-----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, AKAwEzHIAaNJnviJnI0h+bGAjclmrNRTXRLd+3zo4hDc5eI7K7FUW27JffxpsSZi vHVuNzycSKESq8Yf88BxYQ== 0000912057-97-018076.txt : 19970520 0000912057-97-018076.hdr.sgml : 19970520 ACCESSION NUMBER: 0000912057-97-018076 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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: 97608916 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 FORM 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 March 31, 1997 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 May 12, 1997 was 186,246,869. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED HEALTHCARE CORPORATION INDEX
PAGE NUMBER ------------- PART I. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets at March 31, 1997 and December 31, 1996.............................................................. 3 Condensed Consolidated Statements of Operations for the three month periods ended March 31, 1997 and 1996....................................................... 4 Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 1997 and 1996................................................. 5 Notes to Condensed Consolidated Financial Statements................................................ 6 Report of Independent Public Accountants............................................................ 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................... 8 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 14 ITEM 6. EXHIBITS.................................................................................... 14 Signatures.............................................................................................. 15
2 UNITED HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
MARCH 31, DECEMBER 31, 1997 1996 ------------ ------------ ASSETS Current Assets Cash and cash equivalents.......................................................... $ 903,965 $1,036,716 Short-term investments............................................................. 446,362 610,572 Accounts receivable, net........................................................... 681,545 605,801 Assets under management............................................................ 133,519 155,090 Other.............................................................................. 364,090 331,485 ------------ ------------ Total Current Assets............................................................. 2,529,481 2,739,664 Long-term Investments................................................................ 2,081,403 1,804,973 Property and Equipment, net.......................................................... 322,129 312,984 Goodwill and Other Intangible Assets, net............................................ 2,129,595 2,139,009 ------------ ------------ TOTAL ASSETS......................................................................... $ 7,062,608 $6,996,630 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Medical costs payable.............................................................. $ 1,619,151 $1,516,111 Other policy liabilities........................................................... 312,811 334,039 Accounts payable................................................................... 130,011 73,077 Accrued expenses................................................................... 426,220 491,297 Unearned premiums.................................................................. 111,549 228,258 ------------ ------------ Total Current Liabilities........................................................ 2,599,742 2,642,782 Long-term Obligations and Minority Interests......................................... 28,825 30,761 Convertible Preferred Stock.......................................................... 500,000 500,000 ------------ ------------ Shareholders' Equity Common stock, $.01 par value--500,000,000 shares authorized; 185,759,000 and 184,865,000 issued and outstanding............................................... 1,858 1,849 Additional paid-in capital......................................................... 1,176,480 1,148,039 Retained earnings.................................................................. 2,776,311 2,680,191 Net unrealized holding losses on investments available for sale, net of income tax effects.......................................................................... (20,608) (6,992) ------------ ------------ Total Shareholders' Equity....................................................... 3,934,041 3,823,087 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................... $ 7,062,608 $6,996,630 ------------ ------------ ------------ ------------
See notes to condensed consolidated financial statements 3 UNITED HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------------- 1997 1996 ------------ ------------ REVENUES Premiums......................................................................... $ 2,444,580 $ 1,914,364 Management Services and Fees..................................................... 355,733 357,841 Investment and Other Income...................................................... 50,798 45,905 ------------ ------------ Total Revenues................................................................. 2,851,111 2,318,110 ------------ ------------ OPERATING EXPENSES Medical Costs.................................................................... 2,064,020 1,585,369 Selling, General and Administrative Costs........................................ 575,074 508,034 Depreciation and Amortization.................................................... 33,607 31,101 ------------ ------------ Total Operating Expenses....................................................... 2,672,701 2,124,504 ------------ ------------ EARNINGS FROM OPERATIONS........................................................... 178,410 193,606 Interest Expense................................................................. (123) (251) ------------ ------------ EARNINGS BEFORE INCOME TAXES, AND MINORITY INTERESTS............................... 178,287 193,355 Provision for Income Taxes....................................................... (69,532) (73,475) Minority Interests in Net Losses (Earnings) of Consolidated Subsidiaries......... 124 (934) ------------ ------------ NET EARNINGS....................................................................... 108,879 118,946 CONVERTIBLE PREFERRED STOCK DIVIDENDS.............................................. (7,188) (7,188) ------------ ------------ NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS..................................... $ 101,691 $ 111,758 ------------ ------------ ------------ ------------ NET EARNINGS PER COMMON SHARE...................................................... $ 0.54 $ 0.62 ------------ ------------ ------------ ------------ WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............................... 189,330 180,470 ------------ ------------ ------------ ------------
