UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5975
HUMANA INC.
(Exact name of registrant as specified in its charter)
Delaware 61-0647538
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 West Main Street Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
(502) 580-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock August 11, 1997
$.16 2/3 par value 163,702,953 shares
1 of 20
Humana Inc.
Form 10-Q
June 30, 1997
Page of
Form 10-Q
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
for the quarters and six months ended June 30,
1997 and 1996 3
Condensed Consolidated Balance Sheet at June 30, 1997
and December 31, 1996 4
Condensed Consolidated Statement of Cash Flows for the
six months ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-18
Part II: Other Information
Items 1 to 6 19-20
2
Humana Inc.
Condensed Consolidated Statement of Operations
For the quarters and six months ended June 30, 1997 and 1996
Unaudited
(Dollars in millions except per share results)
Quarter Six Months
1997 1996 1997 1996
Revenues:
Premiums $ 1,805 $ 1,578 $ 3,608 $ 3,138
Interest 27 25 53 50
Other income 4 2 7 5
Total revenues 1,836 1,605 3,668 3,193
Operating expenses:
Medical costs 1,487 1,415 2,971 2,689
Selling, general and
administrative 258 228 519 431
Depreciation and
amortization 25 24 49 49
Asset write-downs and
other unusual charges 81 81
Total operating expenses 1,770 1,748 3,539 3,250
Income (loss) from operations 66 (143) 129 (57)
Interest expense 1 3 4 8
Income (loss) before
income taxes 65 (146) 125 (65)
Income tax provision
(benefit) 23 (51) 44 (23)
Net income (loss) $ 42 $ (95) $ 81 $ (42)
Earnings (loss) per
common share $ .25 $ (.58) $ .49 $ (.26)
Shares used in earnings
(loss) per common share
computation (000) 163,158 162,455 162,980 162,417
See accompanying notes.
3
Humana Inc.
Condensed Consolidated Balance Sheet
Unaudited
(Dollars in millions except per share amounts)
June 30, December 31,
1997 1996
Assets
Current assets:
Cash and cash equivalents $ 55 $ 322
Marketable securities 1,261 1,262
Premiums receivable, less allowance
for doubtful accounts $36 - June 30,
1997 and $38 - December 31, 1996 256 211
Deferred income taxes 83 94
Other 125 113
Total current assets 1,780 2,002
Long-term marketable securities 157 143
Property and equipment, net 375 371
Cost in excess of net assets acquired 502 488
Other 144 149
Total assets $ 2,958 $ 3,153
Liabilities and Common Stockholders' Equity
Current liabilities:
Medical costs payable $ 997 $ 1,099
Trade accounts payable and
accrued expenses 370 369
Income taxes payable 66 32
Total current liabilities 1,433 1,500
Long-term debt 3 225
Other long-term obligations 138 136
Total liabilities 1,574 1,861
Contingencies
Common stockholders' equity:
Common stock, $.16 2/3 par; authorized
300,000,000 shares; issued and outstanding
163,428,687 shares - June 30, 1997 and
162,681,123 shares - December 31, 1996 27 27
Other 1,357 1,265
Total common stockholders' equity 1,384 1,292
Total liabilities and common
stockholders' equity $ 2,958 $ 3,153
See accompanying notes.
4
Humana Inc.
Condensed Consolidated Statement of Cash Flows
For the six months ended June 30, 1997 and 1996
Unaudited
(Dollars in millions)
1997 1996
Cash flows from operating activities:
Net income (loss) $ 81 $ (42)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Asset write-downs 70
Depreciation and amortization 49 49
Deferred income taxes 10 (35)
Changes in operating assets and liabilities (127) 156
Other 2 (12)
Net cash provided by operating activities 15 186
Cash flows from investing activities:
Purchases and dispositions of property and
equipment, net (33) (43)
Acquisition of health plan assets (12) (3)
Purchases, sales and maturities of marketable
securities, net (17) (41)
Other (3) (11)
Net cash used in investing activities (65) (98)
Cash flows from financing activities:
Repayment of credit revolver (250)
Change in commercial paper (223) 173
Other 6 1
Net cash used in financing activities (217) (76)
Increase (decrease) in cash and cash equivalents (267) 12
Cash and cash equivalents at beginning of period 322 182
Cash and cash equivalents at end of period $ 55 $ 194
Interest payments, net $ 2 $ 7
Income tax payments (refunds), net $ (4) $ 28
See accompanying notes.
