-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cweby9bsyDv5nImC77ZN3w0e6gfKwhjIZLk0IP9fyXvDztPS+FlotRoJIXdm4CK9 XbKl8Q4ZSu7HuEFY8p9kcw== 0000731766-96-000017.txt : 19961118 0000731766-96-000017.hdr.sgml : 19961118 ACCESSION NUMBER: 0000731766-96-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10864 FILM NUMBER: 96664857 BUSINESS ADDRESS: STREET 1: PO BOX 1459 CITY: MINNEAPOLIS STATE: MN ZIP: 55440-1459 BUSINESS PHONE: 6129361300 MAIL ADDRESS: STREET 1: PO BOX 1459 CITY: MINNEAPOLIS STATE: MN ZIP: 55440-1459 10-Q 1 3RD QUARTER 96 10-Q ________________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number: 0-13253 UNITED HEALTHCARE CORPORATION State of Incorporation: Minnesota I.R.S. Employer Identification No: 41-1321939 Principal Executive Offices: 300 Opus Center 9900 Bren Road East Minnetonka MN, 55343 Telephone Number: (612)936-1300 Indicate by check mark (x) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _______ The number of shares of Common Stock, par value $.01 per share, outstanding on November 8, 1996 was 184,037,423. ________________________________________________________________________________ UNITED HEALTHCARE CORPORATION INDEX Part I. Financial Information. Page Number Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 1996 and December 31, 1995 3 Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 1996 and 1995 4 Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1996 and 1995 5 Notes to Condensed Consolidated Financial Statements 6 Report of Independent Public Accountants 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information Item 6. Exhibits 17 Signatures 18 UNITED HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (unaudited)
September 30, December 31, 1996 1995 ASSETS Current Assets Cash and cash equivalents $ 732,025 $ 940,110 Short-term investments 1,055,930 863,815 Accounts receivable, net 648,734 550,313 Assets under management 158,462 309,170 Other 207,922 203,713 Total Current Assets 2,803,073 2,867,121 Goodwill, net 2,015,837 1,727,042 Long-term Investments 1,530,669 1,274,470 Property and Equipment, net 310,269 267,652 Intangible and Other Assets, net 41,431 24,701 TOTAL ASSETS $ 6,701,279 $ 6,160,986 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 62,942 $ 79,796 Accrued expenses 462,379 566,770 Medical costs payable 1,464,184 1,156,421 Other policy liabilities 363,939 457,528 Unearned premiums 97,574 173,481 Total Current Liabilities 2,451,018 2,433,996 Long-term Obligations and Minority Interests 35,595 38,970 Convertible Preferred Stock 500,000 500,000 Shareholders' Equity Common stock, $.01 par value - 500,000,000 shares authorized; 184,376,000 and 175,215,000 issued and outstanding 1,844 1,752 Additional paid-in capital 1,133,408 822,429 Retained earnings 2,592,204 2,358,640 Net unrealized holding gains (losses) on investments available for sale, net of income tax effects (12,790) 5,199 Total Shareholders' Equity 3,714,666 3,188,020 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,701,279 $ 6,160,986
See notes to condensed consolidated financial statements UNITED HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three Months Ended September 30, Nine Months Ended September 30, 1996 1995 1996 1995 REVENUES Premiums $2,199,270 $1,100,013 $6,208,700 $3,153,275 Management Services and Fees 343,893 76,367 1,053,525 210,340 Investment and Other Income 44,195 39,156 135,426 113,701 Total Revenues 2,587,358 1,215,536 7,397,651 3,477,316 OPERATING EXPENSES Medical Costs 1,856,364 872,358 5,262,682 2,480,020 Selling, General and Administrative Costs 547,686 173,267 1,597,549 500,364 Depreciation and Amortization 33,909 19,343 96,939 59,392 Total Operating Expenses 2,437,959 1,064,968 6,957,170 3,039,776 EARNINGS FROM OPERATIONS 149,399 150,568 440,481 437,540 Interest Expense (83) (146) (593) (704) Merger Costs -- -- (14,968) -- EARNINGS BEFORE INCOME TAXES AND MINORITY INTERESTS 149,316 150,422 424,920 436,836 Provision for Income Taxes (58,234) (55,655) (163,786) (161,629) Minority Interests in Net Losses (Earnings) of Consolidated Subsidiaries 145 (1,097) (640) (2,226) NET EARNINGS 91,227 93,670 260,494 272,981 CONVERTIBLE PREFERRED STOCK DIVIDENDS (7,188) -- (21,564) -- NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS $ 84,039 $ 93,670 $ 238,930 $ 272,981 NET EARNINGS PER COMMON SHARE $ 0.45 $ 0.53 $ 1.29 $ 1.55 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 187,130 177,070 185,030 176,615
See notes to condensed consolidated financial statements UNITED HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended September 30, 1996 1995 OPERATING ACTIVITIES Net Earnings $ 260,494 $ 272,981 Non Cash Items Depreciation and amortization 96,939 59,392 Provision for future losses 45,000 -- Other (20,951) (5,304) Net Change in Other Operating Items, net of effects from acquisitions Accounts receivable and other current assets (93,549) (48,876) Accounts payable (20,794) (44,879) Accrued expenses (98,823) (3,579) Medical costs payable 305,184 13,796 Other policy liabilities (14,658) -- Unearned premiums (76,997) 23,954 Cash Flows From Operating Activities 381,845 267,485 INVESTING ACTIVITIES Cash Paid for Acquisitions, net of cash assumed and other effects (105,379) (546,054) Cash Assumed in Acquisitions, net of cash paid and other effects 53,515 -- Net Purchases of Property and Equipment (110,852) (66,046) Purchases of Investments Available for Sale (3,113,808) (2,121,949) Maturities/Sales of Investments Available for Sale 2,703,823 2,265,167 Purchases of Investments Held to Maturity (20,306) (8,517) Maturities of Investments Held to Maturity 12,712 4,942 Other (11,716) (14,661) Cash Flows Used for Investing Activities (592,011) (487,118) FINANCING ACTIVITIES Net Proceeds from Stock Option Exercises 29,523 18,284 Payment of Long-term Obligations (544) (4,977) Dividends Paid Convertible Preferred Stock (21,564) -- Common Stock (5,334) (5,192) Cash Flows From Financing Activities 2,081 8,115 DECREASE IN CASH AND CASH EQUIVALENTS (208,085) (211,518) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 940,110 1,519,049 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 732,025 $1,307,531
See notes to condensed consolidated financial statements UNITED HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the financial results for the interim periods presented. These financial statements include some amounts that are based on management's best estimates and judgments. The most significant estimates relate to medical costs payable and other policy liabilities, intangible asset valuations and integration and restructuring reserves relating to the Company's recent acquisitions. These estimates are subject to adjustment as more accurate information becomes available and any such adjustment could be significant. Pursuant to the rules and regulations of the Securities and Exchange Commission, footnote disclosures which would substantially duplicate the disclosures contained in the audited financial statements of the Company have been omitted from these interim financial statements. Although the Company believes that the disclosures presented below are adequate to make the interim financial statements presented not misleading, it is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 2. Acquisitions On April 12, 1996, the Company completed its acquisition of HealthWise of America, Inc. (HealthWise), a health care management company based in Nashville, Tennessee. HealthWise owned or operated health plans in Maryland, Kentucky, Tennessee and Arkansas, which served at the time of acquisition 154,000 members. The Company issued approximately 4.3 million shares of common stock in exchange for all the outstanding shares of HealthWise. The acquisition was accounted for as a pooling of interests in the second quarter; however, the historical consolidated financial results of the Company were not restated because the effects of this acquisition on the Company's consolidated financial statements were not material. In connection with the HealthWise acquisition, the Company incurred nonrecurring, non-operating merger costs of $15.0 million, or $0.05 per common share. On March 29, 1996, the Company completed its acquisition of PHP, Inc. (PHP), a health plan based in Greensboro, North Carolina, which served 132,000 members at the time of