See notes to condensed consolidated financial statements 4 UNITED HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------------- 1997 1996 ------------- ----------- OPERATING ACTIVITIES Net Earnings........................................................................ $ 108,879 $ 118,946 Non-cash Items: Depreciation and amortization..................................................... 33,607 31,101 Other............................................................................. 1,879 (2,974) Net Change in Other Operating Items: Accounts receivable and other current assets...................................... (108,349) (61,244) Accounts payable.................................................................. 56,934 (7,338) Accrued expenses.................................................................. (59,588) 48,018 Medical costs payable............................................................. 103,855 65,025 Other policy liabilities.......................................................... (472) 40,169 Unearned premiums................................................................. (116,709) (69,702) ------------- ----------- Cash Flows From Operating Activities............................................ 20,036 162,001 ------------- ----------- INVESTING ACTIVITIES Cash Assumed in Acquisition, net of cash paid and other effects..................... -- 34,788 Net Purchases of Property and Equipment............................................. (32,820) (22,015) Purchases of Investments Available for Sale......................................... (1,009,107) (794,206) Maturities/Sales of Investments Available for Sale.................................. 867,837 719,978 Purchases of Investments Held to Maturity........................................... (5,416) (2,085) Maturities of Investments Held to Maturity.......................................... 13,692 1,964 Other............................................................................... 2,825 449 ------------- ----------- Cash Flows Used for Investing Activities........................................ (162,989) (61,127) ------------- ----------- FINANCING ACTIVITIES Net Proceeds from Stock Option Exercises............................................ 17,390 6,696 Dividends Paid on Convertible Preferred Stock....................................... (7,188) (7,188) ------------- ----------- Cash Flows From (Used for)Financing Activities.................................. 10,202 (492) ------------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (132,751) 100,382 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................ 1,036,716 940,110 ------------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD.............................................. $ 903,965 $ 1,040,492 ------------- ----------- ------------- -----------
See notes to condensed consolidated financial statements 5 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, these unaudited condensed consolidated financial statements should 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, 1996. 2. DIVIDENDS On February 13, 1997, the Company's Board of Directors approved an annual dividend for 1997 of $0.03 per share to holders of the Company's common stock. Dividends of $5.6 million were paid on April 15, 1997 to shareholders of record at the close of business on April 3, 1997. 3. CASH AND INVESTMENTS As of March 31, 1997, 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 COST GAINS LOSSES FAIR VALUE ------------ ----------- ----------- ------------ Cash and Cash Equivalents.................................... $ 903,965 $ -- $ -- $ 903,965 Investments Available for Sale............................... 2,497,791 2,505 (36,288) 2,464,008 Investments Held to Maturity................................. 63,757 127 (309) 63,575 ------------ ----------- ----------- ------------ Total Cash and Investments................................. $ 3,465,513 $ 2,632 $ (36,597) $ 3,431,548 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
4. RECENTLY ISSUED ACCOUNTING STANDARD During March 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No.128, "Earnings per Share" (SFAS No. 128), which changes the computation and disclosure of earnings per share. SFAS No. 128 is effective for both interim and annual periods ending after December 15, 1997 and earlier application is not permitted. Under the Company's current capital structure, the adoption of SFAS No. 128 will not have a material impact on the Company's determination of earnings per share. 6 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 March 31, 1997, and the related condensed consolidated statements of operations and cash flows for the three month periods ended March 31, 1997 and 1996. 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 financial statements of United HealthCare Corporation and Subsidiaries as of and for the year ended December 31, 1996 (not presented herein), and, in our report dated February 28, 1997, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1996, 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 May 7, 1997 7 UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has completed certain transactions which affect the year-to-year comparability of the Company's consolidated financial position and results of operations. 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. 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 HealthWise acquisition was accounted for as a pooling of interests; however, the historical financial results of the Company were not restated because the effects of this acquisition on the Company's financial statements were not material. The PHP acquisition was accounted for using the purchase method of accounting. Accordingly, only the post-acquisition results of HealthWise and PHP are included in the Company's consolidated financial statements. 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 Month Period Ended ------------------------------------------------ March 31, 1997 March 31, -------------------------------- 1996 Percent ------------- AMOUNT OR Increase Amount or PERCENT(a) (Decrease) Percent --------------- -------------- ------------- Total Revenues.......................... $ 2,851,111 23% $2,318,110 Earnings From Operations................ $ 178,410 (8)% $ 193,606 --------------- ----- ------------- Medical Costs to Premium Revenue........ 84.4% 82.8% SG&A Expenses to Total Revenues......... 20.2% 21.9% --------------- ----- ------------- Enrollment (at period end) Health Plan Products Commercial.......................... 4,282(b) 25% 3,424(b) Medicaid............................ 475 30% 365 Medicare............................ 257 57% 164 --------------- ----- ------------- Total............................. 5,014 27% 3,953 Other Network-Based Products.......... 5,533(b) (3)% 5,675(b) Indemnity Products.................... 2,993(b) (24)% 3,950(b) --------------- ----- ------------- Total Enrollment........................ 13,540 0% 13,578 --------------- ----- ------------- --------------- ----- -------------
