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 March 31, 1996
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 May 9, 1996
$.16 2/3 par value 162,395,085 shares
1 of 15
Form 10-Q
Humana Inc.
March 31, 1996
Page of
Form 10-Q
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Income for
the quarters ended March 31, 1996 and 1995 3
Condensed Consolidated Balance Sheet at March 31, 1996
and December 31, 1995 4
Condensed Consolidated Statement of Cash Flows for the
quarters ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
Part II: Other Information
Items 1 to 6 13-15
Exhibits
Exhibit 10(a) Placement Agency Agreement between Humana Inc.
and Merrill Lynch Money Markets Inc. dated
February 20, 1996
Exhibit 10(b) Placement Agency Agreement between Humana Inc.
and Chemical Securities Inc. dated March 6, 1996
Exhibit 12 Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
Condensed Consolidated Statement of Income
Humana Inc.
For the quarters ended March 31, 1996 and 1995
Unaudited
(Dollars in millions except per share results)
1996 1995
Revenues:
Premiums $1,560 $1,025
Interest 25 19
Other income 3 4
Total revenues 1,588 1,048
Operating expenses:
Medical costs 1,274 826
Selling, general and administrative 203 125
Depreciation and amortization 25 15
Total operating expenses 1,502 966
Income from operations 86 82
Interest expense 5 2
Income before income taxes 81 80
Provision for income taxes 28 27
Net income $ 53 $ 53
Earnings per common share $ .32 $ .32
Shares used in earnings per common
share computation (000) 162,379 162,040
See accompanying notes.
Condensed Consolidated Balance Sheet
Humana Inc.
Unaudited
(Dollars in millions except per share amounts)
March 31, December 31,
1996 1995
Assets
Current assets:
Cash and cash equivalents $ 279 $ 182
Marketable securities 1,186 1,156
Premiums receivable, less allowance
for doubtful accounts
$40 - March 31, 1996 and
$36 - December 31, 1995 135 131
Other 162 124
Total current assets 1,762 1,593
Long-term marketable securities 158 180
Property and equipment, net 381 382
Cost in excess of net assets acquired 533 536
Other 180 187
Total assets $3,014 $2,878
Liabilities and Common Stockholders' Equity
Current liabilities:
Medical costs payable $ 936 $ 866
Trade accounts payable and accrued expenses 299 291
Income taxes payable 65 35
Total current liabilities 1,300 1,192
Long-term debt 230 250
Professional liability and other obligations 152 149
Total liabilities 1,682 1,591
Contingencies
Common stockholders' equity:
Common stock, $.16 2/3 par; authorized
300,000,000 shares; issued and outstanding
162,260,071 shares - March 31, 1996 and
162,099,403 shares - December 31, 1995 27 27
Other 1,305 1,260
Total common stockholders' equity 1,332 1,287
Total liabilities and common
stockholders' equity $3,014 $2,878
See accompanying notes.
Condensed Consolidated Statement of Cash Flows
Humana Inc.
For the quarters ended March 31, 1996 and 1995
Unaudited
(Dollars in millions)
1996 1995
Cash flows from operating activities:
Net income $ 53 $ 53
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 25 15
Changes in operating assets and liabilities 89 108
Other (5) (2)
Net cash provided by operating activities 162 174
Cash flows from investing activities:
Purchases and dispositions of property and
equipment, net (13) (12)
Change in marketable securities (33) 22
Net cash (used in) provided by
investing activities (46) 10
Cash flows from financing activities:
Repayment of long-term debt (20)
Other 1 3
Net cash (used in) provided by financing activities (19) 3
Increase in cash and cash equivalents 97 187
Cash and cash equivalents at beginning of period 182 272
Cash and cash equivalents at end of period $ 279 $ 459
Interest payments $ 4 $ 1
Income tax payments, net 2
See accompanying notes.
Notes To Condensed Consolidated Financial Statements
Humana Inc.
Unaudited
(A) Basis of Presentation
The accompanying condensed consolidated 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, 1995.
The preparation of the Company's condensed consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect (a) the reported
amounts of assets and liablities, (b) disclosure of contingent assets and
liabilities at the date of the financial statements and (c) reported amounts
of revenues and expenditures during the reporting period. Actual results
could differ from those estimates.
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's Medicare risk contracts with the federal government are renewed
for a one-year term each December 31 unless terminated 90 days prior thereto.
Current legislative proposals are being considered which include modification
of future reimbursement rates under the Medicare program and proposals which
encourage the use of managed health care for Medicare beneficiaries.
