<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): JANUARY 3, 1995
---------------
UNITED HEALTHCARE CORPORATION
-----------------------------
(Exact name of registrant as specified in charter)
MINNESOTA
---------
(State or other jurisdiction of incorporation)
0-13253 41-1321939
------- ----------
(Commission File Number) (IRS Employer Identification No.)
300 OPUS CENTER, 9900 BREN ROAD EAST, MINNETONKA, MN 55343
-------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 936-1300
--------------
<PAGE>
This filing is an amendment to United HealthCare Corporation's (United)
previously filed Form 8-K dated January 3, 1995, regarding United's January 3,
1995 acquisition of GenCare Health Systems, Inc. (GenCare).
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
- ----------------------------------------------------------------------------
(a) Financial Statements of Business Acquired
-----------------------------------------
Audited Consolidated Financial Statements of GenCare Health Sytems, Inc.
and Subsidiaries for the years ended December 31, 1994, 1993 and 1992.
(b) Pro Forma Financial Information
-------------------------------
Pro forma condensed combining financial information for the year ended
December 31, 1994.
(c) Exhibits
--------
Exhibit 23-Consent of Independent Public Accountants.
2
<PAGE>
[LOGO OF KPMG]
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1994, 1993, and 1992
(With Independent Auditors' Report Thereon)
3
<PAGE>
[LOGO OF KPMG]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GenCare Health Systems, Inc.:
We have audited the accompanying consolidated balance sheets of GenCare Health
Systems, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of earnings, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1994.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audits 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 GenCare
Health Systems, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, 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 certain investments in debt securities to
conform with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," in 1994.
/s/ KPMG Peat Marwick LLP
January 27, 1995
4
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1994 and 1993
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
ASSETS 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,066,757 2,902,341
Investment securities available-for-sale 66,849,608 46,410,725
Premiums receivable, less allowance for billing
adjustments of $179,219 in 1994 and $40,000 in 1993 5,324,228 3,471,801
Prepaid expenses 6,085,419 776,800
Other current assets 3,753,330 1,868,574
Due from related parties 2,130,078 1,568,470
- --------------------------------------------------------------------------------------------
Total current assets 85,209,420 56,998,711
Restricted assets 704,205 561,736
Long-term investments - held-to-maturity 14,631,368 14,633,210
Property and equipment, net 3,964,950 609,611
Deferred taxes 1,647,254 --
Excess of cost over fair value of net assets acquired, net 18,884,720 19,011,432
- --------------------------------------------------------------------------------------------
Total assets $125,041,917 91,814,700
- --------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------
Current liabilities:
Unearned premiums 579,117 491,805
Accounts payable - capitation 70,792 29,321
Claims payable 24,076,763 22,378,127
Medical groups risk-sharing pools 6,031,140 4,245,154
Accrued expenses 7,798,464 195
Income taxes payable 1,481,310 --
Due to Sanus Corp. Health Systems and subsidiaries 444,526 512,620
- --------------------------------------------------------------------------------------------
Total current liabilities 40,482,112 27,657,222
- --------------------------------------------------------------------------------------------
Long-term liabilities:
Other liabilities 102,120 --
Due to Sanus Corp. Health Systems and subsidiaries 930,614 --
- --------------------------------------------------------------------------------------------
Total long-term liabilities 1,032,734 --
- --------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, $.02 par value; authorized 15,000,000
shares, issued and outstanding 10,700,000 shares 214,000 214,000
Additional paid-in capital 28,809,134 28,809,134
Retained earnings 57,062,648 35,134,344
Unrealized loss on investments available-for-sale, net (2,523,185) --
Treasury stock, at cost, 1,132 shares (35,526) --
- --------------------------------------------------------------------------------------------
Total shareholders' equity 83,527,071 64,157,478
- --------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $125,041,917 91,814,700
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 1994, 1993, and 1992
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1994 1993 1992
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums $242,075,604 190,688,129 152,278,779
Preferred provider organization fees 4,024,990 3,301,342 3,049,355
Interest and other 4,824,020 3,328,530 2,122,160
- ---------------------------------------------------------------------------------------------
Total revenues 250,924,614 197,318,001 157,450,294
- ---------------------------------------------------------------------------------------------
Expenses:
Benefit claims and capitation payments 190,645,634 150,783,318 121,222,238
Administration:
Compensation 14,288,159 -- --
Marketing 3,059,153 -- --
Occupancy 1,632,076 -- --
General administration 4,660,033 -- --
Other 1,013,930 1,434,189 577,281
Management fees -- 19,617,975 15,847,098
Amortization of excess of cost over fair value
of net assets acquired 551,213 540,600 540,600
- ---------------------------------------------------------------------------------------------
Total expenses 215,850,198 172,376,082 138,187,217
- ---------------------------------------------------------------------------------------------
Earnings before income tax expense 35,074,416 24,941,919 19,263,077
Income tax expense 13,146,112 9,081,866 7,237,241