- ------------------------ (a) Amounts include post-acquisition operating results of PHP, Inc. acquired on March 29, 1996 and HealthWise of America, Inc. acquired on April 12, 1996. (b) Amounts include both fully insured and self-funded enrollment. As of March 31, 1997 and 1996, self-funded enrollment was as follows: Commercial Health Plan Products--316,000 in 1997 and 294,000 in 8 UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 1996; Other Network-Based Products--4,837,000 in 1997 and 4,936,000 in 1996; Indemnity Products--2,464,000 in 1997 and 3,091,000 in 1996. PREMIUM REVENUES Premium revenues of $2.44 billion in the first quarter of 1997 increased $530 million, or 28%, compared to the first quarter of 1996. Excluding the effects of the Company's 1996 acquisitions of HealthWise and PHP, the increase in first quarter 1997 premium revenues over the first quarter of 1996 was 21%. The increase in premium revenues is primarily attributable to year-over-year same store health plan premium revenue growth of $412 million, or 29%. The health plan premium revenue increase reflects same store enrollment growth of 23% and an average year-over-year premium rate increase on renewing commercial groups of approximately 5%. Growth in the Company's Medicare programs also contributed to the increase in premium revenues. Included in the total health plan same-store enrollment growth of 23% is year-over-year same-store increases of 48% 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 level of medical care services utilized by this population. The year-over-year increase in premium revenues from health plan operations was partially offset by an expected decrease in premium revenues from fully insured non-network-based indemnity products of $13 million. In response to increased medical costs associated with these products, the Company instituted rate increases averaging from 10% to 20% during 1996 and into 1997. 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 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. MEDICAL COSTS The combination of the Company's pricing strategy and its medical management efforts are reflected in its medical care ratio (the percent of premium revenues expensed as medical costs). The Company's commercial health plan business is most sensitive to this strategy. 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 had been able to effectively manage health care costs and maintain the rate at which its health care costs had grown within the commercial health plan line of business to low single-digit percentage increases. Commercial premium rates were set accordingly. When establishing premium rates for late 1995 and January 1996 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 experienced in 1995. The 9 UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) January renewal period is significant for the Company as approximately 45% of its existing commercial health plan enrollment renews in that month. As 1996 progressed, the Company determined year-over-year commercial health care cost trend had risen to the 3% to 4% range. The increasing health care cost trend was attributed to certain cost components 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. Consequently, the commercial health plan premium rates achieved by the Company during late 1995 and January 1996 were less than the corresponding increase in health care costs, causing the Company's consolidated medical care ratio to increase from 82.8% during the first quarter of 1996 to 84.4% during the first quarter of 1997. The Company believes that the competitive premium environment has improved since January 1996. The Company has been able to realize rate increases in excess of 5% in its commercial health plan business during the remainder of 1996 and into 1997. These rate increases combined with stable medical cost trends during the first quarter of 1997 enabled the Company to maintain its consolidated medical care ratio at 84.4%, a level relatively consistent with the consolidated medical care ratio of 84.0% during the fourth quarter of 1996. The modest increase in the first quarter 1997 medical care ratio is the result of expected seasonally higher first quarter utilization, as well as changes in the Company's product mix. The rapid growth associated with recently introduced Medicare products in several new markets (with the proportionately higher medical care ratios expected at this early stage of product introduction) and the absence of Medicaid premium increases contributed to the increased medical care ratio. The medical care ratio for the commercial health plan business declined slightly from the fourth quarter of 1996 to the first quarter of 1997, partially offsetting the impact of the Company's Medicare and Medicaid business. The Company will continue to strive to establish its commercial premium rates based on anticipated health care costs. Depending on the level of future competition, customer acceptance of the Company's premium increases, future health care cost trends 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 its products consistent with health care cost trends. MANAGEMENT SERVICES AND FEE REVENUES Management services and fee revenues were $356 million in the first quarter of 1997, comparable to revenues of $358 million reported in the first quarter of 1996. These revenues are primarily generated from self-funded indemnity products wherein 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. Additionally, the Company generates fee revenues from administrative services performed on behalf of managed health plans and for services provided by the Company's specialty managed care services. Management services and fee revenues from self-funded indemnity products has decreased $14 million from the first quarter of 1996 as a result of declining enrollment in this product. This decrease is fully offset by an increase in revenues generated from the Company's other sources of management services and fee revenues, attributable to enrollment growth within the managed health plans and an increase in lives served by the specialty managed care services operations, most notably in the behavioral health and demand management businesses. 10 UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SELLING, GENERAL AND ADMINISTRATIVE COSTS Selling, general and administrative costs as a percent of total revenues (the SG&A ratio) decreased from 21.9% in the first quarter of 1996 to 21.1% in the fourth quarter of 1996, and again to 20.2% in the first quarter of 1997. The decrease in the SG&A ratio reflects increased operating efficiencies as well as the Company's diligence in managing these expenses. On an absolute dollar basis, selling, general and administrative costs in the first quarter of 1997 increased $67 million, or 13%, over the first quarter of 1996, reflecting the additional infrastructure necessary to support the corresponding $530 million increase in premium based business, as well as additional investment in new Medicare markets and increased support for its growing specialty managed care service operations. INFLATION Although the general rate of inflation has remained relatively stable and health care cost inflation has declined in recent years, the total national health care cost inflation rate still exceeds the general inflation rate. 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 emphasizing preventive health services, appropriate use of specialty referral services, and the reduction of unnecessary hospitalizations. 