-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C2VO2aPCWGIeHaJDeK5ESzBbSwqFewZi+HFnCEHQieipbKi6ypMHaflxDkLCx8dm QP3AnVtPtcUMD7rclqkk/g== 0000950123-96-001905.txt : 19960430 0000950123-96-001905.hdr.sgml : 19960430 ACCESSION NUMBER: 0000950123-96-001905 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960429 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S HEALTHCARE INC CENTRAL INDEX KEY: 0000711405 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 232229683 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10819 FILM NUMBER: 96552768 BUSINESS ADDRESS: STREET 1: 980 JOLLY RD STREET 2: PO BOX 1109 CITY: BLUE BELL STATE: PA ZIP: 19422 BUSINESS PHONE: 2156284800 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES HEALTH CARE SYSTEMS INC DATE OF NAME CHANGE: 19861202 10-K/A 1 AMENDMENT NO. 1 TO FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (AMENDMENT NO. 1) (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-11531 U.S. HEALTHCARE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) PENNSYLVANIA 22-2229683 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 19422 980 JOLLY ROAD, BLUE BELL, PENNSYLVANIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 628-4800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.005 Per Share 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 31, 1996 was $6,292,972,648 calculated by excluding all shares held by executive officers, directors and 5% shareholders of the Registrant without conceding that all such persons are "affiliates" of the Registrant for purposes of the federal securities laws. As of March 31, 1996, there were 139,512,162 shares of Common Stock outstanding and 14,429,867 shares of Class B Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated herein by reference: Parts I, II and IV -- U.S. Healthcare's Annual Report to Shareholders for the year ended December 31, 1995 ("1995 Annual Report to Shareholders"). The undersigned registrant hereby amends the following items and other portions of its Annual Report on Form 10-K for the fiscal year ended December 31, 1995: Part I, Item 1 -- Business Part II, Item 8 -- Financial Statements and Supplementary Data Part III, Item 10 -- Directors and Executive Officers of the Registrant Part III, Item 11 -- Executive Compensation Part III, Item 12 -- Security Ownership of Certain Beneficial Owners and Management Part III, Item 13 -- Certain Relationships and Related Transactions Part IV, Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1 -- BUSINESS SUBSEQUENT EVENT On March 30, 1996, U.S. Healthcare, Inc. ("U.S. Healthcare") entered into an Agreement and Plan of Merger (the "Merger Agreement") with Aetna Life and Casualty Company ("Aetna"), Butterfly, Inc. (the name of which will be changed to Aetna Inc.) ("Parent"), a Connecticut corporation owned 50% by Aetna and 50% by U.S. Healthcare, New Merger Corporation ("U.S. Healthcare Sub"), a wholly-owned subsidiary of Parent, and Antelope Sub, Inc. ("Aetna Sub"), a wholly-owned subsidiary of Parent, pursuant to which (x) U.S. Healthcare Sub will merge with and into U.S. Healthcare, with U.S. Healthcare surviving as a wholly-owned subsidiary of Parent (the "U.S. Healthcare Merger"), and (y) Aetna Sub will merge with and into Aetna, with Aetna surviving as a wholly-owned subsidiary of Parent (the "Aetna Merger," and together with the U.S. Healthcare Merger, the "Mergers"). As a result of the Mergers, each of U.S. Healthcare and Aetna will become wholly-owned subsidiaries of a newly formed holding company. A copy of the Merger Agreement was filed as Exhibit 99.1 to U.S. Healthcare's Current Report on Form 8-K, dated April 2, 1996. Pursuant to the U.S. Healthcare Merger and the Merger Agreement, each share of Common Stock, par value $.005 per share, of U.S. Healthcare (the "U.S. Healthcare Common Stock") and each share of Class B Stock, par value $.005 per share, of U.S. Healthcare (the "U.S. Healthcare Class B Stock," and together with U.S. Healthcare Common Stock, the "U.S. Healthcare Stock") outstanding immediately prior to the date of the Mergers (the "Merger Date") shall (except for shares of U.S. Healthcare Stock held by U.S. Healthcare as treasury stock or owned by Aetna or any subsidiary of Aetna immediately prior to the Merger Date and as otherwise provided for in the Merger Agreement and as to which dissenters' rights have been exercised in accordance with and subject to the provisions of Pennsylvania law) be converted into the right to receive (a) $34.20 in cash without interest, (b) 0.2246 shares of Parent Common Capital Stock (the "Parent Common Stock") and (c) 0.0749 shares of Class C Non-Voting Preferred Stock of Parent. Pursuant to the Aetna Merger and the Merger Agreement, each share of common capital stock, without par value, of Aetna (the "Aetna Stock") outstanding immediately prior to the Merger Date (except for shares of Aetna Stock held by Aetna as treasury stock or owned by U.S. Healthcare or any subsidiary of U.S. Healthcare immediately prior to the Merger Date and except for shares of Aetna Stock as to which objecting shareholders' rights have been exercised in accordance with and subject to the provisions of Connecticut law) will be converted into the right to receive one share of Parent Common Stock. The Merger Agreement has been approved by the Board of Directors of Aetna and the Board of Directors of U.S. Healthcare. The Mergers are subject to approval by shareholders of both Aetna and U.S. Healthcare and federal and state regulators and other conditions. Leonard Abramson, the principal shareholder and owner of shares representing in excess of 80% of the voting power of the shares of U.S. Healthcare, has agreed to vote in favor of the Mergers. PART II ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Exhibit 13. The financial statements included in Exhibit 13 are incorporated herein by reference. PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT NOMINEES FOR ELECTION At the 1996 Annual Meeting of Shareholders of U.S. Healthcare (the "U.S. Healthcare Annual Meeting"), it is expected that the shareholders of U.S. Healthcare will elect two Class III directors to hold office until the 1999 Annual Meeting of Shareholders of U.S. Healthcare and until their successors are duly elected and qualified. U.S. Healthcare's Board of Directors is divided into three classes serving staggered three-year terms; the term of one class of directors expires each year. The term of the Class III directors 1 3 expires at the U.S. Healthcare Annual Meeting. The nominees of the U.S. Healthcare Board of Directors for election as Class III directors are expected to be David B. Soll, M.D. and Timothy T. Weglicki, who are currently Class III directors. In accordance with U.S. Healthcare's Articles of Incorporation, one of the Class III directors is to be elected by the holders of U.S. Healthcare Common Stock and U.S. Healthcare Class B Stock, voting together as a single class, and the other Class III director is to be elected solely by the holders of U.S. Healthcare Common Stock. Dr. Soll will be nominated by the Board of Directors as the Class III director to be elected by the holders of U.S. Healthcare Common Stock and U.S. Healthcare Class B Stock, and his election will require the affirmative vote of a majority of the votes which the holders of U.S. Healthcare Common Stock and U.S. Healthcare Class B Stock present at the U.S. Healthcare Annual Meeting in person or by proxy are entitled to cast, voting together as a single class. Mr. Weglicki will be nominated by the U.S. Healthcare Board of Directors as the Class III director to be elected solely by the holders of U.S. Healthcare Common Stock, and his election will require the affirmative vote of a majority of the votes which the holders of U.S. Healthcare Common Stock present at the U.S. Healthcare Annual Meeting in person or by proxy are entitled to cast. The nominees for election as directors and the directors whose terms of office continue after the U.S. Healthcare Annual Meeting, together with certain information about them, are as follows:
DIRECTOR TERM EXPIRES POSITION(S) WITH U.S. NAME AGE SINCE (CLASS) HEALTHCARE - -------------------------------------- --- -------- ------------ ------------------------- Leonard Abramson(1)(2) 63 1982 1998 (I) Principal executive officer and Director Betsy Z. Cohen(4) 54 1994 1997 (II) Director Jerome S. Goodman(3) 61 1988 1998 (I) Director Allen Misher, Ph.D.(1)(2)(3)(4) 63 1985 1997 (II) Director David B. Soll, M.D. 65 1982 1996 (III) Director Timothy T. Weglicki(3) 44 1990 1996 (III) Director
- --------------- (1) Member of U.S. Healthcare's Stock Option Committee. (2) Member of U.S. Healthcare's Executive Committee. (3) Member of U.S. Healthcare's Audit Committee. (4) Member of U.S. Healthcare's Compensation Committee and Incentive Plan Committee. Effective April 15, 1996, Ms. Cohen and Dr. Misher were appointed to U.S. Healthcare's Compensation Committee and Incentive Plan Committee. Prior to April 15, 1996, Mr. Goodman and Dr. Misher were members of U.S. Healthcare's Compensation Committee and Incentive Plan Committee. The Merger Agreement provides that immediately after the Merger Date, the Board of Directors of U.S. Healthcare will be designated by Parent and will include Michael J. Cardillo and Joseph T. Sebastianelli (the "Co-Presidents"). PRINCIPAL OCCUPATIONS AND DIRECTORSHIPS HELD BY THE NOMINEES FOR DIRECTORS AND DIRECTORS OF U.S. HEALTHCARE Mr. Abramson has been the principal executive officer and a Director of U.S. Healthcare since 1982. Ms. Cohen has been Chairman, Chief Executive Officer, and a Director of JeffBanks, Inc. (a bank holding company) since 1981. From 1985 until 1993, Ms. Cohen was a Director of First Union Corp. of Virginia (a bank holding company) and its predecessor, Dominion Bankshares, Inc. (a bank holding company). Ms. Cohen has also been a Director of Life Technologies since 1992. Mr. Goodman has been Chairman of Cherry Hill Travel, Inc. d/b/a Travel One (a commercial travel agent) since 1971, and was the sole stockholder of Travel One from 1971 to 1994. He has been a Director of GBC Technologies, Inc. since 1992. From 1987 until 1992, Mr. Goodman was also Chairman, President and Chief Executive Officer of First Peoples Financial Corporation (a bank holding company). Dr. Misher has been President Emeritus of the Philadelphia College of Pharmacy and Science since February 1995 and was President of the Philadelphia College of Pharmacy and Science from 1984 to 1994. He 2 4 has been a Director of U.S. Bioscience, Inc. since 1988, a Director of Marsam Pharmaceuticals, Inc. (pharmaceutical company) since 1991, a Director of Cortech, Inc. since 1994 and a Director of Oravax, Inc. since 1996. Dr. Soll is a practicing ophthalmologist and has been Director of the Division of Ophthalmology, Cooper Hospital/University Medical Center and Clinical Professor of Surgery (Ophthalmology), University of Medicine and Dentistry of New Jersey/Robert Wood Johnson Medical School at Camden, New Jersey since 1988. Dr. Soll has been Director of the Ophthalmology Service at Frankford Hospital since 1965 and a consultant at the Philadelphia Geriatric Center since 1965, and from 1968 to the present, he has been Director of the Ophthalmology Service at Medical College Hospitals, Elkins Park Campus. Mr. Weglicki has been a general partner of ABS Capital Partners, L.P., a merchant banking fund affiliated with Alex. Brown & Sons Incorporated, an investment banking and brokerage firm, since January 1994, and was a Managing Director of Alex. Brown & Sons Incorporated from 1984 to 1995. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS U.S. Healthcare's Board of Directors has an Audit Committee, a Compensation Committee, an Incentive Plan Committee, a Stock Option Committee and an Executive Committee, but does not have a Nominating Committee. The Audit Committee, which held two meetings in 1995, consists of Dr. Misher and Messrs. Goodman and Weglicki. The functions of the Audit Committee generally include the following: recommending the engagement of U.S. Healthcare's independent auditors; reviewing with U.S. Healthcare's independent auditors the scope and results of their engagement; reviewing the scope and results of U.S. Healthcare's internal audit function and reviewing the adequacy of U.S. Healthcare's systems of internal accounting controls. The Compensation Committee, which held two meetings in 1995, currently consists of Ms. Cohen and Dr. Misher. The function of the Compensation Committee is to review and approve the compensation of U.S. Healthcare's executive officers. The Incentive Plan Committee, which held two meetings in 1995, currently consists of Ms. Cohen and Dr. Misher. The functions of the Incentive Plan Committee are to grant stock options and restricted stock awards pursuant to U.S. Healthcare's Incentive Plan and to serve as the administrative committee of U.S. Healthcare's Incentive Plan. The Stock Option Committee, which held no meetings in 1995, consists of Messrs. Abramson and Dickerson and Dr. Misher. The function of the Stock Option Committee is to grant stock options pursuant to U.S. Healthcare's stock option plans pursuant to which stock options may be granted to employees and participating physicians under contract with U.S. Healthcare's health maintenance organizations. The Executive Committee is empowered to exercise all of the powers of the Board of Directors between meetings of the Board of Directors, except for certain powers reserved by law or U.S. Healthcare's bylaws to the Board of Directors or the shareholders. The members of the Executive Committee are Mr. Abramson and Dr. Misher. The Executive Committee did not hold any meetings in 1995. The Board of Directors held four meetings in 1995. Each Director attended at least 75% of the aggregate number of meetings of the Board of Directors and committees on which the Director served. COMPENSATION OF DIRECTORS For 1995, U.S. Healthcare paid an annual fee of $10,000 to each non-employee director and $1,000 for each Board of Directors or committee meeting attended. For 1995, Ms. Cohen received $14,000, Mr. Goodman received $18,000, Dr. Misher received $20,000, Dr. Soll received $14,000 and Mr. Weglicki received $16,000. 3 5 ITEM 11 -- EXECUTIVE COMPENSATION Summary Compensation Table. The following table summarizes the compensation paid by U.S. Healthcare to U.S. Healthcare's executive officers for each of the last three fiscal years.