Management is unable to predict the outcome of these proposals or the impact
they may have on the Company's financial position, results of operations or
cash flows. The loss of these contracts or significant changes in the
Medicare risk 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 affect on the revenues, profitability
and business prospects of the Company. Effective January 1, 1996, the
average rate of increase under these contracts approximated 8 percent, a
significant portion of which is expected to be paid to the Company's
providers. Over the last five years, annual increases have ranged from as
low as 3 percent in January 1994 to as high as 12 percent in January 1993,
with an average of approximately 7 percent.
The Company will begin providing managed health care services on July 1,
1996 pursuant to a potential five-year $3.8 billion contract (a one-year
contract renewable annually for up to four additional years at approximately
$750 million per year) with the United States Department of Defense under
the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS).
The use of managed health care under the CHAMPUS is a new program and this
is the Company's first endeavor operating under Department of Defense
guidelines. Management is unable to determine the Company's future degree
of success in managing the implementation and delivery of services under
the CHAMPUS contract, and what effect, if any, this contract may have on
the Company's results of operations, financial position or cash flows.
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 the Company's results of operations,
financial position or cash flows.
(C) Subsequent Event
During April 1996, the Company implemented and began issuing debt under a
commercial paper program, which is backed by the Company's existing $600
million revolving credit agreement.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion and analysis contains both historical and forward
looking information. The forward looking statements are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. Forward looking statements may be significantly impacted by
certain risks and uncertainties described herein, and in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
There can be no assurance that the Company can duplicate its past
performance or that expected future results will be achieved.
Introduction
The Company offers managed health care products which integrate management
with the delivery of health care services through a network of providers,
who in their delivery of quality medical services, may share financial risk
or have incentives to deliver cost-effective medical services. These
products are marketed primarily through health maintenance organizations
("HMO's") and preferred provider organizations ("PPOs") that encourage or
require the use of contracting providers. HMOs and PPOs 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 Medicare and Medicaid-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
The Company's premium revenues increased 52.1 percent to $1.6 billion for
the quarter ended March 31, 1996, compared to $1.0 billion for the same
period in 1995. This increase was due primarily to the fourth quarter of
1995 acquisition of EMPHESYS Financial Group, Inc. ("EMPHESYS"). EMPHESYS'
premium revenues for the quarter ended March 31, 1996 totaled approximately
$424 million. In addition to the acquisition of EMPHESYS, premium revenues
increased as a result of same-store membership growth and premium rate
increases. Commercial product same-store membership increased to
1,797,700 from 1,664,600 for the period between March 31, 1995 and March 31,
1996, while Medicare risk membership increased to 322,300 from 292,500
during the same period. The Commercial membership growth was the result of
increases during the last three quarters of 1995. The Medicare risk premium
rate increased approximately 8.0 percent but was partially offset by
Commercial premium rate reductions of 1.8 percent. The weighted average
Medicare risk premium rate increase for calendar year 1996 will approximate
8 percent. Management anticipates that the 1996 weighted average Commercial
premium rates for calendar year 1996 will decline 1 to 2 percent.
Membership in the Company's Commercial products decreased 21,000 during the
first quarter ended March 31, 1996 compared to an increase of 136,300 for
the same period in 1995. The decrease is primarily the result of the loss
of approximately 50,000 members related to one customer group as well as
the Company's plan to price its products based on costs trends. Medicare
risk members increased by 11,900 during the first quarter compared to 5,100
for the same period in 1995. The Medicare risk membership growth is primarily
the result of sales in new Medicare markets. Given the highly competitive
Commercial pricing environment and the Company's intention to price it's
Commercial products based on cost trends, management anticipates Commercial
product membership gains of approximately 4 percent for calendar year 1996.
Medicare risk membership gains are expected to approximate 12 to 14 percent.
The medical loss ratio for the quarter ended March 31, 1996 was 81.7
percent compared to 80.6 percent for the same period in 1995. The increase
was concentrated in the Company's Commercial product and was the result
of declining premium rates combined with increasing outpatient hospital
and physician services costs. Although the Company is continuing its
efforts to control medical costs, given the competitive pricing environment
and lack of improving medical cost trends, the Company's medical loss ratio
is not expected to improve during the remainder of 1996. The Company has
also experienced substantially greater than expected costs in its
Washington, D.C. market as well as markets where significant growth
occurred during 1995 (service area expansion markets). Management is
currently evaluating more stringent cost control initiatives and strategic
alternatives in its Washington, D.C. and service area expansion markets.
The administrative cost ratio was 14.7 percent and 13.7 percent for the
quarters ended March 31, 1996 and 1995, respectively. The increase was due
to higher administrative costs associated with EMPHESYS' small group
business. Management anticipates that the administrative cost ratio will be
flat to slightly down sequentially for the remainder of 1996.