- ---------------------------------------------------------------------------------------------
Net earnings $ 21,928,304 15,860,053 12,025,836
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Unrealized
gain (loss)
on invest-
Additional ments avail- Total
Common paid-in Retained able for Treasury shareholders'
stock capital earnings sale, net stock equity
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at Decem-
ber 31, 1991 $214,000 28,809,134 7,248,455 -- -- 36,271,589
Net earnings -- -- 12,025,836 -- -- 12,025,836
- ------------------------------------------------------------------------------------------------------------
Balances at Decem-
ber 31, 1992 214,000 28,809,134 19,274,291 -- -- 48,297,425
Net earnings -- -- 15,860,053 -- -- 15,860,053
- ------------------------------------------------------------------------------------------------------------
Balances at Decem-
ber 31, 1993 214,000 28,809,134 35,134,344 -- -- 64,157,478
Effect of change in
accounting principle -- -- -- 723,837 -- 723,837
Net earnings -- -- 21,928,304 -- -- 21,928,304
Change in unrealized
loss on investments -- -- -- (3,247,022) -- (3,247,022)
Treasury stock
purchased -- -- -- -- (35,526) (35,526)
- ------------------------------------------------------------------------------------------------------------
Balances at Decem-
ber 31, 1994 $214,000 28,809,134 57,062,648 (2,523,185) (35,526) 83,527,071
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1993, and 1992
<TABLE>
<CAPTION>
=============================================================================================================
1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 21,928,304 15,860,053 12,025,836
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation of property and equipment 1,162,108 99,566 --
Amortization of excess of cost over fair value
of net assets acquired 551,213 540,600 540,600
Amortization of net investment premiums 646,848 479,462 490,606
Gain on sale of investments, net (38,796) (1,791) (175,742)
Changes in operating assets and liabilities:
Premiums receivable, net (1,852,427) 1,767,234 (1,970,110)
Prepaid capitation -- 1,691,946 (1,691,946)
Prepaid expenses and other current assets (7,014,978) (1,396,822) (301,534)
Due from related parties (561,608) 651,007 (1,881,731)
Restricted assets (142,469) (111,736) --
Unearned premiums 87,312 272,313 135,365
Accounts payable - banks -- (5,336,999) 5,336,999
Accounts payable - capitation 41,471 (5,031) 5,148
Claims payable 1,698,636 5,472,975 3,428,336
Medical groups risk-sharing pools 1,785,986 1,419,864 1,536,150
Accrued expenses 4,467,965 195 --
Income taxes payable 1,481,310 (444,114) (69,071)
Due to Sanus Corp. Health Systems and subsidiaries (68,094) (134,834) (661,825)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 24,172,781 20,823,888 16,747,081
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investments available-for-sale:
Purchases (38,421,369) (25,335,816) (38,698,018)
Maturities 8,194,549 250,000 245,993
Sales 5,387,350 6,040,896 16,465,778
- --------------------------------------------------------------------------------------------------------------
Total (24,839,470) (19,044,920) (21,986,247)
- --------------------------------------------------------------------------------------------------------------
Investments held-to-maturity:
Purchases (1,026,900) (1,049,535) --
Maturities 884,801 1,009,338 --
Sales -- -- --
- --------------------------------------------------------------------------------------------------------------
Total (142,099) (40,197) --
- --------------------------------------------------------------------------------------------------------------
Purchase of property and equipment (4,338,197) (709,177) --
Purchase of subsidiary 2,182,946 -- --
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (27,136,820) (19,794,294) (21,986,247)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (35,526) -- --
Equipment financing provided by Sanus Corp. 1,739,981 -- --
Payment of equipment financing (576,000) -- --
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,128,455 -- --
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,835,584) 1,029,594 (5,239,166)
Cash and cash equivalents at beginning of year 2,902,341 1,872,747 7,111,913
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,066,757 2,902,341 1,872,747
- -------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information - cash paid
during the period for income taxes $ 12,615,000 8,785,888 7,303,993
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1994, 1993, and 1992
===============================================================================
(1) Organization and Operation
GenCare Health Systems, Inc. (GenCare), formerly Sanus Health Plan, Inc.,
and subsidiaries (the Company) is a prepaid health maintenance organization
incorporated in the State of Missouri. Medical care is provided to
employee groups which subscribe to various health maintenance plans of the
Company. The Company is licensed to operate in the States of Missouri and
Illinois and has been granted qualification as a Federal Health Maintenance
Organization under the Public Health Services Act.
GenCare Dental Plan, Inc. (Dental), GenCare Preferred Provider Organization
(PPO), and GenCare Management Company, Inc. (the Management Company) are
wholly owned subsidiaries of GenCare. Dental is comprised of groups with
dental coverage only. The Management Company, formerly Sanus of Missouri,
Inc. (SOMI), was acquired January 1, 1994.
GenCare is structured as an individual practice association. As such,
GenCare has contracts with physicians, hereafter referred to as primary
care physicians (PCPs), to administer to the health care needs of eligible
enrollees (members). Each member chooses a PCP who is under contract with
GenCare. GenCare has also negotiated contracts with hospitals, physician
specialists, and other health care providers to satisfy the necessary
medical care needs of its eligible members that extend beyond the level of
care provided by the PCP.