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 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. GOVERNMENT REGULATION The Company's primary business, offering health care coverage and health care management services, is heavily regulated at both the federal and state levels. The Company believes that it is in compliance in all material respects with the various federal and state regulations applicable to its current operations. To maintain such compliance, it may be necessary for the Company or one of its subsidiaries to make changes from time to time in its services, products, marketing methods, or organizational or capital structure. Government regulation of health care coverage products and services is a changing area of law that varies from jurisdiction to jurisdiction. Changes in applicable laws and regulations are continually being considered and the interpretation of existing laws and rules also may change from time to time. Regulatory agencies generally have broad discretion in promulgating regulations and in interpreting and enforcing laws and rules. While the Company is unable to predict what regulatory changes may occur or the impact on the Company of any particular change, the Company's operations and financial results could be negatively affected by regulatory revisions. Certain proposed changes in Medicare and Medicaid programs may increase the opportunities for the Company to enroll people under products developed for the Medicare- 11 UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) and Medicaid-eligible populations. Other proposed changes also may limit the reimbursement available to the Company and increase competition in those programs, which could adversely affect the Company's financial results. The continued consideration and enactment of "anti-managed care" laws and regulations, such as "any willing provider" laws and limits on utilization management, by federal and state bodies may make it more difficult for the Company to control medical costs and may adversely affect financial results. A number of jurisdictions have enacted small group insurance and rating reforms, which generally limit the ability of insurers and health plans to use risk selection as a method of controlling medical costs for small group business. These laws generally may limit or eliminate use of preexisting conditions exclusions, experience rating and industry class rating, and may limit the amount of rate increases from year to year. Under these laws, medical cost control through provider contracting and managing care may become more important, and the Company currently believes its experience in these areas will allow it to compete effectively. In addition to changes in applicable laws and rules, the Company is potentially subject to governmental investigations and enforcement actions. These include possible government actions relating to the federal Employee Retirement Income Security Act (ERISA), which regulates insured and self-insured health coverage plans offered by employers, the Federal Employees Health Benefit Plan (FEHBP), federal and state fraud and abuse laws, and laws relating to utilization management and the delivery of health care. Any such government action could result in assessment of damages, civil or criminal fines or penalties, or other sanctions, including exclusion from participation in government programs. Although the Company is currently involved in various government audits, such as under the FEHBP or relating to services for ERISA plans, the Company currently does not believe the results of such audits will have a material adverse effect on the Company's financial position or results of operations. FINANCIAL CONDITION AND LIQUIDITY The Company has continued strong financial condition and liquidity with cash and investments of $3.43 billion at March 31, 1997, relatively unchanged from December 31, 1996. Cash flows from operations in the first quarter of 1997 of $20 million reflects net earnings for the quarter of $109 million, offset by normal timing issues in operating cash payments and receipts. The Company expects operating cash flows in the subsequent quarters of 1997 to reflect the positive impact of the reversal of these timing items. Under applicable state regulations, several of the Company's subsidiaries are required to maintain specified capital levels to support their operations. After giving effect to these regulations and certain business considerations, the Company had approximately $864 million in cash and investments available for general corporate use at March 31, 1997. The Company continues to focus on expanding its health care programs to the Medicare population. In connection with the introduction of a Medicare health plan product in a particular site, significant expenditures must be incurred. 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 advance of product sales. In addition, start-up markets generally experience a higher medical care ratio due to the low enrollment base. The Company expects to incur operating losses from its Medicare products in these start-up markets usually for the first 12 to 18 months until Medicare enrollment is sufficient to cover the corresponding administrative cost structure in each site and to absorb the medical risk attributable to these products. 12 UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In February 1997, the Company completed a contract to deliver Medicare supplement insurance and develop an array of new products for the American Association of Retired Persons (AARP) beginning in January 1998. Under the terms of the 10 year contract, the Company's portion of the AARP insurance offerings is expected to represent approximately $3.8 billion in annual premium revenue from over 5 million policyholders (based on year-end 1996 figures). The Company currently believes its available cash resources will be sufficient to meet its current operating requirements and internal development and integration initiatives. In addition, the Company believes that, based on its current financial condition and results of operations, it would be able to finance additional cash requirements in the public or private markets, if necessary. 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. 13 UNITED HEALTHCARE CORPORATION PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's annual meeting of shareholders held on May 14, 1997, the Company's shareholders elected three directors and ratified the appointment of Arthur Andersen LLP as independent public accountants. Three directors whose terms expire in 2000 (Class II) were elected: James A. Johnson with 149,669,494.12 votes cast for his election and 2,068,143.58 votes withheld; Douglas W. Leatherdale with 149,677,404.12 votes cast for his election and 2,060,233.58 votes withheld; Walter F. Mondale, with 149,743,551.135 votes cast for his election and 1,994,086.565 votes withheld. The appointment of Arthur Andersen LLP as independent public accountants for the Company for the year ending December 31, 1997 was ratified with 151,284,351.51 votes cast for ratification, 110,618.830 votes cast against ratification and 342,667.360 abstaining votes cast. There were 0 broker nonvotes on this matter. ITEM 6. EXHIBITS The following exhibits are filed in response to Item 601 of Regulation S-K.
EXHIBIT NO. EXHIBIT - ------------ --------------------------------------------------------------------------- Exhibit 10 -- 1997 Management Incentive Plan Exhibit 11 -- Statements Re Computation of Per Share Earnings Exhibit 15 -- Letter Re Unaudited Interim Financial Information Exhibit 99 -- Cautionary Statements
14 UNITED HEALTHCARE CORPORATION 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: May 14, 1997 By /s/ WILLIAM W. MCGUIRE, M.D. -------------------------------------- William W. McGuire, M.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER Dated: May 14, 1997 By /s/ DAVID P. KOPPE -------------------------------------- David P. Koppe CHIEF FINANCIAL OFFICER
15 UNITED HEALTHCARE CORPORATION EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE - ----------- -------------------------------------------------------------------------------------------------- ----- 10 1997 Management Incentive Plan.................................................................... 11 Statements Re Computation of Per Share Earnings................................................... 15 Letter Re Unaudited Interim Financial Information................................................. 99 Cautionary Statements.............................................................................
