U S HEALTHCARE INC, 10-K/A, 1996-06-11

U S HEALTHCARE INC
10-K/A, 1996-06-11
HOSPITAL & MEDICAL SERVICE PLANS

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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

/ / 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)

<TABLE>
<S> <C>
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)
</TABLE>

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
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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
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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
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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
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INDEX TO EXHIBITS

<TABLE>
<C> <S>
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).
</TABLE>
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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).
</TABLE>
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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.*
</TABLE>

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* Filed previously with U.S. Healthcare's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.

** Filed herewith.

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EXHIBIT 13
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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
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U.S. HEALTHCARE, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(AMOUNTS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
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
========== ==========
</TABLE>

See accompanying notes.

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U.S. HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
(AMOUNTS IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
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
</TABLE>

See accompanying notes.

F-3
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U.S. HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
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
--------- --------- --------- --------- ---------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
--------- --------- -------- -------------
<S> <C> <C> <C> <C>
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
========= ==== ======= ========
</TABLE>

See accompanying notes.

F-4
<PAGE> 6

U.S. HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
---------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
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
</TABLE>

See accompanying notes.

F-5
<PAGE> 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
<PAGE> 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
<PAGE> 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:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
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
========== ====== ======== ==========
</TABLE>

The contractual maturities of marketable securities as of December 31, 1995
were as follows:

<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
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
======== ========
</TABLE>

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
<PAGE> 10

U.S. HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. RECEIVABLES

Receivables consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
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
======== ========
</TABLE>

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:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
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
======== ========
</TABLE>

5. INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>

F-9
<PAGE> 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:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
(PERCENTAGE OF INCOME
BEFORE INCOME TAXES)
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>

6. LEGAL PROCEEDINGS

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
<PAGE> 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:

<TABLE>
<CAPTION>
NUMBER OF SHARES UNDER OPTION
------------------------------------
NON- OPTION PRICE
INCENTIVE STATUTORY TOTAL PER SHARE
--------- ------------ ----- ------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
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
===== ===== =====
</TABLE>

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
<PAGE> 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
<PAGE> 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.

<TABLE>
<CAPTION>
1995 1994
------------ ------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
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
</TABLE>

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.

<TABLE>
<CAPTION>
1995 1994
------------------------------ ------------------------------
COMMON STOCK CLASS B STOCK COMMON STOCK CLASS B STOCK
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
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
=========== ========== =========== ==========
</TABLE>

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
<PAGE> 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.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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
</TABLE>

- ---------------

(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
<PAGE> 16

SUPPLEMENTARY FINANCIAL INFORMATION

The following table contains certain selected quarterly unaudited financial
data for 1995 and 1994.

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- -------- ----------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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
</TABLE>

F-15
<PAGE> 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
<PAGE> 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.

<TABLE>
<CAPTION>
1995
-----------------------
PREMIUMS INCREASE
---------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
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
========= ========
</TABLE>

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
<PAGE> 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.

<TABLE>
<CAPTION>
1994
PREMIUMS INCREASE
---------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
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
========== ========
</TABLE>

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
<PAGE> 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

<PAGE> 1

EXHIBIT 23
<PAGE> 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