-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, SRkHpXAIgVdLIQWeF1pIxDcAD4yPtXcl3SVikwTT65p2GPgS3UeBSIrDJSg73Koc EDk+RZzsXQbN5phPCdu3aQ== 0000950131-95-000628.txt : 19950615 0000950131-95-000628.hdr.sgml : 19950615 ACCESSION NUMBER: 0000950131-95-000628 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950103 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19950317 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED HEALTHCARE CORP CENTRAL INDEX KEY: 0000731766 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 411321939 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10864 FILM NUMBER: 95521684 BUSINESS ADDRESS: STREET 1: 300 OPUS CENTER STREET 2: 9900 BREN ROAD EAST CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129361300 8-K/A 1 FORM 8-K/A 01-03-95 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 -------------- 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 [LOGO OF KPMG] GENCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES Consolidated Financial Statements December 31, 1994, 1993, and 1992 (With Independent Auditors' Report Thereon) 3 [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 GENCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1994 and 1993
- -------------------------------------------------------------------------------------------- ASSETS 1994 1993 - -------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 5 GENCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Years ended December 31, 1994, 1993, and 1992
- --------------------------------------------------------------------------------------------- 1994 1993 1992 - --------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 6 GENCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1994, 1993 and 1992
Unrealized gain (loss) on invest- Additional ments avail- Total Common paid-in Retained able for Treasury shareholders' stock capital earnings sale, net stock equity - ------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 7 GENCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1994, 1993, and 1992
============================================================================================================= 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------- 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 =============================================================================================================
See accompanying notes to consolidated financial statements. 8 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 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 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 GENCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ================================================================================ (3) Investments Investments at December 31, 1994 and 1993 are summarized as follows:
================================================================================= 1994 - --------------------------------------------------------------------------------- Gross Gross Esti- unreal- unreal- mated Amortized ized ized fair cost gains losses value - --------------------------------------------------------------------------------- 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 =================================================================================
1993 - --------------------------------------------------------------------------------- Gross Gross Esti- unreal- unreal- mated Amortized ized ized fair cost gains losses value - --------------------------------------------------------------------------------- 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 =================================================================================
12 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.
________________________________________________________________ Estimated Amortized fair cost value ________________________________________________________________ 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 ________________________________________________________________
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: ________________________________________________________________
_____________________________________________________________ 1994 1993 _____________________________________________________________ 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 _____________________________________________________________
13 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:
Year ended December 31 ______________________________________________________________ 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 _______________________________________________________________
14 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.
Year ended December 31 ________________________________________________________________________ 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 _________________________________________________________________________
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:
1995 $572,160 1996 592,722 1997 605,613 1998 560,946 =======
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 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 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 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 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 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 UNITED HEALTHCARE CORPORATION PRO FORMA CONDENSED COMBINING BALANCE SHEET DECEMBER 31, 1994 (IN THOUSANDS)
United GenCare HealthCare Health Pro Forma Pro Forma Corporation Systems, Inc. Adjustments Combined ----------- ------------- ----------- ----------- 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 ========== ======== ========= ==========
See notes to pro forma condensed combining financial information. 21 UNITED HEALTHCARE CORPORATION PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (in thousands)
United GenCare HealthCare Health Pro Forma Pro Forma Corporation Systems, Inc. Adjustments Combined ----------- -------------- ----------- ---------- 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 ========== ==========
See notes to pro forma condensed combining financial information. 22 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 EXHIBIT INDEX Exhibit Number Description Page No. - -------------- ----------- -------- 23 Consent of Independent Public Accountants 26 24 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 EX-23 2 CONSENT OF KPMG 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 -----END PRIVACY-ENHANCED MESSAGE-----