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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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 0-11531
U.S. HEALTHCARE, INC.
(Exact name of Registrant as specified in its charter)
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PENNSYLVANIA 23-2229683
(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)
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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 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 February 29, 1996 was $6,686,577,885 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 February 29, 1996 there were 139,511,168 shares of Common Stock
outstanding and 14,429,867 shares of Class B Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference:
Parts II and IV -- The Registrant's Annual Report to Shareholders for the year
ended December 31, 1995 ("1995 Annual Report to
Shareholders").
Part III -- The Registrant's definitive Proxy Statement for its 1996
Annual Meeting of Shareholders, to be filed not later than 120
days after the close of the fiscal year ("1996 Proxy
Statement").
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PART I
ITEM 1: BUSINESS
THE HEALTH CARE INDUSTRY
Annual health care expenditures in the United States have grown from $27
billion in 1960, which represented approximately 5% of the gross domestic
product, to $938 billion in 1994, which represented approximately 14% of the
gross domestic product. As a consequence, employers, insurers and governmental
authorities have been increasingly focusing on alternative health care delivery
systems such as health maintenance organizations ("HMOs") that provide better
controls on rising costs without sacrificing quality. HMO enrollment in the
United States has increased from approximately three million members in 1970 to
approximately 51 million at January 1, 1995, served by 562 HMOs.
The goals of HMOs are to provide their members with access to quality health
care, while employing a business strategy and management systems designed to
encourage more cost-effective use of health care delivery systems. Such cost
containment strategies include providing access to primary physician care and
other services on a fixed, prepaid basis, monitoring hospital admissions and
length of stay, using a system of specialist referrals, using non-hospital based
medical services, and emphasizing preventive care. To accomplish these
objectives, several basic HMO models have evolved: staff, group, network,
individual practice, and individual practice association. The key distinguishing
feature of each model is the relationship between the HMO and the participating
physicians. Under the staff model, the HMO employs the physicians and uses
capital to provide the facilities in which the physicians see patients. The
physicians receive a salary and often a bonus based on the performance of the
HMO. Under the group model, the HMO contracts with one large multi-specialty
medical group practice which typically receives a monthly fixed fee for each HMO
member (capitation), regardless of the medical services provided to each member.
The network model is predicated on an HMO contracting with more than one
physician group to provide services on a capitated fee basis. Under an
individual practice model, the HMO contracts with independent physicians who are
broadly dispersed throughout a community and who care for patients in their own
offices. The individual practice association (IPA) model is similar to the
individual practice model except an IPA model HMO contracts with an organization
(the IPA) that in turn contracts with the physicians. The HMOs operated by U.S.
Healthcare, Inc. (the "Company") most closely adhere to the individual practice
model. Unless the context otherwise requires, references to the Company include
its subsidiaries.
THE COMPANY'S MANAGED HEALTH CARE DELIVERY SYSTEM
The Company provides comprehensive managed health care services through HMOs
it owns and operates in Pennsylvania, New Jersey, New York, Delaware,
Connecticut, Massachusetts, New Hampshire, Maryland, Georgia, Virginia, Rhode
Island, North Carolina, South Carolina and the District of Columbia.
The services of the Company's HMOs are marketed primarily to employer groups
and are provided through networks of independent health care providers,
including selected primary care physicians who coordinate each person's
individual medical care. In addition to comprehensive primary physician care,
specialist care and hospital services, the Company makes available home health
care and other outpatient services as well as optional prescription drug, vision
care and dental plans. The Company contracts with independent primary care
physicians who are reimbursed under prospective payment arrangements in order to
remove traditional barriers to care. The Company encourages preventive care and
the use of alternative medical delivery services, and provides access to
comprehensive traditional health care services.
The Company contracts with providers to participate in its HMO service
network as it expands into new geographic areas or as it considers necessary to
serve its HMO membership. At December 31, 1995, the HMO service network included
approximately 13,400 primary care physicians, 40,600 specialists, 441 hospitals
and 7,000 pharmacies.
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THE COMPANY'S HEALTH PLANS
The Company's health plans consist of HMO plans and indemnity-type plans
offered both on a fully-insured and an employer-funded basis. Under
fully-insured health plans, the Company charges a premium and bears the risk for
medical costs incurred. Under employer-funded health plans, the Company charges
a fee for providing administrative services and the employer bears substantially
all risk for medical costs incurred. The Company's health plans served about
2,442,000 members as of December 31, 1995, an increase of 475,000 or 24.1% from
approximately 1,967,000 at December 31, 1994. The following tables show health
plan membership at December 31, 1995 and the increase in membership compared to
December 31, 1994 by plan type and by state:
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BY PLAN TYPE: 12/31/95 INCREASE
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U.S. Healthcare-insured health plans:
HMO plans
Commercial........................................................................... 1,864,000 269,000
Medicare............................................................................. 108,000 70,000
Medicaid and other................................................................... 89,000 32,000
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2,061,000 371,000
Indemnity plans -- Commercial.......................................................... 10,000 4,000
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Total U.S. Healthcare-insured health plans....................................... 2,071,000 375,000
Employer-funded health plans............................................................. 371,000 100,000
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Total health plans................................................................... 2,442,000 475,000
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EMPLOYER-FUNDED
INSURED HEALTH PLANS TOTAL HEALTH PLANS
HEALTH PLANS ---------------------- ------------------------
---------------------- INCREASE INCREASE
BY STATE: 12/31/95 INCREASE 12/31/95 (DECREASE) 12/31/95 (DECREASE)
- --------------------------------------- ----------- --------- --------- ----------- ----------- -----------
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Pennsylvania........................... 782,000 110,000 123,000 40,000 905,000 150,000
New Jersey............................. 561,000 108,000 101,000 26,000 662,000 134,000
New York............................... 531,000 81,000 23,000 5,000 554,000 86,000
Massachusetts.......................... 60,000 14,000 19,000 3,000 79,000 17,000
Connecticut............................ 47,000 15,000 8,000 1,000 55,000 16,000
Maryland and the District of
Columbia.............................. 29,000 13,000 7,000 1,000 36,000 14,000
Delaware............................... 26,000 6,000 4,000 3,000 30,000 9,000
Georgia................................ 21,000 21,000 11,000 6,000 32,000 27,000
New Hampshire.......................... 10,000 3,000 4,000 -- 14,000 3,000
Virginia............................... 3,000 3,000 4,000 1,000 7,000 4,000
Rhode Island........................... 1,000 1,000 1,000 -- 2,000 1,000
North Carolina and South Carolina...... -- -- 5,000 (1,000) 5,000 (1,000)
Other states........................... -- -- 61,000 15,000 61,000 15,000
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Total.................................. 2,071,000 375,000 371,000 100,000 2,442,000 475,000
----------- --------- --------- ----------- ----------- -----------
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Under fully-insured HMO plans, members receive comprehensive medical
coverage in exchange for a fixed monthly premium. The Company offers HMO plans
with minimum out-of-pocket member expense (copayments) and plans with lower
premium rates and higher member copayments. When an individual enrolls in one of
the Company's HMOs, he or she selects a primary care physician from among the
physicians who have contracted with the Company. The primary care physicians are
family practitioners, general practitioners, internists or pediatricians who
provide necessary preventive and primary medical care and are generally
responsible for making referrals to specialists. Except in
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emergency situations, hospital care generally requires a referral from the
member's primary care physician and takes place in hospitals that have contracts
to serve the HMOs' members for an agreed compensation.