acquisition. The Company issued approximately 2.3 million shares of common stock in exchange for all the outstanding shares of PHP. The acquisition was accounted for using the purchase method of accounting. The purchase price and costs associated with the acquisition exceeded the estimated fair value of net assets acquired by $115.4 million. The pro forma effects of the PHP acquisition on the Company's financial statements are not material. On October 2, 1995, the Company completed its acquisition of The MetraHealth Companies, Inc. (MetraHealth), a managed health care coverage company and health insurer. The total purchase price of the acquisition was $1.09 billion in cash and $500.0 million of convertible preferred stock, for a total consideration at closing of $1.59 billion. UNITED HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The former owners of MetraHealth were eligible to receive up to an additional $350.0 million if MetraHealth achieved certain 1995 operating results, as defined. In the third quarter, the Company paid $105.4 million in cash, including interest, as full settlement of the 1995 earnout. This earnout payment has been reflected in the accompanying financial statements as additional goodwill. With the settlement of the 1995 earnout, the Company expects to finalize all aspects of the purchase accounting related to the MetraHealth acquistion in the fourth quarter. In addition, former owners will be eligible to receive up to an additional $175.0 in cash for each of 1996 and 1997 if the Company's in total post-acquisition combined net earnings each of these years reaches certain specified levels. Based on combined operating results through September 30, 1996, the Company believes that any additional payment related to the 1996 earnout is not likely. Any additional consideration that might be paid pursuant to these arrangements will be reflected as additional goodwill. If the MetraHealth acquisition had occurred on January 1, 1995, the estimated combined unaudited pro forma results for the nine month period ended September 30, 1995 would have been: revenues - $6.52 billion; net earnings - $327.8 million and net earnings per common share - $1.74. 3. Provision for Future Losses In the second quarter of 1996, the Company recorded a charge to medical costs of $45.0 million, or $0.15 per common share, to provide for the future estimated losses expected to be incurred through the remaining term of two multi-year contracts in its St. Louis health plan. These contracts cover approximately 23% of the health plan's total commercial enrollment and run through 1998. 4. Restructuring Charges In connection with its acquisition of MetraHealth, the Company developed a comprehensive plan to integrate the business activities of the combined companies (the Plan). The Plan encompasses, among other matters, the disposition, discontinuance and restructuring of certain businesses and product lines, and the recognition of certain asset impairments. In the fourth quarter of 1995, the Company recorded $153.8 million in restructuring charges associated with the Plan. The restructuring charges include $102.3 million for activities under the Plan which were expected to be completed through 1996 and $51.5 million for asset impairment. The charges included $24.0 million for severance and outplacement costs which are based on the projected impact of the Plan on employment levels. In developing the Plan, the Company expected approximately 800 positions to be eliminated through December 31, 1996 under the restructuring efforts. As of September 30, 1996, the elimination of approximately 300 positions have required severance and outplacement payments of $7.7 million. Also included in the restructuring charges is a $58.1 million provision representing costs associated with the termination of certain contracts and the elimination of certain products, networks and systems related to changes in strategies resulting from the MetraHealth acquisition. Expenditures related to these activities of $38.8 million have been incurred through September 30, 1996. UNITED HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The restructuring charges also included a $20.2 million provision for property and lease discontinuances at certain office locations, resulting primarily from various exit strategies and payment of portions of non-cancelable lease obligations. As of September 30, 1996, the Company paid $11.2 million related to the closing of 14 office locations. The Company continues to monitor its integration efforts and has modified its Plan accordingly. The Company believes the original restructuring reserves established pursuant to the original Plan are sufficient; however, reallocation of the reserve estimates among the restructuring captions may be required in the fourth quarter in response to changes to the original Plan. 5. Dividends On February 13, 1996, the Company's Board of Directors approved an annual dividend for 1996 of $0.03 per share to holders of the Company's common stock. Dividends of $5.3 million were paid on April 15, 1996 to shareholders of record at the close of business on April 3, 1996. 6. Cash and Investments As of September 30, 1996, the amortized cost, gross unrealized holding gains and losses and fair value of the Company's cash and investments were as follows (in thousands):
Gross Gross Unrealized Unrealized Amortized Holding Holding Fair Cost Gains Losses Value Cash and Cash Equivalents $ 732,025 $ -- $ -- $ 732,025 Investments Available for Sale 2,543,322 5,780 (26,638) 2,522,464 Investments Held to Maturity 64,135 318 (176) 64,277 Total Cash and Investments $3,339,482 $ 6,098 $ (26,814) $3,318,766
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To United HealthCare Corporation: We have reviewed the accompanying condensed consolidated balance sheet of United HealthCare Corporation (a Minnesota corporation) and Subsidiaries as of September 30, 1996, and the related condensed consolidated statements of operations for the three and nine month periods ended September 30, 1996 and 1995, and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of United HealthCare Corporation and Subsidiaries as of December 31, 1995 (not presented herein), and, in our report dated February 29, 1996, we expressed an unqualified opinion on that balance sheet. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1995, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ARTHUR ANDERSEN LLP Minneapolis, Minnesota, November 7, 1996 UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The consolidated financial results and related comparisons presented in this discussion include several recent transactions which affect the year-to-year comparability of the Company's consolidated financial position and results of operations. The most significant of these transactions was the Company's October 2, 1995, acquisition of The MetraHealth Companies, Inc. (MetraHealth). MetraHealth was formed in January 1995 by combining the group health care operations of Metropolitan Life Insurance Company and The Travelers Insurance Group. At the time of acquisition, MetraHealth served over 10 million individuals, including 5.9 million in network-based care programs, 469,000 of whom were health plan members. In 1996, the Company acquired two other companies with health plan operations. On April 12, 1996, the Company acquired HealthWise of America, Inc. (HealthWise), a health care management company which owned or operated health plans in Maryland, Kentucky, Tennessee and Arkansas, serving 154,000 members at the time of acquisition. On March 29, 1996, the Company acquired PHP, Inc. (PHP), a health plan based in Greensboro, North Carolina, which served 132,000 members at the time of acquisition. The MetraHealth and PHP acquisitions were accounted for as purchase transactions. The HealthWise acquisition was accounted for as a pooling of interests; however, the Company's consolidated financial results were not restated because the effects of the acquisition on the Company's consolidated financial statements were not material. Accordingly, only the post-acquisition results of all of these acquired companies are included in the Company's consolidated financial results. UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS The following discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto. Summary of Operating Information (in thousands)
