executed and delivered by the Company to such Trustee for authentication in accordance with this Indenture, (b) authenticated and delivered by such Trustee in accordance with this Indenture, and (c) issued by the Company in the manner

 

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and subject to the conditions specified in such Opinion of Counsel, will constitute the legal, valid and binding obligations of the Company, subject to the effects of applicable bankruptcy, reorganization, fraudulent conveyance, moratorium, insolvency and other similar laws generally affecting creditors’ rights, to general equitable principles, to an implied covenant of good faith and fair dealing and to such other qualifications as such counsel shall conclude do not materially affect the rights of Holders of such Securities.

 

  2. Denominations and Currencies.

 

Unless otherwise provided with respect to any series of Securities as contemplated by Section 301, any Registered Securities of a series other than Registered Securities issued in global form (which may be of any denomination) shall be issuable in denominations of $1,000 and any integral multiple thereof, and any Bearer Securities of a series other than Bearer Securities issued in global for (which may be of any denomination) shall be issuable in the denomination of $5,000, or the equivalent amounts thereof in the case of Registered Securities and Bearer Securities denominated in a Foreign Currency or currency unit.

 

  3. Execution, Authentication, Delivery and Dating.

 

The Securities and any related coupons shall be executed on behalf of the Company by its Chairman of the Board, a Vice Chairman of the Board, or its President, Chief Executive Officer or one of its Vice Presidents. The Securities shall be so executed under the corporate seal of the Company reproduced thereon and attested to by its Secretary or any one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile.

 

Securities and coupons bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.

 

At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series together with any coupons appertaining thereto, executed by the Company to the Trustee for the Securities of such series for authentication, together with a Company Order for the authentication and delivery of such Securities, and such Trustee, in accordance with the Company Order, shall authenticate and deliver such Securities; provided, however , that, during the “restricted period” (as defined in Section 1.163-5(c)(2)(i)(D)(7) of the United States Treasury Regulations), no Bearer Security shall be mailed or otherwise delivered to any location in the United States; and provided, further , that a Bearer Security may be delivered outside the United States in connection with its original issuance only if the Person entitled to receive such Bearer Security shall have furnished to the Trustee for the Securities of such series a certificate substantially in the form set forth in Exhibit A to this Indenture. If any Security shall be represented by a permanent Global Security, then, for purposes of this Section and Section 304, the notation of a beneficial owner’s interest therein upon original issuance of such Security or upon exchange of a portion of a temporary Global Security shall be deemed to be delivery in connection with the original issuance of such beneficial owner’s interest in such permanent Global Security. Except as permitted by Section 306 or 307, the Trustee for the Securities of a series shall not authenticate and deliver any Bearer Security unless all appurtenant coupons for interest then matured other than matured coupons in default have

 

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been detached and cancelled. If all the Securities of any one series are not to be issued at one time and if a Board Resolution relating to such Securities shall so permit, such Company Order may set forth procedures acceptable to the Trustee for the issuance of such Securities, including, without limitation, procedures with respect to interest rate, Stated Maturity, date of issuance and date from which interest, if any, shall accrue.

 

Notwithstanding any contrary provision herein, if all Securities of a series are not to be originally issued at one time, it shall not be necessary to deliver the Board Resolution, Officers’ Certificate and Opinion of Counsel otherwise required pursuant to Sections 102 and 301 at or prior to the time of authentication of each Security of such series if such documents are delivered at or prior to the authentication upon original issuance of the first Security of such series to be issued.

 

Each Registered Security shall be dated the date of its authentication, and, unless otherwise specified as contemplated by Section 301, each Bearer Security shall be dated as of the date of original issuance of the first Security of such series to be issued.

 

No Security or coupon appertaining thereto shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein manually executed by the Trustee for such Security or on its behalf pursuant to Section 614, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder.

 

In case any Securities shall have been authenticated, but not delivered, by the Trustee or the Authenticating Agent for such series then in office, any successor by merger, conversion or consolidation to such Trustee, or any successor Authenticating Agent, as the case may be, may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee or successor Authenticating Agent had itself authenticated such Securities.

 

Each Depositary designated pursuant to Section 301 for a Global Security in registered form must, at the time of its designation and at all times while it serves as Depositary, be a clearing agency registered under the Exchange Act and any other applicable statute or regulation.

 

The Trustee shall have the right to decline to authenticate and deliver any Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing Holders.

 

  4. Temporary Securities and Exchange of Securities.

 

Pending the preparation of definitive Securities of any particular series, the Company may execute, and upon Company Order the Trustee for the Securities of such series shall authenticate and deliver, in the manner specified in Section 303, temporary Securities which are printed, lithographed, typewritten, photocopied or otherwise produced, in any denomination, with like terms and conditions as the definitive Securities of like series in lieu of which they are issued in registered form or, if authorized, in bearer form with one or more coupons or without coupons, and with such appropriate insertions, omissions,

 

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substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. Any such temporary Securities may be in global form, representing such of the Outstanding Securities of such series as shall be specified therein.

