EXHIBIT 13
FINANCIAL SECTION
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Humana Inc.
1 Selected Financial Data
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
9 Consolidated Balance Sheet
10 Consolidated Statement of Income
11 Consolidated Statement of Common
Stockholders' Equity
12 Consolidated Statement of Cash Flows
13 Notes to Consolidated Financial Statements
22 Report of Independent Accountants
23 Quarterly Financial Information (Unaudited)
24 Board of Directors
25 Senior Management and Officers
26 Additional Information
SELECTED FINANCIAL DATA
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Humana Inc.
Dollars in millions, except per share results
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For the years ended December 31, 1996 (A) 1995(b) 1994 (c) 1993 1992 (d)
SUMMARY OF OPERATIONS
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Revenues:
Premiums:
Commercial $ 4,326 $ 2,934 $ 2,056 $ 1,709 $ 1,642
Medicare risk 1,907 1,569 1,406 1,296 1,112
CHAMPUS 351
Medicare supplement 93 102 114 132 127
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Total premiums 6,677 4,605 3,576 3,137 2,881
Interest 101 87 62 48 36
Other income 10 10 16 10 4
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Total revenues 6,788 4,702 3,654 3,195 2,921
Income (loss) before income
taxes 18 288 257 143 (154)
Net income (loss) 12 190 176 89 (107)
Earnings (loss) per common
share .07 1.17 1.10 .56 (.68)
Net cash provided by operations 341 150 298 185 124
FINANCIAL POSITION
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Cash and investments $ 1,727 $ 1,518 $ 1,203 $ 1,134 $ 614
Total assets 3,153 2,878 1,957 1,731 1,189
Medical costs payable 1,099 866 527 448 400
Debt and other long-term
obligations 361 399 83 71 80
Stockholders' equity 1,292 1,287 1,058 889 376
OPERATING DATA
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Medical loss ratio 84.3% 81.7% 81.6% 83.8% 86.3%
Administrative cost ratio 15.5% 13.9% 13.6% 13.2% 14.1%
Medical membership:
Commercial 2,814,800 2,883,900 1,528,300 1,214,000 1,219,800
Medicare risk 364,500 310,400 287,400 270,800 266,300
CHAMPUS 1,103,000
Medicare supplement 97,700 115,000 131,700 153,600 198,900
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4,380,000 3,309,300 1,947,400 1,638,400 1,685,000
Administrative services 471,000 495,100 93,500 63,700 30,600
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Total 4,851,000 3,804,400 2,040,900 1,702,100 1,715,600
=============================================================================
Specialty membership:
Dental 844,800 797,000
Group life 642,700 576,300
Workers' compensation 132,700 234,200
Other 264,000 252,500
-----------------------------
Total 1,884,200 1,860,000
=============================
(a) Includes special charges of $215 million pretax ($140 million after tax or
$.86 per share) related to the restructuring of the Washington, D.C.,
health plan, provision for expected future losses on insurance contracts,
closing 13 service areas, discontinuing unprofitable products in three
markets, a litigation settlement, and planned workforce reductions.
(b) Includes the operations of EMPHESYS Financial Group, Inc. since October 11,
1995, the date of acquisition.
(c) Includes nonrecurring income of $11 million pretax ($17 million after tax
or $.10 per share) related to the favorable settlement of income tax
disputes with the Internal Revenue Service partially offset by the write-
down of a nonoperational asset.
(d) Includes $171 million pretax ($118 million after tax or $.75 per share) of
restructuring and unusual charges.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Humana Inc.
The consolidated financial statements of Humana Inc. ("Humana" or the
"Company") in this Annual Report present the Company's financial position,
results of operations, and cash flows and should be read in conjunction with the
following discussion and analysis. This discussion and analysis contains both
historical and forward-looking information. The forward-looking statements may
be significantly impacted by risks and uncertainties and are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. There can be no assurance that anticipated future results will be
achieved. Readers are cautioned that a number of factors, which are described
herein and defined below, could adversely affect the Company's ability to obtain
these results, including the effects of either federal or state health care
reform, renewal of the Company's Medicare risk contracts with the federal
government, the renewal of the Company's CHAMPUS contract with the federal
government, and the effects of other general business conditions, including but
not limited to, government regulation, competition, premium rate changes,
medical cost trends, changes in Commercial and Medicare risk membership, capital
requirements, general economic conditions and the retention of key employees.
Readers are also directed to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, for additional discussion of risk factors.
INTRODUCTION
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The Company offers managed health care products that integrate medical
management with the delivery of health care services through a network of
providers. This network of providers may share financial risk or have
incentives to deliver quality medical services in a cost-effective manner.
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 control health care costs by
various means, including pre-admission approval for hospital inpatient services
and pre-authorization of outpatient surgical procedures. The Company also
offers various specialty and administrative service products including dental,
group life, workers' compensation, and pharmacy benefit management services.
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
("Medicare risk") or indemnity insurance policies that supplement Medicare
benefits ("Medicare supplement"). The Medicare risk product provides managed
care services that include all Medicare benefits and, in certain circumstances,
additional managed care services.
On October 11, 1995, the Company acquired EMPHESYS Financial Group, Inc.
("EMPHESYS") for a total purchase price of approximately $650 million. The
purchase was funded through available cash of $400 million and bank borrowings
of $250 million. EMPHESYS is a leading provider of a broad range of managed
care products to small businesses. EMPHESYS' medical loss and administrative
cost ratios tend to be different from Humana's because of variances in the
nature of each entity's products, customer base and the manner in which products
and services are distributed to customers.
On July 1, 1996, the Company began providing managed health care services to
approximately 1.1 million eligible beneficiaries under a potential five-year
contract (a one-year contract renewable annually for up to four additional
years) with the United States Department of Defense under the Civilian Health
and Medical Program of the Uniformed Services ("CHAMPUS"). Under the CHAMPUS
contract, the Company provides managed care services to the beneficiaries of
active military personnel and retired military personnel and their beneficiaries
located in the southeastern United States. The Company has subcontracted with
third parties to provide certain administration and specialty services under the
contract. Three health benefit options are available to CHAMPUS beneficiaries.
In addition to a traditional indemnity option, participants may enroll in an HMO
point-of-service plan or take advantage of reduced co-payments by using a
network of preferred providers.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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Humana Inc.
On January 31, 1997, the Company completed the sale of its Washington, D.C.,
health plan to Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
On January 16, 1997, the Company signed a definitive agreement to sell its
Alabama operations to PrimeHealth of Alabama, Inc. The sale excludes the
Company's small group business and the Company's Alabama CHAMPUS operations.
These transactions will not have a material impact on the Company's financial
position, results of operations, or cash flows.
