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 June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5975
HUMANA INC.
(Exact name of registrant as specified in its charter)
Delaware 61-0647538
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 West Main Street, Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
(502) 580-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock August 10, 1995
$.16 2/3 par value 161,825,590 shares
1 of 16
HUMANA INC.
FORM 10-Q
June 30, 1995
Page of
Form 10-Q
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Income
for the quarters and six months ended
June 30,1995 and 1994 3
Condensed Consolidated Balance Sheet at
June 30, 1995 and December 31, 1994 4
Condensed Consolidated Statement of
Cash Flows for the six months ended
June 30, 1995 and 1994 5
Notes to Condensed Consolidated
Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 8-14
Part II: Other Information
Items 1 to 6 15-16
2
HUMANA INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the quarters and six months ended June 30, 1995 and 1994
Unaudited
(Dollars in millions, except per share results)
Quarter Six Months
1995 1994 1995 1994
Revenues:
Premiums $ 1,048 $ 897 $ 2,073 $ 1,750
Interest 19 15 38 28
Other income 3 5 7 8
Total revenues 1,070 917 2,118 1,786
Operating expenses:
Medical costs 860 736 1,686 1,439
Selling, general and
administrative 125 111 250 213
Depreciation and
amortization 15 12 30 24
Unusual charge (a) 18 18
Total operating
expenses 1,000 877 1,966 1,694
Income from operations 70 40 152 92
Interest expense
(recovery) (a) 2 (28) 4 (27)
Income before income taxes 68 68 148 119
Provision for income
taxes (a) 23 14 50 33
Net income (a) $ 45 $ 54 $ 98 $ 86
Earnings per common
share (a) $ .28 $ .33 $ .60 $ .53
Shares used in earnings
per common share
computation (000) 162,255 160,836 162,148 160,659
(a) 1994 second quarter and six-month results include the favorable
effect of the settlement of tax disputes with the Internal
Revenue Service partially offset by the write-down of a
nonoperational asset.
See accompanying notes.
3
HUMANA INC.
CONDENSED CONSOLIDATED BALANCE SHEET
Unaudited
(Dollars in millions, except per share amounts)
June 30, December 31,
1995 1994
Assets
Current assets:
Cash and cash equivalents $ 447 $ 272
Marketable securities 528 609
Premiums receivable, less allowance
for loss of $19 - June 30, 1995
and $20 - December 31, 1994 80 74
Deferred income taxes 42 45
Other 64 38
Total current assets 1,161 1,038
Property and equipment, net 320 317
Long-term marketable securities 388 322
Cost in excess of net tangible
assets acquired 159 155
Deferred income taxes 50 56
Other 85 69
Total assets $ 2,163 $ 1,957
Liabilities and Common Stockholders' Equity
Current liabilities:
Medical costs payable $ 554 $ 527
Trade accounts payable and
accrued expenses 166 233
Unearned premium revenues 127
Income taxes payable 52 56
Total current liabilities 899 816
Professional liability and other obligations 88 83
Total liabilities 987 899
Contingencies
Common stockholders' equity:
Common stock, $.16 2/3 cents par; authorized
300,000,000 shares; issued and outstanding
161,820,165 shares - June 30, 1995 and
161,330,064 shares - December 31, 1994 27 27
Other 1,149 1,031
Total common stockholders' equity 1,176 1,058
Total liabilities and common
stockholders' equity $ 2,163 $ 1,957
See accompanying notes.
4
HUMANA INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended June 30, 1995 and 1994
Unaudited
(Dollars in millions)
1995 1994
Cash flows from operating activities:
Net income $ 98 $ 86
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 30 24
Deferred income taxes (1) 48
Unusual charge 18
Changes in operating assets and liabilities 71 (46)
Other (1) 2
Net cash provided by operating activities 197 132
Cash flows from investing activities:
Purchase and disposition of property and
equipment, net (25) (11)
Acquisition of health plan assets (3) (37)
Change in marketable securities 2 (152)
Net cash used in investing activities (26) (200)
Cash flows from financing activities:
Other 4 3
Net cash provided by financing activities 4 3
Increase (decrease) in cash and cash equivalents 175 (65)
Cash and cash equivalents at beginning of period 272 372
Cash and cash equivalents at end of period $ 447 $ 307
Interest payments (refunds), net $ 2 $ (20)
Income tax payments (refunds), net $ 52 $ (13)
See accompanying notes.