The contracts with PCPs are structured so that the PCP receives monthly
capitation payments based on the number, age, and sex of members associated
with the PCP. In addition to monthly capitation payments, GenCare has
established certain funds and incentive pools for the PCPs and physician
specialists. These funds and incentive pools are structured to encourage
PCPs, on a group basis, to control the utilization of health care services
by members.
(2) Summary of Significant Accounting Policies
Significant accounting policies of the Company are as follows:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
GenCare and its subsidiaries, Dental, Passport and the Management Company,
presented on a consolidated basis. All significant intercompany accounts
and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consists of all cash on deposit with financial
institutions and all short-term investments with original or remaining
maturities at purchase of 90 days or less.
Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments
in Debt and Equity Securities." SFAS 115 requires that investments in all
debt securities and those equity securities with readily determinable
market values be classified into one of three categories: held-to-
maturity, trading, or
9
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
available-for-sale. The classification of investments is based upon
management's current intent. Debt securities which management has a
positive intent and ability to hold until maturity are classified as
securities held-to-maturity and are carried at amortized cost. Unrealized
holding gains and losses on securities held-to-maturity are not reflected
in the consolidated financial statements. Debt and equity securities that
are purchased for short-term resale are classified as trading securities.
Trading securities are carried at market value, with unrealized holding
gains and losses included in earnings. All other debt and equity securities
not included in the above two categories are classified as securities
available-for-sale. Securities available-for-sale are carried at market
value, with unrealized holding gains and losses reported as a separate
component of shareholders' equity, net of income taxes. At December 31,
1994, the Company did not have any investments categorized as trading
securities. The adoption of SFAS 115 had no effect on the earnings of the
Company.
Prior to implementation of SFAS 115, debt securities for which the Company
had the ability and intent to hold to maturity were carried at cost,
adjusted for amortization of premiums and accretion of discount using a
method which approximates the interest method over the term of the related
security. Debt securities available-for-sale were carried at the lower of
aggregate cost or market value. The cost of investment securities sold is
determined by specific identification.
Restricted Assets
Restricted assets consist of U.S. Treasury notes and U.S. Treasury strip
coupon bonds which are carried at amortized cost. Restricted assets are
held on deposit with financial institutions to comply with applicable
federal and state health maintenance organization regulations.
Property and Equipment
Property and equipment are carried at cost and depreciated over the
estimated useful lives using accelerated depreciation methods.
Excess of Cost Over Fair Value of Net Assets Acquired
Amortization of excess of cost over fair value of net assets acquired has
been computed on a straight-line basis over a 40-year amortization period.
Accumulated amortization at December 31, 1994 and 1993 aggregated
$2,955,839 and $2,404,626, respectively.
Revenue Recognition
The Company recognizes premiums and PPO fees from members as income in the
period to which health care coverage relates. Amounts billed and collected
in advance of the month of coverage are recorded as unearned premiums.
Premiums receivable are net of anticipated billing adjustments for members
who leave the plan prior to the balance sheet dates.
Benefit Claims and Capitation Payments
Benefit claims and capitation payments include estimates of payments to be
made on individual claims for medical specialists, drugs, and hospital
costs for which services have been performed. The cost of claims incurred
but not reported is estimated based on current membership statistics,
current utilization, and historical data. Such amounts include paid and
pending claims and
10
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
estimates of claims for services performed during the fiscal year which
have not, as of the balance sheet dates, been reported to the Company. The
cost of claims incurred but not reported is estimated based on current
membership statistics, current utilization, and historical data.
Reinsurance
Reinsurance premiums and reinsurance recoveries are included in benefit
claims and capitation payments in the accompanying consolidated financial
statements.
Coordination of Benefits and Subrogation
Certain members of the Company's health plans are also covered by other
commercial insurance such that the Company does not have primary
responsibility for the payment of health services provided to the members.
Recoveries under these coordination of benefit provisions are offset
against benefit claims and capitation payments. Cash recoveries under such
provisions amounted to $203,502, $226,324, and $112,448 in 1994, 1993, and
1992, respectively. Additionally, amounts recovered through subrogation
from other commercial insurance carriers amounted to $122,925, $28,113, and
$28,792 in 1994, 1993, and 1992, respectively.
Income Taxes
The Company files a consolidated income tax return with its three wholly
owned subsidiaries. All income is from domestic sources.
Other than amortization of excess of cost over fair value of net assets
acquired and municipal interest recognition, there are no significant
differences between pretax earnings for financial reporting purposes and
pretax earnings for income tax purposes.
Beginning January 1, 1992, the Company accounts for income taxes under the
provision of Statement of Financial Accounting Standards No.E109,
"Accounting for Income Taxes" (SFAS 109). Under the asset and liability
method of Statement 109, deferred tax assets and liabilities are recognized
for temporary differences using enacted tax rates expected to apply when
those temporary differences are recovered or settled. Prior to 1992, there
were no significant temporary differences between tax and financial
reporting amounts. Therefore, the cumulative effect of the change in the
method of accounting for income taxes in 1992 was immaterial.