SPECIAL CHARGES
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During the second quarter of 1996, the Company recognized special charges of
$200 million pretax ($130 million after tax or $.80 per share). The second
quarter special charges included provisions for expected future losses on
insurance contracts ($105 million) as well as an estimate of the costs to be
incurred in restructuring the Washington, D.C., health plan and closing markets
or discontinuing product lines in 16 service areas. The special charges also
included the write-off of miscellaneous assets, a litigation settlement, and
other costs. During 1996, the beneficial effect of the second quarter charges
approximated $30 million pretax ($20 million after tax or $.12 per share). The
beneficial effect consisted primarily of charges against liabilities for
expected future losses on insurance contracts.
The second quarter special charges are presented in the accompanying
consolidated statement of income for the year ended December 31, 1996, as
follows: the provision for expected future losses on insurance contracts ($105
million) has been included in medical costs; asset write-downs, restructuring
costs, market closing and product discontinuance costs have been included in
asset write-downs and other special charges ($81 million); and litigation and
certain other costs have been included in selling, general and administrative
expenses ($14 million).
During the fourth quarter of 1996, the Company recognized an additional special
charge of $15 million pretax ($10 million after tax or $.06 per share). This
charge included severance and facility costs related to planned workforce
reductions, scheduled to be completed in 1997. The fourth quarter special
charge has been included in the accompanying consolidated statement of income in
asset write-downs and other special charges.
For additional information, see Note 3 of Notes to Consolidated Financial
Statements.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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Humana Inc.
COMPARISON OF RESULTS OF OPERATIONS
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Years Ended December 31, 1996 and 1995
In order to enhance comparability, the following discussion comparing the year
ended December 31, 1996, to the year ended December 31, 1995, excludes the
impact of the $215 million pretax ($140 million after tax or $.86 per share)
asset write-downs and other special charges recorded in 1996 related to
provisions for expected future losses on insurance contracts, the restructuring
of the Washington, D.C., health plan, closing 13 service areas, discontinuing
unprofitable products in three markets, a litigation settlement, and planned
workforce reductions.
The Company's premium revenues increased 46 percent to $6.7 billion for the year
ended December 31, 1996, from $4.6 billion for the year ended December 31, 1995.
The premium revenue increase is primarily attributable to the acquisition of
EMPHESYS in the fourth quarter of 1995 and the commencing of health care
services under the CHAMPUS contract during the third quarter of 1996. EMPHESYS
premium revenues totaled approximately $1.7 billion for the year ended December
31, 1996, compared to approximately $370 million for the period October 11
through December 31, 1995. CHAMPUS premium revenues were approximately $351
million for the period July 1 through December 31, 1996. During 1996,
Commercial premium rates declined 0.6 percent and the Medicare risk premium
rates increased 7.8 percent. The effect of premium rate changes increased 1996
premium revenues by approximately $127 million. For 1997, Commercial premium
rates are expected to increase approximately 2 to 3 percent, while Medicare risk
premium rates are expected to increase approximately 4 to 5 percent. The
Company's expected 1997 Medicare risk premium rate increase differs from an
approximate 6 percent statutory increase as a result of a 1996 change in the
geographic mix of the Company's members.
Membership in the Company's fully insured Commercial products declined 69,100 or
2 percent during the year ended December 31, 1996, due to the closing or sale of
certain markets and the pricing of products at rates which are intended to
maintain adequate profitability. This decline compares to an increase (excluding
the EMPHESYS acquisition) of 276,900 or 19 percent for the year ended December
31, 1995. Medicare risk membership increased 54,100 or 17 percent for the year
ended December 31, 1996, compared to an increase of 23,000 or 8 percent in 1995.
Medicare supplement membership declined 17,300 during 1996, compared to a
decline of 16,700 in 1995, while administrative services only ("ASO") membership
declined 24,100 during 1996, compared to an increase (excluding the EMPHESYS
acquisition) of 184,700 during 1995. Membership changes increased 1996 premium
revenues by approximately $260 million. The membership changes which increased
premium revenues included the Medicare risk membership growth described above
and the beneficial effect on 1996 premium revenues of 1995 Commercial membership
growth partially offset by the 1996 Commercial membership declines described
above.
January 1997 fully insured Commercial membership declined 87,500 compared to a
decline of 25,000 in January 1996. The January 1997 membership decline is the
result of the Company's new pricing discipline as well as the closing or sale of
certain markets. Management expects Commercial membership to be flat to
slightly down for 1997 while Medicare risk membership is expected to increase
approximately 20 percent.
Medical membership data at December 31, 1996 and 1995, follows:
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In thousands 1996 1995
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Beginning medical membership 3,804.4 2,040.9
Same-store sales 783.3 739.0
Acquisitions 1,344.3
Same-store cancellations (839.7) (319.8)
CHAMPUS 1,103.0
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Ending medical membership 4,851.0 3,804.4
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4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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Humana Inc.
The Company's medical loss ratio increased to 82.7 percent (excluding special
charges) for the year ended December 31, 1996, from 81.7 percent for the year
ended December 31, 1995. The increase in the medical loss ratio was due to
increased medical costs during a Commercial pricing environment which saw
premium rates decline 0.6 percent. Medical cost increases were most notable in
hospital outpatient, physician, and pharmacy services in both the Commercial and
Medicare risk products. Partially offsetting these cost increases was
improvement in hospital inpatient utilization in both products. With the
benefit of new pricing disciplines and medical management initiatives currently
underway, modest improvement in the medical loss ratio is anticipated during
1997.
The Company's administrative cost ratio was 15.3 percent (excluding special
charges) and 13.9 percent for the years ended December 31, 1996 and 1995,
respectively. The increase in the administrative cost ratio was the result of
higher administrative costs associated with both the EMPHESYS small-group and
CHAMPUS businesses. Excluding the effect of the EMPHESYS acquisition and the
addition of the CHAMPUS business, the Company's administrative cost ratio was
13.2 percent and 13.3 percent for the years ended December 31, 1996 and 1995,
respectively. As a result of investment spending in such areas as customer
service, information systems and Medicare risk product growth initiatives, the
administrative cost ratio may increase modestly during 1997, most notably during
the first half of the year.
Interest income totaled $101 million for the year ended December 31, 1996,
compared to $87 million for the year ended December 31, 1995. The increase is
primarily attributable to higher levels of cash, cash equivalents and marketable
securities resulting from the addition of EMPHESYS. The tax equivalent yield on
invested assets approximated 8 percent for the years ended December 31, 1996 and
1995. Tax equivalent yield is the rate earned on invested assets, excluding
unrealized gains and losses, adjusted for the benefit of nontaxable investment
income. The weighted average investment life decreased to 3.1 years at December
31, 1996, from 4.0 years at December 31, 1995.
Income before income taxes, excluding the $215 million special charges
previously discussed, totaled $234 million for the year ended December 31, 1996,
compared to $288 million for the year ended December 31, 1995. Net income, also
excluding the special charges, was $152 million or $.93 per share for the year
ended December 31, 1996, compared to $190 million or $1.17 per share for the
year ended December 31, 1995.