5
HUMANA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(A) Basis of Presentation
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the
disclosures normally required by generally accepted accounting principles
or those normally made in an annual report on Form 10-K. Accordingly, for
further information, the reader of this Form 10-Q may wish to refer to the
Form 10-K of Humana Inc. (the "Company") for the year ended December 31,
1994.
The financial information has been prepared in accordance with the
Company's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair statement of interim results. All such adjustments
are of a normal and recurring nature.
(B) Contingencies
The Company provides medical services to Medicare risk members under
contracts with the Health Care Financing Administration ("HCFA") that are
renewed for a one-year term each December 31 unless terminated 90 days
prior thereto. The loss of these contracts or significant changes in the
Medicare program as a result of legislative action, including reductions
in payments or increases in benefits without corresponding increases in
payments, would have a material adverse effect on the revenues,
profitability and business prospects of the Company. On July 28, 1995,
HCFA's Office of the Actuary announced the projected national average rate
of increase for 1996 under these contracts to be 10.1 percent. The final
rate of increase will be announced in September 1995. When the final rate
increase is determined, geographic and other adjustments could
significantly affect the Company's actual 1996 increase. Over the last
five years, annual increases have ranged from as low as 2 percent in
January 1991 to as high as 12 percent in January 1993, with an average of
6 percent.
During 1994, the Company's South Florida health plan (the "Plan") was
denied accreditation by the National Committee for Quality Assurance
("NCQA"). The Company began various corrective action procedures
developed to resolve the issues identified and expects no material effects
on its results of operations, financial position or cash flows as a result
of the NCQA accreditation denial. In addition, HCFA notified the Company
regarding a separate investigation of the Plan, that the Plan was not
fully meeting data collection and use requirements in the areas of
utilization management, quality assurance and availability/accessibility.
In July 1995, HCFA notified the Company that it had successfully restored
compliance with these requirements. HCFA's notification was based upon
site visits conducted by them in January and May 1995, together with other
information submitted to HCFA by the Company.
Resolution of various loss contingencies, including litigation pending
against the Company in the ordinary course of business, is not expected to
have a material adverse effect on its results of operations, financial
position or cash flows.
6
HUMANA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Unaudited
(C) Subsequent Event
On August 9, 1995 the Company entered into a definitive agreement with
EMPHESYS Financial Group, Inc. ("EMPHESYS") pursuant to which EMPHESYS
will merge with and into a wholly owned subsidiary of the Company.
EMPHESYS, based in Green Bay, Wisconsin, provides medical health care
services to approximately 1.3 million members. The Company will commence
an all cash tender offer on or prior to August 16, 1995, to acquire all of
EMPHESYS' outstanding common stock for $37.50 per share. The aggregate
purchase price of approximately $650 million will be funded through bank
borrowings, available cash and marketable securities (which may require
the sale of selected marketable securities). Lincoln National Corporation
("Lincoln National"), through a wholly owned subsidiary, owns approximately
29 percent of the outstanding shares of EMPHESYS. Lincoln National has
agreed to tender its shares, has granted the Company an option to acquire
all of its EMPHESYS shares at $37.50 per share and has entered into other
customary lock-up arrangements with the Company. The transaction, which
is subject to certain regulatory approvals, is expected to be completed in
the fall of 1995.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company offers managed health care products which integrate management
with the delivery of health care services through a network of providers
who share financial risk or who have incentives to deliver quality, cost-
effective medical services. These products are marketed primarily through
health maintenance organizations ("HMOs") and preferred provider
organizations ("PPOs") that encourage or require the use of contracting
providers. HMOs and PPOs also control health care costs by various means
including the use of utilization controls such as pre-admission approval
for hospital inpatient services and pre-authorization of outpatient
surgical procedures.
The Company's HMO and PPO products are marketed primarily to employer and
other groups ("Commercial") as well as Medicaid and Medicare-eligible
individuals. The products marketed to Medicare-eligible individuals are
either HMO products that provide managed care services which include all
Medicare benefits and, in certain circumstances, additional managed care
services that are not included in Medicare benefits ("Medicare risk") or
indemnity insurance policies that supplement Medicare benefits ("Medicare
supplement").