Three Months Ended September 30, Nine Months Ended September 30, Percent Percent 1996 (a) 1995 Increase 1996 (a) 1995 Increase Total Revenues $2,587,358 $1,215,536 113 % $7,397,651 $3,477,316 113 % Earnings from Operations(d)$ 149,399 $ 150,568 (1)% $ 440,481 $ 437,540 1 % Medical Costs to Premium Revenues(b) 84.4% 79.3% 84.8% 78.6% SG&A Expenses to Total Revenues 21.2% 14.3% 21.6% 14.4% Total Operating Margin(b) 5.8% 12.4% 6.0% 12.6% Enrollment (at period end) September 30, 1996 September 30, 1995 Health Plan Products Commercial 3,914(c)(d)(e) 2,455(c) Medicaid 524(e) 331 Medicare 203(e) 137 Total 4,641 2,923 Other Network-Based Products 5,703(c) 283(c) Indemnity Products 3,586(c) -- Total Enrollment 13,930 3,206 (a) Includes post-acquisition date operating results of the MetraHealth Companies, Inc. acquired on October 2, 1995. (b) Excluding the provision for future losses on two multi-year contracts of $45.0 million, earnings from operations for the nine month period ended September 30, 1996 would have been $485.4 million; medical costs to premium revenues and total operating margin would have been 84.0% and 6.6%, respectively. (c) Amounts include both fully insured and self-funded enrollment. As of September 30, 1996 and 1995, self-funded enrollment was as follows: Commercial Health Plan Products - 314,000 in 1996 and 192,000 in 1995; Other Network-Based Products - 4,961,000 in 1996 and 283,300 in 1995; Indemnity Products - 2,889,400 in 1996. (d) Includes PHP, Inc. (North Carolina) acquired on March 29, 1996. PHP, Inc. had 142,000 members as of September 1996. Consistent with purchase accounting, no prior period restatement was made. (e) Includes HealthWise of America, Inc. acquired on April 12, 1996. HealthWise's health plan operations had 137,200 commercial members, 7,100 Medicare members, and 17,500 Medicaid members as of September 1996. The acquisition was accounted for as a pooling of interests, but prior period financial and enrollment information was not restated due to the immaterial effects of the acquisition.
UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net earnings for the third quarter of 1996 were $91.2 million, down slightly from comparable 1995 net earnings of $93.7 million. For the nine months ended September 30, 1996, net earnings excluding nonrecurring charges were $297.1 million, a 9% increase over comparable 1995 net earnings of $273.0 million. Net earnings for the nine months ended September 30, 1996, include two large nonrecurring charges recorded in the second quarter of 1996. In connection with the HealthWise acquisition, the Company recorded non-operating merger costs of $15.0 million, or $0.05 per common share, consisting principally of professional fees and other direct costs associated with the acquisition. In addition, the Company recorded a provision to cover the estimated losses expected to be incurred through the remaining term of two large multi-year contracts in its St. Louis health plan of $45.0 million, or $0.15 per common share. These contracts cover approximately 23% of the health plan's total commercial insured enrollment and run through 1998. Including these charges, net earnings for the nine months ended September 30, 1996, were $260.5 million. Revenues Premium revenues for the three and nine months ended September 30, 1996 of $2.20 billion and $6.21 billion nearly doubled premium revenues for the comparable 1995 periods. Excluding the effects of the Company's acquisitions of MetraHealth, HealthWise and PHP, the increase in premium revenues in the three and nine months ended September 30, 1996 over the same periods in 1995 was 34% and 30%, respectively, primarily reflecting year-over-year total health plan enrollment growth of 29% and an average year-over-year premium rate increase on renewing commercial groups of approximately 1% to 2%. The balance of the increase in premium revenues is primarily attributable to growth in the Company's Medicare programs. Included in the total health plan enrollment growth of 29% is year-over-year same store increases of 43% in the Company's Medicare enrollment. Significant growth in Medicare enrollment will impact year-over-year comparability of premium revenues. The Medicare product generally realizes per member premium rates three to four times higher than the average commercial premium rates because of the higher medical care required to serve this population. New and renewal commercial health plan premium rates are generally established by the Company based on anticipated health care costs. Over the past several years, the Company has been able to effectively manage health care costs and maintain the rate at which its health care costs have grown within the commercial health plan line of business to low single-digit percentage increases. However, competition for commercial enrollment in certain of the Company's health plan markets has increased in recent years, particularly related to calendar 1995 and January 1996 renewal businesss. The January renewal period is significant as approximately 45% of the Company's existing commercial health plan enrollment renews in that month. In addition, when establishing premium rates in late 1995 and January 1996 for new and renewing commercial health plan business, the Company believed that its commercial health plan health care cost trend for 1996 would be 1% to 2%, similar to the corresponding health care cost trend it experienced in 1995. However, the Company now believes the current year-over-year health care cost trend experienced by its commercial health plan business is 3% to 4%. In addition, anticipated health care provider contract savings associated with the MetraHealth plan products had not been realized in time to match the UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) pricing decisions made for these products in late 1995 and into 1996. These products comprised approximately 15% of MetraHealth's total revenues in 1995. As a result of all of these factors, the health plan premium rates achieved during late 1995 and January 1996 were less than the corresponding increase in the Company's health care costs. The Company currently believes that the competitive premium environment has somewhat improved and it is seeking and realizing higher premium rates for post January 1996 commercial health plan business. These rating actions have resulted in the realization of 4% to 5% renewal rate increases from February through September 1996, and new group pricing has been similarly increased to reflect the new higher health care cost trends the Company has recently experienced in its commercial health plan products. Depending on the level of future competition, customer acceptance of the Company's premium increases, or other factors, there can be no assurance that the Company's recent enrollment growth trends will continue or that the Company will be able to price consistent with health care cost trends. As a result of its acquisition of MetraHealth, the Company had approximately 697,000 enrollees at September 30, 1996, in fully insured non-network-based indemnity products, primarily from small group employers. These products do not utilize similar health care cost containment measures as the Company's network-based products and, accordingly, are priced differently. In response to increased medical costs associated with these products in early 1995, the Company instituted rate increases ranging from 15% to 25% during the second half of 1995 and all of 1996. These rating actions appear to have been sufficient to cover the corresponding increases in medical costs. As a result of these pricing decisions and other factors, the Company has seen enrollment decreases in the non-network based indemnity products and expects these decreases to continue throughout 1996 and into 1997. To the extent practicable, the Company will attempt to convert these enrollees to its network-based managed care products. While these recent rate increases were based on the Company's estimate of health care cost trends within the non-network-based products, there can be no assurance that these rate increases will be consistent with the related future health care cost experience. Management services and fees revenue for the