EX-10 2 EXHIBIT 10 1997 MANAGEMENT INCENTIVE PLAN - -------------------------------------------------------------------------------- UNITED HEALTHCARE CORPORATION-Signature Mark- 1997 MANAGEMENT INCENTIVE PLAN - -------------------------------------------------------------------------------- As a national leader in health care management, United HealthCare is committed to rewarding - and keeping - the professionals who have helped us accomplish our successes. In 1997 we again will be challenged to attain even higher levels of performance to maintain our leadership position. Overall, we believe our company will continue to provide tremendous opportunities for all of us who work to make United HealthCare successful. In our endeavors in this year and beyond, we will stress tightly managed operational execution and excellence in service. Specific goals include excellent growth and strong financial performance; enhanced responsiveness through better organizational structures and processes; continued leadership gains in each of our business units; improved products and services for all of our customers; and successful integration of business through merger and acquisition activity. As always, we must remain focused on continued improvements in appropriate health care delivery, SG&A, and medical cost trends. The information presented in this brochure describes United HealthCare's Management Incentive Plan. Incentive programs and performance management are inherent to our corporate culture, a culture that rewards leaders who strive for excellence and continuous improvement. This plan also represents a significant step toward unifying all United HealthCare leaders under a single system to recognize our accomplishments as we work toward common goals. As leaders at United HealthCare, we all are responsible and accountable for maintaining the standards of excellence that will move our company forward successfully as we work to improve the health and well-being of the people we serve. /s/ William W. McGuire, M.D. ---------------------------- William W. McGuire, M.D. Chief Executive Officer, President and Chairman 1 1997 MANAGEMENT INCENTIVE PLAN - -------------------------------------------------------------------------------- OVERVIEW Annual management incentive plan funding and payout amounts are determined by the following performance factors: 1) The OVERALL PERFORMANCE OF UNITED HEALTHCARE, measured by accomplishment of strategic initiatives, deployment of capital and resources, market valuation, merger and acquisition activity, public image and recognition, as well as financial goals in the following categories: earnings, revenue, SG&A, medical cost ratio, growth and membership. United HealthCare's performance, by design, affects every manager's incentive to some degree. 2) The OVERALL PERFORMANCE OF YOUR BUSINESS UNIT, SUPPORT UNIT OR CORPORATE DIVISION. If you're part of a United HealthCare business unit, your goals will be developed jointly by your Senior Executive, CEO or Senior Manager and the person to whom he or she reports. If you're part of a United HealthCare business support or corporate division, your goals will be established by the appropriate Senior Executive and the person to whom he or she reports. 3) YOUR INDIVIDUAL PERFORMANCE, based on your overall performance in your position and accomplishment of established goals and objectives. All three performance measures are used to determine the incentive pool and incentive awards. We believe that our collective success must grow out of a synergy of effort. This blend of performance measurement helps ensure all of United HealthCare works together toward common goals - and therefore allows us the greatest opportunities for success, both professionally and personally. INCENTIVE TARGETS Incentive targets are defined as a percent of eligible base earnings paid during the current fiscal year. The incentive target percents are based on grade level and overall position responsibility. Your senior executive will communicate this year's corporate and business unit or corporate division goals. 2 - -------------------------------------------------------------------------------- PAYMENT DETERMINATION STEP 1 - ESTABLISHMENT OF TOTAL INCENTIVE POOL At the end of United HealthCare's fiscal year, the Compensation and Stock Option Committee of the Board of Directors will determine overall United HealthCare company performance and the total amount available in the company incentive pool. The total company incentive pool reflects United HealthCare's total performance on its strategic initiatives, merger and acquisition activity, and the collective results of all United HealthCare operations. It is NOT the average result of United HealthCare operations but the overarching performance of the entire company. The Compensation and Stock Option Committee will approve an incentive pool amount based on an assessment ranging from 50% of total incentive targets to 200% of total incentive targets. Generally, no pool amount of less than 50% will be established. STEP 2 - ESTABLISHMENT OF BUSINESS UNIT, SUPPORT UNIT AND CORPORATE DIVISION POOLS Following a determination of the total amount available in the United HealthCare incentive pool, United HealthCare Senior Management determines the performance and incentive pools specific to the business units, business unit support areas and United HealthCare corporate divisions. Business support areas will be evaluated based on the primary business areas they support and their specific unit performance. The business unit, business support division or corporate division pool is established by creating a pool of available dollars from 50% of target to 200% of targets. Generally, no pool amount of less than 50% will be established for any business unit, support area, or corporate division. STEP 3 - ESTABLISHMENT OF INDIVIDUAL INCENTIVE PAYMENTS After business unit, support division and United HealthCare corporate division incentive pools are established, the respective Health Plan CEOs, Subsidiary Business Presidents and Corporate Senior Managers determine individual incentive payments for their eligible managers. Health Plan CEOs, Corporate Executives or Specialty Business Presidents' incentives are determined by their management. For those receiving an award, payments generally range from 50% of incentive target to 200% of incentive target. 