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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5975
HUMANA INC.
(Exact name of registrant as specified in its charter)
Delaware 61-0647538
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 West Main Street, Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
(502) 580-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock May 10, 1995
$.16 2/3 par value 161,742,420 shares
1 of 12
HUMANA INC.
FORM 10-Q
MARCH 31, 1995
Page of
Form 10-Q
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Income for
the quarters ended March 31, 1995 and 1994 3
Condensed Consolidated Balance Sheet at
March 31, 1995 and December 31, 1994 4
Condensed Consolidated Statement of
Cash Flows for the quarters ended
March 31, 1995 and 1994 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-10
Part II: Other Information
Items 1 to 6 11-12
2
HUMANA INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the quarters ended March 31, 1995 and 1994
Unaudited
(Dollars in millions, except per share results)
1995 1994
Revenues:
Premiums $ 1,025 $ 853
Interest 19 13
Other income 4 3
Total revenues 1,048 869
Operating expenses:
Medical costs 826 703
Selling, general and administrative 125 102
Depreciation and amortization 15 12
Total operating expenses 966 817
Income from operations 82 52
Interest expense 2 1
Income before income taxes 80 51
Provision for income taxes 27 19
Net income $ 53 $ 32
Earnings per common share $ .32 $ .20
Shares used in earnings per common
share computation (000) 162,040 160,482
See accompanying notes.
3
HUMANA INC.
CONDENSED CONSOLIDATED BALANCE SHEET
Unaudited
(Dollars in millions, except per share amounts)
March 31, December 31,
1995 1994
ASSETS
Current assets:
Cash and cash equivalents $ 459 $ 272
Marketable securities 564 609
Premiums receivable, less allowance
for loss of $19 - March 31, 1995
and $20 - December 31, 1994 79 74
Deferred income taxes 46 45
Other 51 38
Total current assets 1,199 1,038
Property and equipment, net 318 317
Long-term marketable securities 357 322
Cost in excess of net tangible assets
acquired 154 155
Deferred income taxes 52 56
Other 67 69
Total assets $2,147 $1,957
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Medical costs payable $ 545 $ 527
Trade accounts payable and accrued expenses 190 233
Unearned premium revenues 122
Income taxes payable 81 56
Total current liabilities 938 816
Long-term obligations 86 83
Total liabilities 1,024 899
Contingencies
Common stockholders' equity:
Common stock, $.16 2/3 par; authorized
300,000,000 shares; issued and outstanding
161,701,945 shares - March 31, 1995 and
161,330,064 shares - December 31, 1994 27 27
Other 1,096 1,031
Total common stockholders' equity 1,123 1,058
Total liabilities and
common stockholders' equity $2,147 $1,957
See accompanying notes.
4
HUMANA INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the quarters ended March 31, 1995 and 1994
Unaudited
(Dollars in millions)
1995 1994
Cash flows from operating activities:
Net income $ 53 $ 32
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 15 12
Deferred income taxes (2) (4)
Changes in operating assets
and liabilities 108 106
Other 2
Net cash provided by
operating activities 174 148
Cash flows from investing activities:
Purchase of property and equipment (12) (14)
Acquisition of health plan assets (36)
Disposition of property and equipment 5
Change in marketable securities 23 (85)
Other investing activities (1) (21)
Net cash provided by (used in)
investing activities 10 (151)
Cash flows from financing activities:
Other 3 1
Net cash provided by
financing activities 3 1
Increase (decrease) in cash
and cash equivalents 187 (2)
Cash and cash equivalents
at beginning of period 272 372
Cash and cash equivalents
at end of period $ 459 $ 370
Interest payments $ 1
Income tax payments, net 2 $ 1
See accompanying notes.
5
HUMANA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(A) Basis of Presentation
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the
disclosures normally required by generally accepted accounting principles
or those normally made in an annual report on Form 10-K. Accordingly, for
further information, the reader of this Form 10-Q may wish to refer to the
Form 10-K of Humana Inc. (the "Company") for the year ended December 31,
1994.
The financial information has been prepared in accordance with the
Company's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair statement of interim results. All such adjustments
are of a normal and recurring nature.