Reclassification
Certain reclassifications of 1993 and 1992 information have been made to
conform with the 1994 presentation.
11
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(3) Investments
Investments at December 31, 1994 and 1993 are summarized as follows:
<TABLE>
<CAPTION>
=================================================================================
1994
- ---------------------------------------------------------------------------------
Gross Gross Esti-
unreal- unreal- mated
Amortized ized ized fair
cost gains losses value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
Mortgage-backed securities $38,713,930 -- 2,608,090 36,105,840
Municipal and other govern-
ment securities 31,926,793 64,973 1,550,398 30,441,368
Other 304,964 -- 2,564 302,400
- ---------------------------------------------------------------------------------
Total $70,945,687 64,973 4,161,052 66,849,608
=================================================================================
Held-to-maturity:
Mortgage-backed securities $ 3,018,637 -- 162,637 2,856,000
Municipal and other govern-
ment securities 11,612,731 12,225 177,771 11,447,185
- ---------------------------------------------------------------------------------
Total $14,631,368 12,225 340,408 14,303,185
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
1993
- ---------------------------------------------------------------------------------
Gross Gross Esti-
unreal- unreal- mated
Amortized ized ized fair
cost gains losses value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
Mortgage-backed securities $19,867,907 136,093 35,000 19,969,000
Municipal and other govern-
ment securities 25,723,355 1,051,308 46,203 26,728,460
Certificates of deposit 100,000 -- -- 100,000
Other 719,463 32,127 -- 751,590
- ---------------------------------------------------------------------------------
Total $46,410,725 1,219,528 81,203 47,549,050
=================================================================================
Held-for-investment:
Mortgage-backed securities $ 3,021,853 68,147 -- 3,090,000
Municipal and other govern-
ment securities 11,611,357 500,778 -- 12,112,135
- ---------------------------------------------------------------------------------
Total $14,633,210 568,925 -- 15,202,135
=================================================================================
</TABLE>
12
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
The amortized cost and estimated fair values of bonds and short-term
investments at December 31, 1994, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
________________________________________________________________
Estimated
Amortized fair
cost value
________________________________________________________________
<S> <C> <C>
Available-for-sale:
Within 1 year $ -- --
After 1 year through 5 years 7,246,037 7,290,959
After 5 years through 10 years 33,983,847 32,306,822
After 10 years 29,715,803 27,251,827
________________________________________________________________
Total $70,945,687 66,849,608
________________________________________________________________
Held-to-maturity:
Within 1 year $ 501,427 501,200
After 1 year through 5 years 4,666,652 4,652,177
After 5 years through 10 years 9,463,289 9,149,809
________________________________________________________________
Total $14,631,368 14,303,186
________________________________________________________________
</TABLE>
Gross gains of $59,107, $20,481, and $-0- and gross losses of $20,312,
$18,690, and $6,545 were realized in 1994, 1993, and 1992, respectively.
(4) Property and Equipment
Property and equipment are summarized as follows:
________________________________________________________________
<TABLE>
<CAPTION>
_____________________________________________________________
1994 1993
_____________________________________________________________
<S> <C> <C>
Furniture and fixtures $ 202,241 54,946
Office and computer equipment 1,734,724 477,332
Computer software 2,966,982 261,020
Leasehold improvements 421,506 14,675
_____________________________________________________________
Total property and equipment 5,325,453 807,973
Less accumulated depreciation
and amortization 1,360,503 198,362
_____________________________________________________________
Property and equipment, net $3,964,950 609,611
_____________________________________________________________
</TABLE>
13
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(5) Reinsurance
The Company purchases, on a premium basis, reinsurance coverage that limits
the Company's exposure on claims for health care services. Effective
October 1, 1993, the deductible under the reinsurance policy increased to
$165,000 from $150,000 per member and includes a stop-loss provision for
90% of claimed health care expenses in excess of the deductible up to a
maximum of $1,000,000 per member per year. The stop-loss provision is 80%
at noncontracted facilities with the same deductible and maximum. The
policy is cancellable by the insurance carrier with notice of at least 31
days prior to the anniversary date.
Reinsurance premiums were $742,026, $563,828, and $302,472 in 1994, 1993,
and 1992, respectively. The Company recorded recoveries of $40,975 in
1994, $349,752 in 1993, and $72,000 in 1992 under reinsurance arrangements.
(6) Medical Groups' Risk-Sharing Pools
The Company compensates PCPs on a capitation basis and the participating
specialists on a fee-for-service basis. As part of the cost control
incentive program, the Company retains a portion of the amounts due to
these participating physicians (the incentive withhold). In the event that
medical expenses exceed budgeted levels, the physicians bear the risk to
the extent of the incentive withhold. In the event that medical expenses
are less than the budget, the Company and the physicians share any savings
on an equal basis.
The medical groups' risk-sharing pool liability represents the amounts
expected to be paid out under applicable incentive arrangements.