5
Humana Inc.
Notes To Condensed Consolidated Financial Statements
Unaudited
(A) Basis of Presentation
The accompanying condensed consolidated financial statements are presented
in accordance with the requirements of Form 10-Q and consequently do not
include all of the disclosures normally required by generally accepted
accounting principles or those normally made in an annual report on
Form 10-K. Accordingly, for further information, the reader of this
Form 10-Q may wish to refer to the Form 10-K of Humana Inc. (the "Company")
for the year ended December 31, 1996.
The preparation of the Company's condensed consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect
(a) the reported amounts of assets and 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.
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, with the exception of the special charges described
below, are of a normal and recurring nature.
(B) Contingencies
The Company's Medicare risk contracts with the federal government
are renewed for a one-year term each December 31 unless terminated
90 days prior. The recently enacted Balanced Budget Act of 1997 includes
modifications of future reimbursement rates under the Medicare program
and encourages the use of managed health care by Medicare
beneficiaries. Management is unable to predict the outcome of this
legislation or the impact it may have on the Company's financial position,
results of operations, or cash flows. Additionally, the Company's
contract with the United States Department of Defense under the Civilian
Health and Medical Program of the Uniformed Services ("CHAMPUS") is in
its second year, and is renewable annually for up to three 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.
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.
6
Humana Inc.
Notes To Condensed Consolidated Financial Statements, continued
Unaudited
(C) Special Charges
During the second quarter of 1996, the Company recognized special
charges of $200 million before tax ($130 million after tax or $.80
per share). The special charges included provisions for expected
future losses on insurance contracts ($105 million) as well as
estimated costs to be incurred in restructuring the Washington, D.C.,
health plan (which was sold January 31, 1997) 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 the quarter ended June 30, 1997,
the beneficial effect of these charges was approximately $4 million
before tax ($3 million after tax or $.02 per share). Approximately
$33 million (of the original $105 million) of the liability for
expected future losses on insurance contracts and approximately $4
million of other costs reserves remain at June 30, 1997.
During the fourth quarter of 1996, the Company recognized an additional
special charge of $15 million before tax ($10 million after tax or
$.06 per share). This charge included severance and facility costs
related to planned workforce reductions, scheduled to be completed
throughout 1997. Approximately $9 million of the liability remains
at June 30, 1997.
(D) Long-Term Debt
During April 1996, the Company implemented a commercial paper program
and began issuing debt securities thereunder. The commercial paper
program is backed by a $600 million line of credit, which is scheduled
to expire in September 2000. At June 30, 1997, there were no borrowings
under the commercial paper program.
In June 1997, the Company received a commitment for a revolving credit
agreement (the "Credit Agreement") which will provide a revolving line
of credit of up to $1.5 billion. The Credit Agreement, which will
replace the $600 million revolving line of credit currently in place,
is expected to bear a comparable interest rate, and contain customary
covenants and events of default. The Credit Agreement is expected to
be in place by the end of the third quarter of 1997.
(E) Acquisition and Dispositions
On February 28, 1997, the Company acquired Health Direct, Inc.
("Health Direct") from Advocate Health Care for $23 million cash.
This transaction, which was accounted for by the purchase method,
added more than 50,000 medical members to the Company's Chicago membership.
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. Effective April 1, 1997, the Company also completed the
sale of its Alabama operations to PrimeHealth of Alabama, Inc. The
Alabama sale excluded the Company's small group business and CHAMPUS
operations. These transactions, which did not have a material
impact on the Company's financial position, results of operations,
or cash flows, reduced total medical membership by approximately 141,000.
7
Humana Inc.