(B) Contingencies
The Company provides medical services to Medicare risk members under
contracts with the Health Care Financing Administration ("HCFA") that are
renewed for a one-year term each December 31 unless terminated 90 days
prior thereto. The loss of these contracts or significant changes in the
Medicare program as a result of legislative action, including reductions
in payments or increases in benefits without corresponding increases in
payments, would have a material adverse effect on the revenues,
profitability and business prospects of the Company. Effective January 1,
1995, the average rate of increase under these contracts approximated 6
percent. Over the last five years, annual increases have ranged from as
low as 2 percent in January 1991 to as high as 12 percent in January 1993,
with an average of 6 percent.
During 1994, the Company's South Florida health plan (the "Plan") was
denied accreditation by the National Committee for Quality Assurance
("NCQA"). In addition, HCFA notified the Company regarding its separate
investigation of the Plan, that the Plan was not fully meeting data
collection and use requirements in the areas of utilization management,
quality assurance and availability/accessibility. The Company has begun
various corrective action procedures developed jointly with regulatory
agencies to resolve the issues identified and expects no material effects
on its results of operations, financial position or cash flows as a result
of the HCFA investigation or NCQA accreditation denial.
Resolution of various loss contingencies, including litigation pending
against the Company in the ordinary course of business, is not expected to
have a material adverse effect on its results of operations, financial
position or cash flows.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company offers managed health care products which integrate management
with the delivery of health care services through a network of
providers who share financial risk or who have incentives to deliver
quality, cost-effective medical services. These products are marketed
primarily through health maintenance organizations ("HMOs") and preferred
provider organizations ("PPOs") that encourage or require use of
contracting providers. HMOs and PPOs also control health care costs by
various means including the use of utilization controls such as pre-
admission approval for hospital inpatient services and pre-authorization
of outpatient surgical procedures.
The Company's HMO and PPO products are primarily marketed to employer and
other groups ("Commercial") as well as Medicaid and Medicare-eligible
individuals. The products marketed to Medicare-eligible individuals are
either HMO products that provide managed care services which include all
Medicare benefits and, in certain circumstances, additional managed care
services that are not included in Medicare benefits ("Medicare risk") or
indemnity insurance policies that supplement Medicare benefits ("Medicare
supplement").
Results of Operations
The Company's premium revenues increased 20 percent to $1 billion for the
quarter ended March 31, 1995, compared to $853 million for the same period
in 1994. This growth was due to same-store membership gains, a 5.7
percent increase in Medicare risk premium rates, and the 1994 acquisitions
of CareNetwork, Inc. and Group Health Association. Premium revenues
associated with these acquisitions totaled approximately $84 million for
the quarter ended March 31, 1995, compared to approximately $17 million
during the first quarter of 1994.
Membership in the Company's Commercial products increased 136,300 or 9
percent during the first quarter ended March 31, 1995. On a same-store
basis, Commercial membership for the quarter ended March 31, 1995,
increased 131,700 compared to 120,000 for all of 1994. The Company also
added 5,100 Medicare risk members and 134,900 members in its
administrative services product. Medicare supplement membership declined
5,600 members during the quarter ended March 31, 1995, as anticipated,
continuing the decline first experienced in 1993. For all of 1995, the
Company anticipates combined Commercial and Medicare risk product
membership gains in excess of 10 percent.
The medical loss ratio for the quarter ended March 31, 1995, was 80.6
percent compared to 82.4 percent for the same period in 1994. The
improvement was primarily due to decreased hospital utilization in both
the Commercial and Medicare risk products. Patient days per thousand
members for the quarter ended March 31, 1995, decreased 5 percent from the
same period a year ago to 274 days per thousand for the Commercial product
and 6 percent to 1,507 days per thousand for the Medicare risk product.
In addition, the Medicare risk premium rate increase of 5.7 percent
exceeded the rate of growth of physician and other medical services costs
in this product, which resulted in an improvement in the overall loss
ratio. Because the Company does not expect Commercial product premium
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
rate increases for the remainder of 1995, additional improvements in
hospital and other medical services costs are necessary to achieve further
reductions in the medical loss ratio.
The administrative cost ratio was 13.7 percent and 13.4 percent for the
quarters ended March 31, 1995 and 1994, respectively. The increase is the
result of increased marketing efforts, costs associated with the
integration of acquired plans and the expansion of market service areas.
Although the Company expects these types of costs to continue, the
administrative cost ratio is expected to decline during the latter part of
1995 as a result of membership growth.