3 1997 MANAGEMENT INCENTIVE PLAN - -------------------------------------------------------------------------------- ELIGIBILITY Generally, full-time regular employees grade 28 and above are eligible for MIP awards. It is at this level that positions are directly accountable for meeting key division or business unit objectives and generally also manage staff, and determine and manage financial resources and budgets. Certain positions are not eligible for MIP due to participation in other incentive plans, even if they meet the eligibility criteria. - - If you were hired or promoted during the year to an MIP-eligible position, your participation will be prorated for the time you serve as an eligible employee. New hires or promotions in the fourth quarter of 1997 are not eligible to participate in the 1997 plan. Employees who were eligible for the performance incentive plan or business incentive plan prior to promotion in the fourth quarter may still be eligible for a year-end PIP or BIP award in lieu of an MIP award for that year. - - If you are promoted to a position that carries a higher management incentive potential, any incentive paid to you would be based on a combination of your existing and new incentive targets. The targets would be weighted according to the time you held each position. - - If you are on leave for part of the year, pay that you receive while on leave (except vacation and sick leave) will not be included as base earnings in the calculation of the management incentive payment. - - TO BE ELIGIBLE FOR A MANAGEMENT INCENTIVE PAYMENT, YOU MUST BE AN ACTIVE EMPLOYEE AT THE TIME SUCH PAYMENTS ARE MADE. EMPLOYEES WHO TERMINATE EMPLOYMENT PRIOR TO THE DATE INCENTIVE AWARDS ARE MADE ARE NOT ELIGIBLE FOR ANY INCENTIVE AWARDS. IF YOU ARE ON A LEAVE OF ABSENCE AT THE TIME OF PAYMENT, YOU WILL BECOME ELIGIBLE FOR AN INCENTIVE PAYMENT AT THE TIME OF YOUR RETURN TO WORK. EMPLOYEES WHO DO NOT RETURN TO WORK FROM LEAVE ARE NOT ELIGIBLE FOR AN INCENTIVE AWARD. - - EMPLOYEES ON FORMAL DISCIPLINARY ACTION ARE NOT ELIGIBLE FOR AN INCENTIVE PAYMENT. The senior vice president of Human Resources will determine any exceptions to eligibility guidelines. 401(k) PLAN AND ESOP CONTRIBUTIONS Management Incentive Plan payments are considered compensation under the 401(k) and Employee Stock Ownership (ESOP) Plans. Management incentive payments are not eligible for the Employee Stock Purchase Plan (ESPP). PAYMENTS Management Incentive Plan payments generally are made following the close of the corporate and operating unit books for the 1997 operating year, generally occurring during the first quarter of the following year. If you have any questions about the Management Incentive Plan, contact your supervisor or the head of your operating unit. 4 - -------------------------------------------------------------------------------- EXAMPLES EXAMPLE 1 - BUSINESS UNIT (E.G., HEALTH PLAN) STEP 1: United HealthCare Compensation & Stock Option Committee determines overall MIP pool. STEP 2: Senior Management determines each unit's pool. As an example, assume this unit is: Business Unit Pool = 130% of target for that business 6 ELIGIBLE EMPLOYEES INCENTIVE TARGETS 2 at 15% at $60,000 Eligible Base Earnings $18,000 2 at 10% at $50,000 Eligible Base Earnings $10,000 2 at 10% at $40,000 Eligible Base Earnings $ 8,000 -------- TOTAL INCENTIVE TARGET EQUALS $36,000 POOL IS CALCULATED: 130% (Unit Pool) x $36,000 (Incentive Target) = Incentive Pool of $46,800 STEP 3: Business Unit Senior Manager evaluates individual performance of each eligible employee and determines incentive payments. Management incentive payments are either 0% or from 50% to 200% of targets. The amount of the pool for this Senior Manager to distribute is $46,800; total payments cannot exceed the pool total. EXAMPLE 2 - CORPORATE DIVISION (E.G., CORPORATE FINANCE DEPARTMENT) STEP 1: United HealthCare Compensation & Stock Option Committee determines overall MIP pool. STEP 2: Senior Management determines each unit's pool. As an example, assume this unit is: Corporate Division Rating = 90% of target 5 ELIGIBLE EMPLOYEES INCENTIVE TARGETS 1 at 20% at $70,000 Eligible Base Earnings $14,000 2 at 15% at $50,000 Eligible Base Earnings $15,000 2 at 10% at $45,000 Eligible Base Earnings $ 9,000 ------- TOTAL INCENTIVE TARGET EQUALS $38,000 POOL IS CALCULATED: 90% (Overall Rating) x $38,000 (Incentive Target) = Incentive Pool of $34,200 STEP 3: Corporate Division Head evaluates individual performance of each eligible employee and determines incentive payments. Management incentive payments are either 0% or can range from 50% to 200% of targets. The amount of the pool for this Division Head is $34,200; total payments cannot exceed the pool total. 5 1997 MANAGEMENT INCENTIVE PLAN - -------------------------------------------------------------------------------- EXAMPLE 3 - BUSINESS SUPPORT UNIT (E.G., SPECIALTY BUSINESS AREA) STEP 1: United HealthCare Compensation & Stock Option Committee determines over all MIP pool. STEP 2: Senior Management determines each unit's pool. As an example, assume this unit is: Support Unit Pool = 100% 4 ELIGIBLE EMPLOYEES INCENTIVE TARGETS 1 at 15% at $60,000 Eligible Base Earnings $ 9,000 2 at 10% at $45,000 Eligible Base Earnings $ 9,000 1 at 10% at $40,000 Eligible Base Earnings $ 4,000 ------- TOTAL INCENTIVE TARGET EQUALS $22,000 POOL IS CALCULATED: 100% (Overall Rating) x $22,000 (Incentive Target) = Incentive Pool of $22,000 STEP 3: Business Support Unit Senior Manager evaluates individual performance of each eligible employee and determines incentive payments. Management incentive payments are either 0% or can range from 50% to 200% of targets. The amount of the pool for this Senior Manager to distribute is $22,000; total payments cannot exceed the pool total. THERE IS NO GUARANTEE THAT ANY MANAGEMENT INCENTIVE PLAN PAYOUTS WILL BE MADE. UNITED HEALTHCARE HAS THE EXCLUSIVE AND BINDING DISCRETION TO AMEND, TERMINATE OR INTERPRET THE TERMS OR CONDITIONS OF THIS MANAGEMENT INCENTIVE PLAN AT ANY TIME AND WITHOUT NOTICE. CHANGES TO THIS PLAN MUST BE IN WRITING MADE BY THE SENIOR VICE PRESIDENT OF HUMAN RESOURCES OR THE CHIEF EXECUTIVE OFFICER OF THE COMPANY. UNITED HEALTHCARE ALSO HAS DISCRETION TO UNILATERALLY MAKE LEGAL AND FACTUAL DETERMINATIONS REGARDING THE PLAN. THIS MANAGEMENT INCENTIVE PLAN IS NOT AND SHALL NOT BE DEEMED TO BE AN ENFORCEABLE CONTRACT OR AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF ERISA. - -------------------------------------------------------------------------------- 6 EX-11 3 EXHIBIT 11 EXHIBIT 11 UNITED HEALTHCARE CORPORATION STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS(2) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 1997 1996 ---------- ---------- PRIMARY: NET EARNINGS.............................................................................. $ 108,879 $ 118,946 LESS CONVERTIBLE PREFERRED STOCK DIVIDENDS................................................ 