Commercial members join the Company's HMOs generally through employer
groups. See "Marketing" below. In many instances, employers offer employees a
choice of managed care or indemnity coverage. Employees may select their desired
health coverage during a designated period (usually one month annually). New
employees make their selections at the time of employment. Employers generally
pay all or part of the monthly premiums and make payroll deductions for any
portion of the premium not provided as an employee benefit.
In 1994, the Company introduced its Quality Point-of-Service-TM- Program
(QPOS-TM-), a joint offering of the Company's HMO and insurance subsidiaries.
Members can utilize comprehensive HMO benefits through participating providers
or go directly, without a referral, to any provider they choose, subject to,
among other things, certain deductibles and coinsurance. Membership in QPOS was
about 325,000 at December 31, 1995, an increase of 292,000 from December 31,
1994. These members are classified as U.S. Healthcare-insured commercial HMO
members in the preceding table.
In New York and New Jersey, the Company makes fully-insured commercial HMO
coverage available on a direct-pay basis to individual subscribers. At December
31, 1995, about 11,000 members were enrolled in these plans.
The Company has annual contracts with the federal government in most of the
states in which the Company operates HMOs to provide fully-insured HMO coverage
to Medicare beneficiaries who choose to receive their health care through an
HMO. Under these contracts, the federal government agrees to pay the Company at
a rate equal to 95% of the estimated average cost for services per Medicare
beneficiary that would have been incurred for treatment of such beneficiaries in
the same geographic areas. Amounts payable under these contracts are subject to
periodic unilateral revision by the federal government. In addition to payments
from the federal government, some of the Company's Medicare HMO plans require a
small premium to be paid by the member. At December 31, 1995, the Company served
about 108,000 Medicare beneficiaries.
The Company has contracts with certain state and local agencies in New
Jersey, New York and Pennsylvania to provide fully-insured medical and health
benefits to persons eligible for Medicaid benefits in certain counties in those
states. The Company's contracts are for periods of one to three years. At
December 31, 1995, about 81,000 Medicaid beneficiaries were enrolled in the
Company's HMO plans. The Company's contract to provide health care coverage to
Medicaid beneficiaries in Massachusetts terminated effective December 31, 1995.
As of that date, the Company served about 200 Medicaid members in Massachusetts.
The Company offers the Children's Health Insurance Program (CHIP) under
contract with the Commonwealth of Pennsylvania. CHIP is a fully-insured
comprehensive health care plan for children of low-income families who are not
covered by Medicaid or other health insurance. The Company also offers CHIP
Plus, a program whereby the Company pays all or a part of the premiums for
certain children ineligible for fully state-funded coverage. At December 31,
1995, about 8,000 members were enrolled in these programs.
The Company offers indemnity health insurance products to employers based in
the states in which it operates HMOs. At December 31, 1995, the Company had
about 10,000 enrollees in its fully-insured indemnity plans.
COST CONTAINMENT
The Company has developed contractual arrangements with providers to help
control the high cost of medical services. These contractual arrangements cover
the majority of medical services. In the Company's managed health care delivery
system, the primary care physician plays an important role in practicing
preventive medicine and acts on behalf of the HMO member to provide access to
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specialist physicians, hospitals, and other health care providers. These primary
care physicians contract with the Company to participate in a system that has
attracted an increasing number of people interested in cost-effective, quality
medical care; to more effectively influence health care planning; to enjoy
stable and timely remuneration; and to reduce bad debt experience, billing and
other paperwork. Participating physicians are primarily independent
practitioners who generally also have patients who are not members of the
Company's HMOs.
The Company generally compensates HMO primary care physicians pursuant to
its Quality Care Compensation System ("QCCS"). The system employs a monthly
capitation payment feature as well as quality assessment, 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 capitated payment 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 with specialist physicians at specified rates per visit or
procedure.
The Company has contracts that provide for all-inclusive per diem and per
case hospitalization rates, and fixed rates for ambulatory surgery and emergency
room services. The Company compensates certain contracted hospitals using the
Company's CapTainer-Registered Trademark- compensation methodology that takes
into account the attainment of agreed upon quality and cost containment goals to
help determine the final compensation paid to the hospitals. Under the CapTainer
methodology, hospitals are paid certain fees based on use of their facilities
but can earn financial incentives based on patient satisfaction and other
performance measurements.
The Company also has contractual arrangements 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. At December 31, 1995, about 86,000 members were enrolled with
primary care physicians who participate in such integrated delivery systems.
In addition to its contractual arrangements, the Company uses other means to
deliver access to quality care in a cost-effective manner. Company employees
monitor hospital cases and assist participating physicians who wish to arrange
for medically appropriate but less costly alternatives. In addition, the
Company's HMOs generally require precertification of elective admissions and
monitor the length of hospital stays. Participating physicians generally admit
their HMO patients to hospitals using referral procedures that direct the
hospital to the Company's patient management unit, which confirms the patient's
membership status while obtaining pertinent data. This unit also coordinates
related activities, including the subsequent transition to the home environment
and home care, if necessary. Case management assistance for complex or
"catastrophic" cases is provided by a special case unit.
The Company generally provides participating primary care physicians with a
monthly report of services and costs rendered to HMO members. This report
contains cost and utilization data, including hospital and specialist costs,
which enables the physician to monitor hospital and specialist costs. The
Company's information systems also enable it to monitor enrollment, member
eligibility, and the historical use and cost of various services.
OTHER PRODUCTS AND SERVICES
The Company offers network-based workers compensation case management and
network-based managed disability services. At December 31, 1995, the Company had
contracts to provide such services for approximately 250,000 employees, compared
to 224,000 employees at December 31, 1994.