Years Ended December 31, 1995 and 1994
In order to enhance comparability, the following discussion comparing the year
ended December 31, 1995, to the year ended December 31, 1994, excludes the
impact of the $11 million pretax ($17 million after tax or $.10 per share)
nonrecurring income recorded in 1994 related to the favorable settlement of
income tax disputes with the Internal Revenue Service (the "IRS") partially
offset by the write-down of a nonoperational asset.
The Company's premium revenues increased 29 percent to $4.6 billion for the year
ended December 31, 1995, from $3.6 billion for the year ended December 31, 1994.
The increase in premium revenues was attributable to the acquisition of
EMPHESYS, same-store membership gains, and the 1994 acquisitions of CareNetwork,
Inc. and Group Health Association. The Company's 5 percent increase in Medicare
risk premium rates was generally offset by a 2 percent reduction in Commercial
premium rates.
Membership in the Company's Commercial products increased 1,355,600 or 89
percent during the year ended December 31, 1995, which included 1.1 million
fully-insured members resulting from the acquisition of EMPHESYS. On a same-
store basis, Commercial membership for the year ended December 31, 1995,
increased 276,900 or 19 percent compared to 113,200 or 9 percent in 1994.
Medicare risk membership increased 23,000 or 8 percent for the year ended
December 31, 1995, compared to an increase of 16,600 or 6 percent in 1994.
Medicare supplement membership declined 16,700 members during the year ended
December 31, 1995. ASO membership at December 31, 1995, increased to 495,100
members, including 216,900 members of EMPHESYS, from 93,500 members at December
31, 1994.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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Humana Inc.
Medical membership data at December 31, 1995 and 1994, follows:
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In thousands 1995 1994
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Beginning medical membership 2,040.9 1,702.1
Same-store sales 739.0 396.6
Acquisitions 1,344.3 224.1
Same-store cancellations (319.8) (281.9)
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Ending medical membership 3,804.4 2,040.9
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Excluding EMPHESYS, the Company's medical loss ratio increased to 82.0 percent
for the year ended December 31, 1995, from 81.6 percent for the year ended
December 31, 1994. The increase in the medical loss ratio was related primarily
to an increase in hospital outpatient, physician, and pharmacy services in the
Commercial product. In addition, the Company experienced greater than expected
medical costs for membership in areas contiguous to existing markets, which was
where a significant amount of 1995 membership growth occurred. Including
EMPHESYS, the Company's 1995 medical loss ratio was 81.7 percent.
The Company's administrative cost ratio was 13.9 percent and 13.6 percent for
the years ended December 31, 1995 and 1994, respectively. The increase in the
administrative cost ratio was the result of higher administrative costs
associated with EMPHESYS' small-group business. Excluding the effect of the
EMPHESYS acquisition, the Company's administrative cost ratio was 13.3 percent
for the year ended December 31, 1995. The reduction from 1994 was the result of
increased premium revenues benefitting the fixed portion of administrative
costs.
Interest income totaled $87 million for the year ended December 31, 1995,
compared to $62 million for the year ended December 31, 1994. The increase was
primarily attributable to increased yields and higher levels of cash, cash
equivalents and marketable securities resulting from the addition of EMPHESYS.
The tax equivalent yield on invested assets approximated 8 percent and 6 percent
for the years ended December 31, 1995 and 1994, respectively. The weighted
average investment life increased to 4.0 years at December 31, 1995, from 2.3
years at December 31, 1994, primarily related to the addition of EMPHESYS'
portfolio.
Income before income taxes, excluding the $11 million nonrecurring income
previously discussed, totaled $288 million for the year ended December 31, 1995,
compared to $246 million for the year ended December 31, 1994. Net income, also
excluding the nonrecurring income, increased to $190 million or $1.17 per share
from $159 million or $1.00 per share for the years ended December 31, 1995 and
1994, respectively.
LIQUIDITY
- ---------
Cash provided by the Company's operations totaled $341 million and $150 million
for the years ended December 31, 1996 and 1995, respectively. The increase in
operating cash flows was primarily attributable to the timing of payments for
medical costs and other liabilities, due in large part to the commencing of
operations under the CHAMPUS contract. Also impacting operating cash flows was
a decrease in net income.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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Humana Inc.
Cash provided by the Company's operations totaled $150 million and $298 million
for the years ended December 31, 1995 and 1994, respectively. Operating cash
flows for 1995 were below those of 1994 primarily as a result of a $71 million
favorable settlement of tax disputes with the IRS received in 1994. The timing
of cash receipts and disbursements related to premiums receivable, medical costs
and other liabilities further reduced 1995 operating cash flows.
The Company maintains a revolving credit agreement (the "Credit Agreement")
which provides a revolving line of credit of up to $600 million. Principal
amounts outstanding under the Credit Agreement bear interest depending on the
ratio of debt to debt plus net worth at rates ranging from LIBOR plus 16 basis
points to LIBOR plus 40 basis points. The Credit Agreement, under which there
were no outstanding borrowings at December 31, 1996, contains customary
covenants and events of default and expires in September 2000.
On April 16, 1996, the Company implemented a commercial paper program and began
issuing debt securities thereunder. At December 31, 1996, borrowings under the
commercial paper program totaled approximately $222 million. The average
interest rate for 1996 borrowings was 5.6 percent. Borrowings under the
commercial paper program have been classified as long-term debt based on
management's ability and intent to refinance borrowings on a long-term basis.
The commercial paper program is backed by the Credit Agreement.
The Company's subsidiaries operate in states which require minimum 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 of the subsidiaries' ability to obtain regulatory
approval to pay dividends.
Management believes that existing working capital, future operating cash flows,
and funds available under the Credit Agreement and commercial paper program are
sufficient to meet future liquidity needs. Management also believes the
aforementioned sources of funds are adequate to allow the Company to pursue
strategic acquisition and expansion opportunities, as well as fund capital
requirements.
CAPITAL RESOURCES
- -----------------
The Company's ongoing capital expenditures relate primarily to medical care
facilities used by either employed or affiliated physicians, as well as
administrative facilities and related information systems necessary for
activities such as claims processing, billing and collections, medical
utilization review, and customer service. Total capital expenditures, excluding
acquisitions, were $72 million, $54 million, and $39 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
Excluding acquisitions, planned capital spending in 1997 will approximate $80 to
$90 million for the expansion and improvement of medical care facilities,
administrative facilities and related information systems.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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Humana Inc.
EFFECTS OF INFLATION AND CHANGING PRICES
- ----------------------------------------
The Company's operations are regulated by various state and federal government
agencies. Actuarially determined premium rate increases for Commercial and
Medicare supplement products are generally approved by the respective state
insurance commissioners, while increases in premiums for Medicare risk products
are established and implemented by the Health Care Financing Administration.