(7) Income Taxes
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Year ended December 31
______________________________________________________________
<S> <C> <C> <C>
1994 1993 1992
______________________________________________________________
Federal $11,160,000 7,806,868 6,424,389
State 1,986,112 1,274,998 812,852
_______________________________________________________________
Total $13,146,112 9,081,866 7,237,241
_______________________________________________________________
</TABLE>
14
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
The following reconciles income tax expense and the amounts obtained by
applying the statutory U.S. federal income tax rate to earnings before
income tax expense, using a statutory rate 35% for the years ended December
31, 1994 and 1993 and 34% for the year ended December 31, 1992.
<TABLE>
<CAPTION>
Year ended December 31
________________________________________________________________________
<S> <C> <C> <C>
1994 1993 1992
________________________________________________________________________
Income tax expense computed
at statutory rate $12,276,045 8,729,672 6,549,446
Amortization of excess of cost over
fair value of net assets acquired 192,925 189,210 183,804
Nontaxable municipal interest (641,246) (614,152) (712,118)
State income taxes, net of federal
tax benefit 1,290,973 828,749 609,639
Other, net 27,415 (51,613) 606,470
_________________________________________________________________________
$13,146,112 9,081,866 7,237,241
_________________________________________________________________________
</TABLE>
The Company's deferred tax asset at December 31, 1994 represents the tax
effect of reflecting the available-for-sale investment portfolio at fair
value. The corresponding deferred tax expense is reflected as a reduction
of the net unrealized loss included in shareholders' equity. There is no
valuation allowance for deferred income tax assets as of December 31, 1994
and no change in the valuation allowance during 1994. In assessing the
realization of the deferred tax asset, management considers whether it is
more likely than not that the deferred tax asset will be realized. The
ultimate realization is dependent upon the generation for future taxable
capital gains during the periods in which the unrealized losses are
realized and become deductible. Management considered tax planning
strategies in making this assessment and believes it more likely than not
that the Company will realize the benefits of the deferred tax asset at
December 31, 1994.
There were no significant temporary differences which gave rise to deferred
tax assets or liabilities at December 31, 1993. Additionally, there were
no net operating losses or tax credits available to offset future tax
liabilities at December 31, 1994.
(8) Lease Commitments
The Company leases office space under noncancellable operating lease
agreements which expire at various dates in the future. Future minimum
annual rents under noncancellable operating leases at December 31, 1994 are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $572,160
1996 592,722
1997 605,613
1998 560,946
=======
</TABLE>
Rent expense amounted to approximately $471,957 during 1994. Rent expense
was covered under the management agreement with SOMI during 1993 and 1992
as discussed in note 12.
15
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(9) Employee Benefits
Substantially all full-time employees of the Company are eligible to
participate in the Company's defined contribution 401(k) plan upon
completion of one year of service. Participants are able to defer up to
10% of their pretax salary. The Company provides a 100% matching
contribution up to $1,000 per participant per year. The Company incurred
$135,724 in matching contributions for the year ended December 31, 1994.
Prior to 1994, matching contributions were covered under the management
agreement with SOMI as discussed in note 12.
During 1994, the Company implemented a profit-sharing plan by which up to
10% of gross salaries, wages, and commissions paid during 1994 would be
available to be paid as a bonus. Substantially all full-time employees
were eligible for this plan. Profit-sharing expense for 1994 was $810,294.
(10) Related Party Transactions
General American Life Insurance Company (General American) owns
approximately 72% of the outstanding common stock of GenCare at December
31, 1994 and 1993. General American serves as a marketing representative
in offering coverage provided by the Company to various employee groups.
At December 31, 1993, approximately 27,000 members of the HMO health plans
were attributable to General American.
Amounts receivable from General American at December 31, 1994 and 1993,
applicable to General American employees, amounted to approximately $26,500
and $29,000, respectively. Premium revenue applicable to General American
employees in 1994, 1993, and 1992 was approximately $3,685,000, $5,092,000,
and $3,982,000, respectively.
Additionally, amounts due from General American applicable to those groups
where General American acts as a marketing representative amounted to
approximately $2,317,000 and $1,539,000 at December 31, 1994 and 1993,
respectively. Premium revenue recognized from such marketing arrangements
in 1994, 1993, and 1992 was approximately $30,745,000, $24,370,000, and
$21,178,000, respectively. General American agreed to indemnify the
Company for a specified portion of claims paid relating to the coverage
marketed by General American. During 1993, the Company received
reimbursements of $500,000, which are reflected as reductions to benefit
claims and capitation payments.
General American has historically provided certain administrative services
to the Company. Such services include investor relations, legal, and
financial reporting. Administrative expenses charged by General American
to the Company were $523,003, $505,816, and $-0- for the years ended
December 31, 1994, 1993, and 1992, respectively.
(11) Management Agreement With Sanus of Missouri, Inc.