The Company provides assistance to multi-state employers by coordinating
their relationships with other HMOs. Services include evaluation of the HMOs in
areas such as quality of care, efficiency and financial stability, as well as
enrollment and billing management.
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The Company offers quality and outcome measurement and improvement programs
and healthcare data analysis systems for providers and purchasers of health
care.
The Company offers a number of supplemental benefit coverages to employers,
either as supplements to HMO plans or as stand-alone products. Such coverages
include dental plans, prescription drug plans, vision plans, employee assistance
programs and wellness programs.
QUALITY ASSESSMENT
The Company is an industry leader in developing and implementing
comprehensive quality assessment programs. The Company believes that providing
access to demonstrably high quality health care services is an essential
ingredient for success.
The Company's quality assessment program begins with the initial selection
of primary care physicians. Those who wish to participate in the Company's HMOs
must satisfy an extensive set of criteria. These criteria include licensure,
hospital admitting privileges, demonstrated proficiency, written references,
patient access, office standards, after-hours coverage and many other factors.
Participating primary care physicians are recertified annually.
Recertification covers many aspects of patient care, an analysis of member
grievances, the transfer and termination rate of HMO members from the practice,
on-site interviews, analysis of utilization patterns, extensive member surveys,
and drug prescription patterns.
Committees, each composed of a peer group of participating private
physicians, review primary care physician applicants and participants being
recertified. These committees recommend certification, recertification or, if
appropriate, sanctions, which may include termination from participation in the
Company's HMOs. Regular reports of their determinations are made to each HMO's
Board of Directors.
The Company's member relations department deals directly with members
concerning their health care benefits. It also investigates grievances. On a
routine basis, survey questionnaires are sent to members regarding the quality
of care they receive. Physician committees and medical directors also review
issues related to the delivery of medical care.
Each participating primary care physician is obligated to carry direct
medical malpractice liability insurance in an amount no less than the greater of
the minimum amount required in the state in which the physician is licensed or
the Company's requirements. In addition, the Company carries contingent medical
malpractice professional liability insurance.
The Company has developed criteria and systems to measure the quality and
effectiveness of health care services provided in a variety of settings ranging
from physicians' offices to hospitals. These systems are used by the Company in
its quality assessment program.
MARKETING
The Company employs a direct sales force of approximately 885 sales
representatives and marketing management personnel. Marketing efforts are
supported by an advertising program that includes television, radio, billboards
and print media, as well as extensive market research and a computerized
database.
The Company's 25 largest customers, including the Federal Employees Health
Benefits Plan, in the aggregate comprised 22% of the fully-insured HMO
membership at December 31, 1995. For the year ended December 31, 1995, premiums
billed to the federal government for the Federal Employees Health Benefits Plan
were approximately 8% of total premium revenue. The Company's agreements with
employer groups are generally for a term of 12 months and are subject to annual
renewal.
TRADEMARKS
The registered trademark U.S. Healthcare-Registered Trademark- is owned by
the Company. The Company considers U.S. Healthcare-Registered Trademark- and its
other trademarks and trade names important in the operation of its business.
However, the business of the Company is not dependent on any individual
trademark or trade name.
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COMPETITION
Competition in the health care industry has intensified in recent years,
primarily due to more aggressive marketing, a proliferation of competing
products from new and existing competitors and increased quality and price
sensitivity. Employer groups have increasingly demanded additional benefit
options, including HMOs, point-of-service products and preferred provider
organizations (PPOs). In addition, some larger employers have adopted
self-funded health benefit plans, with plan administration provided by a third
party. The Company competes with Blue Cross and Blue Shield plans, commercial
insurers and other HMOs. Some of these organizations have greater enrollment or
financial resources than the Company. Management believes that the most
significant factors which distinguish competing health plans are
comprehensiveness of coverage, quality of care and service, cost (including both
premium and member out-of-pocket costs), product design, financial stability and
provider networks. The Company strives to be competitive in each of these areas.
The ability of the Company to increase the number of persons covered by its
health plans or to increase premiums is affected by competition in any
particular area and the desire and ability of employers to self-fund their
health benefit plans. Competition may also affect the availability to the
Company of the services of health care providers, including primary care
physicians and hospitals.
EMPLOYEES
At December 31, 1995, the Company had 4,980 full and part-time employees.
The Company believes that its relationship with its employees is good.
GOVERNMENT REGULATION
The federal government and the states in which the Company conducts its HMO
and other businesses have adopted laws and regulations that govern the business
activities of the Company to varying degrees. These laws and regulations may
restrict how the Company conducts its businesses and may result in additional
burdens and costs to the Company. Areas of governmental regulation include
licensure, premium rates, benefits, service area expansion, quality assurance
procedures, plan design, eligibility requirements, provider contracts and rates
of payment, underwriting, financial arrangements, financial condition (including
reserves) and corporate governance. Laws and regulations governing the Company's
businesses are subject to amendments and changing interpretations in each
jurisdiction.
There have been diverse legislative and regulatory initiatives at both the
federal and state levels to address, among other aspects of the health care
system, increases in health care costs and the lack of health coverage for a
significant segment of the population. Several bills have been introduced in
Congress in recent years to reform the nation's health care system. These bills
include elements such as prohibitions on preexisting condition exclusions;
guaranteed issue and renewability of health insurance; revisions to current
Medicare HMO laws which would have the effect of reducing Medicare HMO premiums
payable by the federal government; subsidies for individuals who are uninsured
or underinsured; mandates on employers to provide health coverage for their
employees; medical savings accounts; minimum or standardized health benefit
packages; limitations on premium rate increases and other price controls;
mandatory community rating of premiums; medical liability reforms; amendment of
the antitrust laws to benefit providers; authorization of provider networks to
obtain federal licensure as Medicare health plans; mandatory or optional
single-payer systems for all or part of the population; and changes in federal
tax, Medicare and Medicaid laws and the Employee Retirement Income Security Act
of 1974 ("ERISA"). To varying degrees, many of the bills contemplate the
involvement of state governments in the regulation and implementation of federal
health care reform legislation.