Medicare risk premiums approximated 29 percent, 34 percent and 39 percent of the
Company's premium revenues for the years ended December 31, 1996, 1995 and 1994,
respectively. The Company's 1997 average rate of statutory increase under the
Medicare risk contracts is approximately 6 percent. However, the Company's
expected 1997 Medicare risk premium rate increase differs from the 6 percent
statutory increase as a result of a change in the geographic mix of the
Company's members. 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, including the January 1997 increase.
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 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.
Additionally, the Company's CHAMPUS contract is a one year contract renewable
annually for up to four additional years. The loss of these contracts or
significant changes in these programs 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.
OTHER INFORMATION
- -----------------
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 financial position, results of
operations, or cash flows.
8
CONSOLIDATED BALANCE SHEET
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Humana Inc.
Dollars in millions, except per share amounts
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December 31, 1996 1995
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ASSETS
Current assets:
Cash and cash equivalents $ 322 $ 182
Marketable securities 1,262 1,156
Premiums receivable, less allowance for doubtful
accounts of $38 in 1996 and $36 in 1995 211 131
Deferred income taxes 94 52
Other 113 72
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Total current assets 2,002 1,593
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Property and equipment, net 371 382
Other assets:
Long-term marketable securities 143 180
Cost in excess of net assets acquired 488 536
Deferred income taxes 17 25
Other 132 162
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Total other assets 780 903
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Total Assets $3,153 $2,878
================================================================================
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Medical costs payable $1,099 $ 866
Trade accounts payable and accrued expenses 369 291
Income taxes payable 32 35
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Total current liabilities 1,500 1,192
Long-term debt 225 250
Professional liability and other obligations 136 149
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Total liabilities 1,861 1,591
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Contingencies
Common stockholders' equity:
Common stock, $.16 2/3 par; authorized 300,000,000
shares; issued and outstanding 162,681,123 shares - 1996
and 162,099,403 shares - 1995 27 27
Capital in excess of par value 822 815
Retained earnings 451 439
Net unrealized investment gains (losses) (8) 6
- --------------------------------------------------------------------------------
Total common stockholders' equity 1,292 1,287
- --------------------------------------------------------------------------------
Total Liabilities and Common Stockholders' Equity $3,153 $2,878
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
9
CONSOLIDATED STATEMENT OF INCOME
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Humana Inc.
Dollars in millions, except per share results
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Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Revenues:
Premiums $6,677 $4,605 $3,576
Interest 101 87 62
Other income 10 10 16
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Total revenues 6,788 4,702 3,654
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Operating expenses:
Medical costs 5,625 3,762 2,918
Selling, general and
administrative 940 571 436
Depreciation and amortization 98 70 50
Asset write-downs and other
special charges 96 18
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Total operating expenses 6,759 4,403 3,422
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Income from operations 29 299 232
Interest expense (recovery) 11 11 (25)
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Income before income taxes 18 288 257
Provision for income taxes 6 98 81
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Net income $ 12 $ 190 $ 176
================================================================================
Earnings per common share $.07 $ 1.17 $ 1.10
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
10
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
Humana Inc.
In millions
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Total
Capital In Net Unrealized Common
Common Stock Excess of Retained Investment Stockholders'
------------
Shares Amount Par Value Earnings Gains (Losses) Equity
- ------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 160 $27 $785 $ 73 $ 4 $ 889
Net income 176 176
Other 1 18 (25) (7)
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Balance, December 31, 1994 161 27 803 249 (21) 1,058
Net income 190 190
Other 1 12 27 39
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Balance, December 31, 1995 162 27 815 439 6 1,287
Net income 12 12
Other 1 7 (14) (7)
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BALANCE, DECEMBER 31, 1996 163 $27 $822 $451 $ (8) $1,292
==================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
11
CONSOLIDATED STATEMENT OF CASH FLOWS
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Humana Inc.
Dollars in millions
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Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12 $ 190 $ 176
Adjustments to reconcile net income
to net cash provided by operating activities:
Asset write-downs 70 18
Depreciation and amortization 98 70 50
Deferred income taxes (25) 13 58
Changes in operating assets and liabilities:
Premiums receivable (81) (27) (8)
Other assets (31) (4) 8
Medical costs payable 215 (9) 36
Other liabilities 81 (83) 67
Unearned premium revenues (110)
Other 2 3
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Net cash provided by operating activities 341 150 298
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of health plan assets (6) (697) (162)
Purchases of property and equipment (72) (54) (39)
Dispositions of property and equipment 5 5 13
Purchases of marketable securities (440) (402) (523)
Maturities and sales of marketable securities 356 731 337
Other (17) (33) (28)
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Net cash used in investing activities (174) (450) (402)
- -------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 250
Repayment of long-term debt (250) (51)
Net commercial paper borrowings 222
Other 1 11 4
- -------------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (27) 210 4
- -------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 140 (90) (100)
Cash and cash equivalents at beginning of period 182 272 372
- -------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $322 $182 $272
=====================================================================================
Interest payments (refunds), net $ 11 $ 12 $(20)
Income tax payments, net 39 94 21
The accompanying notes are an integral part of the consolidated financial
statements.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Humana Inc.
1. REPORTING ENTITY
Nature of Operations
Humana Inc. ("Humana" or the "Company") offers managed health care products that
integrate medical management with the delivery of health care services through a
network of providers. This network of providers may share financial risk or
have incentives to deliver quality medical services in a cost-effective manner.
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 control health care costs by
various means, including pre-admission approval for hospital inpatient services
and pre-authorization of outpatient surgical procedures. The Company also
offers various specialty and administrative service products including dental,
group life, workers' compensation, and pharmacy benefit management services.
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
("Medicare risk") or indemnity insurance policies that supplement Medicare
benefits ("Medicare supplement"). The Medicare risk product provides managed
care services that include all Medicare benefits and, in certain circumstances,
additional managed care services.
On July 1, 1996, the Company began providing managed health care services to
approximately 1.1 million eligible beneficiaries under a potential five-year
contract (a one-year contract renewable annually for up to four additional
years) with the United States Department of Defense under the Civilian Health
and Medical Program of the Uniformed Services ("CHAMPUS"). Under the CHAMPUS
contract, the Company provides managed care services to the beneficiaries of
active military personnel and retired military personnel and their beneficiaries
located in the southeastern United States. The Company has subcontracted with
third parties to provide certain administration and specialty services under the
contract. Three health benefit options are available to CHAMPUS beneficiaries.
In addition to a traditional indemnity option, participants may enroll in an HMO
point-of-service plan or take advantage of reduced co-payments by using a
network of preferred providers.
Basis of Presentation
The preparation of the Company's 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
liabilities, (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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include all subsidiaries of the Company.