LONG-TERM COMPENSATION --------------------------------------------------- ANNUAL COMPENSATION AWARDS ----------------------------------------- ------------------------ PAYOUTS OTHER RESTRICTED ------------ ANNUAL STOCK SECURITIES ALL OTHER FISCAL COMPENSATION AWARDS UNDERLYING COMPENSATION NAME AND POSITION YEAR SALARY(1) BONUS(2) ($)(3) ($)(4) OPTIONS PAYOUTS (5)(6) - --------------------- ------ ---------- ---------- ------------ ---------- ---------- ------- ------------ Leonard Abramson 1995 $1,791,764(7) $ 700,000(8) $121,139 None None None $369,724 Principal executive officer 1994 1,739,577 1,635,000 77,830 None None None 421,581 1993 1,676,700 1,459,395(9) 75,114 None 150,000 None 310,836 Michael J. Cardillo 1995 575,100 221,460 15,839 $499,968 55,595 None 20,062 Co-President and 1994 475,200 300,000 9,588 None None None 20,096 Principal marketing officer 1993 432,000 225,000 8,629 None 40,500 None 29,270 Joseph T. Sebastianelli(10) 1995 513,000 221,460 1,688 499,968 68,095(12) None 20,062 Co-President and Principal medical 1994 313,906 255,000 None 635,000(11) None(12) None 3,000 administrative officer James H. Dickerson, Jr.(10) 1995 378,000 129,146 1,525 291,648 56,475(12) None 20,062 Principal financial officer 1994 283,500 150,000 None 986,133(11) None(12) None None Timothy E. Nolan 1995 378,000 129,146 9,978 291,648 38,300 None 20,062 Senior sales officer 1994 286,200 270,000 6,091 None None None 20,096 1993 243,000 270,000 5,624 None 37,500 None 29,270 David F. Simon 1995 378,000 129,146 8,004 291,648 30,885 None 20,062 Principal legal officer 1994 361,800 150,000 4,373 None None None 20,096 1993 329,400 125,000 3,337 None 15,000 None 29,270
- --------------- (1) Includes deferred compensation that accrues annually at a designated percentage of each executive officer's annual base salary, which is payable upon termination of employment. The designated percentage of deferred compensation for Mr. Abramson for 1993, 1994, and 1995 was 11.78%, and the designated percentage of deferred compensation for the other executive officers for 1993, 1994, and 1995 was 8%. The amount reported in this column also includes the portion of salary that each executive officer contributed to the U.S. Healthcare Savings Plan (the "Savings Plan"). Participants in the Savings Plan may contribute a percentage of their cash compensation, subject to certain limitations set forth in the Savings Plan. (2) Under the 1995 Stock-Based Performance Bonus Program for Senior Employees (the "1995 Bonus Program"), each executive officer other than Leonard Abramson received his 1995 bonus in a combination of cash and restricted shares of U.S. Healthcare's Common Stock. The restricted shares granted under the 1995 Bonus Program vest in five annual installments commencing on January 4, 1996. The 1995 bonus amount for each executive officer in this column (other than Leonard Abramson) includes the market value of the first installment of restricted shares granted under the 1995 Bonus Program which vested on January 4, 1996. The number of shares and the market value (which is determined by multiplying the number of vested shares by the closing price of U.S. Healthcare Common Stock on the Nasdaq Stock Market on the vesting date) of the first installment that vested on January 4, 1996 were as follows: Mr. Cardillo, 2,688 shares ($120,960); Mr. Sebastianelli, 2,688 shares ($120,960); Mr. Dickerson, 1,049 shares ($47,205); Mr. Nolan, 996 shares ($44,820); and Mr. Simon, 1,049 shares ($47,205). Pursuant to the Merger Agreement and the U.S. Healthcare Incentive Plan, all restricted shares vested as of March 30, 1996. (3) The deferred compensation amount, which accrues each year as described above in Note 1, is increased each year by an amount corresponding to interest, based upon U.S. Healthcare's average yield on its investments, on the prior year's accumulated balance. This column includes interest earned by each executive officer on his deferred compensation. (4) The restricted stock awards shown in this column for 1995 reflect the market value (as of the grant date) of the four remaining installments of restricted shares granted to each executive officer other than Leonard Abramson under the 1995 Bonus Program (described above in Note 2) which had not vested as of January 4, 1996. The market value of these restricted shares was determined by multiplying the number of unvested shares by the closing price of Common Stock on the Nasdaq Stock Market as of the grant date. As of January 1, 1996, the officers listed in this table held the following number of shares of restricted stock, with the following values: Mr. Abramson, 0 shares ($0), Mr. Cardillo, 10,752 shares ($499,968); Mr. Sebastianelli, 10,752 shares ($499,968); Mr. Dickerson, 6,272 shares ($291,648); Mr. Nolan, 6,272 shares ($291,648); and Mr. Simon, 6,272 shares ($291,648). As a result of U.S. Healthcare entering into the Merger Agreement, all shares of restricted stock vested as of March 30, 1996. 4 6 (5) Includes contributions made by U.S. Healthcare to the Pension Plan for Employees of U.S. Healthcare (the "Pension Plan") and to the Savings Plan. Under the Pension Plan, U.S. Healthcare contributes for each eligible employee an amount equal to 8% of the employee's compensation plus 5.7% of the employee's compensation in excess of the social security taxable wage base, subject to a maximum limitation on U.S. Healthcare contribution per employee as specified in the Pension Plan. The Pension Plan provides for payment of an employee's account balance either in a lump sum or under an annuity option specified in the Pension Plan, as selected by the employee. The amount reported in this column also includes U.S. Healthcare's contributions under the Savings Plan in an amount equal to one-third of the participating employee's contribution, up to 2% of the employee's annual compensation. (6) Pursuant to agreements between U.S. Healthcare and two trusts created by Leonard Abramson, the trusts have purchased three split-dollar life insurance policies on Mr. Abramson's life and one split-dollar life insurance policy on the joint lives of Mr. Abramson and his wife, Madlyn K. Abramson. Under these agreements, U.S. Healthcare pays the premium on each policy, minus a sum equal to the lesser of the applicable one-year term premium cost computed under Internal Revenue Service Revenue Ruling 55-747 or the cost of comparable one-year term life insurance in the amount of each policy. The trusts are the beneficiaries of the insurance policies. However, U.S. Healthcare has been granted a security interest in the death benefits of each policy equal to the sum of all premium payments made by U.S. Healthcare. These arrangements are designed so that if the assumptions made as to mortality experience, policy dividends and other factors are realized, U.S. Healthcare, upon Mr. Abramson's death or the surrender of the policies, will recover all of its insurance premium payments (which do not include certain amounts paid annually to Mr. Abramson, as described below). The premiums paid by U.S. Healthcare in 1993, 1994, and 1995 pursuant to these arrangements were $405,267, $405,177, and $401,670, respectively. The amounts in this column do not include such premium payments. However, the amounts in this column include the present value of the imputed interest on such premium payments, such interest calculated based upon Mr. Abramson's remaining life expectancy, and totaled $256,760, $282,346, and $256,016 in 1993, 1994, and 1995, respectively. Pursuant to the split-dollar arrangement described above, Mr. Abramson receives each year an amount equal to the portion of the annual premiums due and payable on the life insurance policies which are not paid by U.S. Healthcare pursuant to the above-described formula, but paid by Mr. Abramson. The amounts reported in this column include such amounts, which totaled $25,049, $25,139, and $28,646 in 1993, 1994, and 1995, respectively. The amounts in this column also include the following payments by U.S. Healthcare to Mr. Abramson: (i) for 1995, $50,000 for travel and $18,000 for 1994 tax return preparation fees and (ii) for 1994, $50,000 for travel expenses and $47,000 for 1992 and 1993 tax return preparation fees. (7) Does not include a $48,088 cost of living increase in base salary to which Mr. Abramson was entitled but declined to receive. (8) Does not include $910,488 of cash bonus Mr. Abramson earned for 1995, but did not receive. Mr. Abramson has an employment agreement pursuant to which he was entitled to receive a cash bonus for 1995 in the amount of $1,610,488. However, Mr. Abramson declined to receive the full amount of such cash bonus he was entitled for 1995 and requested that the portion of his bonus in excess of $700,000 be deferred until such time as U.S. Healthcare's earnings per share for any four consecutive quarters in the aggregate have exceeded $2.70 per share. The Board of Directors of U.S. Healthcare accepted Mr. Abramson's request. Accordingly, payment of $910,488 of Mr. Abramson's 1995 total bonus amount of $1,610,488 was initially deferred until such time as U.S. Healthcare's earnings reach the level described above. In connection with the execution of the Merger Agreement, the U.S. Healthcare Board of Directors authorized the payment of such portion of Mr. Abramson's bonus on the Merger Date. (9) The bonus amount for 1993 also includes a contract renewal bonus of $64,395 payable pursuant to the employment agreement which terminated on December 31, 1992. (10) No information is reported for 1993 because Messrs. Sebastianelli and Dickerson were not employees of U.S. Healthcare prior to 1994. (11) The value of the restricted stock grant reflected in this column is determined by multiplying the total number of shares awarded by the closing price of U.S. Healthcare Common Stock on the Nasdaq Stock Market on the date of grant. Messrs. Sebastianelli and Dickerson were awarded 15,000 and 22,500 shares of U.S. Healthcare Common Stock, respectively. (12) Pursuant to a repricing program adopted by the Compensation Committee of the U.S. Healthcare Board of Directors in 1995 (the "Options Repricing Program"), options to purchase 15,000 and 30,000 shares of U.S. Healthcare Common Stock which were granted in 1994 to Messrs. Sebastianelli and Dickerson, respectively, were canceled and were reissued in 1995 with a new exercise price and a new vesting schedule. These canceled stock options are not reflected in this column; only the stock options reissued in 1995 are included in this column. 5 7 U.S. Healthcare did not grant any stock appreciation rights ("SARs") to any executive officer during the three fiscal years covered by the Summary Compensation Table. Option/SAR Grants in Fiscal Year 1995. The following table summarizes the stock options granted by U.S. Healthcare to U.S. Healthcare's executive officers during the last fiscal year. No SARs were granted during the last fiscal year.