Recent legislation and regulation in certain of the states where the
Company's HMOs operate has included mandatory minimum hospital stays after
childbirth; incentives to enroll individuals (including Medicare and Medicaid
beneficiaries) and small groups (including financial penalties if defined
enrollment targets are not achieved); "any willing provider" statutes that would
require the Company's HMOs to accept all providers who agree to meet the
Company's terms, restrictions on medical
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underwriting; mandated offering of small group and individual coverage,
including specified plan designs; guaranteed policy renewability; mandated
continuous open enrollment for individuals and small groups; financial
assessments for the individual and small group markets intended to subsidize
eligible carriers (some or all of which assessments may or may not be reflected
in increased premium rates); mandatory or voluntary regional health alliances or
purchasing cooperatives; and minimum medical loss ratios in certain lines of
business. Similar legislation or regulation is likely to be introduced and
possibly enacted in other states in which the Company does business. Other
proposed state laws and regulations include restrictions on the ability of
managed care entities to negotiate payment rates with providers, restrictions on
the Company's discretion to make benefit determinations, disclosure obligations
relative to marketing and advertising, more stringent license renewal
requirements, and mandated benefits. Several states, including New Jersey, are
contemplating major revisions to HMO regulation which include many of the
foregoing areas.
The Company is unable to predict how existing federal or state laws and
regulations may be changed or interpreted, what additional laws or regulations
affecting its businesses may be enacted or proposed, when and which of the
proposed laws will be adopted and what effect the new laws and regulations will
have on its businesses.
Federally qualified HMOs, such as those operated by the Company, are
required to establish premium rates prospectively and without regard to actual
utilization of services by individual members, using one of three community
rating methods. These rates may vary from account to account to reflect
projected family size and contract mix, benefit levels, renewal date, and other
factors. Under one of these methods, "traditional community rating," an HMO
establishes premium rates based on its revenue requirements for its entire
enrollment in a given community. Under "community rating by class," an HMO
establishes premium rates based on its revenue requirements for broad classes of
membership distinguished by factors such as age and sex. Under "group specific
community rating," an HMO establishes premium rates based on the HMO's revenue
requirements for providing services to the group. New York, one of the principal
states in which the Company operates, generally permits HMOs to set premiums
only in accordance with the traditional community rating method. Several of the
other states in which the Company operates HMOs permit use of all three
community rating methods. State laws in certain of the states in which the
Company operates HMOs require the filing with and approval by the state of HMO
premium rates. In addition to reviewing anticipated medical costs, some states
also review anticipated administrative costs as part of the approval process.
Future results of the Company could be affected if the premium rates requested
by the Company are not approved or are adjusted downward (possibly to levels
lower than rates previously approved) by state regulators.
Most states, including those in which the Company now operates HMOs, require
HMOs to be licensed prior to commencing operations. If the Company establishes
an HMO in any state where it does not presently operate an HMO, it generally has
to seek licensure. The time necessary to obtain an HMO license varies from state
to state. Each HMO must file periodic financial and operating reports with the
states in which it does business. In addition, HMO operations are subject to
state examination and periodic license renewal.
The Company has three insurance subsidiaries, one domiciled in Minnesota and
licensed in 46 other states and the District of Columbia, one domiciled in New
York and one domiciled in Connecticut. The Company's insurance subsidiaries are
subject to regulation in each state in which licensed.
The Company is subject to federal and state regulations which require the
Company's subsidiaries to maintain certain levels of tangible net assets, as
defined, for use in their own operations. Certain states also require prior
approval before dividends are paid or funds are otherwise transferred to
affiliates.
The provision of goods and services to certain employee health benefit plans
is subject to ERISA, a complex set of laws and regulations subject to
interpretation and enforcement by the Internal Revenue Service and the
Department of Labor. ERISA regulates certain aspects of the relationships
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between the Company and employers who maintain employee benefit plans subject to
ERISA. Some of the administrative services and other activities of the Company
may also be subject to regulation under ERISA. In addition, some states require
licensure or registration of companies such as the Company's subsidiary that
provides third party claims administration services for benefit plans.
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statements. The
Company desires to take advantage of this "safe harbor" and, accordingly, hereby
identifies the following important factors which could cause the Company's
actual financial and enrollment results to differ materially from any such
results which might be projected, forecast, estimated or budgeted by the Company
in forward-looking statements.
(a) Heightened competition, including specifically the intensification of price
competition; the entry of new competitors; and the introduction of new
products by new and existing competitors.
(b) Adverse state and federal legislation and regulation, including limitations
on premium levels; increases in minimum capital and reserve and other
financial viability requirements; prohibition or limitation of capitated
arrangements or provider financial incentives; benefit mandates (including
mandatory length of stay and emergency room coverage); limitations on the
ability to manage care and utilization; and any willing provider or pharmacy
laws.
(c) Increases in medical costs, including increases in utilization and costs of
medical services and the effects of actions by competitors or groups of
providers.
(d) Termination of provider contracts or renegotiation at less cost-effective
rates or terms of payment.
(e) Price increases in pharmaceuticals, durable medical equipment and other
covered items.
(f) Adverse actions of governmental payors, including unilateral reduction of
Medicare and Medicaid premiums payable to the Company and discontinuance or
limitations on governmentally-funded programs.
(g) Inability to increase premiums or prospective or retroactive reductions to
premium rates for federal employees apace with increases in medical costs
due to competition, government regulation, or other factors.
(h) Failure to obtain new customers, retain existing customers or reductions in
force by existing customers.
(i) Governmental financial assessments or taxes to subsidize uncompensated care,
other insurance carriers, or academic medical institutions.
(j) Adverse publicity and news coverage.
(k) Inability to carry out marketing and sales plans.
(l) Loss or retirement of key executives.
(m) Denial of accreditation by independent quality accrediting agencies such as
the National Committee for Quality Assurance (NCQA).
(n) The selection by employers and individuals of higher
copayment/deductible/coinsurance plans with relatively lower premiums or
margins.
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(o) The migration of employers from insured to self-funded coverage resulting in
reduced margins to the Company.
(p) The impact upon the Company's medical loss ratio of greater net enrollment
in higher medical loss ratio lines of business such as Medicare and
Medicaid.
(q) Adverse results in significant litigation matters.
(r) Adverse regulatory determinations resulting in loss or limitations of
licensure, certification or contracts with governmental payors.
(s) Higher sales, administrative or general expenses occasioned by the need for
additional advertising, marketing, administrative, or management information
systems expenditures.
(t) Changes in interest rates causing a reduction of investment income or in the
market value of interest rate sensitive investments.
(u) Increases by regulatory authorities of minimum capital, reserve and other
financial viability requirements.
The foregoing cautionary statements pursuant to the Private Litigation
Securities Reform Act of 1995 should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
effective date of said Act, and should be read in conjunction with other
sections of this filing, including Management's Discussion and Analysis of
Financial Condition and Results of Operations.
ITEM 2: PROPERTIES
The Company owns three office buildings having an aggregate 457,000 square
feet in Blue Bell, Pennsylvania. These buildings house the Company's
headquarters and much of its administrative and customer service operations. The
Company also owns and occupies a 110,000 square foot office building in
Fairfield, New Jersey, which houses certain regional activities, and a 65,000
square foot warehouse near its headquarters. The Company leases an aggregate
490,000 square feet of office space in sixteen other facilities housing other
regional and branch offices, additional warehouse space and additional member
relations and provider payments personnel.