 

Except in the case of temporary Securities in global form (which shall be exchanged only in accordance with the provisions of the following paragraphs or as otherwise provided in or pursuant to a Board Resolution or a Supplemental Indenture), if temporary Securities of any particular series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of such definitive Securities, the temporary Securities of such series shall be exchangeable for such definitive Securities of a like Stated Maturity and with like terms and provisions upon surrender of the temporary Securities of such series, together with all unmatured coupons and matured coupons in default, if any, at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any particular series, the Company shall execute and (in accordance with a Company Order delivered at or prior to the authentication of the first definitive Security of such series) the Trustee for the Securities of such series or the Global Exchange Agent shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations of the same series and of a like Stated Maturity and with like terms and provisions; provided, however , unless otherwise specified pursuant to Section 301, no definitive Bearer Security shall be delivered in exchange for a temporary Registered Security; and provided, further , that a definitive Bearer Security shall be delivered in exchange for a temporary Bearer Security only in compliance with the conditions set forth in Section 303. Until exchanged as hereinabove provided, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of the same series and with like terms and conditions, except as to payment of interest, if any, authenticated and delivered hereunder.

 

Any temporary Global Security and any permanent Global Security shall, unless otherwise provided therein, be delivered to a Depositary designated pursuant to Section 301.

 

Without unnecessary delay but in any event not later than the date specified in or determined pursuant to the terms of any such temporary Global Security (the “Exchange Date”), the Securities represented by any temporary Global Security of a series of Securities issuable in bearer form may be exchanged for definitive Securities (subject to the second succeeding paragraph) or Securities to be represented thereafter by one or more permanent Global Securities, without interest coupons. On or after the Exchange Date such temporary Global Security shall be surrendered by the Depositary to the Trustee for such Security, as the Company’s agent for such purpose, or the agent appointed by the Company pursuant to Section 301 to effect the exchange of the temporary Global Security for definitive Securities (the “Global Exchange Agent”), and following such surrender, such Trustee or the Global Exchange Agent (as authorized by the Trustee as an Authenticating Agent pursuant to Section 614) shall (1) endorse the temporary Global Security to reflect the reduction of its principal amount by an equal aggregate principal amount of such Security, (2) endorse the applicable permanent Global Security, if any, to reflect the initial amount, or an increase in the amount of Securities represented thereby, (3) manually authenticate such definitive Securities or such permanent Global Security, as the case may be, (4) subject to Section 303, deliver such definitive Securities to the Holder thereof or, as the case may be, deliver such permanent Global Security to the Depositary to be held outside the United States for the accounts of Euroclear and Clearstream Banking, for credit to the respective accounts at

 

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Euroclear and Clearstream Banking, designated by or on behalf of the beneficial owners of such Securities (or to such other accounts as they may direct) and (5) redeliver such temporary Global Security to the Depositary, unless such temporary Global Security shall have been cancelled in accordance with Section 309 hereof; provided, however , that, unless otherwise specified in such temporary Global Security, upon such presentation by the Depositary, such temporary Global Security shall be accompanied by a certificate dated the Exchange Date or a subsequent date and signed by Euroclear as to the portion of such temporary Global Security held for its account then to be exchanged for definitive Securities or one or more permanent Global Securities, as the case may be, and a certificate dated the Exchange Date or a subsequent date and signed by Clearstream Banking, as to the portion of such temporary Global Security held for its account then to be exchanged for definitive Securities or one or more permanent Global Securities, as the case may be, each substantially in the form set forth in Exhibit B to this Indenture. Each certificate substantially in the form of Exhibit B hereto of Euroclear or Clearstream Banking, as the case may be, shall be based on certificates of the account holders listed in the records of Euroclear or Clearstream Banking, as the case may be, as being entitled to all or any portion of the applicable temporary Global Security. An account holder of Euroclear or Clearstream Banking, as the case may be, desiring to effect the exchange of interest in a temporary Global Security for an interest in definitive Securities or one or more permanent Global Securities shall instruct Euroclear or Clearstream Banking, as the case may be, to request such exchange on its behalf and shall deliver to Euroclear or Clearstream Banking, as the case may be, a certificate substantially in the form of Exhibit A hereto and dated no earlier than 15 days prior to the Exchange Date. Until so exchanged, temporary Global Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities and permanent Global Securities of the same series authenticated and delivered hereunder, except as provided in the fourth succeeding paragraph.

 

The delivery to the Trustee for the Securities of the appropriate series or the Global Exchange Agent by Euroclear or Clearstream Banking of any certificate substantially in the form of Exhibit B hereto may be relied upon by the Company and such Trustee or the Global Exchange Agent as conclusive evidence that a corresponding certificate or certificates has or have been delivered to Euroclear or to Clearstream Banking, as the case may be, pursuant to the terms of this Indenture.

