-----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, McajbT1Ck0D2guO5XnnbXIpdPZdCaeTnLdMfkEhPyWoJjndIZm7yRTrL8dH+iZNG kaR1F2CT4045ZMhGhVnvVw== 0001047469-99-013081.txt : 19990403 0001047469-99-013081.hdr.sgml : 19990403 ACCESSION NUMBER: 0001047469-99-013081 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K SEC ACT: SEC FILE NUMBER: 001-10864 FILM NUMBER: 99583500 BUSINESS ADDRESS: STREET 1: 300 OPUS CENTER STREET 2: 9900 BREN ROAD EAST CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129361300 MAIL ADDRESS: STREET 1: PO BOX 1459 CITY: MINNEAPOLIS STATE: MN ZIP: 55440-1459 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 Commission file number: 1-10864 ------------------------ UNITED HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter) MINNESOTA 41-1321939 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 300 OPUS CENTER 55343 9900 BREN ROAD EAST (Zip Code) MINNETONKA, MINNESOTA (Address of principal executive offices) Registrant's telephone number, including area code: (612)936-1300 ------------------------ Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC. (Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of voting stock held by non-affiliates of the registrant as of March 8, 1999, was approximately $8,512,536,866 (based on the last reported sale price of $51.75 per share on March 8, 1999, on the New York Stock Exchange). As of March 8, 1999, 180,782,384 shares of the registrant's Common Stock, $.01 par value per share, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for the Annual Meeting of Shareholders of Registrant to be held on May 12, 1999. Certain information therein is incorporated by reference into Part III hereof. - ------------------------ *Only shares of common stock held beneficially by directors and executive officers of the Company and persons or entities holding more than 10% of the common stock filing Schedules 13G received by the Company have been excluded in determining this number. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS UnitedHealth Group is a national leader offering health care coverage and related services to help people achieve improved health and well-being through all stages of life. The Company operates in all 50 states, the District of Columbia, Puerto Rico and internationally. UnitedHealth Group's products and services reflect a number of core capabilities, including medical information management, health benefit administration, care coordination, risk assessment and pricing, health benefit design and provider contracting. With these capabilities, United is able to provide comprehensive health care management services through organized health systems and insurance products, including health maintenance organizations ("HMOs"), point-of-service plans ("POS"), preferred provider organizations ("PPO") and managed indemnity programs. The Company also offers specialized health care management services and products such as behavioral health services, workers compensation and disability services, utilization review services, specialized provider networks, employee assistance programs, and knowledge and information services. UnitedHealth Group is a Minnesota corporation, incorporated in January 1977. Unless the context otherwise requires, the terms "United," "UnitedHealth Group" or the "Company" refer to United HealthCare Corporation and its subsidiaries, which operate under the name of, and is sometimes referred to in this Form 10-K as, UnitedHealth Group. United's executive offices are located at 300 Opus Center, 9900 Bren Road East, Minnetonka, Minnesota 55343; telephone (612) 936-1300. BUSINESS OPERATIONS The Company operates in the health and well-being marketplace. In late 1997, the Company announced an internal realignment that established strategic business units for each of the Company's six key business lines. These businesses include UnitedHealthcare, Unimerica, Uniprise, Ovations, Specialized Care Services and Ingenix. While the Company's general management and various operational aspects, including information systems and certain administrative functions, remain interrelated, the realignment allows each business to focus fully on its specific set of customers and markets. The Unimerica business line provides insurance services to the other businesses of UnitedHealth Group, and its results are reported in the segment that originates the business. The results of UnitedHealthcare and Ovations are combined in one segment. UNITEDHEALTHCARE UnitedHealthcare operates organized health systems. As of December 31, 1998, UnitedHealthcare held a majority ownership interest in health plans operating in approximately 40 markets nationwide and in Puerto Rico. UnitedHealthcare also is engaged in a joint venture that operates a health plan in the Republic of South Africa and provides consulting services in Germany, Hong Kong and the Philippines through this business unit. For organized health systems it owns, UnitedHealthcare assumes the risk for health care and administrative costs in return for premium revenue. UnitedHealthcare's owned health systems usually are licensed as health maintenance organizations ("HMOs") or insurers. These plans provide comprehensive health care coverage for a fixed fee or premium that usually does not vary with the extent of medical services received by the member. Most of UnitedHealthcare's owned health plans contract with independent providers of health care services for medical and hospital services. UnitedHealthcare's health plans that employ health care providers strive for cost-effective delivery of health care services by emphasizing appropriate use of these services, promoting preventive health services, and encouraging the use of clinically proven treatments and best medical practices. UnitedHealthcare also provides administrative and other management services to a limited number of health plans in which UnitedHealthcare has no ownership interest. UnitedHealthcare receives an administrative fee for providing its services to these plans and generally assumes no responsibility for health care costs. POINT-OF-SERVICE