Effective April 1, 1988, a management agreement was initiated between the
Company and SOMI. Under the terms of the agreement, SOMI agreed to
conduct, supervise, and administer the day-to-day operations of the Company
and to perform these functions in accordance with accepted management
principles for the health maintenance organization industry and the
reasonable exercise of judgment; provided, however, that such actions taken
are in accordance with the
16
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
Company's Articles of Incorporation and Bylaws and also in accordance with
statutory and regulatory requirements. The management agreement was amended
effective January 1991, and again effective January 1992.
In accordance with the agreement, SOMI agreed to employ all personnel
considered necessary to carry out its responsibilities pursuant to the
terms of the management agreement. Additionally, SOMI agreed to provide or
arrange, at SOMI's expense, all office space and facilities, marketing and
member materials, and accounting and financial support systems, including
computerized data processing equipment, seen as necessary to fulfill SOMI's
responsibilities under the agreement. SOMI also participated in the
Company's underwriting risk related to health coverage offered to members
of the Company's health plans.
Pursuant to the provisions of the amended management agreement effective
January 1, 1991, certain service-based standards had been established
against which SOMI's performance was evaluated. The Company was required,
as of January 1, 1991, to pay SOMI for services rendered based on a per
member per month rate scale as set forth in the management agreement, as
adjusted for the performance compared with established service standards.
Additionally, SOMI also participated in a profit- or loss-sharing
arrangement with the Company.
Pursuant to the terms of the management agreement between GenCare and SOMI,
GenCare exercised its option to purchase SOMI for $200,000 in January 1994.
Immediately following the purchase, SOMI changed its name to GenCare
Management Company, Inc. The acquisition was accounted for using the
purchase method. Accordingly, the purchase price was allocated to assets
and liabilities acquired based on estimates of their fair values. This
resulted in goodwill of $424,201 which is amortized on a straight-line
basis over 40 years. There is no longer a profit-sharing arrangement
between GenCare and the Management Company. GenCare reimburses the
Management Company for actual operating expenses incurred.
(12) Commitments and Contingent Liabilities
The Company is a defendant in a number of litigation actions incurred in
the normal course of conducting its business activities. In the opinion of
management, any adverse judgments that might result from such litigation
will not have a material effect on the Company's financial position.
The Company is a defendant in litigation by a third-party plaintiff
claiming breach of contract and misappropriation of trade secrets. The
Company had entered into discussions with the plaintiff about the
possibility of developing a business to arrange for independent groups of
physicians to provide specialty medical services on a global budgeted
basis. The Company suspended discussions with the plaintiff regarding
potential joint ventures before any contracts were signed. The plaintiff
is seeking $7.83 million for payment under the terms of the purported
contract. The case is currently in discovery and, in the opinion of
management and the Company's counsel, any adverse judgments that might
result from such litigation will not have a material effect on the
Company's financial position.
(13) Stock Options
The Company adopted the GenCare Health Systems, Inc. 1991 Flexible Stock
Plan (the Plan) on October 1, 1991. The Plan provides for the award of
benefits (collectively Benefits) of various
17
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
types, including stock options, stock appreciation rights, restricted
stock, performance shares, cash awards, and other stock-based awards. The
number of shares of common stock which may be issued in connection with
Benefits will not exceed 400,000 shares plus an annual increase, effective
on each January 1, beginning in 1992, equal to 3.5% of the number of the
then outstanding shares of common stock. Information with respect to grants
follows:
===========================================================
Options Outstanding
----------------------------
Shares Price
available per
for grant Shares share
-----------------------------------------------------------
Balance, December 31, 1992 774,500 169,000 $ --
Authorized 374,500 -- --
Forfeited -- (7,500) 10.00
Granted -- -- --
-----------------------------------------------------------
Balance, December 31, 1993 1,149,000 161,500 --
Authorized -- -- --
Forfeited -- (30,900) Various
Granted -- 130,700 31.00
Granted -- 9,000 34.50
-----------------------------------------------------------
Balance, December 31, 1994 1,149,000 270,300
===========================================================
All the options granted October 1, 1991 are in two equal parts: Award A and
Award B. Award A vests, or become exercisable, as to half the shares it
covers on November 30, 1994 with the second half becoming exercisable on
November 30, 1995. Award A expires on October 31, 2001. The first half of
Award B also vests on November 30, 1995 and the second half on November 30,
1996. Award B expires on October 31, 2001. The options granted October
28, 1992 are exercisable in three parts: one-quarter of the shares vests on
November 30, 1994, half vests on November 30, 1995, and the remaining one-
quarter of the shares vests on November 30, 1996. These options expire on
November 30, 2002. Individuals granted the options must be employed by the
Company or General American at the time the options vest in order to
exercise them.
On January 26, 1994, an additional 130,700 stock options were awarded with
an exercise price of $31, representing the closing market price on that
date. These options will expire in 2004, and vest or become exercisable --
25% in February 1997, 25% in February 1998, and 50% in February 1999.
Additionally, on May 18, 1994, 9,000 stock options were awarded with an
exercise price of $34.50, the closing market price on that date. These
options will expire in 2004, and vest or become exercisable -- 25% in May
1997, 25% in May 1998, and 50% in May 1999. See note 15.