NUMBER OF % OF TOTAL SECURITIES OPTIONS/SARS UNDERLYING GRANTED TO EXERCISE OPTIONS/SARS EMPLOYEES IN OR BASE GRANT DATE NAME GRANTED(#)(1) LAST FISCAL YEAR PRICE($/SH) EXPIRATION DATE PRESENT VALUE(2) - -------------------------- ------------- ---------------- ----------- --------------- ---------------- Michael J. Cardillo....... 55,595 2.7% $ 31.18 August 7, 2005 $ 865,058 Joseph T. Sebastianelli... 68,095(3) 3.3% $ 31.18 August 7, 2005 1,059,558 James H. Dickerson, Jr.... 56,475(3) 2.8% $ 31.18 August 7, 2005 878,751 Timothy E. Nolan.......... 38,300 1.9% $ 31.18 August 7, 2005 595,948 David F. Simon............ 30,885 1.5% $ 31.18 August 7, 2005 480,571
- --------------- (1) When granted, the options reflected in the table were to become exercisable in five equal annual installments commencing on August 7, 1996. The exercise price of the options is 100% of the fair market value of U.S. Healthcare Common Stock as of the date of grant. In addition, pursuant to the Merger Agreement and the U.S. Healthcare Incentive Plan, each outstanding option became fully vested as of March 30, 1996 and is no longer subject to any conditions relating to exercisability other than as agreed to under the Employment Agreement (as defined below) with the executive officer. (2) The dollar amount set forth under this heading is the result of calculations based on requirements promulgated by the Securities and Exchange Commission and is not intended to reflect U.S. Healthcare's estimate or projection of possible future stock prices. The dollar amount was calculated for all options using the binomial option pricing model with the following assumptions: (a) 41.56% volatility, (b) 6.67% risk-free rate of return, (c) 2.2% annual dividend yield and (d) all options exercised at the end of their term. (3) In August 1995, Messrs. Sebastianelli and Dickerson received stock option grants for 15,000 shares and 30,000 shares, respectively, at the then fair market value of common stock in exchange for cancellation of a like number of stock options. Aggregated Option/SAR Exercises in Fiscal Year 1995 and Fiscal Year-End Option Values. The following table summarizes the stock options exercised by U.S. Healthcare's executive officers during the last fiscal year and the fiscal year-end number and value of unexercised stock options held by such executive officers. No SARs had been granted as of the end of the last fiscal year.
NUMBER OF VALUE OF SECURITIES UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT SHARES FISCAL YEAR END(#) FISCAL YEAR END($)(2) ACQUIRED VALUE (EXERCISABLE(E)/ EXERCISABLE(E) NAME ON EXERCISE REALIZED($)(1) (UNEXERCISABLE(U)) UNEXERCISABLE(U) - ------------------------------- ----------- -------------- --------------------- --------------------- Leonard Abramson............... 0 0 60,000(E) $1,058,793(E) 90,000(U) 1,588,190(U) Michael J. Cardillo............ 0 0 16,200(E) 290,790(E) 79,895(U) 1,287,900(U) Joseph T. Sebastianelli........ 0 0 68,095(U) 1,043,215(U) James H. Dickerson, Jr. ....... 0 0 56,475(U) 865,197(U) Timothy E. Nolan............... 0 0 7,500(E) 134,625(E) 60,800(U) 990,631(U) David F. Simon................. 10,126 236,293 11,063(E) 309,207(E) 48,323(U) 910,209(U)
- --------------- 6 8 (1) Based on the difference between the closing price of U.S. Healthcare Common Stock on The Nasdaq Stock Market on the date of exercise and the exercise price of the options. In addition, pursuant to the Merger Agreement and the U.S. Healthcare Incentive Plan, each outstanding option became fully vested as of March 30, 1996 and is no longer subject to any conditions relating to exercisability other than as agreed to under the Employment Agreement with each executive officer. (2) Based on the difference between the closing price of U.S. Healthcare Common Stock on The Nasdaq Stock Market at year end 1995 and the exercise price of the options. Ten-Year Option Repricing. Pursuant to the Options Repricing Program, certain stock options were canceled and reissued in 1995 with a new exercise price and a new vesting schedule. In addition, pursuant to the Merger Agreement and the U.S. Healthcare Incentive Plan, each outstanding option became fully vested as of March 30, 1996 and is no longer subject to any conditions relating to exercisability other than as agreed to under the Employment Agreement with each executive officer. The following table provides information regarding repricing of stock options affecting the executive officers identified in the Summary Compensation Table under the Options Repricing Program or any other program within the past ten fiscal years. Messrs. Sebastianelli and Dickerson are the only executive officers who participated in the Options Repricing Program.
NUMBER OF ORIGINAL LENGTH OF ORIGINAL SECURITIES EXERCISE OPTION-TERM UNDERLYING MARKET PRICE OF PRICE OF REMAINING AT REPRICING OPTIONS STOCK AT TIME OF STOCK AT TIME OF NEW EXERCISE DATE OF DATE REPRICED REPRICING REPRICING PRICE REPRICING(1) --------- ----------- ---------------- ---------------- ------------ ------------------ Leonard Abramson...... 11/3/87 337,502 $ 1.67 $ 3.30 $ 1.67 4.25 Michael J. Cardillo... 11/3/87 50,625 1.67 3.00 1.67 4.25 Joseph T. Sebastianelli....... 8/7/95 15,000 31.18 41.04 31.18 8.58 James H. Dickerson, Jr. . ... 8/7/95 30,000 31.18 42.50 31.18 8.67 Timothy E. Nolan...... 11/3/87 50,625 1.67 3.00 1.67 4.25
- --------------- (1) Length of time remaining is set forth in years. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS Mr. Abramson is a party to an employment agreement pursuant to which he is entitled to receive the following compensation for his services in 1996: (i) an annual base salary of $1,602,938, (ii) an annual bonus based upon U.S. Healthcare's performance and (iii) non-cash compensation and fringe benefits (including insurance against accidental injury or death of Mr. Abramson or his spouse). Mr. Abramson's employment agreement, the current term of which is for a period of 5 years from January 1, 1993, provides for a severance payment if he is terminated by U.S. Healthcare without cause, provided that he complies with certain confidentiality and non-competition obligations. In such event, he is entitled to receive his then-current base salary for the balance of his employment term (but not less than one year's base salary) and the pro rata portion of other cash compensation (based upon the other cash compensation he would have received had the agreement not been terminated). Pursuant to the Agreement (the "Agreement with Principal Shareholder"), dated as of March 30, 1996, between Mr. Abramson and Parent, the terms of Mr. Abramson's employment agreement will be superseded as of the Merger Date. A copy of such agreement was filed as Exhibit 99.4 to U.S. Healthcare's Current Report on Form 8-K dated April 2, 1996. In connection with the execution of the Merger Agreement, U.S. Healthcare has entered into employment agreements (each, an "Employment Agreement"), effective as of March 30, 1996 (the "Effective Date"), with each of the following of its executive officers: Michael J. Cardillo, Co-President; James H. Dickerson, Jr., Chief Financial Officer; Timothy E. Nolan, Senior Sales Officer; Joseph T. Sebastianelli, Co-President; and David F. Simon, Chief Legal Officer. Each Employment Agreement will be assumed by Parent at the Merger Date (each of U.S. Healthcare and Parent is sometimes hereinafter referred to as the "Employer") and each of the above-named executives will assume similar positions with respect to the health operations of the combined business at such time. Each Employment Agreement has an initial term of five years with automatic one-year extensions commencing on the fifth anniversary of the Merger Date (or, 7 9 if the Mergers are not consummated, on the fifth anniversary of the Effective Date) unless notice of nonextension is given at least 180 days prior to such anniversary. Each Employment Agreement provides for (i) a base salary at least equal to the executive's annual salary rate (including deferred compensation) for 1996; (ii) an annual target bonus equal to 80% of such executive's base salary upon the attainment of reasonable corporate performance goals, provided that (A) the bonus payment in respect of 1997 must at least equal the target bonus for such fiscal year and (B) if the Merger Date occurs prior to December 31, 1996, the bonus payment in respect of 1996 can be no less than that which the executive would have received (as determined by U.S. Healthcare) had the Merger Date occurred subsequent to such date; (iii) grants of options, shares of restricted stock and other equity-based awards on terms no less favorable than such grants are made to similarly situated executives of the Employer and its subsidiaries; and (iv) benefits (including retirement, group life, medical, dental and disability benefits) on a basis reasonably comparable in the aggregate to those provided to the executive immediately prior to the Merger Date, or if more favorable to the executive, to those provided to other senior officers of Parent and its subsidiaries. For 1996, the annual salary for each of the above-named U.S. Healthcare executives is as follows: Mr. Cardillo, $600,000; Mr. Dickerson, $420,000; Mr. Nolan, $420,000; Mr. Sebastianelli, $600,000; and Mr. Simon, $402,500. Each Employment Agreement provides for the payment, at the Merger Date, of (i) a sign-on bonus (the "Cash Bonus") equal to the sum of the executive's then-current annual salary (including deferred compensation) plus the amount of such executive's 1995 bonus (or 1996 bonus, if the Merger Date follows December 31, 1996 and such 1996 bonus is larger); and (ii) a "stay" bonus in the form of a grant, as of the Merger Date, of that number of shares of restricted Parent Common Stock equal to the Cash Bonus amount divided by the average closing price per share of Parent Common Stock over the ten trading days following the consummation of the Merger (such grant of restricted Parent Common Stock hereinafter referred to as the "Restricted Stock Bonus"). Restrictions with respect to the Restricted Stock Bonus will lapse upon the second anniversary of the date of grant, or, if earlier, (i) upon a change in control of Parent or (ii) upon termination of the executive's employment (a) by reason of death or "disability," (b) by the Employer other than for "cause" or (c) by the executive for "good reason" (each such term, as defined in the Employment Agreements). Each Employment Agreement provides that the executive may not sell or otherwise dispose (with specified exceptions) of (i) during the period commencing with the Effective Date and ending on the Merger Date, any shares of U.S. Healthcare Common Stock, including shares subject to option, except for the partial cash-out of such shares and options in connection with the Mergers and (ii) during the one-year period following the Merger Date, any shares of Parent Common Stock. Each Employment Agreement also provides that, in consideration of the executive's agreement to such restrictions, each executive will be reimbursed for all income and employment taxes (and all income and employment taxes on the reimbursement amount) payable by the executive in connection with the vesting of restricted shares of U.S. Healthcare Common Stock or as the result of the partial cash-out of shares of such stock still subject to option as of the Merger Date. Each Employment Agreement provides that, if the executive's employment under the Employment Agreement is terminated by the Employer other than for "cause" or "disability" or by the executive for "good reason," the executive will be entitled to receive the following payments and benefits: (i) a payment in cash equal to three times the sum of (A) the higher of the executive's base salary as in effect immediately prior to the event or circumstance upon which termination of employment is based and the executive's annual base salary (including amounts deferred for the applicable year and any interest accrued thereon) in effect immediately prior to the Merger Date and (B) the then-current annual target bonus, 50% of such payment to be paid in a lump sum on the date of termination and, subject to compliance with the noncompetition provisions of the Employment Agreement, the remaining 50% to be paid in a lump sum on the first anniversary of the date of termination of employment); (ii) a pro rata portion, to the date of termination, of the higher of the actual or target value of any contingent annual bonus award made to the executive for any then uncompleted fiscal year under any bonus plan (other than the fiscal year commencing in 1996); (iii) for thirty-six months immediately following the date of such termination, the continuation of substantially the same welfare and pension benefits as the executive is receiving immediately prior to termination of employment, subject to offset by any such benefits received without cost during such thirty-six month period; and (iv) if the executive would have become entitled to benefits under the Employer's postretirement health 8 10 care or life insurance plans during the thirty-six month period following the date of termination of employment, the provision of such postretirement benefits beginning on the later of (A) the date the executive would have become eligible for such benefits and (B) the date on which the welfare benefits described in the immediately preceding clause will terminate. In the event that the executive's employment under the Employment Agreement is terminated by reason of death or "disability," each of the Employment Agreements provides that the executive (or his estate or legal representative) will continue to receive his base salary and annual bonus for the one-year period following such termination. Each Employment Agreement also provides for a payment, if necessary, intended to reimburse the executive for any excise tax imposed under section 4999 of Internal Revenue Code of 1986, as amended (the "Code") with respect to any payment or benefits that the executive may receive under his Employment Agreement or any other plan, arrangement or agreement, and all income, employment and excise taxes thereon. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Directors and Executive Officers. The following table sets forth the number of shares of U.S. Healthcare Common Stock and U.S. Healthcare Class B Stock beneficially owned as of March 31, 1996 by each current director and executive officer (including the chief executive officer) of U.S. Healthcare as a group. The number of shares shown for all executive officers and directors as a group represented approximately 2.3% of the U.S. Healthcare Common Stock and 99.9% of the U.S. Healthcare Class B Stock outstanding. Individuals have sole voting and investment power over the stock unless otherwise indicated in the footnotes.