Interest income totaled $25 million and $19 million for the quarters ended
March 31, 1996 and 1995, respectively. The increase is primarily
attributable to increased levels of cash, cash equivalents and marketable
securities and the addition of EMPHESYS' portfolio. The tax equivalent
yield on invested assets approximated 8 percent for each of the quarters
ended March 31, 1996 and 1995.
The Company's income before income taxes totaled $81 million for the quarter
ended March 31, 1996, compared to $80 million for the quarter ended March 31,
1995. Net income was $53 million or $.32 per share for each of the quarters
ended March 31, 1996 and 1995.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Liquidity
Cash provided by the Company's operations totaled $162 million and $174
million for the quarters ended March 31, 1996 and 1995, respectively.
Net income for both periods was flat while increased depreciation and
amortization during the period ended March 31, 1996, was offset by a
reduction in cash provided by changes in operating assets and liabilities.
Changes in operating assets and liabilities relate to the timing of receipts
and disbursements for premiums receivable, medical
costs, unearned premiums and other liabilities.
During the quarter ended March 31, 1996, the Company repaid $20 million of
amounts outstanding under its revolving credit agreement using cash from
operations.
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
their parent company requires regulatory approval.
During April 1996, the Company implemented and began issuing debt under a
commercial paper program, which is backed by the Company's existing $600
million revolving credit agreement. Management anticipates the commercial
paper program will provide additional sources of borrowing, greater
flexibility and rates possibly more favorable than those under the revolving
credit agreement.
Management believes that existing working capital, future operating cash
flows, and the availability of the Company's commercial paper program and
revolving credit agreement are sufficient to not only meet future liquidity
needs and fund capital requirements, but also should facilitate the
Company's pursuing acquisition and expansion opportunities.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
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 1996 will approximate
$65 million to $70 million compared to $54 million in 1995. Capital
spending generally relates to the expansion and improvement of medical
care facilities, administrative facilities and related computer information
systems.
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Humana Inc.
1996 1995
Commercial members enrolled at:
March 31 2,862,900 1,664,600
June 30 1,719,300
September 30 1,780,200
December 31 2,883,900
Medicare risk members enrolled at:
March 31 322,300 292,500
June 30 296,600
September 30 304,300
December 31 310,400
Medicare supplement members enrolled at:
March 31 109,600 126,100
June 30 121,900
September 30 119,100
December 31 115,000
Administrative services members enrolled at:
March 31 444,700 228,400
June 30 264,400
September 30 262,800
December 31 495,100
Total medical members enrolled at:
March 31 3,739,500 2,311,600
June 30 2,402,200
September 30 2,466,400
December 31 3,804,400
Humana Inc.
Part II: Other Information
Items 1 - 3:
None
Item 4: Submission of Matters to a Vote of Security Holders
(a) The regular annual meeting of stockholders of Humana
Inc. was held in Louisville, Kentucky on May 9, 1996
for the purpose of electing the board of directors and
voting on a new stock incentive plan for employees.
(b) Proxies for the meeting were solicited pursuant to
Section 14(a) of the Securities Exchange Act
of 1934 and there was no solicitation in opposition to
management's solicitations. All of management's nominees
for directors were elected and the stock
incentive plan for employees was approved.
(c) Two proposals were submitted to a vote of security
holders as follows:
(1) The stockholders approved the election of
the following persons as directors of the Company:
Name For Withheld
K. Frank Austen, M.D. 139,055,592 653,905
Michael E. Gellert 139,030,418 679,079
John R. Hall 139,053,237 656,260
David A. Jones 139,054,350 655,147
David A. Jones, Jr. 139,038,018 671,479
Irwin Lerner 139,044,602 664,895
W. Ann Reynolds, Ph.D 139,054,316 655,181
Wayne T. Smith 139,064,558 644,939
(2) The stockholders approved with 118,849,118
affirmative votes, 20,247,351 negative
votes, and 613,028 abstentions, the proposal
to adopt the Company's 1996 Stock
Incentive Plan for Employees.
Item 5:
None
Humana Inc.
Part II: Other Information, continued:
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10(a) - Placement Agency Agreement between Humana Inc.
and Merrill Lynch Money Markets Inc.
dated February 20, 1996, filed herewith.
Exhibit 10(b) - Placement Agency Agreement between Humana Inc.
and Chemical Securities Inc. dated
March 6, 1996, filed herewith.
Exhibit 12 - Statement re: Computation of Ratio of Earnings
to Fixed Charges, filed herewith.
Exhibit 27 - Financial Data Schedule, filed herewith.
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1996.
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: May 15, 1996 /s/ James E. Murray
James E. Murray
Vice President-Finance
(Principal Accounting Officer)
Date: May 15, 1996 /s/ Arthur P. Hipwell
Arthur P. Hipwell
Senior Vice President and
General Counsel