PRODUCTS. UnitedHealthcare's point-of-service products are one of its most popular coverage options. Unlike some traditional HMO products, which only cover non-emergency services 2 received from contracted providers, point-of-service products also provide coverage, usually at a lower level, for services received from non-contracted providers. Sometimes, this out-of-network coverage is offered directly by the health plan, but more often it is provided by an insurance policy "wrapped around" the health plan benefit contract. The insurance policy usually is provided through one of Unimerica's insurance subsidiaries. SELF-FUNDED PRODUCTS. UnitedHealthcare has developed self-funded products for employers who want the cost containment aspects of an organized health system while self-insuring the health care cost risk. UnitedHealthcare uses the provider networks it has developed for its health plan or insurance products for its self-funded products, many of which include a point-of-service feature. The provider contracts for these products are with individual physicians, groups of physicians and health care facilities and are generally on a standard fee-for-service basis. With self-funded products, employers and other sponsoring groups have access to a provider network and the administrative and care coordination services associated with an organized health system product, but the sponsoring company or group generally bears the financial costs associated with the health care. MEDICARE+CHOICE PLANS. Several of UnitedHealthcare's owned health plans contract with the federal Health Care Financing Administration ("HCFA") to provide coverage for Medicare-eligible individuals. Under these contracts, plans receive a fixed monthly payment from HCFA for each enrolled individual and must provide at least the benefits that would be covered under traditional Medicare. The plans provide a significantly higher level of coverage and may, but often do not, charge an additional monthly premium to the members for the greater benefits. The health plans generally use a subset of their commercial product provider network as the provider network for the Medicare products. Any Medicare-eligible person in a plan's service area may enroll in the Medicare product without underwriting or health screening. Features such as United Health Passport allow members to travel to other UnitedHealthcare Medicare sites and receive their same benefits. Some of UnitedHealthcare's health plans also offer these Medicare products to or through employer groups as a way of providing retiree health care coverage. MEDICAID PRODUCTS. Several of UnitedHealthcare's health plans offer coverage to Medicaid-eligible individuals. These plans typically contract with a state agency to provide such coverage and receive a fixed monthly payment for each enrolled individual. The level of benefits generally is set by contract, and few additional benefits are offered. Enrollment usually must be offered to all eligible individuals without underwriting or health screening. Generally, the provider network for commercial products is used, but some providers may refuse to participate in the Medicaid product and the network may have a different number or set of providers for other reasons. OVATIONS Ovations includes the Company's operations that target the market segment comprised of people age 50 and older. These operations include Medigap and Medicare supplement products, the EverCare-Registered Trademark- program and the Company's relationship with AARP. AARP. In early 1997, the Company finalized a 10-year agreement with the American Association of Retired Persons ("AARP") to underwrite Medicare and hospital supplement insurance products effective January 1, 1998. During 1997, the Company coordinated the transfer of the operations from AARP's existing vendor and prepared to implement this contract. As of January 1, 1998, the Company's insurance subsidiaries assumed the underwriting risk, and Ovations assumed the claim administration associated with the business. EVERCARE-REGISTERED TRADEMARK-. The EverCare-Registered Trademark- program coordinates the provision of a broad spectrum of health care services primarily to permanent nursing home residents through employed and contracted physicians and nurse practitioners. EverCare is participating in a demonstration project with HCFA to offer health care services to the elderly nursing home residents in several separate locations throughout the country. 3 UNIMERICA Unimerica is UnitedHealth Group's insurance arm, which serves as the legal insurer for insurance products offered through UnitedHealth Group businesses. Unimerica's insurance subsidiaries are licensed in all 50 states, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. UnitedHealth Group reports the revenues from insurance products in the segments that originate the business, not in Unimerica. Through these insurance subsidiaries, Unimerica offers Options PPO, a national preferred provider organization product. Options PPO combines access to UnitedHealthcare's commercial health plan networks and certain specialty services with managed indemnity coverage. Individuals covered under the Options PPO product have lower out-of-pocket costs when they obtain covered services from contracted providers, but also have the option to go outside of the network for covered services. For customers with less than 50 employees, Unimerica typically sells its products on an insured basis for a fixed premium, with no experience adjustments made to the premium. This type of business often has been subject to sudden and unpredictable changes in health care costs and generally has high administrative and marketing expenses. In addition, these products are subject to extensive state regulations. For larger customers, Unimerica sells these products on both an insured and self-funded basis. The insured products often are sold on an experience-rated basis, and the self-funded products usually are sold on an administrative fee basis. In some cases, the agreement with the customer includes penalties or rewards related to