 

On or prior to the Exchange Date, the Company shall deliver to the Trustee for the Securities of the appropriate series or the Global Exchange Agent definitive Securities or one or more permanent Global Securities in aggregate principal amount equal to the principal amount of such temporary Global Security, executed by the Company in the case of the Securities. At any time, on or after the Exchange Date, upon 30 days’ notice to the Trustee for the Securities of the appropriate series or the Global Exchange Agent by Euroclear or Clearstream Banking, as the case may be, acting at the request of or on behalf of the beneficial owner, a Security represented by a temporary Global Security or a permanent Global Security, as the case may be, may be exchanged, in whole or from time to time in part, for definitive Securities without charge and such Trustee or the Global Exchange Agent shall authenticate and deliver, in exchange for each portion of such temporary Global Security or such permanent Global Security, an equal aggregate principal amount of definitive Securities of the same series of authorized denominations and with like terms and provisions as the portion of such temporary Global Security or such permanent Global Security to be exchanged, which, unless the Securities of the series are not issuable both as Bearer Securities and as Registered Securities, as contemplated by Section 301, shall be in the form of Bearer Securities or Registered Securities, or any combination

 

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thereof, as shall be specified by the beneficial owner thereof; provided, however , that definitive Bearer Securities shall be delivered in exchange for a portion of the temporary Global Security or the permanent Global Security only in compliance with the requirements of the second preceding paragraph. On or prior to the thirtieth day following receipt by the Trustee for the Securities of the appropriate series or the Global Exchange Agent of such notice with respect to a Security, or, if such day is not a Business Day, the next succeeding Business Day, the temporary Global Security or the permanent Global Security, as the case may be, shall be surrendered by the Depositary to such Trustee, as the Company’s agent for such purpose, or the Global Exchange Agent to be exchanged in whole, or from time to time in part, for definitive Securities without charge following such surrender, upon the request of Euroclear or Clearstream Banking, as the case may be, and such Trustee or the Global Exchange Agent shall (1) endorse the applicable temporary Global Security or the permanent Global Security to reflect the reduction of its principal amount by the aggregate principal amount of such Security, (2) in accordance with procedures acceptable to the Trustee cause the terms of such Security and coupons, if any, to be entered on a definitive Security, (3) manually authenticate such definitive Security and (4) if a Bearer Security is to be delivered, deliver such definitive Security outside the United States to Euroclear or Clearstream Banking, as the case may be, for or on behalf of the beneficial owner thereof, in exchange for a portion of such permanent Global Security.

 

Unless otherwise specified in such temporary Global Security or permanent Global Security, any such exchange shall be made free of charge to the beneficial owners of such temporary Global Security or permanent Global Security, except that a Person receiving definitive Securities must bear the cost of any taxes, insurance, postage, transportation and the like in the event that such Person does not take delivery of such definitive Securities in person at the offices of Euroclear or Clearstream Banking. Definitive Securities in bearer form to be delivered in exchange for any portion of a temporary Global Security or a permanent Global Security shall be delivered only outside the United States.

 

Until exchanged in full as hereinabove provided, any temporary Global Security or permanent Global Security shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of the same series and with like terms and conditions, except as to payment of interest, if any, authenticated and delivered hereunder. Unless otherwise specified as contemplated by Section 301, interest payable on such temporary Global Security on an Interest Payment Date for Securities of such series shall be payable to Euroclear and Clearstream Banking on such Interest Payment Date upon delivery by Euroclear and Clearstream Banking to the Trustee for the Securities of the appropriate series or the Global Exchange Agent in the case of payment of interest on a temporary Global Security with respect to an Interest Payment Date occurring prior to the applicable Exchange Date of a certificate or certificates substantially in the form set forth in Exhibit C to this Indenture, for credit without further interest on or after such Interest Payment Date to the respective accounts of the Persons who are the beneficial owners of such Global Security on such Interest Payment Date and who have, in the case of payment of interest on a temporary Global Security with respect to an Interest Payment Date occurring prior to the applicable Exchange Date, each delivered to Euroclear or Clearstream Banking, as the case may be, a certificate substantially in the form set forth in Exhibit D to this Indenture.

 

Any definitive Bearer Security authenticated and delivered by the Trustee for the Securities of the appropriate series or the Global Exchange Agent in exchange for a portion of a temporary Global Security or a permanent Global Security shall not bear a coupon for any interest which shall theretofore have been duly paid by such Trustee to Euroclear or Clearstream Banking or by the Company to such Trustee in accordance with the provisions of this Section 304.

 

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With respect to Exhibits A, B, C and D to this Indenture, the Company may, in its discretion and if required or desirable under applicable law, substitute one or more other forms of such exhibits for such exhibits, eliminate the requirement that any or all certificates be provided, or change the time that any certificate may be required, provided that such substitute form or forms or notice of elimination or change of such certification requirement have theretofore been delivered to the Trustee with a Company Request and such form or forms, elimination or change is reasonably acceptable to the Trustee.

 

  5. Registration, Registration of Transfer and Exchange.

 

The Company shall cause to be kept at the Corporate Trust Office of the Trustee for the Securities of each series a register (the register maintained in such office being herein sometimes referred to as the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Registered Securities and of transfers of Registered Securities. The Trustee for the Securities of each series is hereby initially appointed “Security Registrar” for the purpose of registering Registered Securities and transfers of Registered Securities of such series as herein provided.