Notes To Condensed Consolidated Financial Statements, continued
Unaudited
(F) Future Changes in Generally Accepted Accounting Principles
Currently, earnings per share is computed using guidelines included in
Accounting Principles Board Opinion No. 15, "Earnings Per Share,"
("APB No. 15"). In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share," ("SFAS No. 128"), which supersedes
APB No. 15 and its related interpretations. SFAS No. 128 specifies
the computation, presentation, and disclosure requirements for earnings
per share and will be effective for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted. If
applied on a pro forma basis, there would be no difference between
earnings per share computed using SFAS No. 128 or using APB No. 15,
for the quarters and six months ended June 30, 1997 and 1996.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130").
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income is defined as all changes in equity during a
period except those resulting from investments by owners and distributions
to owners. This statement is effective for fiscal years beginning after
December 15, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 requires, if certain
quantitative thresholds are met, public companies to report separate
financial information about operating segments, as well as certain
information about their products and services, the geographic areas in
which they operate, and their major customers. This statement is
effective for financial statements for periods beginning after December
15, 1997.
SFAS No. 130 and SFAS No. 131 require changes to financial statement
presentation and disclosure only, and will not have any impact on the
Company's financial position, results of operations or cash flows.
All presentations and disclosures required by these statements will be
included in the Company's financial statements for periods subsequent to
December 15, 1997.
(G) Other Events
On June 2, 1997, the Company entered into a definitive agreement with
Physician Corporation of America ("PCA") pursuant to which, subject to
the terms and conditions of the agreement, a wholly-owned subsidiary of
the Company will merge with and into PCA. PCA services 1.1 million
members and provides comprehensive health care services through its
health maintenance organizations ("HMOs") in Florida, Texas and Puerto
Rico. The total consideration of approximately $400 million cash consists
of $7.00 per share of PCA's outstanding common stock plus the assumption
of approximately $130 million in debt.
8
Humana Inc.
Notes To Condensed Consolidated Financial Statements, continued
Unaudited
On June 3, 1997, the Company signed a definitive agreement with
ChoiceCare Corporation ("ChoiceCare") pursuant to which, subject to
the terms and conditions of the agreement, a wholly-owned subsidiary of
the Company will merge with and into ChoiceCare. ChoiceCare serves
more than 245,000 members, offering HMO, point-of-service and
administrative services products in the greater Cincinnati, Ohio area.
The Company will purchase all of ChoiceCare's outstanding common stock
for $16.38 per share or a total consideration of approximately
$250 million in cash.
The aggregate purchase price of approximately $650 million for the
PCA and ChoiceCare acquisitions will be funded through available cash
and borrowings under the Credit Agreement discussed in note (D).
The acquisitions, which are subject to various regulatory approvals,
will be accounted for by the purchase method. The PCA transaction
is expected to close in the third quarter of 1997 while ChoiceCare
is expected to close near the beginning of the fourth quarter.
On July 10, 1997, the Company signed a definitive agreement to sell
its California HMO ("HMO California") to HealthMax, Inc. HMO California
has approximately 6,000 members in Southern California. The transaction,
which is subject to regulatory approvals, is expected to close in the
third quarter of 1997.
9
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This discussion and analysis contains both historical and forward-looking
information. The forward-looking statements 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 because actual results may differ materially from those projected
in the forward-looking statements. Readers are cautioned that a number
of factors, which are described herein and in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, could adversely affect
the Company's ability to obtain these results. These include the effects
of either federal or state health care reform or other legislation, renewal
of the Company's Medicare risk contracts with the federal government,
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,
retrospective premium adjustments relating to federal government
contracts, medical cost trends, changes in Commercial and Medicare
risk membership, capital requirements, general economic conditions, and
the retention of key employees. In addition, past financial performance
is not necessarily a reliable indicator of future performance and investors
should not use historical performance to anticipate results or future
period trends.
Introduction
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 require or encourage 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 employers
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.
The Company also offers administrative services ("ASO") to employers who
self-insure their employee health benefits.
The Company is in the second year of its contract with the United States
Department of Defense under the Civilian Health and Medical Program of the
Uniformed Services ("CHAMPUS"). Under the CHAMPUS contract, which is
renewable annually for up to three additional years, the Company provides
managed care services to the beneficiaries of active military personnel and
retired military personnel and their beneficiaries located in the south-
eastern United States.
In June 1997, the Company was awarded a contract by the Department of
Defense to administer a dental program for select military reservists.