Results of Operations
Second Quarter Ended June 30, 1995 and 1994
The Company's premium revenues increased 17 percent to $1 billion for the
quarter ended June 30, 1995, compared to $897 million for the same period
in 1994. This growth was due to same-store Commercial membership gains,
a 5 percent increase in Medicare risk premium rates and the December 1994
acquisition of CareNetwork, Inc. Premium revenues associated with this
acquisition totaled approximately $40 million for the quarter ended June
30, 1995. Partially reducing these increases was a 1.8 percent reduction
of Commercial premium rates. Management believes this rate of decrease
will continue for the remainder of 1995.
Membership in the Company's Commercial products increased 54,700 or 3
percent during the second quarter ended June 30, 1995. On a same-store
basis, Commercial membership for the quarter ended June 30, 1995,
increased 53,000 compared to 5,000 for the same period in 1994. The
Company also added 4,100 Medicare risk members and 36,000 members in its
administrative services product. Medicare supplement membership declined
4,200 members during the quarter ended June 30, 1995, as anticipated. For
all of 1995, the Company anticipates combined same-store Commercial and
Medicare risk product membership gains approximating 15 to 20 percent.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, (Continued)
The medical loss ratio for the quarter ended June 30, 1995, was 82.1
percent compared to 81.9 percent for the same period in 1994. The
increase was due primarily to an increase in non-hospital and outpatient
services costs associated with the Company's Commercial product in
expansion markets and less restrictive managed care products. Although
the Company has developed corrective action plans, it is anticipated that
increased non-hospital and outpatient services cost trends experienced
during the second quarter of 1995 will likely continue during the remainder
of 1995. Patient days per thousand members for the quarter ended June 30,
1995, decreased 4 percent from the same period a year ago to 259 days per
thousand for the Commercial product and 3 percent to 1,353 days per thousand
for the Medicare risk product.
The administrative cost ratio was 13.4 percent and 13.6 percent for the
quarters ended June 30, 1995 and 1994, respectively. The reduction is the
result of increased premium revenues as well as efforts to control
administrative spending. As a result of membership growth, the
administrative cost ratio is expected to continue to decline for the
remainder of 1995.
Interest income totaled $19 million and $15 million for the quarters ended
June 30, 1995 and 1994, respectively. The increase is attributable to
higher yields earned in the second quarter of 1995 compared to the same
period in 1994, as well as increased levels of cash, cash equivalents and
marketable securities. The tax equivalent yield on invested assets
approximated 8 percent and 6 percent for the quarters ended June 30, 1995
and 1994, respectively.
The Company's income before income taxes totaled $68 million for the
quarter ended June 30, 1995 compared to $57 million for the quarter ended
June 30, 1994. Income before income taxes for 1994 excludes $29 million
related to the favorable settlement of tax disputes with the Internal
Revenue Service (the "IRS") and an $18 million charge related to the
write-down of a nonoperational asset. Excluding the effects of the
nonrecurring items described above, net income increased to $45 million
or $.28 per share from $37 million or $.23 per share for the quarters
ended June 30, 1995 and 1994, respectively.
Six Months Ended June 30, 1995 and 1994
The Company's premium revenues increased 18 percent to $2.1 billion for
the six months ended June 30, 1995 compared to $1.8 billion for the same
period in 1994. This growth was due to same-store membership gains, a 5
percent increase in Medicare risk premium rates and the 1994 acquisitions
of CareNetwork, Inc. and Group Health Association. Premium revenues
associated with these acquisitions totaled approximately $169 million for
the six months ended June 30, 1995, compared to approximately $67 million
for the six months ended June 30, 1994. Commercial premium rates were
down approximately 1 percent for the six months ended June 30, 1995,
compared to the same period in 1994. Management believes that commercial
premium rates will continue to be down 1 percent to 2 percent (compared to
1994) for the remainder of 1995.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, (Continued)
Membership in the Company's Commercial products increased 191,000 or 12
percent during the six months ended June 30, 1995. On a same-store basis,
Commercial membership for the six months ended June 30, 1995, increased
180,900 compared to 55,400 for the same period in 1994. The Company also
added 9,200 Medicare risk members and 170,900 members in its
administrative services product. Medicare supplement membership declined
9,800 members during the six months ended June 30, 1995, as anticipated.