All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include cash, money market funds, commercial paper,
and certain U.S. Government securities with an original maturity of three months
or less. Carrying value approximates fair value due to the short-term
maturities of the investments.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
Marketable Securities
At December 31, 1996 and 1995, marketable debt and equity securities have been
categorized as available for sale and, as a result, are stated at fair value
based generally on quoted market prices. Commercial mortgage loans are carried
at cost. Marketable debt and equity securities available for current operations
are classified as current assets. Marketable securities available for the
Company's future acquisition, capital spending, professional liability, and
long-term insurance product requirements are classified as long-term assets.
Unrealized holding gains and losses, net of applicable deferred taxes, are
included as a component of common stockholders' equity until realized.
Property and Equipment
Property and equipment is carried at cost and comprises the following at
December 31, 1996 and 1995:
- ------------------------------------------------------------------------------
Dollars in millions 1996 1995
- ------------------------------------------------------------------------------
Land $ 33 $ 34
Buildings 278 282
Equipment 370 333
- ------------------------------------------------------------------------------
681 649
Accumulated depreciation (310) (267)
- ------------------------------------------------------------------------------
$ 371 $ 382
==============================================================================
Depreciation is computed using the straight-line method over estimated useful
lives ranging from 3 to 25 years. Depreciation expense was $59 million, $50
million, and $39 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired represents the unamortized excess of cost
over the fair value of tangible and identifiable intangible assets acquired and
is being amortized on a straight-line basis over varying periods not exceeding
40 years. The carrying values of all intangible assets are periodically reviewed
by management and impairments are recognized when the expected undiscounted
future operating cash flows derived from operations associated with such
intangible assets are less than their carrying value. Accumulated amortization
totaled $18 million and $8 million at December 31, 1996 and 1995, respectively.
Revenue and Medical Cost Recognition
Premium revenues are recognized as income in the period members are entitled to
receive services. Premiums received prior to such periods are recorded as
unearned premium revenues.
Medical costs include claim payments, capitation payments, physician salaries,
and various other costs incurred to provide medical care to members, and
estimates of future payments to hospitals and others for medical care provided
prior to the balance sheet date. Capitation payments represent monthly prepaid
fees paid to participating primary care physicians and other providers, who are
responsible for providing medical care to members. The estimates of future
medical claim payments are developed using actuarial methods and assumptions
based upon payment patterns, medical inflation, historical development, and
other relevant factors. Estimates of future payments relating to services
incurred in the current and prior periods are continually reviewed by management
and adjusted as necessary. Management believes the Company's medical costs
payable are adequate to cover claims incurred; however, such estimates are
subject to changes in assumption, and therefore, the actual liability could
differ from amounts provided.
Earnings per Common Share
Earnings per common share are based upon the weighted average number of common
shares outstanding. Shares used in computing earnings per common share were
162,531,524, 162,268,815, and 160,910,641 for the years ended December 31, 1996,
1995 and 1994, respectively.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
3. SPECIAL CHARGES
During the second quarter of 1996, the Company recognized special charges of
$200 million pretax ($130 million after tax or $.80 per share). The second
quarter special charges included provisions for expected future losses on
insurance contracts ($105 million) as well as an estimate of the costs to be
incurred in restructuring the Washington, D.C., health plan and closing markets
or discontinuing product lines in 16 market areas. The special charges also
included the write-off of miscellaneous assets, a litigation settlement, and
other costs. During 1996, the beneficial effect of the second quarter charges
approximated $30 million pretax ($20 million after tax or $.12 per share). The
beneficial effect consisted primarily of charges against liabilities for
expected future losses on insurance contracts.
The special charges included $70 million of asset write-downs, related to long-
lived assets, primarily associated with the Company's Washington, D.C., health
plan. In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, " the Company conducted a review of the carrying value of its
Washington, D.C., health plan's long-lived assets. This review was initiated
because the health plan was experiencing significant operating losses. A
forecast of expected undiscounted future cash flows was prepared to determine
whether an impairment existed and fair values were used to measure the amount of
the impairment. As a result of the review, the Washington, D.C., health plan's
long-lived assets were written down to their estimated fair value.
The second quarter special charges have been included in the accompanying
consolidated statement of income for the year ended December 31, 1996, as
follows: the provision for expected future losses on insurance contracts ($105
million) has been included in medical costs; asset write-downs, restructuring
costs, market closing and product discontinuance costs have been included in
asset write-downs and other special charges ($81 million); and litigation and
certain other costs have been included in selling, general and administrative
expenses ($14 million).
During the fourth quarter of 1996, the Company recognized an additional special
charge of $15 million pretax ($10 million after taxes or $.06 per share). This
charge included severance and facility costs related to planned workforce
reductions, scheduled to be completed in 1997. The fourth quarter special
charge has been included in the accompanying consolidated statement of income in
asset write-downs and other special charges.
The components and usage of the 1996 special charges follows:
- ----------------------------------------------------------------------------------------------------
Liability For Asset
Expected Future Write-downs &
Losses On Workforce
Dollars in millions Insurance Contracts Reductions Other Total
- ----------------------------------------------------------------------------------------------------
Provision for special charges $105 $ 96 $ 14 $215
1996 usage (cash) (30) (11) (10) (51)
1996 usage (non-cash) (70) (70)
- ----------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $ 75 $ 15 $ 4 $ 94
====================================================================================================
On January 31, 1997, the Company completed the sale of its Washington, D.C.,
health plan. On January 16, 1997, the Company signed a definitive agreement to
sell its Alabama operations. These transactions will further reduce the
liability for expected future losses on insurance contracts by approximately $30
to $35 million. As a result, these transactions will not have a material impact
on the Company's financial position, results of operations, or cash flows.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
At December 31, 1996, there were additional liabilities totaling approximately
$50 million included in the accompanying consolidated balance sheet, primarily
related to contract disputes. This liability was originally recognized in
August 1992. Management regularly evaluates the continued reasonableness of
this liability, as well as the 1996 special charges, and to the extent
adjustments are necessary, current earnings are charged or credited.
In June 1994, the Company recorded an $18 million pretax charge ($11 million
after tax or $.07 per share) to reduce the net book value of a nonoperational
asset to its estimated fair value.