18
<PAGE>
GENCARE HEALTH SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(14) Statutory Reporting Information and Net Worth Requirements
Total assets and shareholders' equity, for statutory reporting purposes, do
not reflect the effects of the "push down" of excess of cost over fair
value of net assets acquired or the effects of the net unrealized loss on
investments available for sale. Certain premium receivables outstanding in
excess of 60 days, other receivables in excess of 90 days, prepaid
expenses, and property and equipment are not reflected in statutory total
assets and shareholders' equity. For these reasons, shareholders' equity,
as reported for statutory reporting purposes, was less than amounts
reported under generally accepted accounting principles by $22,268,329 and
$20,114,283 at December 31, 1994 and 1993, respectively.
The Company is subject to regulation by the Department of Insurance of the
State of Missouri. Additionally, the Company is also licensed to operate
in the State of Illinois. As part of the regulations governing health
maintenance organizations operating within those states, GenCare is
required to maintain a minimum level of net capital, computed in accordance
with statutory regulations, equal to $1,500,000. Dental is also required,
by applicable regulations, to maintain minimum capital requirements of
$150,000. GenCare and Dental each met the applicable minimum levels of net
capital in 1994, 1993, and 1992.
(15) Subsequent Event
On September 11, 1994, an agreement was entered into whereby United
HealthCare Corporation (United) would purchase 100% of the outstanding
common stock of the Company, subject to obtaining the necessary regulatory
and shareholder approvals. Pursuant to this agreement, effective January
3, 1995, the Company was purchased by United at a price of $47.50 per
share, resulting in a total purchase price of approximately $508 million.
All stock options became immediately excercisable on the effective date.
19
<PAGE>
UNITED HEALTHCARE CORPORATION
PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
On January 3, 1995, United completed its acquisition of GenCare, a health plan
based in St. Louis, Missouri, which served 230,000 members at the time of
acquisition. The total purchase price of the acquisition was $515.4 million in
cash.
The following unaudited pro forma condensed combining financial information
presents the estimated effects of the purchase of GenCare on United. The Pro
Forma Condensed Combining Statement of Operations assumes the acquisition of
GenCare was completed on January 1, 1994. In the case of the December 31, 1994
Pro Forma Condensed Combining Balance Sheet, the estimated effects are reflected
on a pro forma basis as if the transaction had occurred on December 31, 1994.
The pro forma condensed combining financial information reflects the terms of a
definitive agreement between United and GenCare dated September 11, 1994. The
pro forma condensed combining financial information is based on assumptions
deemed appropriate by United's management based on their best current judgement.
These assumptions are set forth in the accompanying notes to pro forma condensed
combining financial information. The pro forma condensed combining financial
information is not necessarily indicative of the results that actually would
have occurred had this transaction been consummated on the dates indicated above
or of the results of operations which may be obtained in the future.
The pro forma condensed combining financial information should be read in
conjunction with United's historical consolidated financial statements and notes
thereto to be included in United's annual report on Form 10-K for the year
ended December 31, 1994.
20
<PAGE>
UNITED HEALTHCARE CORPORATION
PRO FORMA CONDENSED COMBINING BALANCE SHEET
DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
United GenCare
HealthCare Health Pro Forma Pro Forma
Corporation Systems, Inc. Adjustments Combined
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $1,519,049 $ 1,067 $(523,757)(A) $ 996,359
Short-term investments 135,287 66,850 -- 202,137
Accounts receivable, net 167,369 5,324 -- 172,693
Other 86,510 11,968 -- 98,478
---------- -------- --------- ----------
Total Current Assets 1,908,215 85,209 (523,757) 1,469,667
Long-term Investments 1,115,054 15,336 -- 1,130,393
Property and Equipment, net 162,597 3,965 -- 166,559
Intangible and Other Assets, net 303,613 20,532 489,115 (B) 794,375
(18,885)(C)
---------- -------- --------- ----------
TOTAL ASSETS $3,489,479 $125,042 $ (53,527) $3,560,994
========== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical costs payable $ 443,559 30,179 -- 473,738
Accrued expenses 83,087 9,279 30,000 (D) 122,366
Unearned premiums 70,718 579 -- 71,297
Accounts payable 66,938 445 -- 67,383
---------- -------- --------- ----------
Total Current Liabilities 664,302 40,482 30,000 734,784
Long-term Liabilities 24,275 1,033 -- 25,308
Minority Interests 5,446 -- -- 5,446
---------- -------- --------- ----------
Shareholders' Equity
Common stock 1,728 214 (214)(E) 1,728
Treasury Stock -- (36) 36 (E) --
Additional paid-in capital 752,472 28,809 (28,809)(E) 752,472
Retained earnings 2,085,056 57,063 (57,063)(E) 2,085,056
Deferred compensation (35) -- -- (35)
Unrealized holding losses
on investments available for
sale, net of income tax effects (43,765) (2,523) 2,523 (E) (43,765)
---------- -------- --------- ----------
Total Shareholders' Equity 2,795,456 83,527 (83,527) 2,795,456
---------- -------- --------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $3,489,479 $125,042 $ (53,527) $3,560,994
========== ======== ========= ==========
</TABLE>
See notes to pro forma condensed combining financial information.