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
10
<PAGE>
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.
Two class action complaints have been filed in the United States District
Court for the Eastern District of Pennsylvania seeking unspecified damages. The
complaints allege that the Company and two of its executive officers, through
certain misrepresentations and omissions about the Company, violated federal
securities laws and related state law. The court has granted the plaintiffs'
motion for class certification as to the federal claims but has denied it as to
the state claims. The litigation is still in the preliminary stages, and merits
discovery has just begun. The Company has denied the allegations and continues
to defend the actions vigorously.
The Company is also involved in legal actions concerning benefit plan
coverage and other decisions by the Company, and alleged medical malpractice by
participating providers. If found liable in such actions, which are vigorously
defended on several grounds, the Company may bear financial responsibility. The
Company is also involved in certain other claims and legal actions arising in
the ordinary course of business. In the opinion of management, these claims and
legal actions will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of U.S. Healthcare, Inc. are as follows:
<TABLE>
<CAPTION>
NAME AND AGE PRESENT POSITION (PRINCIPAL FUNCTION) WITH THE COMPANY
- --------------------------------- ----------------------------------------------------------
<S> <C>
Leonard Abramson (63) Chairman and principal executive officer
Michael J. Cardillo (53) Co-President and principal marketing officer
Joseph T. Sebastianelli (49) Co-President and principal medical administrative officer
James H. Dickerson, Jr. (49) Principal financial officer
Timothy E. Nolan (40) Senior operations officer
David F. Simon (42) Principal legal officer
</TABLE>
The Company's executive officers are elected by the board and serve until
their successors are duly elected and qualified.
Mr. Abramson has been the principal executive officer of the Company since
1982. From 1982 until he also was elected as Chairman in 1995, Mr. Abramson also
held the position of President.
Mr. Cardillo has been Co-President of the Company since 1995 and principal
marketing officer since 1989.
Mr. Sebastianelli has been Co-President of the Company since 1995 and
principal medical administrative officer since 1994. From 1984 to 1994, Mr.
Sebastianelli was the sole proprietor of Sebastianelli Law Associates, Paoli,
Pennsylvania.
Mr. Dickerson has been an executive officer of the Company since 1994 and
principal financial officer of the Company since 1995. From 1983 to 1994, Mr.
Dickerson held a number of positions at Bell Atlantic Corp., including Vice
President-Special Assignment, Vice President-Finance and Controller, and Vice
President-Treasurer.
Mr. Nolan has been an executive officer of the Company since 1994 and senior
operations officer since 1995, and held various marketing positions with the
Company from 1985 to 1994.
11
<PAGE>
Mr. Simon has been an executive officer of the Company since 1994 and
principal legal officer since 1990. From 1985 to 1990, Mr. Simon was a partner
at the law firm of Wolf Block Schorr and Solis-Cohen, Philadelphia,
Pennsylvania.
PART II
Information for Items 5 through 8 of this Report is included in the
Company's 1995 Annual Report to Shareholders as indicated below, and is
incorporated herein by reference.
<TABLE>
<CAPTION>
1995 ANNUAL
ITEM REPORT PAGE(S)
- ------------------------------------------------------------------------------------------------- --------------
<S> <C> <C>
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock........................................................... 29
Dividends............................................................................. 29
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data............................................................... 30
Supplementary Financial Information................................................... 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 32 - 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements..................................................... 17 - 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No change of accountants and/or disagreements on any matter of accounting principles
or financial statement disclosures have occurred within the last two years.
</TABLE>
PART III
The information called for by Item 10, Directors and Executive Officers of
the Registrant (except for the information regarding executive officers called
for by Item 401 of Regulation S-K which is included in Part I hereof in
accordance with General Instruction G(3)); Item 11, Executive Compensation; Item
12, Security Ownership of Certain Beneficial Owners and Management; and Item 13,
Certain Relationships and Related Transactions, is incorporated herein by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders, which shall be filed with the Securities and Exchange
Commission within 120 days from the end of the Registrant's fiscal year.
12
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated statements are included in the Company's
1995 Annual Report to Shareholders as indicated on the following
table and are incorporated herein by reference.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1995 ANNUAL
REPORT PAGE(S)
------------------
<S> <C>
Report of Ernst & Young LLP, independent auditors.................................... 17
Consolidated balance sheets at December 31, 1995 and 1994............................ 18
Consolidated statements of income for each of the three years in the period ended
December 31, 1995.................................................................... 19
Consolidated statements of shareholders' equity for each of the three years in the
period ended December 31, 1995....................................................... 20 - 21
Consolidated statements of cash flows for each of the three years in the period ended
December 31, 1995.................................................................... 22
Notes to consolidated financial statements........................................... 23 - 28
</TABLE>
2. Financial statement schedules
<TABLE>
<CAPTION>
PAGES IN FORM 10-K
------------------
<S> <C>
Schedule I -- Condensed Financial Information of Registrant.......................... 14 - 16
</TABLE>
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibits required to be filed by Item 601 of Regulation S-K, whether filed
herewith or incorporated herein by reference, are listed on the Index to
Exhibits of this filing.
Executive Compensation Plans and Arrangements.
Management contracts and compensatory plans, contracts and arrangements in
which directors or executive officers participate, whether filed herewith
or incorporated herein by reference, are listed on the Index to Exhibits
of this filing as Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.10,
10.12, 10.13, 10.14, 10.15, 10.16, 10.17, 10.22, 10.26 and 10.27.
(b) 1. Reports on Form 8-K
None were filed during the fourth quarter of 1995.