three and nine months ended September 30, 1996, were five times more than the comparable 1995 revenues. Prior to the MetraHealth acquisition, these revenues were primarily comprised of administrative fees relating to services performed on behalf of the Company's managed health plans and fees generated by the Company's specialty managed care services. Excluding the effect of the Company's acquistions of MetraHealth, Healthwise and PHP, the Company recorded management services and fees revenue for the three and nine months ended September 30, 1996, of $106.5 million and $286.3 million, representing a 39% and 36% increase over the same periods in 1995. These increases can be primarily attributed to enrollment growth within the managed health plans and an increase in lives served by the specialty managed care services operations, most notably in behavioral health and demand management divisions. At September 30, 1996, the Company had approximately 8,164,400 enrollees in self-funded products, most of which related to the former MetraHealth business. Under these funding arrangements, the Company receives a fee for the provision of administrative services and generally assumes no financial responsibility for health care costs associated with these products. In the UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) three and nine months ended September 30, 1996, the Company recorded management services and fees revenue related to the former MetraHealth self-funded products of $198.9 million and $603.5 million, respectively. Operating Expenses The combination of the Company's pricing strategy and its medical management efforts are reflected in its medical expense ratio (the percent of premium revenues expensed as medical costs). The medical expense ratio for the third quarter of 1996 was 84.4% compared to 79.3% for the same period in 1995. Through the first nine months of 1996, this ratio increased to 84.8% from 78.6% for the comparable 1995 period. A portion of the year-over-year increase in the ratio is generally attributable to the former MetraHealth products (included in 1996 results, but not in 1995) which historically have had a higher medical expense ratio as compared to the Company's previous products. Also contributing to the year-over-year increases is the provision for future losses on two multi-year St. Louis contracts of $45.0 million. The 1996 medical expense ratio also reflects the increasing health care cost trend previously discussed. In particular, the Company experienced increases in some health care cost components within its health plan commercial products, led by outpatient services, physician utilization and prescription drugs. Decreases in inpatient hospital utilization in the health plans did not fully offset the increases in these other health care services. The 1996 medical expense ratio through the first nine months, excluding the contract loss provision, was 84.0%. The SG&A ratio (selling, general and administrative expenses as a percent of total revenues) increased from 14.3% in the third quarter of 1995 to 21.2% in the third quarter of 1996. Through the first nine months of 1996, the ratio increased to 21.6% from 14.4% for the comparable 1995 period. As expected, the MetraHealth acquisition had a significant impact on the Company's selling, general and administrative expenses (in total dollars as well as a percentage of revenue) because a greater proportion of the former MetraHealth business consists of fee-based, self-funded products rather than products which generate full premium revenue. Since the MetraHealth acquisition at the beginning of the fourth quarter of 1995, the Company has successfully achieved selling, general and administrative efficiencies resulting in a decrease in the SG&A ratio from 24.2% in the fourth quarter of 1995 to 21.6% in the first nine months of 1996. INFLATION Although the general rate of inflation has remained relatively stable and health care cost inflation has declined in recent years, the national health care cost inflation rate still exceeds the general inflation rate. As mentioned previously, the Company believes the current year-over-year health care cost trend experienced by its commerical health plan business is 3% to 4%. The Company uses various strategies to mitigate the negative effects of health care cost inflation, including setting commercial premiums based on its anticipated health care costs, risk-sharing arrangements with the Company's various health care providers, and other health care cost containment measures. Specifically, the Company's health plans attempt to control medical and hospital costs through contractual arrangements primarily with independent providers of health care services. Cost-effective delivery of health care services by such health care providers is achieved by the reduction of unnecessary hospitalizations, appropriate use of specialty referral services, UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) and emphasizing preventive health services. While the Company currently believes its strategies to mitigate health care cost inflation will continue to be successful, competitive pressures, new health care product introductions, demands from providers and customers, applicable regulations or other factors may adversely affect the Company's ability to control the impact of health care cost increases. In addition, certain non-network-based products of the former MetraHealth business do not have similar health care cost containment measures as the Company's network-based managed care products. As a result, the Company is subject to more health care cost inflation risk with these products. FINANCIAL CONDITION AND LIQUIDITY The Company's cash and investments increased from $3.08 billion at December 31, 1995, to $3.32 billion at September 30, 1996. The increase of $240.2 million during the first nine months of 1996 primarily reflects cash generated from operations of $381.8 million, less a cash payment of $105.4 million, including interest, related to the 1995 MetraHealth earnout discussed below. The Company generally invests a large portion of its cash resources in high quality, long-term investments. At September 30, 1996, the Company had working capital of $352.1 million, a current ratio of 1.14, which is reflective of its longer-term investment strategy. At December 31, 1995 the Company had working capital of $433.1 million and a current ratio of 1.18. Under applicable state regulations, certain of the Company's subsidiaries are required to retain cash generated from their operations. After giving effect to these restrictions, the Company had approximately $743.3 million in cash and investments available for general corporate use at September 30, 1996. In connection with the Company's acquisition of MetraHealth, the former owners of MetraHealth were eligible to receive up to an additional $350.0 million if MetraHealth achieved certain 1995 operating results, as defined. In the third quarter, the Company paid $105.4 million in cash, including interest, as full settlement of the 1995 earnout. In addition, if the Company's post-acquisition combined net earnings for 1996 and 1997 reaches certain specified levels, certain of MetraHealth's former owners will be eligible to receive up to an additional $175.0 million in cash for each of those years. As described more fully in Note 2 to the condensed consolidated financial statements, the Company acquired, in separate transactions, PHP on March 29, 1996 and HealthWise on April 12, 1996. These transactions were completed through the exchange of shares of the Company's common stock for all the outstanding shares of PHP and HealthWise and, with the exception of transaction costs, did not require the use of cash. The Company continues to focus on expanding its health care programs to the Medicare population. In the past twelve months, the number of sites offering a Medicare health plan product increased from 8 to 17 sites. Over the same period, health plan Medicare enrollment grew 43%. The Company continues to invest in new markets and expects to have over 30 sites offering Medicare programs by mid-1997. Significant expenditures must be incurred in connection with the introduction of a Medicare health plan product in a particular site. These start up expenditures include