SHARES OF U.S. HEALTHCARE COMMON AND CLASS B STOCK, AS APPLICABLE, BENEFICIALLY OWNED(1) --------------------------- CLASS OF NUMBER OF PERCENT OF NAME SHARES SHARES CLASS - --------------------------------------------- -------------- ---------- ---------- Leonard Abramson............................. Common Stock 2,268,755 (2) 1.6% Class B Stock 14,411,955 99.9% Betsy Z. Cohen............................... Common Stock 2,000 * Jerome S. Goodman............................ Common Stock 83,095 * Allen Misher, Ph.D........................... Common Stock 5,250 * David B. Soll, M.D........................... Common Stock 217,147 * Timothy T. Weglicki.......................... Common Stock 37,500 (3) * Michael J. Cardillo.......................... Common Stock 153,763 (4) * Joseph T. Sebastianelli...................... Common Stock 95,694 (5) * James H. Dickerson, Jr....................... Common Stock 81,884 (6) * Timothy E. Nolan............................. Common Stock 170,898 (7) * David F. Simon............................... Common Stock 80,310 (8) * All directors and executive officers as a group................................. Common Stock 3,196,296 (9) 2.3% Class B Stock 14,411,955 99.9%
- --------------- * Less than 1%. (1) Based on information furnished by the beneficial owners listed. (2) Includes 35,260 shares of U.S. Healthcare Common Stock held by Mr. Abramson and two other individuals, as trustees of a trust for the benefit of Mr. Abramson's grandchildren, 1,691,543 shares of U.S. Healthcare Common Stock held by Madlyn K. Abramson, Mr. Abramson's wife, as trustee for three trusts for the benefit of their children, and 80,000 shares of U.S. Healthcare Common Stock held in a trust for the benefit of Mr. Abramson's grandchildren for which Mrs. Abramson is co-trustee; Mr. Abramson disclaims beneficial ownership of these shares. Also includes options to purchase 450,000 shares of U.S. Healthcare Common Stock that are currently exercisable. If all of the shares of U.S. Healthcare Class B Stock beneficially owned by Mr. Abramson were converted into U.S. Healthcare 9 11 Common Stock, Mr. Abramson would become a beneficial owner of approximately 10.8% of all outstanding U.S. Healthcare Common Stock. (3) Includes options to purchase 37,500 shares of U.S. Healthcare Common Stock that are currently exercisable. Mr. Weglicki has been a partner of ABS Capital Partners, L.P., a merchant banking fund affiliated with Alex. Brown & Sons Incorporated, an investment banking and brokerage firm, since January 1994, and was a Managing Director of Alex. Brown & Sons Incorporated from 1984 to 1995. Alex. Brown & Sons Incorporated is a market maker in U.S. Healthcare Common Stock, and in the ordinary course of business buys and sells U.S. Healthcare Common Stock. Mr. Weglicki disclaims beneficial ownership of any shares of U.S. Healthcare Common Stock held by Alex. Brown & Sons Incorporated. (4) Includes 228 shares of U.S. Healthcare Common Stock held under the U.S. Healthcare, Inc. Savings Plan. Also includes options to purchase 96,095 shares of U.S. Healthcare Common Stock that are currently exercisable. (5) Includes 159 shares of U.S. Healthcare Common Stock held under the Savings Plan. Also includes options to purchase 68,095 shares of U.S. Healthcare Common Stock that are currently exercisable. (6) Includes 88 shares of U.S. Healthcare Common Stock held under the U.S. Healthcare Savings Plan. Also includes options to purchase 56,475 shares of U.S. Healthcare Common Stock that are currently exercisable. (7) Includes 15,094 shares of U.S. Healthcare Common Stock held under the U.S. Healthcare Savings Plan. Also includes options to purchase 68,300 shares of U.S. Healthcare Common Stock that are currently exercisable, 60 shares of U.S. Healthcare Common Stock held in a custodial account for the benefit of Mr. Nolan's niece, 55 shares of U.S. Healthcare Common Stock held in a custodial account for the benefit of Mr. Nolan's godchild, 30 shares of U.S. Healthcare Common Stock held in a custodial account for the benefit of Mr. Nolan's nephew and 20 shares of U.S. Healthcare Common Stock held in a custodial account for the benefit of Mr. Nolan's niece. This also includes 4,539 shares of U.S. Healthcare Common Stock held in a joint account by Mr. Nolan and Kathleen Nolan, his wife. (8) Includes 790 shares of U.S. Healthcare Common Stock held under the U.S. Healthcare Savings Plan. Also includes options to purchase 51,323 shares of U.S. Healthcare Common Stock that are currently exercisable. (9) Includes options to purchase 827,788 shares of U.S. Healthcare Common Stock that are currently exercisable. Also includes 16,359 shares of U.S. Healthcare Common Stock held under the U.S. Healthcare Savings Plan. Pursuant to the Merger Agreement and the U.S. Healthcare Incentive Plan, all unexercisable options held by each director and executive officer as of March 30, 1996 became fully vested on March 30, 1996 and are no longer subject to any conditions relating to exercisability other than as agreed to under the Employment Agreements and the Agreement with Principal Shareholder, as applicable. If all of the shares of U.S. Healthcare Class B Stock beneficially owned by Mr. Abramson were converted into U.S. Healthcare Common Stock, all directors and executive officers as a group would become beneficial owners of approximately 11.4% of all outstanding U.S. Healthcare Common Stock. Five Percent Stockholders. The following table sets forth information concerning the only persons known to U.S. Healthcare as of March 31, 1996 to own beneficially more than 5% of the outstanding shares of U.S. Healthcare Stock.
BENEFICIAL OWNERSHIP OF INDICATED CLASS --------------------------- NAME AND ADDRESS CLASS OF NUMBER OF PERCENT OF OF SHAREHOLDER STOCK SHARES CLASS - ---------------------------------------------------- ------------- ----------- ---------- Leonard Abramson.................................... Common Stock 2,268,755(1) 1.6% Class B Stock 14,411,955 99.9%
- --------------- (1) Includes 35,260 shares of U.S. Healthcare Common Stock held by Mr. Abramson and two other individuals, as trustees of a trust for the benefit of Mr. Abramson's grandchildren, 1,691,543 shares of U.S. Healthcare Common Stock held by Madlyn K. Abramson, Mr. Abramson's wife, as trustee for three 10 12 trusts for the benefit of their children, and 80,000 shares of Common Stock held in a trust for the benefit of Mr. Abramson's grandchildren for which Mrs. Abramson is co-trustee; Mr. Abramson disclaims beneficial ownership of these shares. Also includes options to purchase 450,000 shares of Common Stock that are currently exercisable. If all of the shares of Class B Stock beneficially owned by Mr. Abramson were converted into Common Stock, Mr. Abramson would become a beneficial owner of approximately 10.8% of all outstanding Common Stock. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During 1995, the medical practice of Dr. Soll, a Director of U.S. Healthcare, received $670,878 from U.S. Healthcare or its subsidiaries for medical services rendered to members of U.S. Healthcare's health maintenance organizations. During 1995, U.S. Healthcare paid $3,862,837 to vendors of travel and lodging services for business related travel by employees arranged through Cherry Hill Travel, Inc. d/b/a Travel One, a travel agency. Mr. Goodman, a Director of U.S. Healthcare, is the Chairman of Cherry Hill Travel, Inc. U.S. Healthcare paid $248,715 in salary and cash bonus and 2,608 shares of restricted U.S. Healthcare Common Stock (which vest in five equal annual installments) for services rendered in 1995 by Ms. Nancy Wolfson, an employee of U.S. Healthcare and a daughter of Mr. Abramson (who is a Director, principal executive officer and beneficial holder of more than ten percent of the voting securities of U.S. Healthcare). U.S. Healthcare paid $287,010 in salary and cash bonus and 3,012 shares of restricted U.S. Healthcare Common Stock (which vest in five equal annual installments) for services rendered in 1995 by Mr. Richard Wolfson, an employee of U.S. Healthcare and a son-in-law of Mr. Abramson. Pursuant to the Merger Agreement, as of March 30, 1996, each then-outstanding share of U.S. Healthcare restricted stock became fully vested. U.S. Healthcare owns 51% and Ms. Marcy Shoemaker (a daughter of Mr. Abramson) owns 49% of the outstanding voting securities of Criterion Communications, Inc. ("Criterion"), a Delaware corporation engaged in corporate communications business. U.S. Healthcare has made available to Criterion a line of credit for up to $10,000,000. In 1995, Criterion borrowed $184,707 under the line of credit. U.S. Healthcare has also entered into a service agreement with Criterion pursuant to which Criterion is obligated to pay for certain administrative services and facilities provided by U.S. Healthcare for Criterion. Criterion paid U.S. Healthcare $89,630 for services and facilities provided in 1995. In addition, U.S. Healthcare is the guarantor of Criterion's obligations under a lease agreement for Criterion's office space. Criterion has also entered into a service agreement with U.S. Healthcare pursuant to which U.S. Healthcare is obligated to pay for certain services provided or arranged by Criterion for U.S. Healthcare. U.S. Healthcare paid Criterion $5,186,240 for such services provided in 1995. Ms. Shoemaker was paid $225,000 in salary and no bonus as an officer of Criterion. Pursuant to the Merger Agreement, Parent has agreed to cause U.S. Healthcare to perform U.S. Healthcare's agreements with Criterion and not to terminate such agreements until 2004, absent a breach by any other party thereto. In connection with the execution of the Merger Agreement, U.S. Healthcare has entered into employment agreements with twenty-seven of its executives, including Nancy Wolfson, Richard Wolfson and Marcy Shoemaker. Nancy Wolfson and Marcy Shoemaker are daughters of Mr. Abramson, and Richard Wolfson is a son-in-law of Mr. Abramson. PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)1. FINANCIAL STATEMENTS U.S. Healthcare's audited financial statements, previously filed as Exhibit 13 to U.S. Healthcare's Annual Report on Form 10-K, have been revised to include the addition of Note 9 thereto which reflects that U.S. Healthcare has entered into the Merger Agreement. Such financial statements are being filed as Exhibit 13 hereto. 11 13 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. U.S. HEALTHCARE, INC By: /s/ Don H. Liu ------------------------------------ Name: Don H. Liu Title: Secretary Dated: April 29, 1996 12 14 INDEX TO EXHIBITS Exhibit 3. Articles of incorporation and by-laws. 3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 3.2 By-laws (incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). Exhibit 4. Specimen of common stock certificate. 4.1 Specimen of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 4.2 Specimen of Class B Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). Exhibit 10. Material contracts. 10.1 Employment Agreement dated as of January 1, 1993 between U.S. Healthcare, Inc. and Leonard Abramson (incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.2 Employment Agreement dated as of January 1, 1993 between U.S. Healthcare, Inc. and Michael Cardillo (incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992) (the Employment Agreement referenced herein as Exhibit 10.29 supersedes this Employment Agreement). 10.3 Employment Agreement dated as of January 1, 1993 between U.S. Healthcare, Inc. and Timothy Nolan (incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994) (the Employment Agreement referenced herein as Exhibit 10.33 supersedes this Employment Agreement). 10.4 Employment Agreement dated as of January 1, 1993 between U.S. Healthcare, Inc. and David F. Simon (incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994) (the Employment Agreement referenced herein as Exhibit 10.30 supersedes this Employment Agreement). 10.5 Employment Agreement dated as of January 24, 1994 between U.S. Healthcare, Inc. and Joseph T. Sebastianelli (incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994) (the Employment Agreement referenced herein as Exhibit 10.28 supersedes this Employment Agreement). 10.6 Employment Agreement dated as of February 4, 1994 between U.S. Healthcare, Inc. and James H. Dickerson, Jr. (incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994) (the Employment Agreement referenced herein as Exhibit 10.31 supersedes this Employment Agreement). 10.7 1982 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1, No. 2-81039). 10.8 Second Incentive Stock Option Plan (incorporated by reference to Exhibit 10.21 to the Registrant's Registration Statement on Form S-1, No. 2-84210). 10.9 Third Incentive Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987). 10.10 U.S. Healthcare, Inc. Incentive Plan (incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.11 Form of Non-statutory Stock Option (incorporated by reference to Exhibit 10.25 to the Registrant's Registration Statement on Form S-1, No. 2-84210). 10.12 1987 Non-statutory Option Plan (incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987). 10.13 Form of Stock Option Contract for Stock Options granted under the U.S. Healthcare, Inc. Incentive Plan (incorporated by reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992).