For all of 1995, the Company anticipates combined same-store Commercial
and Medicare risk product membership gains approximating 15 to 20 percent.
The medical loss ratio for the six months ended June 30, 1995 was 81.3
percent compared to 82.2 percent for the same period in 1994. The
improvement was the result of decreased hospital utilization in both the
Commercial and Medicare risk products and Medicare risk premium rate
increases which exceeded the rate of growth of physician and other medical
services costs. Patient days per thousand members decreased 5 percent
from the same period a year ago to 266 days per thousand for the
Commercial product and 4 percent to 1,429 days per thousand for the
Medicare risk product. The year-to-date improvement in the medical loss
ratio was reduced during the second quarter of 1995 by an increase in non-
hospital and outpatient services costs. The medical loss ratio for the
second quarter of 1995 was 82.1 percent compared to 81.9 percent for the
second quarter of 1994. Although the Company has developed corrective
action plans, it is anticipated that the increased non-hospital and
outpatient services cost trends experienced during the second quarter of
1995 will likely continue during the remainder of 1995.
The administrative cost ratio was 13.5 percent for the six months ended
June 30, 1995 and 1994. The administrative cost ratio is expected to
decline during the remainder of 1995 as a result of membership growth.
Interest income totaled $38 million and $28 million for the six months
ended June 30, 1995 and 1994, respectively. The increase is attributable
to higher yields earned in the six months of 1995 compared to the same
period in 1994, as well as increased levels of cash, cash equivalents and
marketable securities. The tax equivalent yield on invested assets
approximated 8 percent and 6 percent for the six months ended June 30,
1995 and 1994, respectively.
The Company's income before income taxes totaled $148 million for the six
months ended June 30, 1995, compared to $108 million for the six months
ended June 30, 1994. Income before income taxes for 1994 excludes $29
million related to the favorable settlement of tax disputes with the IRS
and an $18 million charge related to the write-down of a nonoperational
asset. Excluding the effects of the nonrecurring items described above,
net income increased to $98 million or $.60 per share from $69 million or
$.43 per share for the six months ended June 30, 1995 and 1994,
respectively.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, (Continued)
Liquidity
Cash provided by the Company's operations totaled $197 million for the six
months ended June 30, 1995 compared to $132 million for the six months
ended June 30, 1994. The timing of the receipt of Medicare risk premiums
increased cash provided by operations by $127 million for the six months
ended June 30, 1995 and reduced cash provided by operations by $110
million for the same period in 1994. Excluding the effect of the timing
of Medicare risk premiums, cash provided by operations was $70 million and
$242 million for the six months ended June 30, 1995 and 1994,
respectively. The decrease in cash provided by operations was primarily
attributable to the timing of payments for medical costs and other
payables as well as inclusion in 1994 of the settlement of tax disputes
with the IRS.
The Company's subsidiaries operate in states which require certain levels
of equity and regulate the payment of dividends to the parent company. As
a result, the Company's ability to use operating subsidiaries' cash flows
is restricted to the extent that the subsidiaries' ability to pay
dividends to its parent Company requires regulatory approval. At June 30,
1995, and December 31, 1994, the Company had approximately $350 million
and $220 million of unrestricted cash, cash equivalents and marketable
securities, respectively.
On August 9, 1995, the Company entered into a definitive agreement with
EMPHESYS Financial Group, Inc. ("EMPHESYS") pursuant to which, subject to
the terms and conditions of such agreement, EMPHESYS will merge with and
into a wholly owned subsidiary of the Company. EMPHESYS, based in Green
Bay, Wisconsin, provides medical health care services to approximately 1.3
million members. The Company will commence an all cash tender offer on or
prior to August 16, 1995, to acquire all of EMPHESYS' outstanding common
stock for $37.50 per share. The aggregate purchase price of approximately
$650 million will be funded through bank borrowings, available cash and
marketable securities (which may require the sale of selected marketable
securities). This transaction, which is subject to certain regulatory
approvals, is expected to be completed in the fall of 1995.