a lengthy and detailed regulatory approval process, product-specific provider contracting and network configuration, high up-front sales and marketing costs, and staffing of service areas in UNITED HEALTHCARE CORPORATION MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) advance of product sales. The Company expects to incur operating losses from its Medicare products in these start-up markets usually for the first twelve to eighteen months until Medicare enrollment is sufficient to cover the corresponding administrative cost structure in each site. The Company currently believes its available cash resources will be sufficient to meet its current operating requirements and internal development and integration initiatives. There currently are no other material definitive commitments for future use of the Company's available cash resources; however, management continually evaluates opportunities to expand its operations, which includes internal development of new products and programs and may include additional acquisitions. CAUTIONARY STATEMENTS A number of factors should be considered in conjunction with any discussion of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or communications by the Company. These factors are set forth in Exhibit 99 to this Quarterly Report. UNITED HEALTHCARE CORPORATION Part II. Other Information Item 6. Exhibits Exhibits. The following exhibits are filed in response to Item 601 of Regulation S-K. Exhibit No. Exhibit Exhibit 10 - Employment Agreement effective as of June 25, 1995, between United HealthCare Corporation and David A.George Exhibit 11 - Statements Re Computation of Per Share Earnings Exhibit 15 - Letter Re Unaudited Interim Financial Information Exhibit 99 - Cautionary Statements 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 Dated: November 14, 1996 By /s/ William W. McGuire, M.D. William W. McGuire, M.D. President and Chief Executive Officer Dated: November 14, 1996 By /s/ David P. Koppe David P. Koppe Chief Financial Officer UNITED HEALTHCARE CORPORATION Exhibit Index Exhibit Number Description Page 10 Employment Agreement effective as of 20 June 25, 1995, between United HealthCare Corporation and David A. George 11 Statements Re Computation of Per 28 Share Earnings 15 Letter Re Unaudited Interim Financial 29 Information 99 Cautionary Statements 30 Exhibit 10 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made as of the Effective Date between UHC Management Company, Inc. (the "Company") and David A. George ("Executive"). RECITALS: The Board of Directors of the Company (the "Board of Directors") recognizes that outstanding management of the Company is essential to advancing the best interests of the Company, its shareholders and its subsidiaries. The Company desires to employ Executive and Executive has agreed to be employed by the Company under the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing and the mutual undertakings contained in this Agreement, the parties agree as follows: 1. Employment. The Company will employ Executive, and Executive accepts employment by the Company, for the period beginning on the date the proposed merger transaction between United HealthCare Corporation and The MetraHealth Companies ("Metra") closes ("Effective Date") and ending on December 31, 1998 (the "Employment Period"), according to the terms of this Agreement. This Agreement shall never be of any effect in the event the proposed merger transaction does not close. 2. Duties. (a) The Company and Executive agree that during the Employment Period Executive will have such authority and perform such executive duties as are commensurate with his position. Executive will support the Chief Executive Officer of the Company in carrying out his responsibilities as Chief Executive Officer. (b) Executive (i) will devote his knowledge, skill and best efforts on a full-time basis to performing his duties and obligations to the Company (with the exception of absences on account of illness or vacation in accordance with the Company's policies and civic and charitable commitments not involving a conflict with the Company's business), and (ii) will comply with the directions and orders of the Board of Directors and Chief Executive Officer of the Company with respect to the performance of his duties. 3. Compensation and Benefits. (a) During the Employment Period, the Company will pay to Executive the following salary and incentive awards for services rendered to the Company: (i) An annualized base salary of not less than $300,000. Executive's performance will be evaluated at least annually and annual increases in Executive's base salary will be considered based on Executive's performance. (ii) Executive shall be eligible to participate in the Company's management incentive compensation plan in accordance with the terms and conditions of that plan. Executive's management incentive plan target will be 100% of his base salary. For calendar year 1995 Executive shall be paid whatever incentive compensation he would have received under his employment agreement with Metra, which for 1995 will not be less than $181,000. (b) During the Employment Period, Executive will be eligible to participate in a similar manner as other senior executives of the Company in such employee benefit plans and programs as may be established and maintained by the Company for its senior management employees. (c) Executive shall be eligible to participate in the Company's stock option and stock grant plans in accordance with the terms and conditions of those plans. 4. Termination of Employment. (a) By the Company without Cause. If the Company terminates Executive's employment without Cause (as defined in paragraph (c) below) during the Employment Period, the Company will pay Executive severance pay as follows: (i) (A) If the Company terminates Executive's employment without Cause on or before November 14, 1995, Executive will receive severance pay equal to two years of both base salary and management incentive plan payments, plus a prorated management incentive plan payment for the fraction of the management incentive plan payment period ending on Executive's termination of employment and any management incentive plan payments remaining unpaid from the preceding year under the terms of the management incentive plan. The severance pay will be paid over a two year period in equal biweekly installments. (B) If the Company terminates Executive's employment without Cause after November 14, 1995, Executive will receive severance pay equal to one year of both base salary and management incentive plan payments, plus a prorated management incentive plan payment for the fraction of the management incentive plan payment period ending on Executive's termination of employment and any management incentive plan payments remaining unpaid from the proceeding year under the terms of the management incentive plan. The severance pay will be paid over a one year period in equal biweekly installments. (ii) The Company will continue coverage under the Company's group health plan for Executive and his eligible dependents for the period during which Executive is entitled to receive severance benefits pursuant to (i). Notwithstanding the foregoing, if the Company determines that giving such continued coverage could adversely affect the tax qualification or tax treatment of a benefit plan, or otherwise have adverse legal ramifications to the Company, the Company may reimburse Executive for the cost of COBRA coverage for himself and his eligible dependents, and if Executive's severance payments extend beyond the period of his COBRA coverage, pay Executive a lump sum cash amount that reasonably approximates the after-tax value to Executive of the balance of his continued coverage through the severance payment period, in lieu of giving credit and continued coverage. (iii) Any unvested stock options or grants awarded Executive shall continue to vest for a period of two years from the last day of Executive's employment, in accordance with those grants' or options' pre-established vesting schedule. (iv) For purposes of subparagraphs (i) and (ii), Executive's annual base salary will be calculated at the highest rate in effect for Executive at any time during the twelve month period preceding the time of his termination of employment, and