15 10.14 Form of Restricted Stock Agreement for restricted stock awarded under the U.S. Healthcare, Inc. Incentive Plan (incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.15 Form of Restricted Stock Bonus Agreement (incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988). 10.16 Amended and Restated U.S. Healthcare, Inc. Savings Plan (incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.17 Amended and Restated Pension Plan for Employees of U.S. Healthcare, Inc. (incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.18 Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 10.19 Amendment No. 1 to 1982 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 10.20 Amendment No. 1 to Second Incentive Stock Option Plan (incorporated by reference to Exhibit 10.29 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 10.21 Amendment No. 2 to Second Incentive Stock Option Plan (incorporated by reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 10.22 Amendment No. 1 to 1987 Non-statutory Stock Option Plan (incorporated by reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 10.23 Amendment No. 1 to Third Incentive Stock Option Plan (incorporated by reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). 10.24 Split Dollar Insurance Agreement dated February 1, 1990 by and between Madlyn K. Abramson, Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson and David B. Soll, and U.S. Healthcare, Inc., and the related Collateral Assignment Agreement dated February 1, 1990 by and between Madlyn K. Abramson, Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson and David B. Soll and U.S. Healthcare, Inc. (incorporated by reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). 10.25 Split Dollar Insurance Agreement Dated January 21, 1991 by and between Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson, David B. Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare, Inc., and the related Collateral Assignment Agreement dated January 21, 1991 by and between Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson, David B. Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare, Inc. (incorporated by reference to Exhibit 10.24 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 10.26 Description of Deferred Compensation Plan (incorporated by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.27 Description of Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.28 Form of Employment Agreement, dated as of March 30, 1996, by and between U.S. Healthcare, Inc. and Joseph Sebastianelli (this Employment Agreement supersedes the Employment Agreement referenced herein as Exhibit 10.5) (incorporated by reference to Exhibit 99.5 to U.S. Healthcare's Current Report on Form 8-K dated April 2, 1996).
16 10.29 Form of Employment Agreement, dated as of March 30, 1996, by and between U.S. Healthcare, Inc. and Michael Cardillo (this Employment Agreement supersedes the Employment Agreement referenced herein as Exhibit 10.2) (incorporated by reference to Exhibit 99.6 to U.S. Healthcare's Current Report on Form 8-K dated April 2, 1996). 10.30 Form of Employment Agreement, dated as of March 30, 1996, by and between U.S. Healthcare, Inc. and David Simon (this Employment Agreement supersedes the Employment Agreement referenced herein as Exhibit 10.4) (incorporated by reference to Exhibit 99.7 to U.S. Healthcare's Current Report on Form 8-K dated April 2, 1996). 10.31 Form of Employment Agreement, dated as of March 30, 1996, by and between U.S. Healthcare, Inc. and James Dickerson (this Employment Agreement supersedes the Employment Agreement referenced herein as Exhibit 10.6) (incorporated by reference to Exhibit 99.8 to U.S. Healthcare's Current Report on Form 8-K dated April 2, 1996). 10.32 Form of Employment Agreement, dated as of March 30, 1996, by and between U.S. Healthcare, Inc. and Arthur Leibowitz (incorporated by reference to Exhibit 99.9 to U.S. Healthcare's Current Report on Form 8-K dated April 2, 1996). 10.33 Form of Employment Agreement, dated as of March 30, 1996, by and between U.S. Healthcare, Inc. and Timothy Nolan (this Employment Agreement supersedes the Employment Agreement referenced herein as Exhibit 10.3) (incorporated by reference to Exhibit 99.10 to U.S. Healthcare's Current Report on Form 8-K dated April 2, 1996). Exhibit 11. Computation of Net Income Per Common and Common Equivalent Share.* Exhibit 13. The 1995 Annual Report to Shareholders of U.S. Healthcare, Inc. is not deemed filed as part of this report (with the exception of the information incorporated by reference to Items 5, 6, 7 and 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 in the 1995 Annual Report to Shareholders).** Exhibit 21. Subsidiaries of the Registrant.* Exhibit 23. Consent of Ernst & Young LLP, independent auditors.** Exhibit 27. Financial Data Schedule.*
- --------------- * Filed previously with U.S. Healthcare's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. ** Filed herewith. EX-13 2 1995 ANNUAL REPORT PAGES 1 EXHIBIT 13 2 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders U.S. Healthcare, Inc. We have audited the accompanying consolidated balance sheets of U.S. Healthcare, Inc. as of December 31, 1995 and 1994 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S. Healthcare, Inc. at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for marketable securities as of December 31, 1993. ERNST & YOUNG LLP Philadelphia, Pennsylvania February 2, 1996 F-1 3 U.S. HEALTHCARE, INC. CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ----------------------- 1995 1994 --------- --------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Current assets: Cash and cash equivalents......................................... $ 804,631 $ 123,814 Marketable securities............................................. 450,006 1,009,244 Receivables....................................................... 144,571 103,465 Other............................................................. 31,945 38,453 ---------- ---------- Total current assets...................................... 1,431,153 1,274,976 Property and equipment, less accumulated depreciation............... 142,137 127,562 Marketable securities............................................... 50,771 33,405 Other long-term assets.............................................. 43,083 27,944 ---------- ---------- Total assets.............................................. $1,667,144 $1,463,887 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Medical costs payable............................................. $ 505,832 $ 378,321 Unearned premiums................................................. 68,655 32,283 Accounts payable and accrued liabilities.......................... 77,511 84,747 Income taxes payable.............................................. 28,179 46,525 ---------- ---------- Total current liabilities................................. 680,177 541,876 Long-term liabilities............................................... 22,836 16,338 ---------- ---------- Total liabilities......................................... 703,013 558,214 ---------- ---------- Shareholders' equity: Common stock, $.005 par value -- 275,000 shares authorized; 148,891 and 148,307 shares issued in 1995 and 1994........................................ 744 741 Class B stock, $.005 par value -- 50,000 shares authorized; 14,431 and 14,537 shares issued and outstanding in 1995 and 1994.................................................. 72 73 Additional paid-in capital.......................................... 169,359 157,275 Retained earnings................................................... 1,121,616 899,072 Net unrealized gains (losses) on marketable securities, less applicable income taxes...................................... 4,758 (27,203) Common stock held in treasury -- at cost; 9,710 and 2,821 shares in 1995 and 1994..................................... (311,767) (105,892) Unearned portion of restricted common stock......................... (20,651) (18,393) ---------- ---------- Shareholders' equity...................................... 964,131 905,673 ---------- ---------- Total liabilities and shareholders' equity................ $1,667,144 $1,463,887 ========== ==========
See accompanying notes. F-2 4 U.S. HEALTHCARE, INC. CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 --------- --------- --------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Operating revenue: Commercial premiums.................................. $2,971,365 $2,635,621 $2,402,431 Government premiums.................................. 490,677 240,891 157,277 Other, principally administrative services fees...... 55,764 32,770 20,212 ---------- ---------- ---------- 3,517,806 2,909,282 2,579,920 Operating expenses: Medical costs........................................ 2,577,833 1,994,780 1,861,985 Administrative, marketing and other operating costs............................................. 412,878 322,372 279,586 ---------- ---------- ---------- 2,990,711 2,317,152 2,141,571 ---------- ---------- ---------- Income from operations................................. 527,095 592,130 438,349 Investment income, including net realized gains and losses............................................... 91,873 65,214 65,315 ---------- ---------- ---------- Income before income taxes............................. 618,968 657,344 503,664 Provision for income taxes............................. 238,303 266,225 203,989 ---------- ---------- ---------- Net income............................................. $ 380,665 $ 391,119 $ 299,675 ========== ========== ========== Net income per common and common equivalent share -- primary and fully diluted............................ $2.42 $2.42 $1.84 ========== ========== ========== Weighted average number of common and common equivalent shares outstanding: Primary.............................................. 157,015 161,646 162,654 Fully diluted........................................ 157,436 161,704 162,798
See accompanying notes. F-3 5 U.S. HEALTHCARE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON NET STOCK UNREALIZED HELD IN COMMON STOCK CLASS B STOCK GAINS TREASURY --------------------- --------------------- ADDITIONAL (LOSSES) --------- NUMBER NUMBER PAID-IN RETAINED ON MARKETABLE NUMBER OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL EARNINGS SECURITIES OF SHARES --------- --------- --------- --------- ---------- --------- ------------- --------- Balance at January 1, 1993... 96,781 $ 484 10,751 $ 54 $120,506 $ 385,011 -- -- Exercise of stock options and related tax benefits.................. 453 2 -- -- 8,993 -- -- -- Net unrealized gains on marketable securities, less applicable income taxes..................... -- -- -- -- -- -- $ 23,301 -- Restricted common stock transactions, net......... 20 -- -- -- 1,253 -- -- -- Conversion of Class B stock to common stock........... 713 4 (713) (4) -- -- -- -- Purchase of treasury stock..................... -- -- -- -- -- -- -- (155) Cash dividends paid: $.3867 per common share... -- -- -- -- -- (56,490) -- -- $.3480 per Class B share................... -- -- -- -- -- (5,381) -- -- Net income.................. -- -- -- -- -- 299,675 -- -- Shares distributed under a 3 for 2 stock split......... 48,984 245 5,019 25 (270) -- -- (78) ------- ---- ------ --- -------- ---------- ------- ------ Balance at December 31, 1993........................ 146,951 735 15,057 75 130,482 622,815 23,301 (233) Exercise of stock options and related tax benefits.................. 402 2 -- -- 8,146 -- -- -- Net unrealized (losses) on marketable securities, less applicable income taxes..................... -- -- -- -- -- -- (50,504) -- Restricted common stock transactions, net......... 434 2 -- -- 18,647 -- -- -- Conversion of Class B stock to common stock........... 520 2 (520) (2) -- -- -- -- Purchase of treasury stock..................... -- -- -- -- -- -- -- (2,588) Cash dividends paid: $.7233 per common share... -- -- -- -- -- (105,157) -- -- $.6510 per Class B share................... -- -- -- -- -- (9,705) -- -- Net income.................. -- -- -- -- -- 391,119 -- -- ------- ---- ------ --- -------- ---------- ------- ------ Balance at December 31, 1994........................ 148,307 741 14,537 73 157,275 899,072 (27,203) (2,821) Exercise of stock options and related tax benefits.................. 333 1 -- -- 6,575 -- -- -- Net unrealized gains on marketable securities, less applicable income taxes..................... -- -- -- -- -- -- 31,961 -- Restricted common stock transactions, net......... 145 1 -- -- 5,509 -- -- -- Conversion of Class B stock to common stock........... 106 1 (106) (1) -- -- -- -- Purchase of treasury stock..................... -- -- -- -- -- -- -- (6,889) Cash dividends paid: $1.0250 per common share.. -- -- -- -- -- (144,711) -- -- $.9225 per Class B share................... -- -- -- -- -- (13,410) -- -- Net income.................. -- -- -- -- -- 380,665 -- -- ------- ---- ------ --- -------- ---------- ------- ------ Balance at December 31, 1995........................ 