4. MARKETABLE SECURITIES
Marketable securities classified as current assets at December 31, 1996 and
1995, included the following:
1996 1995
-------------------------------------------------- -----------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Dollars in millions Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Government securities $ 67 $ (1) $ 66 $ 77 $ 1 $(1) $ 77
Tax exempt municipal bonds 613 $ 3 (6) 610 560 6 (3) 563
Corporate bonds 313 1 (3) 311 331 9 340
Redeemable preferred stock 117 (1) 116 13 13
Marketable equity
securities 79 2 (3) 78 57 1 (4) 54
Collateralized mortgage
obligations 54 1 55 90 2 92
Other 23 6 (3) 26 16 1 17
- ------------------------------------------------------------------------------------------------------------------------------------
$1,266 $ 13 $ (17) $1,262 $1,144 $ 20 $(8) $1,156
====================================================================================================================================
Marketable securities classified as long-term assets at December 31, 1996 and
1995, included the following:
1996 1995
-------------------------------------------------- -----------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Dollars in millions Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
Tax exempt municipal bonds $ 77 $ (1) $ 76 $ 65 $ 1 $(3) $ 63
Redeemable preferred stocks 9 9 50 50
Marketable equity securities 5 5 8 8
Other 52 $ 1 53 59 59
- ------------------------------------------------------------------------------------------------------------------------------------
$143 $ 1 $ (1) $ 143 $ 182 $ 1 $(3) $ 180
====================================================================================================================================
The contractual maturities of debt securities available for sale at December 31,
1996, regardless of their balance sheet classification, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Fair
Dollars in millions Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
Due within one year $ 117 $ 113
Due after one year through five years 438 437
Due after five years through ten years 261 264
Due after ten years 134 138
Not due at a single maturity date 375 370
- ------------------------------------------------------------------------------------------------------------------------------------
$1,325 $1,322
====================================================================================================================================
Gross realized gains and losses for the years ended December 31, 1996 and 1995,
were immaterial. For the purpose of determining gross realized gains and
losses, the cost of securities sold is based upon specific identification.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
5. INCOME TAXES
The provision for income taxes consisted of the following:
Years Ended December 31,
- --------------------------------------------------------------------------------
Dollars in millions 1996 1995 1994
- --------------------------------------------------------------------------------
Current provision:
Federal $ 30 $ 78 $ 72
State 1 7 11
- --------------------------------------------------------------------------------
31 85 83
- --------------------------------------------------------------------------------
Deferred provision (benefit):
Federal (23) 11 (2)
State (2) 2
- --------------------------------------------------------------------------------
(25) 13 (2)
- --------------------------------------------------------------------------------
$ 6 $ 98 $ 81
================================================================================
The income tax provision was different from the amount computed using the
federal statutory income tax rate due to the following:
Years Ended December 31,
- --------------------------------------------------------------------------------
Dollars in millions 1996 1995 1994
- --------------------------------------------------------------------------------
Income tax provision at federal statutory rate $ 6 $ 101 $ 90
State income taxes, net of federal benefit 1 7 7
Tax exempt investment income (12) (12) (12)
Amortization 12 6 1
Other items, net (1) (4) (5)
- --------------------------------------------------------------------------------
$ 6 $ 98 $ 81
================================================================================
Cumulative temporary differences which gave rise to deferred tax assets and
liabilities at December 31, 1996 and 1995, were as follows:
Assets (Liabilities)
- --------------------------------------------------------------------------------
Dollars in millions 1996 1995
- --------------------------------------------------------------------------------
Marketable securities $ 2 $ (9)
Long-term assets (41) (35)
Medical costs payable 28 27
Liabilities for special charges 46 25
Professional liability risks 34 28
Other 42 41
- --------------------------------------------------------------------------------
$ 111 $ 77
================================================================================
Management believes that the deferred tax assets ultimately will be realized
based primarily on the existence of sufficient taxable income within the
allowable carryback periods.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
During 1994, the Company received $71 million in income tax refunds for the
settlement of disputes with the Internal Revenue Service (the "IRS") related to
the timing of medical claims deductions and the deductibility of intangible
amortization for tax years 1988 through 1991. The Company had previously
prepaid tax and interest for these issues for the 1988 and 1989 tax years to
stop the accrual of interest expense on the disputed amounts. As a result of the
settlement, the Company recognized a $29 million reduction of interest expense
($18 million after tax or $.11 per share) and a $10 million reduction of tax
expense ($.06 per share), both of which represented the cumulative effect from
1988 to 1994 of amounts previously provided. During 1995, the Company made a $30
million payment to the IRS to stop the accrual of interest expense and resolve
disputed amounts related to tax periods September 1, 1991, through December 31,
1993.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $28 million related to prior acquisitions. These loss
carryforwards, if unused to offset future taxable income of the acquired
subsidiaries, will expire in 2002 through 2008.
6. LONG-TERM DEBT
The Company maintains a revolving credit agreement (the "Credit Agreement")
which provides a revolving line of credit of up to $600 million. Principal
amounts outstanding under the Credit Agreement bear interest depending on the
ratio of debt to debt plus net worth at rates ranging from LIBOR plus 16 basis
points to LIBOR plus 40 basis points. The Credit Agreement, under which there
were no outstanding borrowings at December 31, 1996, contains customary
covenants and events of default and expires in September 2000.
On April 16, 1996, the Company implemented a commercial paper program and began
issuing debt securities thereunder. At December 31, 1996, borrowings under the
commercial paper program totaled approximately $222 million. The average
interest rate for 1996 borrowings was 5.6 percent. Borrowings under the
commercial paper program have been classified as long-term debt based on
management's ability and intent to refinance borrowings on a long-term basis.
The commercial paper program is backed by the Credit Agreement.
7. PROFESSIONAL LIABILITY AND OTHER OBLIGATIONS
The Company insures substantially all professional liability risks through a
wholly owned subsidiary (the "Subsidiary"). Provisions for such risks,
including expenses incident to claim settlements, were $31 million, $27 million,
and $22 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The Subsidiary reinsures levels of coverage for losses in excess
of its retained limits with unrelated insurance carriers. Allowance for
professional liability risks and the equivalent amounts of marketable securities
related to the funding thereof included in the accompanying consolidated balance
sheet were $95 million and $78 million at December 31, 1996 and 1995,
respectively.
In addition to the long-term portion of the allowance for professional liability
risks, professional liability and other obligations in the accompanying
consolidated balance sheet consists primarily of liabilities for disability and
other long-term insurance products and the Company's employee retirement and
benefit plans. These liabilities totaled $61 million and $87 million at
December 31, 1996 and 1995, respectively.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
8. COMMON STOCKHOLDERS' EQUITY
As a result of state regulatory requirements, the Company must maintain certain
levels of equity in its licensed subsidiaries. The Company's ability to make
use of the equity of its subsidiaries is subject to these equity restrictions
as well as regulatory approval.
In 1987, the Company adopted and in 1996 amended a stockholders' rights plan
designed to deter takeover initiatives not considered to be in the best
interests of the Company's stockholders. The rights are redeemable by action
of the Company's Board of Directors at a price of $.01 per right at any time
prior to their becoming exercisable. Pursuant to the plan, under certain
conditions, each share of stock has a right to acquire 1/100th of a share of
Series A Participating Preferred Stock at a price of $145 per share. The plan
expires in 2006.
The Company has plans under which options to purchase common stock have been
granted to officers, directors and key employees. Options are granted at market
price on the date of grant. Exercise provisions vary, but most options vest in
whole or in part one to five years after grant and expire ten years after grant.