13
<PAGE>
U.S. HEALTHCARE, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 135,142 $ 7,503
Marketable securities............................................................ 7,602 123,242
Receivable from subsidiaries, net................................................ -- 10,995
Other receivables................................................................ 498 2,132
Current and deferred income taxes................................................ 11,974 9,746
Other............................................................................ 12,010 5,687
------------- ------------
Total current assets......................................................... 167,226 159,305
Property and equipment, less accumulated depreciation.............................. 76,262 62,710
Investments in and advances to subsidiaries, net of borrowings..................... 748,618 717,158
Other long-term assets............................................................. 33,985 22,733
------------- ------------
Total assets................................................................. $ 1,026,091 $ 961,906
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities......................................... $ 36,343 $ 38,132
Payable to subsidiaries, net..................................................... 8,081 --
Income taxes payable............................................................. 3,714 7,709
------------- ------------
Total current liabilities.................................................... 48,138 45,841
Long-term liabilities.............................................................. 13,822 10,392
------------- ------------
Total liabilities............................................................ 61,960 56,233
------------- ------------
Shareholders' equity:
Common stock, Class B stock and additional paid-in capital....................... 170,175 158,089
Retained earnings................................................................ 1,121,616 899,072
Net unrealized gains (losses) on marketable securities, less applicable income
taxes:
Related to marketable securities of U.S. Healthcare, Inc....................... (26) (4,093)
Related to marketable securities of subsidiaries............................... 4,784 (23,110)
Common stock held in treasury -- at cost......................................... (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................................... $ 1,026,091 $ 961,906
------------- ------------
------------- ------------
</TABLE>
14
<PAGE>
U.S. HEALTHCARE, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF INCOME
(amounts in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Investment income, including net realized gains and losses............... $ 13,501 $ 4,088 $ 12,957
Intercompany, principally administrative services fees................... 211,104 170,652 144,255
Other income............................................................. 2,860 1,095 459
Equity in net income of subsidiaries..................................... 359,537 370,914 269,646
----------- ----------- -----------
587,002 546,749 427,317
EXPENSES:
Administrative, marketing and other operating costs, net of
reimbursements from subsidiaries for shared costs....................... 149,056 113,287 87,272
Intercompany interest expense, net....................................... 45,204 25,443 16,763
----------- ----------- -----------
194,260 138,730 104,035
----------- ----------- -----------
Income before income taxes................................................. 392,742 408,019 323,282
Provision for income taxes................................................. 12,077 16,900 23,607
----------- ----------- -----------
Net income................................................................. $ 380,665 $ 391,119 $ 299,675
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
15
<PAGE>
U.S. HEALTHCARE, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1995 1994 1993
------------ ------------ ------------
<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....................................... 25,460 21,405 18,823
Equity in net income of subsidiaries................................ (359,537) (370,914) (269,646)
Net realized (gains) losses on sales of marketable securities....... 1,017 10,195 (4,460)
Other non-cash (credits) charges, net............................... 8,234 1,043 (2,220)
Changes in operating assets and liabilities:
Receivables......................................................... 1,634 2,681 (3,327)
Accounts payable and accrued liabilities............................ (1,789) 10,052 6,458
Receivable from or payable to subsidiaries, net..................... 19,076 (96,789) (102,238)
Income taxes payable................................................ (1,618) (166) 12,531
Other, net.......................................................... (12,558) (2,168) 1,452
------------ ------------ ------------
Cash flow from operating activities............................. 60,584 (33,542) (42,952)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of marketable securities..................................... (306,041) (311,800) (984,585)
Purchase of property and equipment, net............................... (33,376) (14,794) (15,405)
Proceeds from maturities or sales of marketable securities............ 426,976 412,563 772,086
Dividends received from subsidiaries.................................. 114,000 70,000 120,000
Borrowings from subsidiaries, net..................................... 249,971 70,579 232,500
Capital contributed to subsidiaries................................... (8,000) (12,900) (13,550)
Other................................................................. (16,678) (11,859) (10,644)
------------ ------------ ------------
Cash flow from investing activities............................. 426,852 201,789 100,402
------------ ------------ ------------
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........................ 127,639 (41,851) (6,613)
Cash and cash equivalents at beginning of year.......................... 7,503 49,354 55,967
------------ ------------ ------------
Cash and cash equivalents at end of year................................ $ 135,142 $ 7,503 $ 49,354
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
16
<PAGE>
SIGNATURES
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/ LEONARD ABRAMSON
----------------------------------
LEONARD ABRAMSON
PRINCIPAL EXECUTIVE OFFICER
Dated: March 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE (PRINCIPAL FUNCTION) DATE
- ---------------------------------------- -------------------------------- --------------
/s/ LEONARD ABRAMSON
-------------------------------------- Chairman, Principal Executive March 25, 1996
LEONARD ABRAMSON Officer and Director
/s/ JAMES H. DICKERSON, JR.
-------------------------------------- Principal Financial Officer March 25, 1996
JAMES H. DICKERSON, JR.
/s/ THOMAS A. MASCI, JR.
-------------------------------------- Principal Accounting Officer March 25, 1996
THOMAS A. MASCI, JR.
/s/ BETSY Z. COHEN
-------------------------------------- Director March 25, 1996
BETSY Z. COHEN
/s/ JEROME S. GOODMAN
-------------------------------------- Director March 25, 1996
JEROME S. GOODMAN
/s/ ALLEN MISHER, PH.D.
-------------------------------------- Director March 25, 1996
ALLEN MISHER, PH.D.
/s/ DAVID B. SOLL, M.D.
-------------------------------------- Director March 25, 1996
DAVID B. SOLL, M.D.
-------------------------------------- Director
TIMOTHY T. WEGLICKI
</TABLE>
17
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C> <C>
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).
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).
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).
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).
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).
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).
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
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).
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).
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
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).
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 this Annual Form 10-K 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>
20
<PAGE>
EXHIBIT 11
U.S. HEALTHCARE, INC.
COMPUTATION OF NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE*
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------
(amounts in thousands except per share data) 1995 1994 1993
- --------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
NET INCOME................................................................. $ 380,665 $ 391,119 $ 299,675
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Shares outstanding at beginning of period.................................. 145,486 146,718 145,172
Effect of purchase of treasury stock....................................... (4,097) (1,725) (167)
Effect of conversion of Class B stock...................................... 106 520 1,070
Effect of exercise of stock options........................................ 192 233 679
Effect of restricted stock awarded......................................... 80 302 24
WEIGHTED AVERAGE NUMBER OF COMMON EQUIVALENT SHARES:
Class B stock.............................................................. 14,431 14,537 15,057
Assumed exercise of stock options.......................................... 817 1,061 819
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING
-- PRIMARY BASIS......................................................... 157,015 161,646 162,654
----------- ----------- -----------
Incremental additional equivalent shares from application of the fully
diluted computation...................................................... 421 58 144
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING
-- FULLY DILUTED BASIS................................................... 157,436 161,704 162,798
----------- ----------- -----------
----------- ----------- -----------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
Primary and fully diluted................................................ $2.42 $2.42 $1.84
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
*After giving effect to a 3 for 2 stock split paid on March 29, 1994.
21
<PAGE>
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.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 2, 1996
22
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------
(amounts in thousands except per share data) 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
ASSETS
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.
23
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------
(amounts in thousands except per share data) 1995 1994 1993
- ---------------------------------------------------------------------------------------
<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.