This contract will begin October 1, 1997 and is renewable annually for up
to five years.
10
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
Special Charges
During the second quarter of 1996, the Company recognized special charges
of $200 million before tax ($130 million after tax or $.80 per share).
The special charges included provisions for expected future losses on
insurance contracts ($105 million) as well as estimated costs to be
incurred in restructuring the Washington, D.C., health plan (which was
sold January 31, 1997) 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 the quarter ended June 30, 1997, the beneficial effect of these
charges was approximately $4 million before tax ($3 million after tax
or $.02 per share). Approximately $33 million (of the original $105
million) of the liability for expected future losses on insurance contracts
and approximately $4 million of other costs reserves remain at June 30, 1997.
During the fourth quarter of 1996, the Company recognized an additional
special charge of $15 million before tax ($10 million after tax or $.06
per share). This charge included severance and facility costs related to
planned workforce reductions, scheduled to be completed throughout 1997.
Approximately $9 million of the liability remains at June 30, 1997.
The following discussions comparing the quarter ended June 30, 1997 to
June 30, 1996, and the six months ended June 30, 1997, to the corresponding
six-month period ended June 30, 1996, exclude the special charges described
above. The beneficial effect of these charges for the quarters ended
June 30, 1997 and 1996, was approximately $.02 and $.04 per share,
respectively. The beneficial effect of these charges for the six months
ended June 30, 1997 and 1996, was approximately $.06 and $.04 per share,
respectively. The beneficial effect consists primarily of charges against
reserves for losses on insurance contracts and amounts related to
depreciation and amortization on asset write-downs.
Future Changes in Generally Accepted Accounting Principles
Currently, earnings per share is computed using guidelines included in
Accounting Principles Board Opinion No. 15, "Earnings Per Share,"
("APB No. 15"). In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," ("SFAS No. 128"), which supersedes APB No. 15 and
its related interpretations. SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share and will
be effective for both interim and annual periods ending after December 15,
1997. Earlier application is not permitted. If applied on a pro forma
basis, there would be no difference between earnings per share computed
using SFAS No. 128 or using APB No. 15, for the quarters and six months
ended June 30, 1997 and 1996.
11
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"). SFAS No.
130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. Comprehensive
income is defined as all changes in equity during a period except those
resulting from investments by owners and distribution to owners. This
statement is effective for fiscal years beginning after December 15, 1997.
In June 1997, FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 requires, if certain
quantitative thresholds are met, public companies to report separate
financial information about operating segments, as well as certain
information about their products and services, the geographic areas in
which they operate, and their major customers. This statement is
effective for financial statements for periods beginning after December
15, 1997.
SFAS No. 130 and SFAS No. 131 require changes to financial statement
presentation and disclosure only, and will not have any impact on the
Company's financial position, results of operations or cash flows.
All presentations and disclosures required by these statements will be
included in the Company's financial statements for periods subsequent
to December 15, 1997.
Acquisition and Dispositions
On February 28, 1997, the Company acquired Health Direct, Inc.
("Health Direct") from Advocate Health Care for $23 million cash.
This transaction, which was accounted for by the purchase method,
added more than 50,000 medical members to the Company's Chicago membership.
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. Effective April 1, 1997, the Company also completed the
sale of its Alabama operations to PrimeHealth of Alabama, Inc. The
Alabama sale excluded the Company's small group business and CHAMPUS
operations. These transactions, which did not have a material impact on
the Company's financial position, results of operations, or cash flows,
reduced total medical membership by approximately 141,000.
Results of Operations
Quarters Ended June 30, 1997 and 1996
The Company's premium revenues increased 14 percent to $1.8 billion for
the quarter ended June 30, 1997, compared to $1.6 billion for the same
period in 1996. Premium revenues increased primarily due to the addition
of premium revenues from the Company's CHAMPUS contract which began on
July 1, 1996 and was renewed on July 1, 1997. Premium revenues also
increased as a result of premium rate increases in the Company's Commercial
and Medicare risk products. The impact on premium revenues of Commercial
membership declines was offset by Medicare risk membership increases.