At December 31, 1996, there were 15,431,887 shares reserved for employee and
director stock option plans. At December 31, 1996, there were 4,510,000 shares
of common stock available for future grants. In January 1997, a total of
2,130,000 options were granted.
The Company's option plan activity for the years ended December 31, 1996, 1995
and 1994, is summarized below:
- ---------------------------------------------------------------------------------------------
Weighted
Shares Exercise Price Average
Under Option Per Share Exercise Price
- ---------------------------------------------------------------------------------------------
Balance, January 1, 1994 8,519,735 $ 4.32 to $14.44 $ 7.40
Granted 419,500 16.94 to 17.94 17.67
Exercised (931,701) 4.32 to 11.01 8.66
Canceled or lapsed (337,333) 6.56 to 17.94 8.84
- ---------------------------------------------------------------------------------------------
Balance, December 31, 1994 7,670,201 4.32 to 17.94 7.75
Granted 3,107,000 18.94 to 23.06 22.84
Exercised (751,096) 4.32 to 11.90 8.35
Canceled or lapsed (190,250) 6.56 to 23.06 13.11
- ---------------------------------------------------------------------------------------------
Balance, December 31, 1995 9,835,855 4.32 to 23.06 12.37
Granted 1,888,500 15.63 to 27.56 19.74
Exercised (454,044) 4.32 to 23.06 8.11
Canceled or lapsed (348,424) 6.56 to 27.56 15.87
- ---------------------------------------------------------------------------------------------
Balance, December 31, 1996 10,921,887 $ 4.32 to $26.94 $13.71
=============================================================================================
A summary of stock options outstanding and exercisable at December 31, 1996
follows:
- -----------------------------------------------------------------------------------------------------
Stock Options Stock Options
Outstanding Exercisable
- -----------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
- -----------------------------------------------------------------------------------------------------
$ 4.32 to $ 6.56 4,027,261 5.4 years $ 6.54 2,436,011 $ 6.52
6.70 to 9.64 1,608,645 5.3 years 7.96 938,895 7.93
10.54 to 14.44 202,950 4.2 years 11.19 195,450 11.21
15.63 to 22.44 2,110,500 9.2 years 18.60 161,716 18.78
22.63 to 26.94 2,972,531 7.5 years 23.23 1,054,897 23.06
- -----------------------------------------------------------------------------------------------------
$ 4.32 to $26.94 10,921,887 6.7 years $13.71 4,786,969 $11.05
=====================================================================================================
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
As of December 31, 1995 and 1994, there were 2,079,980 and 1,304,201 options
exercisable, respectively. The weighted average exercise price of options
exercisable during 1995 and 1994 was $7.51 and $8.41, respectively.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS
No. 123") but continues to apply Accounting Principles Board Opinion No. 25 and
related interpretations in the accounting for its stock option plans. If the
Company had adopted the expense recognition provisions of SFAS No. 123 for
purposes of determining compensation expense related to stock options granted
during the years ended December 31, 1996 and 1995, net income and earnings per
common share would have been changed to the pro forma amounts shown below:
Years Ended
December 31,
- --------------------------------------------------------------------------------
Dollars in millions, except per share results 1996 1995
- --------------------------------------------------------------------------------
Net income As reported $ 12 $ 190
Pro forma 4 181
- --------------------------------------------------------------------------------
Earnings per common share As reported $ .07 $1.17
Pro forma .02 1.11
- --------------------------------------------------------------------------------
The fair value of each option granted during 1996 and 1995 was estimated on the
date of grant using an option-pricing model (Black-Scholes) with the following
weighted average assumptions: (i) no dividend yield, (ii) an expected volatility
of 40.2 percent, (iii) a risk-free interest rate of 7.0 percent, and (iv) an
expected option life of 5.8 years. Based upon the above assumptions, the
weighted average fair value at grant date of options granted during 1996 and
1995 was $8.92 and $9.57, respectively. The effects of applying SFAS No. 123 in
the pro forma disclosures are not likely to be representative of the effects on
pro forma net income for future years because variables such as option grants,
exercises, and stock price volatility included in the disclosures may not be
indicative of future activity.
9. 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 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.
Additionally, the Company's CHAMPUS contract is a one year contract renewable
annually for up to four additional years. The loss of these contracts or
significant changes in these programs 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.
During the ordinary course of business, the Company is subject to pending and
threatened legal actions. Management of the Company does not believe that any
of these actions will have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
The Company remains contingently liable as guarantor for approximately $55
million of debt incurred prior to the March 1, 1993, separation of Humana's
managed care and hospital businesses into two independent publicly-held
companies.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Humana Inc.
10. ACQUISITIONS
On October 11, 1995, the Company acquired EMPHESYS Financial Group, Inc.
("EMPHESYS") for a total purchase price of approximately $650 million. The
purchase was funded though available cash of $400 million and bank borrowings of
$250 million under the Company's Credit Agreement. On November 30, 1995, the
Company acquired certain primary care centers in South Florida and Tampa
previously owned by Coastal Physician Group, Inc. for approximately $50 million.
During the year ended December 31, 1994, the Company acquired two health plans
for approximately $181 million.
The above acquisitions, and certain other minor acquisitions, were accounted
for under the purchase method. In connection with these acquisitions, the
Company allocated the acquisition costs to tangible and identifiable intangible
assets based upon their fair values. Identifiable intangible assets, which are
included in other long-term assets in the accompanying consolidated balance
sheet, include subscriber and provider contracts, and at December 31, 1996 and
1995, totaled $88 million and $124 million, respectively. Any remaining value
not assigned to tangible or identifiable intangible assets was then allocated to
cost in excess of net assets acquired. Cost in excess of net tangible and
identifiable intangible assets acquired, recorded in connection with the
acquisitions, was $387 million in 1995. Subscriber and provider contracts are
amortized over their estimated useful lives (7 to 14 years) while cost in excess
of net assets acquired is amortized over periods not exceeding 40 years.
The results of operations for the previously mentioned acquisitions have been
included in the accompanying consolidated statement of income since the date of
acquisition. The following unaudited pro forma consolidated results of
operations give effect to those acquisitions as if they had occurred on January
1, 1994:
Years Ended
December 31,
-------------------------------------------------------------------------
Dollars in millions, except per share results 1995 1994
-------------------------------------------------------------------------
Revenues $5,968 $5,243
Net income 200 215
Earnings per common share 1.23 1.33
The unaudited pro forma information may not necessarily reflect future results
of operations or what the results of operations would have been had the
acquisitions actually been consummated on January 1, 1994.
On December 30, 1996, the Company entered into a stock purchase agreement to
acquire Health Direct, Inc. ("Health Direct") from Advocate Health Care
("Advocate") for $23 million. Health Direct provides managed health care
services to approximately 50,000 members (including 24,000 employees of
Advocate) in the metropolitan Chicago, Illinois area.