 

Upon surrender for registration of transfer of any Registered Security of any particular series at the office or agency of the Company in a Place of Payment for that series, the Company shall execute, and the Trustee for the Securities of each series shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Registered Securities of any authorized denominations, and of a like Stated Maturity and of a like series and aggregate principal amount and with like terms and conditions.

 

Except as set forth below, at the option of the Holder, Registered Securities of any particular series may be exchanged for other Registered Securities of any authorized denominations, and of a like Stated Maturity and of a like series and aggregate principal amount and with like terms and conditions upon surrender of the Registered Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee for such Securities shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. Except as otherwise specified pursuant to Section 301, Registered Securities may not be exchanged for Bearer Securities.

 

Notwithstanding any other provision of this Section or Section 304, unless and until it is exchanged in whole or in part for Registered Securities in definitive form, a Global Security representing all or a portion of the Registered Securities of a series may not be transferred except as a whole by the Depositary for such series to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor Depositary for such series or a nominee of such successor Depositary.

 

If (but not only if) permitted by the applicable Board Resolution and (subject to Section 308) set forth in the applicable Officer’s Certificate, at the option of the Holder, Bearer Securities of any series may be exchanged for Registered Securities of the same series of

 

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any authorized denominations and of a like aggregate principal amount and with like terms and provisions upon surrender of the Bearer Securities to be exchanged at any office or agency of the Company in a Place of Payment for that series, with all unmatured coupons and all matured coupons in default thereto appertaining. If the Holder of a Bearer Security is unable to produce any such unmatured coupon or coupons or matured coupon or coupons in default, such exchange may be effected if the Bearer Securities are accompanied by payment in funds acceptable to the Company (or to the Trustee for the Security in case of matured coupons in default) in an amount equal to the face amount of such missing coupon or coupons, or the surrender of such missing coupon or coupons may be waived by the Company and such Trustee if there is furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless. If thereafter the Holder of such Security shall surrender to any Paying Agent any such missing coupon in respect of which such a payment shall have been made, such Holder shall be entitled to receive the amount of such payment; provided, however , that, except as otherwise provided in Section 1002, interest represented by coupons shall be payable only upon presentation and surrender of those coupons at an office or agency of the Company in a Place of Payment for that series located outside the United States. Notwithstanding the foregoing, in case a Bearer Security of any series is surrendered at any such office or agency in exchange for a Registered Security of the same series and with like terms and conditions after the close of business at such office or agency on or after (i) any Regular Record Date and before the opening of business at such office or agency on the relevant Interest Payment Date, or (ii) any Special Record Date and before the opening of business at such office or agency on the related proposed date for payment of Defaulted Interest, such Bearer Security shall be surrendered without the coupon relating to such Interest Payment Date or proposed date for payment, as the case may be (or, if such coupon is so surrendered with such Bearer Security, such coupon shall be returned to the person so surrendering the Bearer Security), and interest or Defaulted Interest, as the case may be, will not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of the Registered Security issued in exchange for such Bearer Security, but will be payable only to the Holder of such coupon when due in accordance with the provisions of this Indenture.

 

Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee for such Securities shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive.

 

If at any time the Depositary for Securities of a series in registered form notifies the Company that it is unwilling or unable to continue as Depositary for the Securities of such series or if at any time the Depositary for the Securities of such series shall no longer be eligible under Section 303, the Company shall appoint a successor Depositary with respect to the Securities for such series. If (i) a successor Depositary for the Securities of such series is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such ineligibility, (ii) the Company delivers to the Trustee for Securities of such series in registered form a Company Order stating that the Securities of such series shall be exchangeable, or (iii) an Event of Default under Section 501 hereof has occurred and is continuing with respect to the Securities of such series, the Company’s election pursuant to Section 301 shall no longer be effective with respect to the Securities for such series and the Company will execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of definitive Securities of such series, will authenticate and deliver Securities of such series in definitive form in an aggregate principal amount equal to the principal amount of the Global Security or Securities representing such series in exchange for such Global Security or Securities.

 

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The Company may at any time and in its sole discretion determine that the Registered Securities of any series issued in the form of one or more Global Securities shall no longer be represented by such Global Security or Securities. In such event the Company will execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of definitive Registered Securities of such series, will authenticate and deliver, Registered Securities of such series in definitive form and in an aggregate principal amount equal to the principal amount of the Global Security or Securities representing such series in exchange for such Global Security or Securities.

 

If specified by the Company pursuant to Section 301 with respect to a series of Securities in registered form, the Depositary for such series of Securities may surrender a Global Security for such series of Securities in exchange in whole or in part for Securities of such series of like tenor and terms and in definitive form on such terms as are acceptable to the Company and such Depositary. Thereupon the Company shall execute, and, upon receipt of a Company Order, the Trustee shall authenticate and deliver, without service charge, (i) to each Person specified by such Depositary a new Security or Securities of the same series, of like tenor and terms and of any authorized denomination as requested by such Person in aggregate principal amount equal to and in exchange for such Person’s beneficial interest in the Global Security; and (ii) to such Depositary a new Global Security of like tenor and terms and in a denomination equal to the difference, if any, between the principal amount of the surrendered Global Security and the aggregate principal amount of Securities delivered to Holders thereof.