7,188 7,188 ---------- ---------- NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS............................................ $ 101,691 $ 111,758 ---------- ---------- ---------- ---------- Weighted-average number of common shares outstanding...................................... 184,862 175,540 Additional equivalent shares issuable from assumed exercise of common stock options and warrants................................................................................ 4,468 4,930 ---------- ---------- WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING...................................... 189,330 180,470 ---------- ---------- ---------- ---------- NET EARNINGS PER COMMON SHARE............................................................. $ 0.54 $ 0.62 ---------- ---------- ---------- ---------- FULLY DILUTED(1): NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS............................................ $ 108,879 $ 118,946 ---------- ---------- ---------- ---------- Weighted-average number of common shares outstanding...................................... 184,862 175,540 Additional equivalent shares issuable from assumed exercise of common stock options and warrants................................................................................ 4,476 4,930 Assumed conversion of convertible preferred stock......................................... 10,106 10,106 ---------- ---------- WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING...................................... 199,444 190,576 ---------- ---------- ---------- ---------- NET EARNINGS PER COMMON SHARE............................................................. $ 0.55 $ 0.62 ---------- ---------- ---------- ----------
- ------------------------ (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) As discussed more fully in Footnote 4 to the condensed consolidated financial statements, the Company is required to implement a new methodology for determining earnings per share in the fourth quarter of 1997. The impact of this new methodology is not expected to be material. EX-15 4 EXHIBIT 15 EXHIBIT 15 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION May 7, 1997 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, 333-25923 and 333-05291 its Form 10-Q for the quarter ended March 31, 1997, which includes our report dated May 7, 1997, 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 EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNITED HEALTHCARE CORPORATION FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 903,965 2,527,765 730,241 48,696 0 2,529,481 599,553 277,424 7,062,608 2,599,742 0 500,000 0 1,858 3,932,183 7,062,608 2,800,313 2,851,111 2,639,094 2,672,701 33,607 0 123 178,287 69,532 108,879 0 0 0 108,879 0.54 0.54
EX-99. 6 EXHIBIT 99 EXHIBIT 99 CAUTIONARY STATEMENTS The statements contained in this Form 10-Q include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases, presentations to securities analysts or investors, and in oral statements made by or with the approval of an authorized executive officer of the Company, the words or phrases "believes," "anticipates," "intends," "will likely result," "estimates," "projects" or similar expressions are intended to identify such forward-looking statements. Any of these forward-looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. The following discussion contains certain cautionary statements regarding United's business that investors and others should consider. This discussion is intended to take advantage of the "safe harbor" provisions of the PSLRA. In making these cautionary 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 results to differ from discussions or information contained in previous filings or communications. In addition, any of the matters discussed below may have affected United's past, as well as current, foward-looking statements about future results, so that the Company's actual results in the future may differ materially from those expressed in prior communications. HEALTH CARE COSTS. A large portion of the revenue received by United is used 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 incurrence of the related costs, usually on a prospective annual basis. While United attempts to base the premiums it charges at least in part on its estimate of future 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, the introduction of new or costly treatments, general inflation, new mandated benefits or other regulatory changes, and insured population characteristics. In addition, the Company's earnings reported for any particular quarter include estimates of covered services incurred by the Company's enrollees during that period but for which a claim has not been received or processed. These are estimates and therefore the Company's earnings may be subject to later adjustment based on the actual costs. INDUSTRY FACTORS. The managed care industry has recently received significant amounts of negative publicity. This publicity, in turn, has contributed to increased legislative activity, regulation and review of industry practices. These factors may adversely affect the Company's ability to market its products or services, could necessitate changes in the Company's products and services, and may increase regulatory burdens under which the Company operates, further increasing the costs of doing business and adversely affecting profitability. COMPETITION. In many of its geographic or product markets, the Company competes with a number of other entities, some of which may have certain characteristics or capabilities that give them an advantage in competing with the Company. The Company believes the barriers to entry in these markets are not substantial, 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 1 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 that act as suppliers to the Company, such as the hospital, physician, pharmaceutical and medical device