21
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors
Humana Inc.
We have audited the accompanying consolidated balance sheet of Humana Inc.
as of December 31, 1996 and 1995, and the related consolidated statements of
income, common stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Humana Inc. as
of December 31, 1996 and 1995, and the consolidated results of operations and
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Louisville, Kentucky
February 11, 1997
22
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
Humana Inc.
A summary of the Company's quarterly results of operations follows:
- --------------------------------------------------------------------------------
Dollars in millions, except
per share results 1996
- --------------------------------------------------------------------------------
First Second (a) Third Fourth (b)
- --------------------------------------------------------------------------------
Revenues $1,588 $1,605 $1,784 $1,811
Income (loss) before income taxes 81 (146) 48 35
Net income (loss) 53 (95) 32 22
Earnings (loss) per common share .32 (.58) .20 .13
- --------------------------------------------------------------------------------
Dollars in millions, except
per share results 1995
- --------------------------------------------------------------------------------
First Second Third Fourth (c)
- --------------------------------------------------------------------------------
Revenues $1,048 $1,070 $1,094 $1,490
Income before income taxes 80 68 65 75
Net income 53 45 43 49
Earnings per common share .32 .28 .27 .30
(a) Includes special charges of $200 million pretax ($130 million after tax or
$.80 per share) related to the restructuring of the Washington, D.C.,
health plan, provision for expected future losses on insurance contracts,
closing 13 service areas, discontinuing unprofitable products in three
markets, and a litigation settlement.
(b) Includes a special charge of $15 million pretax ($10 million after tax or
$.06 per share) related to planned workforce reductions.
(c) Includes the results of EMPHESYS Financial Group, Inc. since October 11,
1995, the date of acquisition.
23
BOARD OF DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------
K. FRANK AUSTEN, M.D. MICHAEL E. GELLERT JOHN R. HALL
Theodore B. Bayles Professor of Medicine, General Partner, Windcrest Retired Chairman of the Board
Harvard Medical School and the Partners, and Chief Executive Officer,
Brigham and Women's Hospital private investment partnership Ashland Inc.
DAVID A. JONES DAVID A. JONES, JR. IRWIN LERNER
Chairman of the Board and Chief Vice Chairman, Humana Inc. Retired Chairman of the
Executive Officer, Humana Inc. Managing Director, Board
Chrysalis Ventures, Inc., and Executive Committee,
venture capital firm Hoffmann-La Roche Inc.
W. ANN REYNOLDS, PH.D.
Chancellor - City University of
New York
EXECUTIVE COMMITTEE
- ------------------------------------------------------------------------------------------------------------------------
DAVID A. JONES MICHAEL E. GELLERT DAVID A. JONES, JR.
Chairman
AUDIT COMMITTEE
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MICHAEL E. GELLERT K. FRANK AUSTEN, M.D. JOHN R. HALL
Chairman
IRWIN LERNER
COMPENSATION COMMITTEE
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K. FRANK AUSTEN, M.D. MICHAEL E. GELLERT IRWIN LERNER
Chairman
W. ANN REYNOLDS, PH.D.
INVESTMENT COMMITTEE
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W. ANN REYNOLDS, PH.D. MICHAEL E. GELLERT JOHN R. HALL
Chairwoman
DAVID A. JONES, JR.
NOMINATING COMMITTEE
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JOHN R. HALL K. FRANK AUSTEN, M.D. DAVID A. JONES, JR.
Chairman
W. ANN REYNOLDS, PH.D.
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SENIOR MANAGEMENT
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DAVID A. JONES GREGORY H. WOLF
Chairman of the Board and Chief Executive Officer President and Chief Operating Officer
DAVID R. ASTAR KAREN A. COUGHLIN
Vice President-Customer Service Division II-President
and Quality
KENNETH J. FASOLA ARTHUR P. HIPWELL
Vice President and National Sales Manager Senior Vice President and General Counsel
GAIL H. KNOPF MICHAEL B. MCCALLISTER
Vice President-Information Systems Division I-President
JAMES E. MURRAY DAVID R. NELSON
Chief Financial Officer Vice President-Risk Management and Chief Actuary
BRUCE D. PERKINS JERRY D. REEVES, M.D.
Senior Vice President- Senior Vice President and Chief Medical Officer
Provider Affairs and Reengineering
GREGORY K. ROTHERHAM KIRK E. ROTHROCK
Vice President-Marketing Vice President-Specialty Products and
Business Development
GEORGE W. VIETH, JR. TOD J. ZACHARIAS
Vice President-Development and Planning Vice President
Employers Health Insurance Company
OFFICERS
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GEORGE G. BAUERNFEIND DOUGLAS R. CARLISLE
Vice President - Tax Vice President
JAMES W. DOUCETTE ROBERT A. HORRAR
Vice President and Treasurer Vice President-Human Resources
JOAN O. KROGER THOMAS J. LISTON
Secretary Vice President-Finance
HEIDI S. MARGULIS SHERI E. MITCHELL
Vice President-Government Affairs Vice President - Quality and Service Excellence
WALTER E. NEELY R. EUGENE SHIELDS
Vice President and Associate General Counsel Military Health Services Division-President
DAVID W. WILLE
Vice President
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ADDITIONAL INFORMATION
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TRANSFER AGENT
Bank of Louisville
Security Transfer Department
Post Office Box 1497
Louisville, Kentucky 40201
800-925-0810
FORM 10-K
Copies of the Company's Form 10-K filed with the Securities and Exchange
Commission may be obtained, without charge, by writing:
Investor Relations
Humana Inc.
Post Office Box 1438
Louisville, Kentucky 40201-1438
Copies of the Company's Form 10-K and other Company information can also be
obtained through the Internet at the following address:
http://www.Humana.com
STOCK LISTING
The Company's common stock trades on the New York Stock Exchange under the
symbol HUM. The following table shows the range of high and low closing sales
prices as reported on the New York Stock Exchange Composite Tape.
1996 HIGH LOW
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First Quarter 28-3/4 24
Second Quarter 26-1/2 17-5/8
Third Quarter 21-1/4 15-5/8
Fourth Quarter 21-1/4 17-3/4
1995 HIGH LOW
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First Quarter 26-1/2 21-7/8
Second Quarter 27-1/8 17-3/8
Third Quarter 20-3/8 17-1/2
Fourth Quarter 28 18-5/8
CORPORATE HEADQUARTERS
Humana Inc.
The Humana Building
500 West Main Street
Louisville, Kentucky 40202
(502) 580-1000
(800) 486-2620
ANNUAL MEETING
The Company's Annual Meeting of Stockholders will be held on Thursday, May 8,
1997, at 10:00 a.m. in the Auditorium on the 25th floor of the Humana Building.
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