Executive's management incentive payment will be calculated at a rate equal to the management incentive payment paid or payable to Executive for the fiscal year preceding his termination of employment. (b) By Executive for Good Reason. If Executive voluntarily terminates employment with the Company during the Employment Period for Good Reason (as defined in this subsection (b)), Executive will be entitled to receive the benefits described in subsection (a) for termination by the Company without Cause. Subject to the provisions of this subsection (b), these benefits will be provided if Executive voluntarily terminates employment after (i) the Company reduces Executive's base salary from the level in effect during the preceding fiscal year, (ii) Executive is not in good faith considered for management incentive payments as described in Section 3 (a)(ii), (iii) the Company fails to provide benefits as required by Section 3 (b), (iv) the Company demotes Executive to a position that is not a senior management position of comparable scope and responsibility (other than on account of Executive's disability, as defined in Section 5 below) or (v) the Company relocates Executive's place of employment to a location more than 100 miles from Reston, Virginia. In order for this subsection (b) to be effective: (1) Executive must give written notice to the Company indicating that Executive intends to terminate employment under this section (b), (2) Executive's voluntary termination under this subsection must occur within 60 days after he has actual knowledge of an event described in clause (i), (ii), (iii), (iv) or (v) above, or within 60 days after the last in a series of such events, and (3) the Company must have failed to remedy the event describe in clause (i), (ii), (iii), (iv) or (v), as the case may be, within 30 days after receiving Executive's written notice. If the Company remedies the event described in clause (i), (ii), (iii), (iv) or (v), as the case may be, within 30 days after receiving Executive's written notice, Executive may not terminate employment under this subsection (b) on account of the event specified in Executive's notice. (c) By the Company for Cause or the Executive Without Good Reason. If Executive's employment is terminated by the Company for Cause or if Executive voluntarily terminates employment without Good Reason, as described in subsection (b) above, this Agreement will immediately terminate. For purposes of this Agreement, the term "Cause" means (i) the repeated material failure or refusal of Executive to follow the reasonable directions of Company's Board of Directors or Executive's supervisor or to adequately perform any duties reasonably required by Company, (ii) material violations of Company's Code of Conduct or (iii) the commission of any criminal act or act of fraud or dishonesty by Executive in connection with Executive's employment by Company. In the event that Company terminates Executive's employment under subsection (i) of this Cause definition, Company shall specify in the notice of termination the basis for Cause. If the Cause described in the notice is cured to Company's reasonable satisfaction prior to the end of the 30 day notice period, the notice of termination of employment shall be withdrawn. (d) Notwithstanding the foregoing, the amount of severance benefits under this Agreement will be reduced by 80% of any compensation earned by Executive from another employer (including self-employment) if Executive is employed by another employer (including self-employment) during the period which Executive receives severance benefits. (e) The amounts under this Agreement will be paid in lieu of severance benefits under any severance plan or program maintained by the Company. 5. Disability or Death. (a) If Executive becomes disabled (as defined below) during the Employment Period while he is employed by the Company, Executive shall be entitled to receive continued base salary at the annual rate in effect on the date of his disability during the remaining Employment Period while he remains disabled, including a prorated management incentive payment for the fraction of the management incentive payment measuring period ending on the date of Executive's disability, plus any management incentive payment remaining unpaid from the preceding year under the terms of the management incentive plan. These payments shall be reduced by any amounts that Executive receives from Company paid for disability insurance, his compensation from other employment, or from worker's compensation, Social Security or governmental programs relating to disability. Except as provided in this Section 5, all of the rights and benefits of Executive under this Agreement shall cease immediately upon the date of Executive's disability, except that Executive shall receive any management incentive payment remaining unpaid from the preceding year under the terms of the management incentive plan. The term "disability" means a condition, resulting from mental or physical incapacity, bodily injury or disease, that renders, and for a six consecutive month period has rendered, Executive unable to perform any and every duty pertaining to his employment with the Company. A return to work of less than 14 consecutive days will not be considered an interruption in Executive's six consecutive months of disability. Disability will be determined by the Company on the basis of medical evidence satisfactory to the Company. (b) If Executive dies during the Employment Period while he is employed by the Company, the Company will pay to the personal representative of Executive's estate Executive's base salary for the month in which his death occurs, plus a prorated management incentive payment for the fraction of the management incentive payment measuring period ending on the date of Executive's death, plus any management incentive payment remaining unpaid from any preceding year under the terms of the management incentive plan. Insofar as practicable, the prorated management incentive payment will be paid within 90 days after the end of the management incentive payment measuring period. Except for the foregoing payments, this Agreement terminates on the date of Executive's death. (c) Except as provided in (a) above, the foregoing benefits will be provided in addition to any death and other benefits provided under any Company benefit plan in which Executive participates. 6. Confidential Information. Executive agrees that during and after the term of this Agreement Executive shall keep confidential all confidential information and trade secrets of the Company, or any subsidiaries or affiliates of the Company and shall not disclose such information to any person without the prior approval of the Company, or use such information for any purpose other than in the course of fulfilling his duties pursuant to this Agreement. Upon termination of this Agreement, Executive shall return any documents, records, data, books or materials of or pertaining to the Company or its subsidiaries or affiliates in his possession or control and any of his work papers in his possession or control containing confidential information or trade secrets. The Company acknowledges that Executive already has substantial experience and expertise in the health insurance and managed health care business, and use of that experience and expertise in other employment will not be deemed a violation of this Agreement. 