12
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
Commercial and Medicare risk premium rates increased 3.5 percent and 4.5
percent, respectively, for the quarter ended June 30, 1997. For 1997,
excluding the impact of future acquisitions or dispositions, Commercial
premium rates are expected to increase approximately 3.5 to 4 percent,
while Medicare risk premium rates are expected to increase approximately
4 to 5 percent.
Same-store Commercial membership decreased 5,500 members during the
quarter ended June 30, 1997, compared to an increase of 3,500 for the
same period in 1996. This same-store membership decline, which excludes
the sale of the Company's Alabama operations (effective April 1, 1997), and
the Washington, D.C., health plan, and the purchase of Health Direct, was
due to the Company's more disciplined product pricing begun in the fall of
1996 and withdrawal from certain unprofitable markets. Same-store Medicare
risk membership increased 15,400 members during the quarter compared to a
same-store increase of 9,200 members for the same period in 1996. The
higher Medicare risk growth rate during the first six months of 1997
is primarily the result of sales in new Medicare markets. Given the
competitive large group Commercial pricing environment, the Company's
new pricing discipline, the closing or sale of certain markets, and
excluding any future acquisitions or dispositions, management expects
Commercial membership to be down approximately 5 percent for 1997,
while Medicare risk membership is expected to increase approximately
20 percent.
The medical loss ratio for the quarter ended June 30, 1997 was 82.3 percent
compared to 82.9 percent for the same period in 1996. The improvement was
primarily due to premium rate increases, favorable physician cost trends in
Commercial products and Medicare risk products in established markets and
a slight improvement in hospital days per thousand trends in both products.
These medical cost improvements were partially offset by higher than
anticipated medical costs in the Company's new Medicare risk markets
(where a large portion of Medicare growth is currently taking place) and
increased pharmacy costs system wide.
The administrative cost ratio was 15.7 percent and 15.2 percent for the
quarters ended June 30, 1997 and 1996, respectively. The increase was due
to planned spending on critical core processes necessary for long-term
improvements in the areas of medical management, customer service,
information systems and marketing. Management anticipates improvement
in the administrative cost ratio in the second half of 1997 as membership
increases and the favorable effect of the workforce reduction initiatives
are experienced.
Interest income totaled $27 million and $25 million for the quarters ended
June 30, 1997 and 1996, respectively. The increase was primarily
attributable to increased levels of cash, cash equivalents and marketable
securities. The tax equivalent yield on invested assets approximated 8
percent for each of the quarters ended June 30, 1997 and 1996.
The Company's income before income taxes totaled $65 million for the
quarter ended June 30, 1997, compared to $54 million for the quarter ended
June 30, 1996. Net income was $42 million or $.25 per share and $35 million
or $.22 per share for each of the quarters ended June 30, 1997 and 1996,
respectively.
13
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
Six Months Ended June 30, 1997 and 1996
The Company's premium revenues increased 15 percent to $3.6 billion for
the six months ended June 30, 1997, compared to $3.1 billion for the same
period in 1996. Premium revenues increased primarily due to premium
revenues from the Company's CHAMPUS contract which began on July 1, 1996
and was renewed on July 1, 1997. Premium revenues also increased as a result
of premium rate increases in the Company's Commercial and Medicare risk
products. The impact on premium revenues of Commercial membership declines
was offset by Medicare risk membership increases. Commercial and Medicare
risk premium rates increased 3.2 percent and 4.5 percent, respectively,
for the six months ended June 30, 1997.
Same-store Commercial membership decreased 110,400 members during the six
months ended June 30, 1997, compared to a decrease of 12,900 for the
same period 1996. This same-store membership decline, which excludes the
sale of the Company's Alabama operations (18,600 members), and the
Washington, D.C., health plan (92,500 members) and the purchase of
Health Direct (22,100 members), was due to the Company's more disciplined
product pricing begun in the fall of 1996 and withdrawal from certain
unprofitable markets. Same-store Medicare risk membership increased 30,500
members during the six months ended June 30, 1997, compared to a same-
store increase of 19,400 members for the same period in 1996. The higher
Medicare growth rate during the first six months of 1997 was primarily the
result of sales in new Medicare markets.