Management believes that existing working capital and future operating
cash flows are sufficient to meet future liquidity needs.
Capital Resources
The Company's ongoing capital expenditures relate primarily to the
addition or expansion of medical care facilities used by either employed
or affiliated physicians as well as administrative facilities and related
computer information systems necessary for activities such as claims
processing, billing and collections, medical utilization review and
customer service.
Excluding acquisitions, planned capital spending in 1995 will approximate
$45 million to $50 million compared to $39 million in 1994. Management
believes that its capital spending program is adequate to expand, improve
and equip its existing business.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, (Continued)
1995 1994
Commercial members enrolled at:
March 31 1,664,600 1,381,100
June 30 1,719,300 1,386,100
September 30 1,408,800
December 31 1,528,300
Medicare risk members enrolled at:
March 31 292,500 276,600
June 30 296,600 281,200
September 30 286,400
December 31 287,400
Medicare supplement members enrolled at:
March 31 126,100 144,100
June 30 121,900 139,000
September 30 134,700
December 31 131,700
Administrative services members enrolled at:
March 31 228,400 75,500
June 30 264,400 81,300
September 30 79,100
December 31 93,500
Total members enrolled at:
March 31 2,311,600 1,877,300
June 30 2,402,200 1,887,600
September 30 1,909,000
December 31 2,040,900
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, (Continued)
Supplemental Consolidated Statement of Quarterly Income
(Dollars in millions except per share results)
1995
First Second Total
Revenues:
Premiums:
Commercial $ 614 $ 633 $1,247
Medicare risk 384 389 773
Medicare supplement 27 26 53
1,025 1,048 2,073
Interest 19 19 38
Other income 4 3 7
Total revenues 1,048 1,070 2,118
Operating expenses:
Medical costs 826 860 1,686
Selling, general and
administrative 125 125 250
Depreciation and
amortization 15 15 30
Total operating expenses 966 1,000 1,966
Income from operations 82 70 152
Interest expense 2 2 4
Income before income taxes 80 68 148
Provision for income taxes 27 23 50
Net income $ 53 $ 45 $ 98
Earnings per common share $ .32 $ .28 $ .60
Medical loss ratio 80.6% 82.1% 81.3%
Administrative cost ratio 13.7% 13.4% 13.5%
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Supplemental Consolidated Statement of Quarterly Income
(Dollars in millions except per share results)
1994
First Second Third Fourth Total
Revenues:
Premiums:
Commercial $ 480 $ 518 $ 521 $ 537 $ 2,056
Medicare risk 342 350 357 357 1,406
Medicare supplement 31 29 28 26 114
853 897 906 920 3,576
Interest 13 15 17 17 62
Other income 3 5 3 5 16
Total revenues 869 917 926 942 3,654
Operating expenses:
Medical costs 703 736 736 743 2,918
Selling, general and
administrative 102 111 111 112 436
Depreciation and
amortization 12 12 13 13 50
Total operating
expenses 817 859 860 868 3,404
Income from operations 52 58 66 74 250
Interest expense 1 1 1 1 4
Income before income taxes 51 57 65 73 246
Provision for income
taxes 19 20 23 25 87
Net income $ 32 $ 37 $ 42 $ 48 $ 159
Earnings per common share $ .20 $ .23 $ .27 $ .30 $ 1.00
Medical loss ratio 82.4% 81.9% 81.3% 80.8% 81.6%
Administrative cost ratio 13.4% 13.6% 13.7% 13.6% 13.6%
Note:Second quarter and the total results exclude the impact of the
favorable settlement of tax disputes with the Internal Revenue
Service and the write-down of a nonoperational asset.
14
Part II: Other Information
Items 1 - 4:
None
Item 5: Other Information
See Note (C) of Notes To Condensed Consolidated Financial
Statements.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 - Statement re: Computation of Ratio of Earnings
to Fixed Charges
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter
ended June 30, 1995.
15
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.
Date: August 14, 1995 /s/ James E. Murray
James E. Murray
Vice President and Controller
(Principal Accounting Officer)
Date: August 14, 1995 /s/ Arthur P. Hipwell
Arthur P. Hipwell
Senior Vice President and
General Counsel
16