Interest income totaled $19 million and $13 million for the quarters ended
March 31, 1995 and 1994, respectively. The increase is attributable to
higher yields earned in the first quarter of 1995 compared to the first
quarter of 1994, as well as increased levels of cash, cash equivalents and
marketable securities. The tax equivalent yield on invested assets
approximated 8 percent and 6 percent for the quarters ended March 31, 1995
and 1994, respectively.
The Company's income before income taxes totaled $80 million for the
quarter ended March 31, 1995, compared to $51 million for the quarter
ended March 31, 1994. Net income increased to $53 million or $.32 per
share from $32 million or $.20 per share for the quarters ended March 31,
1995 and 1994, respectively.
Liquidity
Cash provided by the Company's operations totaled $174 million and $148
million for the quarters ended March 31, 1995 and 1994, respectively. The
timing of the receipt of Medicare risk premiums increased cash provided by
operations by $122 million for the quarter ended March 31, 1995 compared
to $6 million for the same period in 1994. Excluding the effect of the
timing of Medicare risk premiums, cash provided by operations was $52
million and $142 million for the quarters ended March 31, 1995 and 1994,
respectively. This decrease in cash provided by operations was primarily
attributable to the timing of payments for medical costs and other
payables, partially offset by increased net income.
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 the Company requires regulatory approval. At March 31, 1995,
and December 31, 1994, the Company had approximately $250 million and $220
million of unrestricted cash, cash equivalents and marketable securities,
respectively.
Management believes that existing working capital, including the
aforementioned unrestricted funds, future operating cash flows, and the
availability of a $350 million line of credit are sufficient to meet
future liquidity needs, allow the Company to pursue acquisition and
expansion opportunities and fund capital requirements.
8
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 1995 will approximate
$45 million to $50 million compared to $39 million in 1994. Management
believes that its capital spending program is adequate to expand, improve
and equip its existing business.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
1995 1994
Commercial members enrolled at:
March 31 1,664,600 1,381,100
June 30 1,386,100
September 30 1,408,800
December 31 1,528,300
Medicare risk members enrolled at:
March 31 292,500 276,600
June 30 281,200
September 30 286,400
December 31 287,400
Medicare supplement members
enrolled at:
March 31 126,100 144,100
June 30 139,000
September 30 134,700
December 31 131,700
Administrative services members
enrolled at:
March 31 228,400 75,500
June 30 81,300
September 30 79,100
December 31 93,500
Total members enrolled at:
March 31 2,311,600 1,877,300
June 30 1,887,600
September 30 1,909,000
December 31 2,040,900
10
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 11, 1995 for the
purpose of electing the board of directors.
(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 as
follows:
Name For Withheld
K. Frank Austen, M.D. 142,430,435 282,836
Michael E. Gellert 141,590,086 1,123,185
John R. Hall 142,444,699 268,572
David A. Jones 142,131,791 581,480
David A. Jones, Jr. 142,116,339 596,932
Irwin Lerner 142,435,054 278,217
W. Ann Reynolds, Ph.D. 142,121,416 591,855
Wayne T. Smith 142,130,098 583,173
Item 5:
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 - Statement re: Computation of Ratio of Earnings
to Fixed Charges
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter
ended March 31, 1995.
11
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 12, 1995 /s/ James E. Murray
James E. Murray
Vice President and Controller
(Principal Accounting Officer)
Date: May 12, 1995 /s/ Arthur P. Hipwell
Arthur P. Hipwell
Senior Vice President and
General Counsel
12
Exhibit 12
HUMANA INC.
RATIO OF EARNINGS TO FIXED CHARGES
For the quarters ended March 31, 1995 and 1994
Unaudited
(Dollars in millions)
1995 1994
Earnings:
Income before income taxes $ 80 $ 51
Fixed charges 3 2
$ 83 $ 53
Fixed charges:
Interest charged to expense $ 2 $ 1
One-third of rent expense 1 1
$ 3 $ 2
Ratio of earnings to fixed charges 25.5 20.8
For the purpose of determining earnings in the calculation of the ratio
of earnings to fixed charges, earnings have been increased by the provision
for income taxes and fixed charges. Fixed charges consist of interest
expense on borrowings and one-third (the proportion
deemed representative of the interest portion) of rent expense.
5