The medical loss ratio was 82.3 percent for the six months ended June 30,
1997 and 1996. Increases in premium rates, improvement in Medicare risk
days per thousand and favorable physician cost trends in Commercial
products and Medicare risk products in established markets were offset by
increased pharmacy costs system wide and higher than anticipated medical
costs in new Medicare risk
markets.
The administrative cost ratio was 15.8 percent and 15.0 percent for the
six months ended June 30, 1997 and 1996, respectively. The increase was
due to planned spending on critical core processes necessary for long-term
improvements in the areas of medical management, customer service,
information systems, and marketing.
Interest income totaled $53 million and $50 million for the six months
ended June 30, 1997 and 1996, respectively. The increase was primarily
attributable to increased levels of cash, cash equivalents and marketable
securities. The tax equivalent yield on invested assets approximated 8
percent for each of the six months ended June 30, 1997 and 1996.
The Company's income before income taxes totaled $125 million for the
six months ended June 30, 1997, compared to $135 million for the six months
ended June 30, 1996. Net income was $81 million or $.49 per share and $88
million or $.54 per share for each of the six months ended June 30, 1997
and 1996, respectively.
14
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
Liquidity
Cash provided by the Company's operations totaled $15 million and $186
million for the six months ended June 30, 1997 and 1996, respectively.
The decrease in net cash provided by operations was due to changes in
operating assets and liabilities relating to the timing of receipts and
disbursements for premiums receivable, medical costs, unearned premiums
and other liabilities.
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 of the subsidiaries' abilities to obtain
regulatory approval to pay dividends.
During April 1996, the Company implemented a commercial paper program and
began issuing debt securities thereunder. The commercial paper program is
backed by a $600 million line of credit, which is scheduled to expire in
September 2000. At June 30, 1997, there were no borrowings under the
commercial paper program.
In June 1997, the Company received a commitment for a revolving credit
agreement (the "Credit Agreement") which will provide a revolving line of
credit of up to $1.5 billion. The Credit Agreement, which will replace the
$600 million revolving line of credit currently in place, is expected to
bear a comparable interest rate, and contain customary covenants and events
of default. The Credit Agreement is expected to be in place by the end
of the third quarater of 1997.
Management believes that existing working capital, future operating cash
flows, and funds available under the existing revolving credit agreement,
the proposed 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.
Excluding acquisitions, planned capital spending in 1997 will be
approximately $80 to $90 million for the expansion and improvement of
medical care facilities, administrative facilities, and related information
systems.
15
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
1997 1996
Quarterly Membership
Commercial members at:
March 31 2,631,000 2,862,900
June 30 2,628,600 2,861,900
September 30 2,846,400
December 31 2,814,800
Medicare risk members at:
March 31 374,200 322,300
June 30 389,600 332,900
September 30 347,400
December 31 364,500
CHAMPUS eligible members at:
March 31 1,103,100
June 30 1,107,300
September 30 1,075,300
December 31 1,103,000
Medicare supplement members at:
March 31 93,500 109,600
June 30 74,600 106,000
September 30 101,800
December 31 97,700
Administrative services members at:
March 31 566,300 444,700
June 30 555,000 447,900
September 30 458,300
December 31 471,000
Total medical members at:
March 31 4,768,100 3,739,500
June 30 4,755,100 3,748,700
September 30 4,829,200
December 31 4,851,000
Specialty members at:
March 31 2,172,900 1,811,300
June 30 2,127,200 1,863,800
September 30 1,895,900
December 31 1,884,200
16
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
Supplemental Consolidated Statement of Quarterly Income (Unaudited)
(Dollars in millions except per share results)
1997
First Second Total