148,891 $ 744 14,431 $ 72 $169,359 $1,121,616 $ 4,758 (9,710) ======= ==== ====== === ======== ========== ======= ====== UNEARNED PORTION OF RESTRICTED COMMON STOCK --------------------- NUMBER SHAREHOLDERS' COST OF SHARES AMOUNT EQUITY --------- --------- -------- ------------- Balance at January 1, 1993... -- (103) $ (965) $ 505,090 Exercise of stock options and related tax benefits.................. -- -- -- 8,995 Net unrealized gains on marketable securities, less applicable income taxes..................... -- -- -- 23,301 Restricted common stock transactions, net......... -- 37 (720) 533 Conversion of Class B stock to common stock........... -- -- -- -- Purchase of treasury stock..................... $ (5,996) -- -- (5,996) Cash dividends paid: $.3867 per common share... -- -- -- (56,490) $.3480 per Class B share................... -- -- -- (5,381) Net income.................. -- -- -- 299,675 Shares distributed under a 3 for 2 stock split......... -- (33) -- -- --------- ---- ------- -------- Balance at December 31, 1993........................ (5,996) (99) (1,685) 769,727 Exercise of stock options and related tax benefits.................. -- -- -- 8,148 Net unrealized (losses) on marketable securities, less applicable income taxes..................... -- -- -- (50,504) Restricted common stock transactions, net......... -- (370) (16,708) 1,941 Conversion of Class B stock to common stock........... -- -- -- -- Purchase of treasury stock..................... (99,896) -- -- (99,896) Cash dividends paid: $.7233 per common share... -- -- -- (105,157) $.6510 per Class B share................... -- -- -- (9,705) Net income.................. -- -- -- 391,119 --------- ---- ------- -------- Balance at December 31, 1994........................ (105,892) (469) (18,393) 905,673 Exercise of stock options and related tax benefits.................. -- -- -- 6,576 Net unrealized gains on marketable securities, less applicable income taxes..................... -- -- -- 31,961 Restricted common stock transactions, net......... -- (48) (2,258) 3,252 Conversion of Class B stock to common stock........... -- -- -- -- Purchase of treasury stock..................... (205,875) -- -- (205,875) Cash dividends paid: $1.0250 per common share.. -- -- -- (144,711) $.9225 per Class B share................... -- -- -- (13,410) Net income.................. -- -- -- 380,665 --------- ---- ------- -------- Balance at December 31, 1995........................ $(311,767) (517) $(20,651) $ 964,131 ========= ==== ======= ========
See accompanying notes. F-4 6 U.S. HEALTHCARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------ 1995 1994 1993 ---------- ----------- ----------- (AMOUNTS IN THOUSANDS) Operating Activities: Net income......................................... $ 380,665 $ 391,119 $ 299,675 Adjustments to reconcile net income to cash flow from operating activities: Depreciation and amortization................. 33,279 27,763 21,786 Net realized (gains) losses on sales of marketable securities...................... (15,079) 2,461 (10,769) Other non-cash (credits) charges, net......... 9,297 3,267 (1,885) Changes in operating assets and liabilities: Receivables................................ (41,106) (5,171) (15,277) Medical costs payable...................... 127,511 (40,577) 35,651 Unearned premiums.......................... 36,372 4,759 7,740 Accounts payable and accrued liabilities... (7,236) 40,151 12,610 Income taxes payable....................... (15,969) (2,327) 29,763 Other, net................................. (14,048) (4,067) 2,863 ---------- ----------- ----------- Cash flow from operating activities...... 493,686 417,378 382,157 ---------- ----------- ----------- Investing Activities: Purchase of marketable securities.................. (904,735) (1,161,082) (1,604,199) Purchase of property and equipment, net............ (42,100) (27,219) (40,871) Proceeds from maturities or sales of marketable securities...................................... 1,514,656 1,024,618 1,299,363 Other.............................................. (20,893) (16,122) (7,614) ---------- ----------- ----------- Cash flow from investing activities........ 546,928 (179,805) (353,321) ---------- ----------- ----------- Financing Activities: Proceeds from exercise of stock options............ 4,199 4,660 3,804 Purchase of treasury stock......................... (205,875) (99,896) (5,996) Cash dividends paid................................ (158,121) (114,862) (61,871) ---------- ----------- ----------- Cash flow from financing activities........ (359,797) (210,098) (64,063) ---------- ----------- ----------- Increase (decrease) in cash and cash equivalents..... 680,817 27,475 (35,227) Cash and cash equivalents at beginning of year....... 123,814 96,339 131,566 ---------- ----------- ----------- Cash and cash equivalents at end of year............. $ 804,631 $ 123,814 $ 96,339 ========== =========== =========== Supplemental disclosure of cash flow information: Income taxes paid, net of state income tax refunds... $ 258,170 $ 270,476 $ 176,904 Supplemental disclosure of non-cash financing activities: Income tax benefits related to exercise of stock options............................................ $ 2,377 $ 3,488 $ 5,191
See accompanying notes. F-5 7 U.S. HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements include the accounts of U.S. Healthcare, Inc. and its subsidiaries (the Company), all of which are wholly owned except for certain subsidiaries which are not health maintenance organizations (HMOs). All significant intercompany transactions have been eliminated in consolidation. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes to consolidated financial statements. Actual results could differ from those estimates. Cash, Cash Equivalents and Marketable Securities -- Cash equivalents classified with cash consist of all highly liquid instruments which mature within three months from the date of purchase. The carrying amounts of cash and cash equivalents reported in the accompanying consolidated balance sheets approximate fair value. Marketable securities consist of debt securities. The Company determines the appropriate classification of debt securities at the time of purchase and reevaluates such classification as of each balance sheet date. At December 31, 1995 and 1994, all securities are classified as available for sale. Such securities are carried at fair value and cumulative net unrealized gains or losses, less applicable income taxes, are recorded as a separate component of shareholders' equity. Realized gains and losses and unrealized losses judged to be other than temporary are included in net income. Fair values of marketable securities are based on market prices, where available. If quoted market prices are not available, fair values are based on market prices of comparable instruments. The cost of securities sold is based on the specific identification method. At December 31, 1995 and 1994, $50,771,000 and $33,405,000, respectively, of the Company's marketable securities were held by trustees or state regulatory agencies in accordance with certain state requirements relating principally to HMOs. Such securities are classified as non-current assets. The Company determined that other marketable securities held as of December 31, 1995 and 1994 were available for use in current operations and, accordingly, classified such securities as current assets without regard to the securities' contractual maturity dates. The Company adopted Statement of Financial Accounting Standards Number 115 (FAS 115), "Accounting for Certain Investments in Debt and Equity Securities" as of December 31, 1993. The adoption of FAS 115 had no effect on net income but, as of December 31, 1993, increased marketable securities by $38,204,000, representing net unrealized gains, and shareholders' equity by $23,301,000 (net unrealized gains less deferred income taxes of $14,903,000). Property and Equipment -- Property and equipment, stated at cost, are depreciated on the straight-line method over their estimated useful lives for financial reporting purposes and under accelerated methods for income tax purposes. Operating Revenue -- Premiums for prepaid health care are recognized as income in the month in which the enrollees are entitled to health care services. Administrative services fees are recognized as income as services are rendered. Medical Costs -- Medical costs consist principally of medical claims and capitation costs. Medical claims include estimates of payments to be made on claims reported as of the balance sheet date and estimates of health care services rendered but not reported to the Company as of the balance sheet date. Such estimates include the cost of services which will continue to be rendered after the balance sheet date if the Company is obligated to pay for such services in accordance with contract provisions or regulatory requirements. Medical claims payable are estimated periodically and any resulting adjustments are included in current operations. Capitation costs represent monthly fees to participating primary care physicians and other medical providers as retainers for providing continuing health care services. F-6 8 U.S. HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Advertising Costs -- The Company expenses advertising costs as incurred. Advertising costs were $47,057,000, $37,129,000 and $28,435,000 in 1995, 1994, and 1993, respectively. Income Taxes -- Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Such temporary differences include depreciation and amortization, allowance for doubtful accounts, accrued compensated absences, deferred compensation and net unrealized gains or losses on marketable securities. Retirement Plans -- The Company has a defined contribution pension plan covering substantially all of its employees, subject to certain age and service requirements. The Company's contribution for each eligible employee is a percentage of the employee's compensation, as defined. The Company also has an employee savings plan (401(k)) available to all its employees, subject to certain age and service requirements. The Company matches 33 1/3% of the employee's contribution, up to a maximum of 2% of the employee's annual compensation. The Company funds pension and savings plan costs accrued. The Company has a retiree health benefit plan covering substantially all its employees (except for certain "key employees," as defined in the plan), subject to certain age and service requirements set forth in the plan. Company contributions, which are at the Company's sole discretion, are paid to a voluntary employees' beneficiary association (VEBA) trust. Any such contributions to the VEBA trust are allocated and credited to separate accounts established for each eligible employee and for each employee's eligible spouse. Funds accumulated in these separate accounts are used to fund all or a portion of the premiums for health care benefit coverage for eligible retired employees and their eligible spouses. When funds in these separate accounts are exhausted, neither the Company nor the VEBA trust have any obligation to make any further contributions or payments. Retirement plan costs were $14,199,000, $14,375,000, and $14,322,000 in 1995, 1994 and 1993, respectively. Net Income Per Common and Common Equivalent Share -- Primary and fully diluted net income per common and common equivalent share are based upon the applicable weighted average number of common and common equivalent (Class B stock and stock options) shares outstanding during the year, after giving effect to the stock split explained in Note 7. Accounting Standards Issued But Not Yet Adopted -- In March 1995, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard Number 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which addresses accounting for the impairment of long-lived assets such as property and equipment, identifiable intangible assets and goodwill. The prospective implementation of FAS 121, which must be adopted in 1996, is not expected to have a material effect on the Company's consolidated financial position or results of operations. In October 1995, the FASB issued Financial Accounting Standard Number 123 (FAS 123), "Accounting for Stock-Based Compensation," which prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options and restricted stock plans. Under FAS 123, companies may adopt a fair value method of expense recognition for all stock-based compensation or continue to account for all stock-based compensation under the measurement standards of Accounting Principles Board Opinion Number 25, "Accounting for Stock Issued to Employees" (APB 25). The implementation of FAS 123 in 1996 is not expected to affect the Company's consolidated financial position or results of operations because the Company presently expects to continue to apply the principles of APB 25. F-7 9 U.S. HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. MARKETABLE SECURITIES The following is a summary of marketable securities as of December 31, 1995 and 1994:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) December 31, 1995 Certificates of deposit.................. $ 4,767 -- -- $ 4,767 U.S. Government obligations.............. 338,377 $3,507 $ (519) 341,365 Municipal tax-exempt bonds............... 146,699 5,580 (34) 152,245 Other.................................... 2,400 -- -- 2,400 ---------- ------ -------- ---------- $ 492,243 $9,087 $ (553) $ 500,777 ========== ====== ======== ========== Classified as current.................... $ 441,570 $8,761 $ (325) $ 450,006 Classified as non-current................ 50,673 326 (228) 50,771 ---------- ------ -------- ---------- $ 492,243 $9,087 $ (553) $ 500,777 ========== ====== ======== ========== December 31, 1994 Certificates of deposit.................. $ 5,460 -- -- $ 5,460 U.S. Government obligations.............. 962,493 $ 237 $ (40,863) 921,867 Municipal tax-exempt bonds............... 117,632 505 (4,315) 113,822 Other.................................... 1,500 -- -- 1,500 ---------- ------ -------- ---------- $1,087,085 $ 742 $ (45,178) $1,042,649 ========== ====== ======== ========== Classified as current.................... $1,050,932 $ 718 $ (42,406) $1,009,244 Classified as non-current................ 36,153 24 (2,772) 33,405 ---------- ------ -------- ---------- $1,087,085 $ 742 $ (45,178) $1,042,649 ========== ====== ======== ==========