7. Non-Competition. (a) Executive agrees that (i) until the expiration of the Employment Period under Section 1, and (ii) for a period of two years after the last day of Executive's employment if Executive's employment is terminated by the Company without Cause (as provided in Section 4(a)) or Executive voluntarily terminates his employment for Good Reason (as provided in Section 4(b)), in either case on or before November 14, 1995, or for a period of one year if the termination occurs after November 14, 1995, Executive agrees not to engage, directly or indirectly (whether as officer, director, employee, consultant or by ownership or otherwise) in a competitive business in the Company's market area. (b) Executive agrees that if (i) Executive's employment is terminated by Company for Cause, (ii) Executive terminates his employment without Good Reason, or (iii) upon termination of this agreement at the end of the term, Company shall have the option of electing to pay Executive the periodic payments set forth in Section 4 (a) (i) for up to one year and that if Company so elects, Executive agrees not to engage, directly or indirectly (whether as officer, director, employee, consultant or by ownership or otherwise) in a competitive business in the Company's market area for so long as Company is making those periodic payments to Executive. (c) Notwithstanding the foregoing, nothing in this Agreement shall prohibit or penalize the ownership by Executive of investments in shares of a competitive business that are registered under Section 12 of the Securities Exchange Act of 1934 and constitute, together with all such investments owned by any immediate family member of affiliate of, or person acting in concert with, Executive, less than 5% of the outstanding registered investments in such business. As used herein, the term "competitive business" means a business entity that markets health insurance, managed health care, health maintenance organizations, or the administration of health insurance programs, and the term "market area" means any state or possession in which the Company is engaged in business on the date of the Executive's termination of employment. 8. Nonsolicitation. Executive agrees that (i) during the Employment Period, and (ii) for the longer of a one-year period after Executive's termination of employment for any reason, and any period with respect to which the Company is required to make payments pursuant to Section 4(a) or 4(b) or elects to make payments pursuant to Section 7(b), Executive will not (a) induce or attempt to induce, directly or indirectly, any of the Company's employees to terminate their employment with the Company nor (b) solicit the sale of any product or service that constitutes a competitive business to any entity which on the date of Executive's termination of employment was purchasing (or with which substantial negotiations were then in progress for the purchase of) the Company's services or products. 9. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by Executive to enforce this Agreement and that result from an actual or threatened breach of this Agreement by the Company. 10. Payment of Compensation and Taxes. All amounts payable under this Agreement (other than stock-related compensation, which will be paid according to the terms of the Company's stock incentive plan) will be paid in cash, subject to required income and payroll tax withholdings. 11. Assignment. The rights and obligations of the Company under this Agreement will inure to the benefit of and will be binding upon the successors and assigns of the Company. If the Company is consolidated or merged with or into another corporation, or if another entity purchases all or substantially all of the Company's assets, the surviving or acquiring corporation will succeed to the Company's rights and obligations under this Agreement. Executive's rights under this Agreement may not be assigned or transferred in whole or in part, except that the personal representative of Executive's estate will receive any amounts payable under this Agreement after the death of Executive. The Company may arrange for one or more of its affiliates to act as the Company for purposes of administering and providing Executive's compensation and benefits under this Agreement. 12. Rights Under the Agreement. The right to receive benefits under this Agreement will not give Executive any proprietary interest in the Company or any of its assets. Benefits under the Agreement will be payable from the general assets of the Company, and there will be no required funding of amounts that may become payable under the Agreement. Executive will for all purposes be a general creditor of the Company. The interest of Executive under the Agreement cannot be assigned, anticipated, sold, encumbered or pledged and will not be subject to the claims of Executive's creditors. The foregoing provisions of this Section 12 shall not apply to the extent (if any) that they conflict with the rights of the Executive under the stock option plans referred to in Section 3(c). 13. Entire Agreement. This Agreement constitutes the entire agreement and understanding between the Company and Executive with respect to the matters referred to herein and supersedes all prior agreements and understandings between Executive and the Company or any affiliate of the Company, including Metra, except as specifically noted herein, with respect to the employment of Executive after the Effective Date and any other matters referred to herein. 14. Notice. Any written notice required to be given by one party to the other party hereunder shall be deemed effective if mailed by registered mail: To the Company c/o: UHC Management Company, Inc. 9900 Bren Rd E Minnetonka, MN 55343 Attention: Vice President Human Resources with a copy to: General Counsel To Executive at: 12522 Knollbrook Dr. Clifton, VA 22024 or such other address as may be stated in notice given under this Section 14. 15. Dispute Resolution and Remedies. Any dispute arising between the parties relating to this Agreement or to Executive's employment by Company shall be resolved by binding arbitration pursuant to the Rules of the American Arbitration Association. In no event may the arbitration be initiated more than one year after the date one party first gave written notice of the dispute to the other party. The arbitrators shall interpret and construe this Agreement pursuant to controlling law but may not in any case award any punitive or exemplary damages. The parties acknowledge that Executive's failure to comply with the Confidentiality, Nonsolicitation and Non- Competition provisions of this Agreement will cause immediate and irreparable injury to Company and that therefore the arbitrators, or a court of competent jurisdiction if an arbitration panel cannot be immediately convened, will be empowered to provide injunctive relief, including temporary or preliminary relief, to restrain any such failure to comply. 16. Miscellaneous. To the extent not governed by federal law, this Agreement will be construed in accordance with the laws of the State of Minnesota, without reference to its conflict of law rules. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and the writing is signed by Executive and the Company. A waiver of any breach of or compliance with any provision or condition of this Agreement is not a waiver of similar or dissimilar provisions or conditions. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect. This Agreement may be executed in one or more counterparts, all of which will be considered one and the same agreement. WITNESS the following signatures. UHC Management Company, Inc. Dated: 6-25-96 By: /s/ Kevin H. Roche Executive Dated 6-25-96 /s/ David A. George EXHIBIT 11 UNITED HEALTHCARE CORPORATION STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS (in thousands, except per share data) (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30, 1996 1995 1996 1995 PRIMARY: NET EARNINGS $ 91,227 $ 93,670 $ 260,494 $ 272,981 LESS CONVERTIBLE PREFERRED STOCK DIVIDENDS (7,188) -- (21,564) -- NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 84,039 $ 93,670 $ 238,930 $ 272,981 Weighted average number of common shares outstanding 184,082 173,606 180,560 173,255 Additional equivalent shares issuable from assumed exercise of common stock options and warrants 3,048 3,464 4,470 3,360 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 187,130 177,070 185,030 176,615 NET EARNINGS PER COMMON SHARE $ 0.45 0.53 $ 1.29 $ 1.55 FULLY DILUTED: NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS $ 91,227 $ 93,670 $ 260,494 $ 272,981 Weighted average number of common shares outstanding 184,082 173,606 180,560 173,255 Additional equivalent shares issuable from assumed exercise of common stock options and warrants 3,387 3,464 4,457 3,360 Assumed conversion of convertible preferred stock 10,106 -- 10,106 -- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 197,575 177,070 195,123 176,615 NET EARNINGS PER COMMON SHARE $ 0.46(1) $ 0.53(2) $ 1.34(1) $ 1.55(2) (1) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. (2) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%.