 

Upon the exchange of a Global Security for Securities in definitive form representing the aggregate principal amount of such Global Security, such Global Security shall be cancelled by the Trustee. Registered Securities issued in exchange for a Global Security pursuant to this Section shall be registered in such names and in such authorized denominations as the Depositary for such Global Security, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee in writing. The Trustee shall deliver such Registered Securities to the persons in whose names such Securities are so registered.

 

All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange.

 

Every Security presented or surrendered for registration of transfer or exchange shall (if so required by the Company or the Trustee for such Security) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar for such series duly executed, by the Holder thereof or his attorney duly authorized in writing.

 

No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906 or 1107 not involving any transfer.

 

The Company shall not be required (i) to issue, register the transfer of or exchange Securities of any series during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities of that series selected for

 

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redemption under Section 1104 and ending at the close of business on (A) if Securities of the series are issuable only as Registered Securities, the day of the mailing of the relevant notice of redemption and (B) if Securities of the series are issuable as Bearer Securities, the day of the first publication of the relevant notice of redemption or, if Securities of the series are also issuable as Registered Securities and there is no publication, the mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any Registered Security so selected for redemption as a whole or in part, except the unredeemed portion of any Security being redeemed in part, or (iii) to exchange any Bearer Security so selected for redemption except that such a Bearer Security may be exchanged for a Registered Security of that series and like tenor; provided, however , that such Registered Security shall be simultaneously surrendered for redemption.

 

Furthermore, notwithstanding any other provision of this Section 305, the Company will not be required to exchange any Securities if, as a result of the exchange, the Company would suffer adverse consequences under any United States law or regulation.

 

  6. Mutilated, Destroyed, Lost and Stolen Securities and Coupons.

 

If (i) any mutilated Security or a Security with a mutilated coupon appertaining thereto is surrendered to the Trustee for such Security or the Company and the Trustee for a Security receive evidence to their satisfaction of the destruction, loss or theft of any Security or coupon and (ii) there is delivered to the Company and such Trustee such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or such Trustee that such Security or coupon has been acquired by a bona fide or protected purchaser, the Company shall execute and upon its request such Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security or in exchange for such mutilated Security, or in exchange for the Security to which a mutilated, destroyed, lost or stolen coupon appertains (with all appurtenant coupons not mutilated, destroyed, lost or stolen) a new Security of the same series and in a like principal amount and of a like Stated Maturity and with like terms and conditions, and bearing a number not contemporaneously outstanding with coupons corresponding to the coupons, if any, appertaining to such mutilated, destroyed, lost or stolen Security or to the Security to which such mutilated, destroyed, lost or stolen coupon appertains.

 

In case any such mutilated, destroyed, lost or stolen Security or coupon has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security or coupon (without surrender thereof except in the case of a mutilated Security or coupon) if the applicant for such payment shall furnish to the Company and the Trustee for such Security such security or indemnity as may be required by them to save each of them harmless, and in case of destruction, loss or theft, evidence satisfactory to the Company and such Trustee and any agent of any of them of the destruction, loss or theft of such Security and the ownership thereof; provided, however , that the principal of (and premium, if any) and interest, if any, on Bearer Securities shall, except as otherwise provided in Section 1002, be payable only at an office or agency located outside the United States and, unless otherwise specified as contemplated by Section 301, any interest on Bearer Securities shall be payable only upon presentation and surrender of the coupons appertaining thereto.

 

Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including all fees and expenses of the Trustee for such Security) connected therewith.

 

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Every new Security of any series, with its coupons, if any, issued pursuant to this Section in lieu of any destroyed, lost or stolen Security or in exchange for any mutilated Security, or in exchange for a Security to which a mutilated, destroyed, lost or stolen coupon appertains shall constitute an original additional contractual obligation of the Company whether or not the destroyed, lost or stolen Security and its coupons, if any, or the destroyed, lost or stolen coupon shall be at any time enforceable by anyone, and each such new Security shall be at any time enforceable by anyone, and each such new Security shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of the same series and their coupons, if any, duly issued hereunder.

 

The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities or coupons.

 

  7. Payment of Interest; Interest Rights Preserved.

 

Interest on any Registered Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall, if so provided in such Security, be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest payment.

 

Unless otherwise provided with respect to the Securities of any series, payment of interest may be made at the Corporate Trust Office or, at the option of the Company (i) in the case of Registered Securities, may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register, or (ii) in the case of Bearer Securities, upon presentation and surrender of the appropriate coupon appertaining thereto or by transfer to an account maintained by the payee with a bank located outside the United States. Notwithstanding the foregoing, a Holder of $1,000,000 or more in aggregate principal amount of Securities of any series in definitive form, whether having identical or different terms and provisions, having the same Interest Payment Dates will, at the option of the Company, be entitled to receive interest payments, other than at Maturity, by wire transfer of immediately available funds if appropriate wire transfer instructions have been received in writing by the Trustee for the Securities of such series at least 15 days prior to the applicable Interest Payment Date. Any wire instructions received by the Trustee for the Securities of such series shall remain in effect until revoked by the Holder.