The contractual maturities of marketable securities as of December 31, 1995 were as follows:
ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- (AMOUNTS IN THOUSANDS) Due in one year or less........................................ $ 110,318 $ 110,312 Due after one year through five years.......................... 246,444 250,105 Due after five years through ten years......................... 113,131 116,991 Due after ten years............................................ 22,350 23,369 -------- -------- $ 492,243 $ 500,777 ======== ========
Gross realized gains on sales of marketable securities were $18,081,000 and $13,890,000 in 1995 and 1994, respectively. Gross realized losses on sales of marketable securities were $3,002,000 and $16,351,000 in 1995 and 1994, respectively. F-8 10 U.S. HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. RECEIVABLES Receivables consist of the following:
DECEMBER 31, --------------------- 1995 1994 -------- -------- (AMOUNTS IN THOUSANDS) Premiums (net of allowance for doubtful accounts of $15,779 in 1995 and $12,910 in 1994)................. $133,303 $ 83,711 Interest............................................... 7,196 16,441 Other.................................................. 4,072 3,313 -------- -------- $144,571 $103,465 ======== ========
For the years ended December 31, 1995, 1994 and 1993, premiums billed to the Federal Government, excluding premiums for Medicare beneficiaries, represented 8%, 9% and 10%, respectively, of premium revenue. These premiums are classified as commercial premiums in the accompanying consolidated statements of income. 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, --------------------- 1995 1994 -------- -------- (AMOUNTS IN THOUSANDS) Land................................................... $ 5,899 $ 5,888 Buildings.............................................. 58,936 55,297 Furniture and equipment................................ 135,615 101,877 Aircraft............................................... 35,767 37,881 -------- -------- 236,217 200,943 Less accumulated depreciation........................ 94,080 73,381 -------- -------- $142,137 $127,562 ======== ========
5. INCOME TAXES The provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- (AMOUNTS IN THOUSANDS) Current provision: Federal.................................. $198,958 $211,206 $165,657 State.................................... 35,145 55,404 41,892 -------- -------- -------- 234,103 266,610 207,549 Deferred provision (benefit): Federal.................................. 2,517 (307) (3,055) State.................................... 1,683 (78) (505) -------- -------- -------- 4,200 (385) (3,560) -------- -------- -------- $238,303 $266,225 $203,989 ======== ======== ========
F-9 11 U.S. HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A reconciliation between the federal statutory income tax rate and the Company's effective income tax rates is as follows:
YEARS ENDED DECEMBER 31, ------------------------- 1995 1994 1993 ----- ----- ----- (PERCENTAGE OF INCOME BEFORE INCOME TAXES) Federal statutory income tax rate.................. 35.0% 35.0% 35.0% Income tax rates are affected by: State income taxes............................... 3.7% 5.4% 5.3% Other, net....................................... (0.2%) 0.1% 0.2% ----- ----- ----- Effective income tax rates......................... 38.5% 40.5% 40.5% ===== ===== =====
6. LEGAL PROCEEDINGS Two class action complaints have been filed in the United States District Court for the Eastern District of Pennsylvania seeking unspecified damages. The complaints allege that the Company and two of its executive officers, through certain misrepresentations and omissions about the Company, violated federal securities laws and related state law. The Court has granted the plaintiffs' motion for class certification as to the federal claims but has denied it as to the state claims. The litigation is still in the preliminary stages, and merits discovery has just begun. The Company has denied the allegations and continues to defend the actions vigorously. The Company is also involved in legal actions concerning benefit plan coverage and other decisions by the Company, and alleged medical malpractice by participating providers. If found liable in such actions, which are vigorously defended on several grounds, the Company may bear financial responsibility. The Company is also involved in certain other claims and legal actions arising in the ordinary course of business. In the opinion of management, these claims and legal actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 7. SHAREHOLDERS' EQUITY On February 22, 1994, the Board of Directors declared a 3 for 2 stock split on common and Class B stock effected in the form of a 50% stock dividend paid on March 29, 1994. The effects of this stock split have been reflected in shareholders' equity as of December 31, 1993 as if the stock split had occurred as of that date. Amounts shown as cash dividends paid per common and Class B share for all periods presented reflect the effects of this stock split. Class B stock is convertible into common stock on a share for share basis and is entitled to receive cash dividends in an amount not to exceed 90% of cash dividends paid on common stock. Voting rights are one vote per share for common stock and fifty votes per share for Class B stock. The Company is authorized to issue 50,000,000 shares of preferred stock with no par value. No shares were issued as of December 31, 1995 and 1994. The Company has incentive stock plans that provide for grants of stock options and restricted stock awards. Recipients of stock options include employees, members of the Board of Directors and certain physicians who contract with the Company. Generally, the option price is not less than the market value of the stock when the options are granted. Options granted under the plans are generally exercisable commencing one year from the date of grant in increments ranging from 20% to 33 1/3% a year. Continued affiliation with the Company is a condition of vesting and exercise. Restricted stock awards of common stock are granted to selected employees and certain physicians who contract with the Company, subject to forfeiture if affiliation F-10 12 U.S. HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) with the Company terminates or violations of other terms of the awards occur prior to the end of the prescribed restriction period. Shares are granted without payment to the Company. Recipients have all of the rights of shareholders except that the shares are deposited with the Company and cannot be disposed of until the restrictions have lapsed. The approximate fair value (as of the award date) of shares awarded is accrued, and charged to expense ratably as the restrictions are lifted and the shares released to the recipients. Information concerning options outstanding for the two most recent years, after giving effect to the stock split described above, is as follows:
NUMBER OF SHARES UNDER OPTION ------------------------------------ NON- OPTION PRICE INCENTIVE STATUTORY TOTAL PER SHARE --------- ------------ ----- ------------ (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Outstanding at January 1, 1994......................... 2,253 510 2,763 $ 1.55-32.45 Granted........................ 386 483 869 $37.09-46.09 Exercised...................... (383) (26) (409) $ 1.55-29.73 Canceled....................... (81) (39) (120) $13.67-37.98 ----- ----- ----- Outstanding at December 31, 1994......................... 2,175 928 3,103 $ 1.55-46.09 Granted........................ 1,427 830 2,257 $12.33-43.18 Exercised...................... (258) (75) (333) $ 1.55-37.98 Canceled....................... (516) (75) (591) $ 6.50-46.09 ----- ----- ----- Outstanding at December 31, 1995......................... 2,828 1,608 4,436 $ 4.74-33.95 ===== ===== ===== Exercisable at December 31, 1995......................... 726 186 912 ===== ===== =====
At December 31, 1995 and 1994, 27,055,000 and 28,018,000 shares, respectively, of common stock were reserved for issuance under the plans discussed above. 8. CONTRACTUAL ARRANGEMENTS WITH PROVIDERS The Company generally compensates primary care physicians through prospective compensation arrangements which incorporate quality assessment standards, comprehensiveness of care, utilization and office status components. These components are used to adjust the capitation payments to individual physician offices and to determine the amount of additional periodic payments. The Company has prospective compensation arrangements for mental health, substance abuse, diagnostic laboratory, radiology and diagnostic imaging services, podiatric treatment, physical therapy and prescription drug dispensing. The Company has contracts that provide for all-inclusive per diem and per case hospitalization rates and fixed rates for ambulatory surgery, emergency room services and specialist services. The Company has also entered into quality-based compensation arrangements with certain hospitals, as well as agreements with certain integrated health delivery systems under which the systems are compensated on a substantially fixed prospective basis for medical services, including primary, specialist and hospital care. The arrangements described above cover the majority of medical services. 9. SUBSEQUENT EVENT (UNAUDITED) The Company and Aetna Life and Casualty Company entered into a definitive agreement, dated March 30, 1996, pursuant to which they have agreed to merge in a transaction valued at $8.9 billion. The merger agreement, which has been approved by the board of directors of each company, calls for the formation of a new holding company, Aetna Inc. Under the terms of the agreement, U.S. Healthcare shareholders will receive $34.20 in cash, 0.2246 shares of Aetna Inc. common stock and 0.0749 shares of Aetna Inc. F-11 13 U.S. HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) mandatorily convertible preferred stock for each common share and each Class B share of the Company. Following the merger, Company shareholders will own 22% of the stock of the combined company. The merger is subject to approval by shareholders of both companies and federal and state regulators, the close of the previously announced sale of Aetna's property and casualty unit, and other conditions. The merger is expected to close in the third quarter of 1996. The controlling shareholder of the Company has agreed to vote in favor of the merger. F-12 14 PRICE RANGE OF COMMON STOCK The common stock of the Company is traded on The Nasdaq Stock Market under the symbol USHC. The following table sets forth for the indicated periods the high and low prices of the common stock as reported by Nasdaq. All quotations have been rounded to the nearest one-eighth.
1995 1994 ------------ ------------ HIGH LOW HIGH LOW ---- --- ---- --- First Quarter................................... 47 1/2 39 1/2 45 1/2 36 5/8 Second Quarter.................................. 44 1/2 26 1/2 47 1/2 35 Third Quarter................................... 36 1/8 29 7/8 47 1/4 33 3/4 Fourth Quarter.................................. 46 1/2 34 3/8 49 38
On February 29, 1996, there were 3,679 and 19 shareholders of record of common and Class B stock, respectively. The Class B stock cannot be traded but is convertible into common stock on a share for share basis. DIVIDENDS The table below sets forth the cash dividends per share paid during 1995 and 1994.
1995 1994 ------------------------------ ------------------------------ COMMON STOCK CLASS B STOCK COMMON STOCK CLASS B STOCK ------------ ------------- ------------ ------------- First Quarter......... $ .250 $ .2250 $.1333 $ .1200 Second Quarter........ .250 .2250 .1700 .1530 Third Quarter......... .250 .2250 .2100 .1890 Fourth Quarter........ .275 .2475 .2100 .1890 ------------ ------------- ------------ ------------- Total for year...... $1.025 $ .9225 $.7233 $ .6510 =========== ========== =========== ==========
Future dividends will be declared and paid at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, capital requirements and the general financial condition of the Company. Cash dividends on the Class B stock may be paid only when dividends on the common stock are declared and paid. Cash dividends on a share of Class B stock cannot exceed 90% of the cash dividends on a share of common stock. F-13 15 SELECTED FINANCIAL DATA This data should be read in conjunction with the accompanying financial statements and related notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report.