EXHIBIT 15 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION November 7, 1996 To United HealthCare Corporation: We are aware that United HealthCare Corporation and Subsidiaries has incorporated by reference in its Registration Statements No. 33-3558, 2-95342, 33-22310, 33-27208, 33-36579, 33-50282, 33-67918, 33-68300, 33-75846, 33- 79632, 33-79634, 33-79636, 33-59083, 33-59623, 33-63885, 333-05717, 333-02525, 333-04875, 333-04401, 333-06533, 333-01517, 333-01915, 333-05291 its Form 10-Q for the quarter ended September 30, 1996, which includes our report dated November 7, 1996, covering the unaudited interim condensed consolidated financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ARTHUR ANDERSEN LLP CAUTIONARY STATEMENTS EXHIBIT 99 The following discussion contains certain cautionary statements regarding United's business and results of operations which should be considered by investors and others. These statements discuss matters which may in part be discussed elsewhere in this report and which may have been discussed in other documents prepared by the Company pursuant to federal or state securities laws. This discussion is intended to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The following factors should be considered in conjunction with any discussion of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or other communications by the Company. In making these statements, the Company is not undertaking to address or update each factor in future filings or communications regarding the Company's business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. In addition, any of the matters discussed below may have affected United's past results and may affect future results, so that the Company's actual results for third quarter 1996 and beyond may differ materially from those expressed in prior communications. Health Care Costs. A large portion of the revenue received by United is expended to pay the costs of health care services or supplies delivered to its members. The total health care costs incurred by United are affected by the number of individual services rendered and the cost of each service. Much of the Company's premium revenue is set in advance of the actual delivery of services and the related incurring of the cost, usually on a prospective annual basis. While United attempts to base the premiums it charges at least in part on its estimate of expected health care costs over the fixed premium period, competition, regulations and other circumstances may limit United's ability to fully base premiums on estimated costs. In addition, many factors may and often do cause actual health care costs to exceed that estimated and reflected in premiums. These factors may include increased utilization of services, increased cost of individual services, catastrophes, epidemics, seasonality, general inflation, new mandated benefits or other regulatory changes and insured population characteristics. Marketing. The Company markets its products and services through both employed sales people and independent sales agents. Although the Company has a number of such sales employees and agents, if certain key sales employees or agents or a large subset of such individuals were to leave the Company, its ability to retain existing customers and members could be impaired. In addition, certain of the Company's customers or potential customers consider rating, accreditation or certification of the Company by various private or governmental bodies or rating agencies necessary or important. Certain of the Company's health plans or other business units may not have obtained or may not desire or be able to obtain or maintain such accreditation or certification which could adversely affect the Company's ability to obtain or retain business with such customers. The managed care industry has recently received significant amounts of negative publicity. Such general publicity, or any negative publicity regarding United in particular, could adversely affect the Company's ability to sell its products or services or could create regulatory problems for the Company. Competition. In any of its geographic or product markets the Company competes with a number of other entities, some of which may have certain characteristics or capabilities which give them an advantage in competing with the Company. The Company believes there are few barriers to entry in these markets, so that the addition of new competitors can occur relatively easily. Certain of the Company's customers may decide to perform for themselves functions or services formerly provided by the Company, which would result in a decrease in the Company's revenues. Certain of the Company's providers may decide to market products and services to Company customers in competition with the Company. In addition, significant merger and acquisition activity has occurred in the industry in which the Company operates as well as in industries which act as suppliers to the Company, such as the hospital, physician, pharmaceutical and medical device industries. This activity may create stronger competitors and/or result in higher health care costs. To the extent that there is strong competition or that competition intensifies in any market, the Company's ability to retain or increase customers, its revenue growth, its pricing flexibility, its control over medical cost trends and its marketing expenses may all be adversely affected. Provider Relations. One of the significant techniques United uses to manage health care costs and utilization and monitor the quality of care being delivered is contracting with physicians, hospitals and other providers. Because of the geographic diversity of its health plans and the large number of providers with which most of those health plans contract, United currently believes it has a limited exposure to provider relations issues. In any particular market, however, providers could refuse to contract with United, demand higher payments or take other actions which could result in higher health care costs, less desirable products for customers and members or difficulty meeting regulatory or accreditation requirements. In some markets, certain providers, particularly hospitals, physician/hospital organizations or multi-specialty physician groups, may have significant market positions or even monopolies. Many of these providers may compete directly with the Company. If such providers refuse to contract with United or utilize their market position to negotiate favorable contracts or place United at a competitive disadvantage, United's ability to market products or to be profitable in those areas could be adversely affected. Administration and Management. The level of administrative expense is a partial determinant of United's profitability. While United attempts to effectively manage such expenses, increases in staff-related and other administrative expenses may occur from time-to-time due to business or product start-ups or expansions, growth or changes in business, acquisitions, regulatory requirements or other reasons. Such expense increases are not clearly predictable and increases in administrative expenses may adversely affect results. United's business is significantly dependent on effective information systems. United has many different information systems for its various businesses. United is in the process of attempting to reduce the number of systems and also upgrade and expand its information systems capabilities. Failure to maintain an effective and efficient information system could result in loss of existing customers and difficulty in attracting new customers, customer and provider disputes, regulatory problems, increases in administrative expenses or other adverse consequences. In addition, the Company may, from time- to-time, obtain significant portions of its systems-related or other services or facilities from independent third parties which may make the Company's operations vulnerable to such third party's failure to perform adequately. United currently believes it has a relatively experienced, capable management staff. Loss of certain managers or a number of such managers could adversely affect United's ability to administer and manage its business. The Company has made several large acquisitions in recent years, and has an active ongoing acquisition program. Failure to effectively integrate acquired operations could result in increased administrative costs or customer confusion or dissatisfaction. Government Programs and Regulation. The Company's business is heavily regulated. The laws and rules governing the Company's business and interpretations of those laws and rules are subject to frequent change. Existing or future laws and rules could force United to change how it does business and may restrict United's revenue and/or enrollment growth and/or increase its health care and administrative costs. Regulatory approvals must be obtained and maintained to market many of United's products and services. Delays in obtaining or failure to obtain or maintain such approvals could adversely affect United's revenue or the number of its members, or could increase costs. A significant portion of United's revenues relate to federal, state and local government health care coverage programs. These types of programs, such as the federal Medicare program and the federal and state Medicaid program, are generally subject to frequent change including changes which may reduce the number of persons enrolled or eligible, reduce the revenue received by United or increase the Company's administrative or health care costs under such programs. Such changes have in the past and may in the future adversely affect United's results and its willingness to participate in such programs. The Company is also subject to various governmental audits and investigations. Such activities could result in the loss of licensure or the right to participate in certain programs, or the imposition of fines, penalties and other sanctions. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect the Company's reputation in various markets and make it more difficult for the Company to sell its products and services. Litigation and Insurance. United is subject to a variety of legal actions to which any corporation may be subject, including employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, tort claims, shareholder suits, including securities fraud, and intellectual property related litigation. In addition, because of the nature of its business, United incurs and likely will continue to incur potential liability for claims related to its business, such as failure to pay for or provide health care, poor outcomes for care delivered or arranged, provider disputes, including disputes over withheld compensation, claims related to self-funded business and improper copayment calculations. In some cases, substantial non-economic or punitive damages may be sought. While United currently has insurance coverage for some of these potential liabilities, others may not be covered by insurance, the insurers may dispute coverage or the amount of insurance may not be enough to cover the damages awarded. In addition, certain types of damages, such as punitive damages, may not be covered by insurance and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future. Stock Market. Recently, the market prices of the securities of certain of the publicly-held companies in the industry in which United operates have shown volatility and sensitivity in response to many factors, including public communications regarding managed care, legislative or regulatory actions, health care cost trends, pricing trends, competition, earnings or membership reports of particular industry participants, and acquisition activity. There can be no assurances regarding the level or stability of United's share price at any time or of the impact of these or any other factors on the share price. EX-27 2 ARTICLE 5 3RD QUARTER 95 FDS
5 0000731766 UNITED HEALTHCARE CORPORATION 1000 9-MOS DEC-31-1996 SEP-30-1996 732,025 2,586,599 685,419 36,685 0 2,803,073 601,606 291,337 6,701,279 2,451,018 0 500,000 0 1,844 3,712,822 6,701,279 7,262,225 7,397,651 6,860,231 6,957,170 96,939 0 593 424,920 163,786 260,494 0 0 0 260,494 1.29 1.29
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