 

Unless otherwise provided or contemplated by Section 301, every permanent Global Security will provide that interest, if any, payable on any Interest Payment Date will be paid to each of Euroclear and Clearstream Banking with respect to that portion of such permanent Global Security held for its account by the Depositary. Each of Euroclear and Clearstream Banking will in such circumstances credit the interest received by it in respect of such permanent Global Security to the accounts of the beneficial owners thereof.

 

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Any interest on any Registered Security of any particular series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called “Defaulted Interest”) shall forthwith cease to be payable to the registered Holder on the relevant Regular Record Date by virtue of having been such Holder; and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below:

 

  1. The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Registered Securities of that series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee for the Registered Securities of such series in writing of the amount of Defaulted Interest proposed to be paid on each Registered Security of that series and the date of the proposed payment, and at the same time the Company shall deposit with such Trustee an amount of money in the currency or currency unit in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series and except as provided in Sections 311(b) and 311(d)), equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to such Trustee for such deposit on or prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon such Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall not be more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by such Trustee of the notice of the proposed payment. Such Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Registered Securities of that series at his address as it appears in the Security Register not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names the Registered Securities of that series (or their respective Predecessor Securities) are registered on such Special Record Date and shall no longer be payable pursuant to the following clause (2).

 

  2. The Company may make payment of any Defaulted Interest on Registered Securities of any particular series in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Registered Securities may be listed, and upon such notice as may be required by such exchange, if, after notice is given by the Company to the Trustee for the Securities of such series of the proposed manner of payment pursuant to this clause, such manner of payment shall be deemed practicable by such Trustee.

 

Subject to the foregoing provisions of this Section and Section 305, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.

 

  8. Persons Deemed Owners.

 

Prior to due presentment of a Registered Security for registration of transfer, the Company, the Trustee for such Security and any agent of the Company or such Trustee may treat the

 

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Person in whose name any such Security is registered as the owner of such Security for the purpose of receiving payment of principal of (and premium, if any) and (subject to Section 307) interest, if any, on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and none of the Company, such Trustee or any agent of the Company or such Trustee shall be affected by notice to the contrary.

 

Title to any Bearer Security and any coupons appertaining thereto shall pass by delivery. The Company, the Trustee for such Security and any agent of the Company or such Trustee may treat the bearer of any Bearer Security and the bearer of any coupon as the absolute owner of such Bearer Security or coupon for the purpose of receiving payment thereof or on account thereof and for all other purposes whatsoever, whether or not such Security or coupon be overdue, and none of the Company, such Trustee or any agent of the Company or such Trustee shall be affected by notice to the contrary.

 

None of the Company, the Trustee, any Paying Agent or the Security Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Security or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

 

  9. Cancellation.

 

All Securities and coupons surrendered for payment, redemption, registration of transfer or exchange, or delivered in satisfaction of any sinking fund payment, shall, if surrendered to any Person other than the Trustee for such Securities, be delivered to such Trustee and, in the case of Registered Securities and matured coupons, shall be promptly cancelled by it. All Bearer Securities and unmatured coupons so delivered to the Trustee for such Securities shall be cancelled by such Trustee. The Company may at any time deliver to the Trustee for Securities of a series for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by such Trustee. Notwithstanding any other provision of this Indenture to the contrary, in the case of a series, all the Securities of which are not to be originally issued at one time, a Security of such series shall not be deemed to have been Outstanding at any time hereunder if and to the extent that, subsequent to the authentication and delivery thereof, such Security is delivered to the Trustee for such Security for cancellation by the Company or any agent thereof upon the failure of the original purchaser thereof to make payment therefor against delivery thereof, and any Security so delivered to such Trustee shall be promptly cancelled by it. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities and coupons held by the Trustee for such Securities shall be disposed of by such Trustee in accordance with its standard procedures and a certificate of disposition evidencing such disposition of Securities and coupons shall be provided to the Company by such Trustee. In the case of any temporary Global Security, which shall be disposed of if the entire aggregate principal amount of the Securities represented thereby has been exchanged, the certificate of disposition shall state that all certificates required pursuant to Section 304 hereof, substantially in the form of Exhibit B hereto (or in the form of any substitute exhibit as provided in the last paragraph of Section 304), to be given by Euroclear or Clearstream Banking, have been duly presented to the Trustee for such Securities by Euroclear or Clearstream Banking, as the case may be. Permanent Global Securities shall not be disposed of until exchanged in full for definitive Securities or until payment thereon is made in full.

 

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  10. Computation of Interest.

 

Except as otherwise specified as contemplated by Section 301 for Securities of any particular series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months.