administrative service standards and/or health care costs. Unimerica's insurance subsidiaries also offer several health insurance products in conjunction with health plan products. These products help employers replace multiple health care policies and vendors with a single health care plan. These subsidiaries also offer reinsurance and other insured products on a selective basis to most of UnitedHealthcare's health plans and to employers and other sponsoring groups offering self-funded health care benefit plans. Under an agreement with Metropolitan Life Insurance Company ("MetLife"), UnitedHealth Group businesses offers MetLife's life, dental, accidental death and dismemberment and short-term disability products to customers, and MetLife offers UnitedHealth Group's health care coverage products to MetLife customers. This agreement with MetLife also contains certain exclusivity and non-competition provisions. UNIPRISE Uniprise focuses on UnitedHealth Group's business with large employers. Its core competencies include sales and account management, benefits administration and customer services, including government-related operations, and care management. Uniprise provides sales and account management services to more than 200 customers, approximately 50 percent of which are Fortune 500 companies. UnitedHealth Group's network-based medical and insurance products and specialized care services are available to these customers, with various types of funding arrangements. Uniprise specializes in serving the needs of large multi-site employers, and offers long-term strategic health care coverage planning to its customers. The operations unit of Uniprise provides benefits administration services and customer services to UnitedHealth Group customers in its other business lines. Benefits administration services include enrollment, eligibility, claims processing, and billing. Customer services include telephonic information, provider directories and identification card production, and oversight of the government operations and care management centers divisions. The government operations division provides Medicare Part A services for hospitals and nursing homes in Connecticut, New York and Michigan and Medicare Part B services for beneficiaries and providers in Connecticut, Minnesota, Mississippi and Virginia. This division also provides specialized claims processing services for durable medical equipment in 10 northeastern states. This unit serves as the national Medicare Part B carrier for the Railroad Retirement Board. In addition, at the request of the Office of Personnel Management and HCFA, the government operations division contracts with all 4 insurance carriers involved in the administration of the Federal Employee Health Benefit Plan ("FEHBP"). The care management centers division offers customers medical management programs designed to improve patients' clinical outcomes, reduce medical expenses, and increase consumer satisfaction. These services include utilization review, review of hospital-based services, and the administration of high-impact medical programs based upon customer-specific demographic and claims data. SPECIALIZED CARE SERVICES Specialized Care Services is a portfolio of businesses that focus on specific aspects of health and well-being. These businesses sell its products and services to and through other UnitedHealth Group businesses as well as to independent entities such as HMOs, PPOs, insurers, Blue Cross/Blue Shield plans, third-party administrators, employers, labor unions and/or government agencies. These businesses generally receive fees for the services they provide, which are primarily administrative in nature. Specialized Care Services assumes no responsibility for health care costs except for certain behavioral health products. These businesses assume some responsibility for health care costs related to providing mental health/substance abuse services. BEHAVIORAL HEALTH SERVICES. Specialized Care Services provides behavioral health services through United Behavioral Health ("UBH"), which offers behavioral health care management services, employer assistance programs, and psychiatric disability management services through specialized provider networks and behavioral health care managers. UBH customers include most of UnitedHealthcare's health plans, private and public sector employers and government agencies. These services are provided by a national network of contracted providers. United assumes the responsibility for health care costs related to some of these services. UBH serves approximately 14 million individuals. HEALTH INFORMATION, EDUCATION AND SUPPORT SERVICES. Specialized Care Services provides health information, education and related services through Optum-Registered Trademark-. Optum offers a full spectrum of counseling, access and consumer information services for helping individuals manage their health and well-being. Its services are available via 24-hour telephone information lines, publications, audiotapes, face-to-face meetings and the Internet. Optum services are available to approximately 15 million individuals. TRANSPLANT SERVICES. Specialized Care Services offers transplant services through United Resource Networks. United Resource Networks offers clients access to a network of health care facilities for transplant-related services and transplant care management services. United Resource Networks negotiates fixed, competitive rates for high-cost, low-frequency health care services such as organ and tissue transplants. United Resource Networks serves 450 clients, representing approximately 37 million individuals. INGENIX Ingenix builds upon UnitedHealth Group's heritage of using its large database and expertise to provide knowledge and information services to providers, drug and device manufacturers, the government, payers, employers and other interested organizations. It was formed by combining UnitedHealth Group's information-related businesses and capabilities and expanded through several acquisitions, as well as internal growth. Ingenix provides four broad types of products and