-----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, E5tFM6HAIn6kbSr784VtkwhHur04Nqo9VcSwT6xbu7/1lV2VefwVrxBIvynR2oCW NOnDpUAm8kQmYjAbVP75mQ== 0000950123-96-002975.txt : 19960613 0000950123-96-002975.hdr.sgml : 19960613 ACCESSION NUMBER: 0000950123-96-002975 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960611 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: 96579540 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. 2 TO FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (AMENDMENT NO. 2) (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.) 980 JOLLY ROAD, BLUE BELL, PENNSYLVANIA 19422 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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 June 3, 1996 was $7,442,368,776 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 June 3, 1996, there were 139,842,375 shares of Common Stock outstanding and 14,429,426 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 3 -- Legal Proceedings Part II, Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations Part II, Item 8 -- Financial Statements and Supplementary Data Part IV, Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 3 -- LEGAL PROCEEDINGS On October 12, 1993, the Company filed a petition with the New York State Supreme Court seeking to stay and annul the Opinion and Decision of Superintendent of Insurance of the State of New York dated September 30, 1993, which would have reduced the premium rates for the Company's New York HMO for the twelve month period beginning October 1, 1993 by a weighted average of 3.9% from the rates in effect for the preceding twelve month period. On November 1, 1993, the Court held a hearing and ordered that a stay should be granted. Accordingly, for New York HMO group contracts renewed or entered into during the first quarter of 1994, the Company generally charged the premium rates in effect during the third quarter of 1993. The Court entered a written Order and Decision on July 8, 1994, implementing the November 1, 1993 oral decision on the basis that the Superintendent violated the New York Insurance Law (by reducing the Company's premium rates without giving the Company an opportunity to oppose the reduction) and remanding the matter to the Superintendent for a proper hearing. On August 4, 1994, the Superintendent filed a Notice of Appeal with the Appellate Division; the appeal was dismissed on October 11, 1994. On October 13, 1994, the Superintendent moved for permission to appeal to the Appellate Division; this motion was denied on January 17, 1995. The Superintendent did not appeal from the decisions of the Appellate Division. The portion of the litigation related to rates for contracts entered into or renewed on or after April 1, 1994 through September 30, 1994 was implicitly mooted by the Superintendent's Opinion and Decision dated April 29, 1994 approving revised rates for such period, leaving only that portion of the litigation related to rates for contracts entered into or renewed during the first quarter of 1994 subject to a possible hearing. On August 15, 1995, the Superintendent notified the Company that he had decided not to hold a hearing concerning the Company's premium rates for the first quarter of 1994, thereby leaving in place the third quarter of 1993 premium rates generally charged for that quarter. Subsequently, a stipulation executed by the Superintendent and the Company dismissing the action was filed. Class action complaints were filed in the United States District Court for the Eastern District of Pennsylvania by J/H Real Estate, Inc. and Joseph Tulino on July 5, 1995 and November 14, 1995, respectively, seeking among other remedies damages resulting from defendants' alleged violations of federal securities laws and related state law. The complaints allege that the Company and two of its executive officers, Leonard Abramson and Costas Nicolaides, made certain misrepresentations and omissions about the Company. 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 begun and is continuing. 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. PART II ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See Exhibit 13. The discussion included in Exhibit 13 is incorporated herein by reference. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Exhibit 13. The financial statements included in Exhibit 13 are incorporated herein by reference. 1 3 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 amend and restate Note 6 thereto. Such financial statements are being filed as Exhibit 13 hereto. 2 4 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: June 11, 1996 3 5 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).
6 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).
7 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 TO SHAREHOLDERS 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 Class action complaints were filed in the United States District Court for the Eastern District of Pennsylvania by J/H Real Estate, Inc. and Joseph Tulino on July 5, 1995 and November 14, 1995, respectively, seeking among other remedies damages resulting from defendants' alleged violations of federal securities laws and related state law. The complaints allege that the Company and two of its executive officers, Leonard Abramson and Costas Nicolaides, made certain misrepresentations and omissions about the Company. 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 begun and is continuing. 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 F-10 12 U.S. HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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 F-11 13 U.S. HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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. In 1995, premium revenue growth resulted from significant enrollment growth in both Commercial and government plans. The Company expects its premium revenue growth to continue to come from both Commercial and government plans. The Company is experiencing pricing pressures in its Commercial plans as a result of intensified competition from new and existing competitors and increasing demands by customers for lower premiums. The ability of the Company to increase the number of persons covered by its health plans or to increase premiums is also affected by competition in any particular area and the desire and ability of employers to self-fund their health benefit plans. Premium rates for Commercial and government plans are also subject to governmental action. 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 (primarily due to an increase in the proportion of Medicare enrollment to total enrollment), contractual changes in provider rates, higher specialist usage, higher capitation rates and the inclusion of a pharmacy benefit for most Medicare members. Medical costs are impacted by changes in product and geographic mix because various plans exert different pressures on medical costs. Plans that provide HMO members an option to obtain medical services, without a referral, from any provider the member chooses, subject to, among other things, certain deductibles and coinsurance, and plans in newer geographic markets may result in an increase in medical costs as a result of an increase in members obtaining care from providers not under contract with the Company. Differences in plan features, such as different copayment and coinsurance levels, may result in an increase or decrease in utilization of medical services. Medicare plans have substantially higher medical costs per member than Commercial plans because Medicare plan members use substantially more medical services per member than Commercial plan 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. As of December 31, 1995, the Company employed 885 sales and marketing personnel, a 48% increase since December 31, 1994. Employer-funded health plans cost substantially the same per member to F-17 19 administer as insured health plans but provide significantly less revenue per member. Accordingly, an increase in the proportion of employer-funded health plan enrollment to total enrollment results in an increase in administrative, marketing and other operating costs as a percentage of operating revenue. 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 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. F-18 20 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-19 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, Amendment No. 2) 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, Amendment No. 2) for the year ended December 31, 1995 and the related financial statement schedule included therein. /s/ ERNST & YOUNG LLP Philadelphia, Pennsylvania June 10, 1996 -----END PRIVACY-ENHANCED MESSAGE-----