21
<PAGE>
UNITED HEALTHCARE CORPORATION
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
United GenCare
HealthCare Health Pro Forma Pro Forma
Corporation Systems, Inc. Adjustments Combined
----------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES
Premiums $3,376,238 $242,076 $(28,299)(F) $3,590,015
Management Services 274,616 4,025 3,124 (F) 281,765
Investment Income 118,028 4,823 (28,851)(G) 94,000
---------- -------- -------- ----------
Total Revenues 3,768,882 250,924 (54,026) 3,965,780
---------- -------- -------- ----------
OPERATING EXPENSES
Medical Costs 2,643,107 190,646 (25,175)(F) 2,808,578
Selling, General &
Administrative Costs 555,649 23,491 -- 579,140
Depreciation & Amortization 64,079 1,713 12,228 (H) 77,469
(551)(I)
---------- -------- -------- ----------
Total Operating Expenses 3,262,835 215,850 (13,498) 3,465,187
---------- -------- -------- ----------
EARNINGS FROM OPERATIONS 506,047 35,074 (40,528) 500,593
Interest Expense (2,163) -- -- (2,163)
Merger Costs (35,940) -- -- (35,940)
---------- -------- -------- ----------
EARNINGS BEFORE INCOME TAXES AND
MINORITY INTERESTS 467,944 35,074 (40,528) 462,490
Provision for Income Taxes (177,822) (13,146) 15,401 (J) (175,567)
Minority Interests in Net
Earnings of Consolidated
Entities (1,983) -- -- (1,983)
---------- -------- -------- ----------
NET EARNINGS BEFORE
EXTRAORDINARY GAIN 288,139 21,928 (25,127) 284,940
EXTRAORDINARY GAIN ON SALE OF
SUBSIDIARY net of income
taxes of $808,758 1,377,075 -- -- 1,377,075
---------- -------- -------- ----------
NET EARNINGS $1,665,214 $ 21,928 $(25,127) $1,662,015
========== ======== ======== ==========
NET EARNINGS PER SHARE
BEFORE EXTRAORDINARY GAIN $ 1.64 $ 1.63
EXTRAORDINARY GAIN PER SHARE 7.86 7.86
---------- ----------
NET EARNINGS PER SHARE $ 9.50 $ 9.49
========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 175,209 175,209
========== ==========
</TABLE>
See notes to pro forma condensed combining financial information.
22
<PAGE>
UNITED HEALTHCARE CORPORATION
NOTES TO PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
(1) The pro forma adjustments have been recorded as follows:
(A) This adjustment reflects the reduction in cash for the $515.4 million
cash purchase price paid to GenCare's shareholders and approximately $8.4
million in cash for various costs incurred in connection with the
transaction.
(B) This adjustment reflects the estimated costs in excess of net assets
acquired resulting from the transaction.
(C) This adjustment reflects the write-off of GenCare's costs in excess of
net assets acquired existing at December 31, 1994.
(D) This adjustment reflects the transition and integration costs
associated with the acquisition of GenCare of $30.0 million.
(E) This adjustment reflects the elimination of GenCare's shareholders'
equity.
(F) Certain amounts in the GenCare historical financial information have
been adjusted to conform with United's financial statement presentation.
These adjustments have no effect on GenCare's previously reported net
income or shareholders' equity.
(G) This adjustment reflects the reduction in interest income due to the
net reduction in cash used in the transaction.
(H) This adjustment reflects the amortization of cost in excess of net
assets acquired resulting from the transaction.
(I) This adjustment reflects the reversal of GenCare's previously
recognized amortization of cost in excess of net assets acquired. This
adjustment assumes that GenCare's cost in excess of net assets acquired was
written-off on January 1, 1994.
(J) This adjustment reflects the estimated net tax effects of the
transaction and pro forma adjustments described herein for the respective
periods using United's 1994 consolidated effective tax rate of 38%.
23
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page No.
- -------------- ----------- --------
23 Consent of Independent Public Accountants 26
24
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED HEALTHCARE CORPORATION
-----------------------------------
(Registrant)
By /s/ David P. Koppe
-----------------------------------
David P. Koppe
Vice President, Treasurer and
Chief Financial Officer
Date: March 17, 1995
25
<PAGE>
Exhibit 23
The Board of Directors
GenCare Health Systems, Inc.
We consent to the inclusion of our report dated January 27, 1995, with respect
to the consolidated balance sheets of GenCare Health Systems, Inc. and
subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of earnings, changes in shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1994, which report
appears in the Form 8-K/A of United HealthCare Corporation dated March 17, 1995.
Our report dated January 27, 1995, refers to a change in the method of
accounting for certain investments in debt securities.
KPMG PEAT MARWICK LLP
St. Louis, Missouri
March 16, 1995