24
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Class B Stock
---------------------- ------------------------
Number Number
(amounts in thousands except per share data) of shares Par value of shares Par value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 96,781 $484 10,751 $54
Exercise of stock options and related tax benefits 453 2 - -
Net unrealized gains on marketable securities,
less applicable income taxes - - - -
Restricted common stock transactions, net 20 - - -
Conversion of Class B stock to common stock 713 4 (713) (4)
Purchase of treasury stock - - - -
Cash dividends paid:
$.3867 per common share - - - -
$.3480 per Class B share - - - -
Net income - - - -
Shares distributed under a 3 for 2 stock split 48,984 245 5,019 25
-----------------------------------------------
BALANCE AT DECEMBER 31, 1993 146,951 735 15,057 75
Exercise of stock options and related tax benefits 402 2 - -
Net unrealized (losses) on marketable securities,
less applicable income taxes - - - -
Restricted common stock transactions, net 434 2 - -
Conversion of Class B stock to common stock 520 2 (520) (2)
Purchase of treasury stock - - - -
Cash dividends paid:
$.7233 per common share - - - -
$.6510 per Class B share - - - -
Net income - - - -
-----------------------------------------------
BALANCE AT DECEMBER 31, 1994 148,307 741 14,537 73
Exercise of stock options and related tax benefits 333 1 - -
Net unrealized gains on marketable securities,
less applicable income taxes - - - -
Restricted common stock transactions, net 145 1 - -
Conversion of Class B stock to common stock 106 1 (106) (1)
Purchase of treasury stock - - - -
Cash dividends paid:
$1.0250 per common share - - - -
$.9225 per Class B share - - - -
Net income - - - -
-----------------------------------------------
BALANCE AT DECEMBER 31, 1995 148,891 $744 14,431 $72
-----------------------------------------------
-----------------------------------------------
</TABLE>
See accompanying notes.
25
<PAGE>
<TABLE>
<CAPTION>
Common stock
Net unrealized held in treasury
Additional gains (losses) --------------------
paid-in Retained on marketable Number
capital earnings securities of shares Cost
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $120,506 $385,011 - - -
Exercise of stock options and related
tax benefits 8,993 - - - -
Net unrealized gains on marketable
securities, less applicable income
taxes - - $23,301 - -
Restricted common stock
transactions, net 1,253 - - - -
Conversion of Class B stock to
common stock - - - - -
Purchase of treasury stock - - - (155) $ (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 (270) - - (78) -
----------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 130,482 622,815 23,301 (233) (5,996)
Exercise of stock options and
related tax benefits 8,146 - - - -
Net unrealized (losses) on
marketable securities,
less applicable income taxes - - (50,504) - -
Restricted common stock
transactions, net 18,647 - - - -
Conversion of Class B stock to
common stock - - - - -
Purchase of treasury stock - - - (2,588) (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 157,275 899,072 (27,203) (2,821) (105,892)
Exercise of stock options and
related tax benefits 6,575 - - - -
Net unrealized gains on
marketable securities,
less applicable income taxes - - 31,961 - -
Restricted common stock
transactions, net 5,509 - - - -
Conversion of Class B stock
to common stock - - - - -
Purchase of treasury stock - - - (6,889) (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 $169,359 $1,121,616 $ 4,758 (9,710) $(311,767)
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Unearned portion
of restricted
common stock
-------------------
Number Shareholders'
of shares Amount equity
- --------------------------------------------------------------------------
<S> <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)
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 (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)
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 (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)
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 (517) $(20,651) $ 964,131
---------------------------------
---------------------------------
</TABLE>
26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31
------------------------------
(amounts in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<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.
27
<PAGE>
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 quoted 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
28
<PAGE>
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.
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.
29
<PAGE>
2. MARKETABLE SECURITIES
The following is a summary of marketable securities as of December 31, 1995
and 1994:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
(amounts in thousands) cost gains losses value
- -------------------------------------------------------------------------------
<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
(amounts in thousands) cost value
- ------------------------------------------------------------------------------
<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.
30
<PAGE>
3. RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
December 31
-----------------
(amounts in thousands) 1995 1994
- ----------------------------------------------------------------------------------------
<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
------------------
(amounts in thousands) 1995 1994
- --------------------------------------------------------------------------
<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
-----------------------------
(amounts in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------
<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>
31
<PAGE>
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
------------------------
(percentage of income before income taxes) 1995 1994 1993
- ---------------------------------------------------------------------------
<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
Two class action complaints have been filed the United States District Court
for the Eastern District of Pennsylvania seeking unspecified damages. The
complaints allege that the Company and two of its executive officers, through
certain misrepresentations and omissions about the Company, violated federal
securities laws and related state law. The Court has granted the plaintiffs'
motion for class certification as to the federal claims but has denied it as
to the state claims. The litigation is still in the preliminary stages, and
merits discovery has just begun. The Company has denied the allegations and
continues to defend the actions vigorously.
The Company is also involved in legal actions concerning benefit plan coverage
and other decisions by the Company, and alleged medical malpractice by
participating providers. If found liable in such actions, which are vigorously
defended on several grounds, the Company may bear financial responsibility.
The Company is also involved in certain other claims and legal actions arising
in the ordinary course of business. In the opinion of management, these claims
and legal actions will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
7. SHAREHOLDERS' EQUITY
On February 22, 1994, the Board of Directors declared a 3 for 2 stock split on
common and Class B stock effected in the form of a 50% stock dividend paid on
March 29, 1994. The effects of this stock split have been reflected in
shareholders' equity as of December 31, 1993 as if the stock split had
occurred as of that date. Amounts shown as cash dividends paid per common and
Class B share for all periods presented reflect the effects of this stock
split.
Class B stock is convertible into common stock on a share for share basis and
is entitled to receive cash dividends in an amount not to exceed 90% of cash
dividends paid on common stock. Voting rights are one vote per share for
common stock and fifty votes per share for Class B stock.
The Company is authorized to issue 50,000,000 shares of preferred stock with
no par value. No shares were issued as of December 31, 1995 and 1994.
The Company has incentive stock plans that provide for grants of stock options
and restricted stock awards. Recipients of stock options include employees,
members of the Board of Directors and certain physicians who contract with the
Company. Generally, the option price is not less than the market value of the
stock when the options are granted. Options granted under the plans are
generally exercisable commencing one year from the date of grant in increments
ranging from 20% to 33 1/3% a year. Continued affiliation with the Company is a
condition of vesting and exercise. Restricted stock awards of common stock are
granted to selected employees and certain physicians who contract with the
Company, subject to forfeiture if affiliation 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
32
<PAGE>
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
----------------------------- Option price
(amounts in thousands except per share data) Incentive Non-Statutory Total per share
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 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.