 

  11. Currency and Manner of Payments in Respect of Securities.

 

Unless otherwise specified in accordance with Section 301 with respect to any series of Securities, the following provisions shall apply:

 

  a. Except as provided in paragraphs (b) and (d) below, the principal of (and premium, if any) and interest on Securities of any series denominated in a Foreign Currency or currency unit will be payable by the Company in Dollars based on the equivalent of that Foreign Currency or currency unit converted into Dollars in the manner described in paragraph (c) below.

 

  b. It may be provided pursuant to Section 301 with respect to Registered Securities of any series denominated in a Foreign Currency or currency unit that Holders shall have the option, subject to paragraph (d) below, to receive payments of principal of (and premium, if any) and interest on such Registered Securities in such Foreign Currency or currency unit by delivering to the Trustee (or to any duly appointed Paying Agent) for the Registered Securities of that series a written election, to be in form and substance satisfactory to such Trustee (or to any such Paying Agent), not later than the close of business on the Election Date immediately preceding the applicable payment date. If a Holder so elects to receive such payments in such Foreign Currency or currency unit, such election will remain in effect for such Holder until changed by such Holder by written notice to the Trustee (or to any such Paying Agent) for the Registered Securities of that series; provided, however , that any such change must be made not later than the close of business on the Election Date immediately preceding the next payment date to be effective for the payment to be made on such payment date; and provided, further, that no such change or election may be made with respect to payments to be made on any Registered Security of such series with respect to which an Event of Default has occurred, the Company has exercised any defeasance, satisfaction or discharge options pursuant to Article Four or notice of redemption has been given by the Company pursuant to Article Eleven. If any Holder makes any such election, such election will not be effective as to any transferee of such Holder and such transferee shall be paid in Dollars unless such transferee makes an election as specified above; provided, however, that such election, if in effect while funds are on deposit with respect to the Registered Securities of such series as described in Section 404 or Section 405, will be effective as to any transferee of such Holder unless otherwise specified pursuant to Section 301 for such Registered Securities. Any Holder of any such Registered Security who shall not have delivered any such election to the Trustee (or to any duly appointed Paying Agent) for the Registered Securities of such series not later than the close of business on the applicable Election Date will be paid the amount due on the applicable payment date in Dollars.

 

  c.

With respect to any Registered Securities of any series denominated in a Foreign Currency or currency unit and payable in Dollars, the amount of Dollars so payable will be determined by the Currency Determination Agent based on the highest indicative quotation in The City of New York selected by the Currency Determination Agent at approximately 11:00 A.M., New York City time, on the second Business

 

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Day preceding the applicable payment date. Such selection shall be made from among the quotations appearing on the bank composite or multi-contributor pages of the Reuters Monitor Foreign Exchange Service or, if not available, the Telerate Monitor Foreign Exchange Service, for three (or two if three are not available) major banks in New York City. The first three (or two) such banks selected by the Currency Determination Agent which are offering quotes on the Reuters Foreign Exchange Service shall be used. If such quotations are unavailable from either such foreign exchange service, such selection shall be made from the quotations received by the Currency Determination Agent from no more than three nor less than two recognized foreign exchange dealers in The City of New York selected by the Currency Determination Agent and approved by the Company (one of which may be the Currency Determination Agent) for the purchase by the quoting dealer, for settlement on such payment date, of the aggregate amount of the Foreign Currency or currency unit payable on such payment date in respect of all Registered Securities denominated in such Foreign Currency or currency unit and for which the applicable dealer commits to execute a contract. If fewer than two such bid quotations are available at 11:00 a.m., New York City time, on the second Business Day preceding the applicable payment date, such payment will be based on the Market Exchange Rate as of the second Business Day preceding the applicable payment date. If the Market Exchange Rate for such date is not then available, payments shall be made in the Foreign Currency or currency unit. All currency exchange costs associated with any payment in Dollars on any such Registered Securities will be borne by the Holder thereof by deductions from such payment.

 

  d. If a Conversion Event occurs with respect to a Foreign Currency or currency unit in which Registered Securities of any series are payable, then with respect to each date for the payment of principal of (and premium, if any) and interest on the Registered Securities of that series occurring after the last date on which such Foreign Currency or currency unit was used, the Company may make such payment in Dollars. The Dollar amount to be paid by the Company to the Trustee for the Registered Securities of such series and by such Trustee or any Paying Agent for the Registered Securities of such series to the Holders of such Registered Securities with respect to such payment date shall be determined by the Currency Determination Agent on the basis of the Market Exchange Rate as of the second Business Day preceding the applicable payment date or, if such Market Exchange Rate is not then available, on the basis of the most recently available Market Exchange Rate, or as otherwise established pursuant to Section 301 with respect to such Notes. Any payment in respect of such Registered Security made under such circumstances in Dollars will not constitute an Event of Default hereunder.

 

  e. For purposes of this Indenture the following terms shall have the following meanings:

 

A “Component Currency” shall mean any currency which is a component currency of any currency unit.

 

“Election Date” shall mean, for the Registered Securities of any series, the date specified pursuant to Section 301(14).

 

  f.