YEARS ENDED DECEMBER 31, -------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Income Statement Data: Operating revenue: Commercial premiums................ $2,971,365 $2,635,621 $2,402,431 $2,010,963 $1,584,860 Government premiums................ 490,677 240,891 157,277 105,600 74,807 Other, principally administrative services fees................... 55,764 32,770 20,212 12,522 4,733 ---------- ---------- ---------- ---------- ---------- 3,517,806 2,909,282 2,579,920 2,129,085 1,664,400 Operating expenses: Medical costs...................... 2,577,833 1,994,780 1,861,985 1,631,317 1,279,960 Administrative, marketing and other operating costs................. 412,878 322,372 279,586 227,770 182,723 ---------- ---------- ---------- ---------- ---------- 2,990,711 2,317,152 2,141,571 1,859,087 1,462,683 ---------- ---------- ---------- ---------- ---------- Income from operations............... 527,095 592,130 438,349 269,998 201,717 Investment income, including net realized gains and losses.......... 91,873 65,214 65,315 60,139 44,101 Other income......................... -- -- -- -- 1,485 ---------- ---------- ---------- ---------- ---------- Income before income taxes........... 618,968 657,344 503,664 330,137 247,303 Provision for income taxes........... 238,303 266,225 203,989 130,091 96,203 ---------- ---------- ---------- ---------- ---------- Net Income........................... $ 380,665 $ 391,119 $ 299,675 $ 200,046 $ 151,100 ========== ========== ========== ========== ========== Net income per common and common equivalent share:(a) Primary............................ $ 2.42 $ 2.42 $ 1.84 $ 1.23 $ .93 Fully diluted...................... $ 2.42 $ 2.42 $ 1.84 $ 1.23 $ .92 Weighted average number of common and common equivalent shares outstanding:(a) Primary............................ 157,015 161,646 162,654 162,401 162,968 Fully diluted...................... 157,436 161,704 162,798 162,614 163,397 Cash dividends paid per common share(a)........................... $ 1.0250 $ .7233 $ .3867 $ .2733 $ .1600 Cash dividends paid per Class B share(a)........................... $ .9225 $ .6510 $ .3480 $ .2460 $ .1440 Medical costs as a percentage of premiums........................... 74.5% 69.3% 72.7% 77.1% 77.1% Balance Sheet data:(b) Total assets....................... $1,667,144 $1,463,887 $1,343,653 $ 981,094 $ 758,218 Total liabilities.................. 703,013 558,214 573,926 476,004 411,324 Shareholders' equity............... 964,131 905,673 769,727 505,090 346,894
- --------------- (a) After giving effect to 3 for 2 stock splits effected in the form of 50% stock dividends paid in September 1992 and March 1994. (b) After giving effect to a change in the method of accounting for marketable securities as of December 31, 1993, explained in Note 1 of Notes to Consolidated Financial Statements. F-14 16 SUPPLEMENTARY FINANCIAL INFORMATION The following table contains certain selected quarterly unaudited financial data for 1995 and 1994.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL -------- -------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1995 Operating revenue.......... $814,029 $840,514 $909,225 $954,038 $3,517,806 Income from operations..... 135,201 123,888 131,395 136,611 527,095 Income before income taxes.................... 155,002 150,052 149,859 164,055 618,968 Net income................. 94,552 93,056 92,163 100,894 380,665 Net income per common and common equivalent share -- primary and fully diluted............ $ .59 $ .59 $ .60 $ .65 $ 2.42 1994 Operating revenue.......... $703,447 $712,036 $736,946 $756,853 $2,909,282 Income from operations..... 137,650 141,938 152,472 160,070 592,130 Income before income taxes.................... 150,149 156,754 170,346 180,095 657,344 Net income................. 89,339 93,268 101,361 107,151 391,119 Net income per common and common equivalent share -- primary and fully diluted............ $ .55 $ .58 $ .63 $ .67 $ 2.42
F-15 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Substantially all of the Company's revenue is generated from premiums received for health care coverage provided to its members. These premiums represent approximately 98%, 99% and 99% of the Company's operating revenue for the years ended December 31, 1995, 1994, and 1993, respectively. The Company's operating expenses are primarily medical costs consisting principally of medical claims and capitation costs. The Company's results of operations depend in large part on accurately predicting and effectively managing medical costs and other operating expenses. A variety of factors and risks, including competition, changes in health care practices, changes in federal or state laws and regulations or the interpretations thereof, inflation, provider contract changes, new technologies, government-imposed surcharges, taxes or assessments, reductions in provider payments by governmental payors (including Medicare and Medicaid) (such reductions may cause providers to seek higher payments from private payors), major epidemics, disasters, changes in product mix and entry into new geographic markets (both of which may result in an increase in members obtaining care from providers not under contract with the Company) and numerous other factors affecting the delivery and cost of health care, may in the future affect the Company's ability to control its medical costs and other operating expenses. Governmental action (including downward adjustments to premium rates) or business conditions (including intensification of competition and the other factors described above) could result in premium revenues not increasing to offset increases in medical costs and other operating expenses. Once set, premiums are generally fixed for one-year periods and, accordingly, unanticipated costs during such periods cannot be recovered through higher premiums. The expiration, suspension, termination of, or failure to obtain contracts to provide health coverage for governmental entities or other significant customers would also negatively impact the Company. Due to these factors and risks, no assurance can be given with respect to the Company's premium levels or its ability to control its medical costs. Legislative and regulatory proposals have been made at the federal and state government levels related to the health care system, including but not limited to limitations on managed care organizations (including benefit mandates, provider contract limitations, restrictions on utilization management, premium assessments or taxes to pay for uncompensated care and any willing provider requirements) and changes in the Medicare and Medicaid programs. Legislative or regulatory action could also have the effect of reducing the premiums paid to the Company by governmental programs or increasing the Company's medical costs. Specifically, potential federal legislation would reduce the premiums payable to the Company under the Medicare program as compared to previously announced levels; other potential legislation and regulation could have the result of reducing the premiums payable to the Company under state Medicaid programs. The Company is unable to predict the specific content of any legislation or regulation that may be enacted or when or in what jurisdictions any such legislation or regulation will be adopted. Therefore, the Company cannot predict the effect of such legislation or regulation on the Company's business. For additional factors and risks, see the Company's Annual Report on Form 10-K for the year ended December 31, 1995. OPERATIONS 1995 Compared to 1994 Operating revenue increased $608,524,000 or 21%, principally due to growth in U.S. Healthcare-insured health plan enrollment (375,000 additional members). Commercial premiums increased $335,744,000 or 13%. The principal factor for the increase was a 13% increase in Commercial member months (the sum of members enrolled in each month during the year). The average premium for the Commercial plans, which at December 31, 1995, had about 1,874,000 members, decreased 1% to approximately $138 per member per month. Government premiums consist principally of Medicare and Medicaid premiums. Medicare premiums increased $205,600,000 or 115%. The principal factor for the increase was a 125% increase in Medicare F-16 18 member months, offset by the effect of lower average premiums per member. The average premium for the Medicare plans, which at December 31, 1995, had about 108,000 members, decreased 4% to $437 per member per month. Medicaid and other premiums increased $44,186,000 or 71%. The principal factor for the increase was a 105% increase in Medicaid member months offset by the effects of lower premiums per member. The average premium for the Medicaid plans, which at December 31, 1995, had about 81,000 members, decreased 9% to $125 per member per month. The following table shows total premiums earned in 1995 and the increase in premiums compared to 1994 by plan type.
1995 ----------------------- PREMIUMS INCREASE ---------- -------- (AMOUNTS IN THOUSANDS) Commercial plans..................................... $2,971,365 $335,744 Government plans: Medicare plans..................................... 384,005 205,600 Medicaid and other plans........................... 106,672 44,186 ---------- -------- $3,462,042 $585,530 ========= ========
Other operating revenue, which consists principally of administrative services fees, increased $22,994,000 or 70%, principally due to a 37% increase in employer-funded health plan members. At December 31, 1995, the Company had about 371,000 members in employer-funded health plans. Medical costs increased $583,053,000 or 29% over 1994, primarily due to a 17% growth in U.S. Healthcare-insured member months, and higher costs per member. Compared to 1994, the weighted average medical cost per member increased 11% to $111 per member per month. Factors for the per member increase include changes in product and geographic mix, contractual changes in provider rates, higher specialist usage, higher capitation rates and the inclusion of a pharmacy benefit for most Medicare members. Compared to 1994, medical costs rose 5% to $101 per member per month for Commercial plans, 6% to $352 per member per month for Medicare plans and 22% to $109 per member per month for Medicaid plans. Administrative, marketing and other operating costs increased $90,506,000 or 28% over 1994. Personnel costs contributed the largest increase as a result of higher salaries and an increase in the number of employees necessitated, in part, by higher business volume and changes in product mix, and increased marketing capability. Investment income increased $26,659,000 or 41% from 1994, principally due to realized gains on sales of marketable securities and earnings on higher average portfolio balances. Net realized gains were $15,079,000 in 1995 compared to net realized losses of $2,461,000 in 1994. Net income for 1995 was $381 million compared to $391 million in 1994. On a per share basis, net income was $2.42 in 1995 and 1994, reflecting the effects of the Company's repurchase of 6.9 million shares of its common stock during 1995. 1994 Compared to 1993 Operating revenue increased $329,362,000 or 13%, principally due to growth in U.S. Healthcare-insured health plan enrollment (175,000 additional members). Commercial premiums increased $233,190,000 or 10%. The principal factors for the increase were an 8% increase in Commercial member months and higher premium rates. The average premium for the Commercial plans, which at December 31, 1994, had about 1,595,000 members, increased 1% to approximately $139 per member per month. Government premiums consist principally of Medicare and Medicaid premiums. Medicare premiums increased $43,581,000 or 32%. The principal factor for the increase was a 35% increase in Medicare member months, offset by the effect of lower average premiums per member. The average premium for the Medicare F-17 19 plans, which at December 31, 1994, had about 38,000 members, decreased 2% to $457 per member per month. Medicaid and other premiums increased $40,033,000 or 178%. The principal factor for the increase was a 216% increase in Medicaid member months offset by the effects of lower premiums per member. The average premium for the Medicaid plans, which at December 31, 1994, had about 51,000 members, decreased 7% to $138 per member per month. On December 31, 1994, the Company also had about 271,000 members in employer-funded health plans. The following table shows total premiums earned in 1994 and the increase in premiums compared to 1993 by plan type.
1994 PREMIUMS INCREASE ---------- -------- (AMOUNTS IN THOUSANDS) Commercial plans..................................... $2,635,621 $233,190 Government plans: Medicare plans..................................... 178,405 43,581 Medicaid and other plans........................... 62,486 40,033 ---------- -------- $2,876,512 $316,804 ========== ========
Medical costs increased $132,795,000 or 7% over 1993, primarily due to a 12% growth in U.S. Healthcare-insured membership, partly offset by lower costs per member. Administrative, marketing and other operating costs increased $42,786,000 or 15% over 1993. Personnel costs contributed the largest increase as a result of higher salaries and an increase in the number of employees necessitated, in part, by higher business volume and changes in product mix, and increased marketing capability. Investment income was virtually unchanged from 1993, because net realized losses on sales of marketable securities and a decrease in the yield on investments combined to offset the effect of higher investment portfolio balances. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity requirements have been met from cash flow's generated by operating activities. In 1995, net cash flows from such activities were $493,686,000. The Company believes that its existing financial resources are sufficient to meet its liquidity needs. The Company's operations are conducted principally through HMO and insurance subsidiaries. These subsidiaries are subject to state regulations which require the subsidiaries to maintain certain levels of equity, as defined. Levels of required equity vary by state and, in some states, vary depending on premium revenue, medical costs, the cost of care delivered by providers not under contract to the Company and other factors. As of December 31, 1995, the amount of equity so required was approximately $88 million. The effect of this required equity is to limit, for use in the subsidiaries' own respective operations, assets such as cash, marketable securities and receivables in an amount equal to the sum of the subsidiaries' liabilities plus their required equity. As of December 31, 1995, cash and marketable securities limited for such use in the subsidiaries' operations under these requirements totaled approximately $560 million. Regulations which were adopted but were not yet effective would have increased the subsidiaries' required equity (and increased the amount of assets limited as aforesaid) by approximately $30 million as of December 31, 1995. Other changes in equity requirements are being considered at the state and federal levels, which may cause the amount of equity required to be maintained by subsidiaries to increase. Changes in the factors underlying existing equity requirements (such as an increase in premium revenue, medical costs or the cost of care delivered by providers not under contract to the Company) and expansion into new geographic markets may also cause the amount of the subsidiaries' required equity to increase. Most states also require the subsidiaries to obtain approval or provide notice before funds in excess of certain thresholds are transferred to affiliates. F-18 EX-23 3 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 2 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Annual Report (Form 10-K/A) of U.S. Healthcare, Inc. of our report dated February 2, 1996, included in the 1995 Annual Report to Shareholders of U.S. Healthcare, Inc. Our audits also included the financial statement schedule of U.S. Healthcare, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the schedule based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole presents fairly in all material respects the information set forth therein. We consent to the incorporation by reference in the Registration Statements of U.S. Healthcare, Inc. pertaining to the 1982 Incentive Stock Option Plan and the Second Incentive Stock Option Plan (Form S-8 No. 2-91754); the U.S. Healthcare, Inc. Savings Plan (Form S-8 No. 33-36049); the Second Incentive Stock Option Plan, the Third Incentive Stock Option Plan and the 1987 Non-Statutory Option Plan (Form S-8 No. 33-26157); the U.S. Healthcare, Inc. Incentive Plan (Form S-8 No. 33-80632); and the registration of shares of U.S. Healthcare, Inc. common stock under various non-statutory stock option grants and for the registration of 187,073 shares (as adjusted to reflect subsequent stock splits) of U.S. Healthcare, Inc. common stock (Form S-3 No. 33-14653) of our report dated February 2, 1996, with respect to the consolidated financial statements of U.S. Healthcare, Inc. incorporated by reference in the Annual Report (Form 10-K/A) for the year ended December 31, 1995 and the related financial statement schedule included therein. ERNST & YOUNG LLP Philadelphia, Pennsylvania April 26, 1996 -----END PRIVACY-ENHANCED MESSAGE-----