services: CONSULTING. Ingenix provides consulting services to providers, payers, employers and other health system participants focusing on actuarial and financial matters, product development, provider contracting, and medical policy and management. PHARMACEUTICAL SERVICES. Ingenix performs clinical trials services and outcomes and pharmacoeconomic research for pharmaceutical and medical device manufacturers globally. Services 5 include helping find and train investigators and recruit patients, developing research protocols, providing regulatory assistance, data collection and management, biostatistics, and general project management. PUBLISHING. Ingenix's publications unit sells print and electronic media products that provide information regarding coding, reimbursement, billing, compliance and other general health care issues. SOFTWARE, DATA AND SERVICES. Ingenix's software, data and services include databases for benchmarking, software to analyze and report cost and utilization of services, data management services, HEDIS reporting, fraud and abuse services, claims editing software, and reimbursement systems audits. EXPANSION AND DIVESTITURE OF OPERATIONS United continually evaluates expansion opportunities and often considers whether to divest or stop offering certain of its businesses or products. Expansion opportunities may include acquiring specialized care services programs or insurance and health plan operations. United also devotes significant attention to developing new products and techniques for managing health care costs, measuring the outcomes and efficiency of health care delivered, and coordinating and managing health care delivery systems. As part of its expansion efforts, in 1998 the Company earmarked $35 million from the Company's corporate usable cash reserves to invest in and help develop small but promising ventures. During 1998, the Company completed several acquisitions and also sold or terminated certain lines of business and ceased offering some products, all as part of its ongoing emphasis on its strategic focus. If the Company were to make numerous acquisitions, it may affect its ability to integrate and manage its overall business effectively. Integration activities relating to acquisitions may increase costs, affect membership, affect revenue and earnings growth and adversely affect United's financial results. GOVERNMENT REGULATION United's primary business, offering health care coverage and health care management services, is heavily regulated at both the federal and state level. United believes it complies in all material respects with the various federal and state regulations that apply to its current operations. To maintain compliance, United or a subsidiary may make occasional changes in its services, products, organizational or capital structure, or marketing methods. Government regulation of health care coverage products and services is a changing area of law that varies from jurisdiction to jurisdiction. Regulatory agencies generally have broad discretion to issue regulations and interpret and enforce laws and rules. Changes in applicable laws and regulations are continually being considered, and the interpretation of existing laws and rules also may change periodically. These regulatory revisions could affect United's operations and financial results. Certain proposed changes in Medicare and Medicaid programs may improve opportunities to enroll people under products developed for the senior populations. Other proposed changes may limit available reimbursement and increase competition in those programs, with adverse effects on United's financial results. Also, it may be more difficult for United to control medical costs if federal and state bodies continue to consider and enact significant and sometimes onerous managed care laws and regulations. Examples of such laws are medical malpractice liability laws for health plans; mandates requiring health plans to offer point-of-service plans and other benefits such as direct access and formulary restrictions; limits on contractual terms with providers, including termination provisions; implementation of a mandatory third party review process for certain coverage denials and other laws and limits on utilization management. HIPPAA. The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") may represent the most significant federal reform of employee benefits law since the enactment of the Employee Retirement Income Security Act ("ERISA") in 1974. HIPAA's federal standards apply to both the group and individual health insurance markets, including self-insured employee benefit plans. Some of HIPAA's significant provisions include guarantees of the availability of health insurance for certain employees and individuals; limits on the use of preexisting condition exclusions; prohibitions against discriminating on the basis of health status; and requirements which make it easier to continue coverage in cases where an 6 employee is terminated or changes employers. While United currently believes that it is in material compliance with the requirements of HIPAA, the law is far reaching and complex, and the federal agencies involved in the enforcement of HIPAA's provisions have been slow to provide guidance regarding HIPAA's requirements in the form of final rules and regulations. Consequently, United's efforts to measure, monitor, and adjust its business practices to comply with HIPAA are ongoing. Further, significant enforcement responsibilities for HIPAA's provisions have been given to the states. It is likely that United will encounter different interpretations of HIPAA's provisions in the different states as well as varying enforcement philosophies which may inhibit United's ability to standardize its products and services across state lines. Ultimately, under HIPAA and other state laws, cost control through provider contracting and coordinating care may become more important, and United believes its experience in these areas will allow it to compete effectively. FRAUD AND ABUSE. Health care fraud and abuse have become a top priority for the nation's law