Notwithstanding any other provisions of this Section 311, the following shall apply: (i) if the official unit of any Component Currency is altered by way of combination or subdivision, the number of units of that currency as a component shall be divided or multiplied in the same proportion, (ii) if two or more Component Currencies are consolidated into a single currency, the amounts of those currencies as components

 

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shall be replaced by an amount in such single currency equal to the sum of the amounts of the consolidated Component Currencies expressed in such a single currency, (iii) if any Component Currency is divided into two or more currencies, the amount of that original Component Currency as a component shall be replaced by the amounts of such two or more currencies having an aggregate value on the date of division equal to the amount of the former Component Currency immediately before such division and (iv) in the event of an official redenomination of any currency (including, without limitation, a currency unit), the obligations of the Company to make payments in or with reference to such currency on the Registered Securities of any series shall, in all cases, be deemed immediately following such redenomination to be obligations to make payments in or with reference to that amount of redenominated currency representing the amount of such currency immediately before such redenomination.

 

  g. All determinations referred to in this Section 311 made by the Currency Determination Agent shall be in its sole discretion and shall, in the absence of manifest error, be conclusive for all purposes and irrevocably binding upon the Holders of the applicable Securities. The Currency Determination Agent shall promptly give written notice to the Trustee of any such decision or determination. The Currency Determination Agent shall have no liability for any determinations referred to in this Section 311 made by it.

 

  h. The Trustee for the Securities of a particular series shall be fully justified and protected in relying and acting upon information received by it from the Company and the Currency Determination Agent with respect to any of the matters addressed in or contemplated by this Section 311 and shall not otherwise have any duty or obligation to determine such information independently.

 

  12. Appointment and Resignation of Currency Determination Agent.

 

  a. If and so long as the Securities of any series (i) are denominated in a currency unit or a currency other than Dollars or (ii) may be payable in a currency unit or a currency other than Dollars, or so long as it is required under any other provision of this Indenture, then the Company shall maintain with respect to each such series of Securities, or as so required, a Currency Determination Agent. The Company shall cause the Currency Determination Agent to make the necessary foreign exchange determinations at the time and in the manner specified pursuant to Section 301 for the purpose of determining the applicable rate of exchange and for the purpose of converting the issued currency or currency unit into the applicable payment currency or currency unit for the payment of principal (and premium, if any) and interest, if any, pursuant to Section 311.

 

  b. No resignation of the Currency Determination Agent and no appointment of a successor Currency Determination Agent pursuant to this Section shall become effective until the acceptance of appointment by the successor Currency Determination Agent as evidenced by a written instrument delivered to the Company and the Trustee of the appropriate series of Securities accepting such appointment executed by the successor Currency Determination Agent.

 

  c. If the Currency Determination Agent shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of the Currency Determination Agent for any cause, with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Currency Determination Agent or Currency Determination Agents with respect to the Securities of that or those series (it being understood that any such successor Currency Determination Agent may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall only be one Currency Determination Agent with respect to the Securities of any particular series).

 

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  13. Ranking.

 

The Securities shall constitute the senior indebtedness of the Company and shall rank pari passu in right of payment among themselves and with all of the other existing and future senior indebtedness of the Company.

 

IV .

 

Satisfaction and Discharge

 

  1. Option to Effect Legal Defeasance or Covenant Defeasance.

 

The Company may, at the option of its Board of Directors evidenced by a Board Resolution set forth in an Officers’ Certificate, at any time, with respect to the Securities of any series, elect to have either Section 402 or 403 be applied to all of the Outstanding Securities of that series upon compliance with the conditions set forth below in this Article Four.

 

  2. Legal Defeasance and Discharge.

 

Upon the Company’s exercise under Section 401 of the option applicable to this Section 402, the Company shall be deemed to have been discharged from its obligations with respect to all Outstanding Securities of the particular series and any coupons appertaining thereto on the date the conditions set forth below in Section 404 are satisfied (hereinafter, “Legal Defeasance”). For this purpose, such Legal Defeasance means that the Company shall be deemed to have paid and discharged all the obligations relating to the Outstanding Securities of that series and the Securities of that series, including any coupons appertaining thereto, shall thereafter be deemed to be “Outstanding” only for the purposes of Section 406, Section 408 and the other Sections of this Indenture referred to below in this Section 402, and to have satisfied all of its other obligations under such Securities and any coupons appertaining thereto and this Indenture and cured all then existing Events of Default (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of Outstanding Securities of the particular series and coupons, if any, of such series to receive payments in respect of the principal of (and premium, if any) and interest, if any, on such Securities when such payments are due or on the Redemption Date solely out of the trust created pursuant to this Indenture; (b) the Company’s obligations with respect to such Securities concerning issuing temporary Securities of that series, or, where relevant, registration of such Securities, mutilated, destroyed, lost or stolen Securities of that series and the maintenance of an office or agency for payment and money for Securities payments held in trust; (c) the rights, powers, trusts, duties and immunities of the Trustee for the Securities of that series, and the Company’s obligations in connection therewith; and (d) this Article Four and the obligations set forth in Section 406 hereof.

 

Subject to compliance with this A