industries. This activity may create stronger competitors 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 or providers, its revenue growth, its pricing flexibility, its control over medical cost trends and its marketing expenses may all be adversely affected. AARP CONTRACT. In early 1997, the Company finalized its contract arrangements with the American Association of Retired Persons ("AARP") under which the Company will provide Medicare supplement health insurance products to AARP members, effective January 1, 1998. As a result of this agreement, the Company will significantly expand the number of members served, the products offered and the services it must provide. The success of the AARP arrangement will depend, in part, on the Company's ability to service these new members, develop additional products and services, and price the products and services competitively. GOVERNMENT PROGRAMS AND REGULATION. The Company's business is heavily regulated on a federal, state and local level. The laws and rules governing the Company's business and interpretations of those laws and rules are subject to frequent change and broad latitude is given to the agencies administering those regulations. Existing or future laws and rules could force United to change how it does business, may restrict United's revenue and/or enrollment growth, increase its health care and administrative costs, and/ or increase the Company's liability for medical malpractice or other actions. 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 programs, are generally subject to frequent change including changes that 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. The National Association of Insurance Commissioners (the "NAIC") has an effort underway that would require new minimum capitalization limits for health care coverages provided by insurance companies, HMOs and other risk bearing health care entities. The requirements would take the form of risk-based capital rules similar to those which currently apply only to insurance companies. Depending on the nature and extent of the new minimum capitalization requirements ultimately adopted, there could be an increase in the capital required for certain of United's subsidiaries and there may be some potential for disparate treatment relative to competing products. Failure of the NAIC to act may result in some form of federal solvency regulation of companies providing Medicare-related benefit programs. 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 2 United, demand higher payments or take other actions that 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 near monopolies. In addition, physician or practice management companies, which aggregate physician practices for purposes of administrative efficiency and marketing leverage, continue to expand. These providers may compete directly with the Company. If such providers refuse to contract with United, use 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. LITIGATION AND INSURANCE. United may be a party 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 for securities fraud, and intellectual property related litigation. In addition, because of the nature of its business, United is subject to a variety of legal actions relating to its business operations, such as claims relating to the denial of health care benefits, medical malpractice actions, provider disputes including disputes over withheld compensation and termination of provider contracts, disputes related to self-funded business including actions alleging claim administration errors and the failure to disclose network rate discounts and other fee and rebate arrangements, disputes over copayment calculations, and claims relating to customer audits and contract performance. Recent court decisions and legislative activity may have the effect of increasing the Company's exposure for any of these types of claims. 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. INFORMATION SYSTEMS. United's business is significantly dependent on effective information systems. United has many different information systems for its various businesses. The Company's information systems require an ongoing commitment of resources to maintain and enhance existing systems and develop new systems. As a result of United's acquisition activities, 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 effective and efficient information systems could result in loss of existing customers, 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 parties' failure to perform adequately. THE YEAR 2000. The Company is in the process of modifying its computer systems to accommodate the year 2000 and currently expects to complete this modification sufficiently in advance of the year 2000 so as not adversely to affect its operations. The Company is expensing the costs incurred to make these modifications. The inability of the Company to complete timely its year 2000 modifications or the inability of other companies with which United does business to complete timely their year 2000 modifications could adversely affect the Company's operations. ADMINISTRATION AND MANAGEMENT. Efficient and cost-effective administration of the Company's operations is integral to United's profitability and competitive positioning. 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. 3 United believes it currently 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. 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. ACQUISITIONS. The Company has made several large acquisitions in recent years and has an active ongoing acquisition program. These acquisitions may entail certain risks and uncertainties in addition to those present in its ongoing business operations, unknown liabilities, unforeseen administrative needs or increased efforts to integrate the acquired operations. Failure to identify liabilities, anticipate additional administrative needs or effectively integrate acquired operations could result in reduced revenues, increased administrative and other costs, or customer confusion or dissatisfaction. STOCK MARKET. 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 general market trends, 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. During 1996, the market price for United's securities experienced similar volatility. There can be no assurance 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. 4 -----END PRIVACY-ENHANCED MESSAGE-----