Revenues:
Premiums:
Commercial $ 1,047 $ 1,031 $ 2,078
Medicare risk 550 571 1,121
CHAMPUS 183 184 367
Medicare supplement 23 19 42
Total premiums 1,803 1,805 3,608
Interest 26 27 53
Other income 3 4 7
Total revenues 1,832 1,836 3,668
Operating expenses:
Medical costs 1,484 1,487 2,971
Selling, general and administrative 261 258 519
Depreciation and amortization 24 25 49
Total operating expenses 1,769 1,770 3,539
Income from operations 63 66 129
Interest expense 3 1 4
Income before income taxes 60 65 125
Provision for income taxes 21 23 44
Net income $ 39 $ 42 $ 81
Earnings per common share $ .24 $ .25 $ .49
Medical loss ratio 82.3% 82.3% 82.3%
Administrative cost ratio 15.8% 15.7% 15.8%
17
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
Supplemental Consolidated Statement of Quarterly Income (Unaudited)
(Dollars in millions except per share results)
1996
First Second(a) Third Fourth (b) Total
Revenues:
Premiums:
Commercial $ 1,082 $ 1,088 $ 1,079 $ 1,077 $ 4,326
Medicare risk 454 466 484 503 1,907
CHAMPUS 170 181 351
Medicare supplement 24 24 23 22 93
Total premiums 1,560 1,578 1,756 1,783 6,677
Interest 25 25 25 26 101
Other income 3 2 3 2 10
Total revenues 1,588 1,605 1,784 1,811 6,788
Operating expenses:
Medical costs 1,274 1,415 1,460 1,476 5,625
Selling, general and
administrative 203 228 249 260 940
Depreciation and
amortization 25 24 25 24 98
Asset write-downs and
unusual charges 81 15 96
Total operating expenses 1,502 1,748 1,734 1,775 6,759
Income (loss) from operations 86 (143) 50 36 29
Interest expense 5 3 2 1 11
Income (loss) before income
taxes 81 (146) 48 35 18
Income tax provision
(benefit) 28 (51) 16 13 6
Net income (loss) $ 53 $ (95) $ 32 $ 22 $ 12
Earnings (loss) per
common share $ .32 $ (.58) $ .20 $ .13 $ .07
Medical loss ratio 81.7% 89.7% 83.1% 82.8% 84.3%
Administrative cost ratio 14.7% 16.0% 15.6% 15.8% 15.5%
(a) Includes special charges of $200 million before tax ($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 markets or discontinuing product lines
in 16 market areas, and a litigation settlement.
(b) Includes a special charge of $15 million before tax ($10 million
after tax or $.06 per share) related to planned workforce reductions.
18
Humana Inc.
Part II: Other Information
Item 1: Legal Proceedings
Damages for claims for personal injuries and medical benefit
denials are usual in the Company's business. Personal injury
claims are covered by insurance from the Company's wholly-owned
captive insurance subsidiary and excess carriers, except to the
extent that claimants seek punitive damages, which may not be
covered by insurance if awarded. Punitive damages generally are
not paid where claims are settled and generally are awarded only
where a court determines there has been a willful act or omission
to act.
Management does not believe that any pending legal actions will
have a material adverse effect on the Company's financial position,
results of operations, or cash flows.
Items 2 - 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) On June 17, 1997, the Company filed a report on Form 8-K
regarding the execution of definitive agreements to acquire
Physician Corporation of America and ChoiceCare Corporation.
19
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUMANA INC.
Date: August 14, 1997 /s/ James E. Murray
James E. Murray
Chief Financial Officer
(Principal Accounting Officer)
Date: August 14, 1997 /s/ Arthur P. Hipwell
Arthur P. Hipwell
Senior Vice President and
General Counsel
20
Humana Inc.
Ratio of Earnings to Fixed Charges
For the quarters and six months ended June 30, 1997 and 1996
Unaudited
(Dollars in millions)
Quarter Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Earnings:
Income (loss) before
income taxes $ 65 $ (146) $ 125 $ (65)
Fixed charges 3 5 8 11
$ 68 $ (141) $ 133 $ (54)
Fixed charges:
Interest charged to expense $ 1 $ 3 $ 4 $ 8
One-third of rent expense 2 2 4 3
$ 3 $ 5 $ 8 $ 11
Ratio of earnings to
fixed charges 20.9 (a) 15.9 (a)
For the purpose of determining earnings in the calculation of the ratio
of earnings to fixed charges (the "Ratio"), 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.
(a) Exclusive of the special charges of $200 million before income
taxes, the Ratio for the quarter and six months ended June 30,
1996, would have been 12.3 and 13.2, respectively.
5