33
<PAGE>
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.
34
<PAGE>
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
-----------------------------------------------------------------
(amounts in thousands except per share data) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
<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.
35
<PAGE>
SUPPLEMENTARY FINANCIAL INFORMATION
The following table contains certain selected quarterly unaudited financial
data for 1995 and 1994.
<TABLE>
<CAPTION>
First Second Third Fourth
(amounts in thousands except per share data) Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------
<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>
36
<PAGE>
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).
37
<PAGE>
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 member months, offset by the effect
of lower average premiums per member. The average premium for the Medicare
plans, which at December 31, 1995, had about 108,000 members, decreased 4% to
$437 per member per month. Medicaid and other premiums increased $44,186,000
or 71%. The principal factor for the increase was a 105% increase in Medicaid
member months offset by the effects of lower premiums per member. The average
premium for the Medicaid plans, which at December 31, 1995, had about 81,000
members, decreased 9% to $125 per member per month.
The following table shows total premiums earned in 1995 and the increase in
premiums compared to 1994 by plan type.
<TABLE>
<CAPTION>
1995
(amounts in thousands) Premiums Increase
- ----------------------------------------------------------
<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, contractual changes in provider rates,
higher specialist usage, higher capitation rates and the inclusion of a
pharmacy benefit for most Medicare members. Compared to 1994, medical costs
rose 5% to $101 per member per month for Commercial plans, 6% to $352 per
member per month for Medicare plans and 22% to $109 per member per month for
Medicaid plans.
Administrative, marketing and other operating costs increased $90,506,000 or
28% over 1994. Personnel costs contributed the largest increase as a result of
higher salaries and an increase in the number of employees necessitated, in
part, by higher business volume and changes in product mix, and increased
marketing capability.
Investment income increased $26,659,000 or 41% from 1994, principally due to
realized gains on sales of marketable securities and earnings on higher
average portfolio balances. Net realized gains were $15,079,000 in 1995
compared to net realized losses of $2,461,000 in 1994.
Net income for 1995 was $381 million compared to $391 million in 1994. On a
per share basis, net income was $2.42 in 1995 and 1994, reflecting the effects
of the Company's repurchase of 6.9 million shares of its common stock during
1995.
38
<PAGE>
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, 1995, 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
(amounts in thousands) Premiums Increase
- --------------------------------------------------
<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.
39
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have been met from cash flows 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.
40
<PAGE>
EXHIBIT 21
U.S. HEALTHCARE, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
-------------------
<S> <C>
United States Health Care Systems of Pennsylvania, Inc.,
d/b/a The Health Maintenance Organization of Pennsylvania and also U.S. Healthcare.......... Pennsylvania
Health Maintenance Organization of New Jersey, Inc. also d/b/a U.S. Healthcare............... New Jersey
U.S. Healthcare, Inc......................................................................... New York
U.S. Healthcare, Inc......................................................................... Delaware
U.S. Healthcare, Inc......................................................................... Connecticut
U.S. Healthcare, Inc......................................................................... Massachusetts
U.S. Healthcare, Inc......................................................................... Virginia
U.S. Healthcare of New Hampshire, Inc........................................................ New Hampshire
U.S. Healthcare of Georgia, Inc.............................................................. Georgia
U.S. Healthcare of the Carolinas, Inc........................................................ North Carolina
U.S. Healthcare, Inc. d/b/a U.S. Managed Care................................................ Ohio
U.S. Managed Care, Inc....................................................................... Maryland
Advent HMO Corporation....................................................................... North Dakota
U.S. Healthcare Dental Plan, Inc............................................................. Pennsylvania
U.S. Healthcare Dental Plan, Inc............................................................. New Jersey
U.S. Healthcare Dental Plan, Inc............................................................. Delaware
U.S. Health Insurance Company................................................................ New York
U.S. Health Insurance Company................................................................ Connecticut
Corporate Health Insurance Company........................................................... Minnesota
United States Home Health Care Systems, Inc.................................................. Pennsylvania
United States Physicians Care Systems, Inc................................................... Pennsylvania
U.S. Healthcare Properties, Inc.............................................................. Pennsylvania
U.S. Healthcare Financial Services, Inc...................................................... Delaware
Primary Investments, Inc..................................................................... Delaware
Primary Holdings, Inc........................................................................ Delaware
U.S. Health Aviation Corp.................................................................... Pennsylvania
Advent Financial Services, Inc............................................................... Delaware
U.S. Healthcare Advantage, Inc............................................................... Delaware
Advent Investments, Inc...................................................................... Delaware
Independent Investments, Inc................................................................. Delaware
Corporate Health Administrators, Inc......................................................... Pennsylvania
Managed Care Coordinators, Inc............................................................... Delaware
Wissahickon Payment Administrators, Inc...................................................... Delaware
U.S. Mental Health Systems, Inc.............................................................. Pennsylvania
U.S. Quality Algorithms, Inc. d/b/a USQA..................................................... Pennsylvania
Workers Comp Advantage, Inc.................................................................. Pennsylvania
Healthcare Data Interchange Corporation...................................................... Delaware
Orion Computer Systems, Inc.................................................................. Pennsylvania
Criterion Communications, Inc................................................................ Delaware
Inteli-Health, Inc........................................................................... Delaware
USHC Management Services Corporation......................................................... Delaware
</TABLE>
41
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Annual Report (Form
10-K) 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) for the year ended December 31, 1995 and the related
financial statement schedule included therein.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 26, 1996
42
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1995 ANNUAL REPORT TO SHAREHOLDERS OF U.S. HEALTHCARE, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 804,631
<SECURITIES> 450,006
<RECEIVABLES> 149,082
<ALLOWANCES> 15,779
<INVENTORY> 0
<CURRENT-ASSETS> 1,431,153
<PP&E> 236,217
<DEPRECIATION> 94,080
<TOTAL-ASSETS> 1,667,144
<CURRENT-LIABILITIES> 680,177
<BONDS> 0
0
0
<COMMON> 744
<OTHER-SE> 963,387
<TOTAL-LIABILITY-AND-EQUITY> 1,667,144
<SALES> 0
<TOTAL-REVENUES> 3,609,679
<CGS> 0
<TOTAL-COSTS> 2,990,711
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 618,968
<INCOME-TAX> 238,303
<INCOME-CONTINUING> 380,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 380,665
<EPS-PRIMARY> 2.42
<EPS-DILUTED> 2.42
</TABLE>