enforcement entities. The funding of such law enforcement efforts has increased dramatically in the past few years and is expected to continue. The focus of these efforts has been directed at participants in federal government health care programs such as Medicare, Medicaid and FEHBP. United participates extensively in these programs. The regulations and contractual requirements applicable to participants in these programs are extremely complex and ever changing. In light of this environment, United has re-emphasized its regulatory compliance efforts for these programs; however, the programs are subject to highly technical rules. When combined with law enforcement intolerance for any level of noncompliance, these rules mean that compliance efforts in this arena continue to be challenging. AUDITS AND INVESTIGATIONS. United also is subject to governmental audits, investigations and enforcement actions. These include possible government actions relating to ERISA, which regulates insured and self-insured health coverage plans offered by employers and United's services to such plans and employers; FEHBP; federal and state fraud and abuse laws; state insurance or licensing laws; laws relating to utilization management and the delivery of health care; and laws relating to Medicare, including ACR development, special payment status, payments for emergency room visits, and various other areas. Any such government actions could result in assessment of damages, civil or criminal fines or penalties, or other sanctions, including exclusion from participation in government programs. United is currently involved in various government investigations, audits and reviews, some of which are under FEHBP, ERISA, and the authority of state departments of insurance. United does not believe the results of current audits, individually or in the aggregate, will have a material adverse effect on its financial position or results. HMOS. All of the states in which United's health plans offer HMO products regulate the activities of those health plans. Most states require periodic financial reports from entities licensed to operate as HMOs in their states and impose minimum capital or reserve requirements. Some of United's health plan and insurance subsidiaries must maintain specified capital levels to support their operations. In addition, state regulatory agencies require some United health plans and insurance subsidiaries to maintain restricted cash reserves represented by interest-bearing instruments, which are held by trustees or state regulatory agencies to ensure that each subsidiary maintains adequate financial reserves. Some state regulations allow agencies to review all contracts entered into by HMOs, including management contracts and agreements between affiliates, for reasonableness of fees charged and other provisions. United's health plans that have Medicare risk contracts are regulated by HCFA. HCFA has the right to audit health plans operating under Medicare risk contracts to determine each health plan's compliance with HCFA's contracts and regulations and the quality of care being given to the health plan's members. To enter into Medicare risk contracts, a health plan must be either federally qualified or considered a Competitive Medical Plan under HCFA's requirements. Health plans that offer a Medicare risk product also must comply with requirements established by peer review organizations ("PROs"), which are organizations under contract with HCFA to monitor the quality of health care Medicare beneficiaries receive. PRO requirements relate to quality assurance and utilization review procedures. United's health plans that have Medicare cost contracts are subject to similar regulatory requirements. In addition, these 7 health plans must file certain cost reimbursement reports with HCFA, which are subject to audit and revision. United's health plans that have Medicaid contracts are subject to federal and state regulation regarding services to be provided to Medicaid enrollees, payment for those services, and other aspects of the Medicaid program. Both Medicare and Medicaid have, or have proposed, regulations relating to fraud and abuse, physician incentive plans, and provider referrals that could affect United's operations. Many of United's health plans have contracts with FEHBP. These contracts are subject to extensive regulation, including complex rules regarding premiums charged. FEHBP is authorized to audit the rates charged retroactively and seek premium refunds or institute other sanctions against health plans that participate in the program, depending on the outcome of such audits. INSURANCE REGULATION. United's insurance subsidiaries and most of the Company's health plans are regulated by the department of insurance or equivalent agency in each state or other jurisdiction in which the entity is licensed. Regulatory authorities have extensive supervisory power regarding: licensing; the amount of reserves that must be maintained; the approval of insurance policy forms; the nature of, and limits on, insurance company investments; periodic examination of insurance company operations; the form and content of annual statements and other required reports on the financial condition of insurance companies; and the capital requirements for insurance companies. United's insurance company subsidiaries must file periodic statutory financial statements in each jurisdiction in which they are licensed. Additionally, these companies are periodically examined by the insurance departments or equivalent agencies of the jurisdictions in which they are licensed to do business. INSURANCE HOLDING COMPANY REGULATIONS. Many of United's health plans and each of United's insurance subsidiaries are regulated under state insurance holding company regulations. Insurance holding company laws and regulations generally require registration with the state department of insurance and the filing of certain reports that describe capital structure, ownership, financial condition, certain intercompany transactions and general business operations. Various notice, reporting and pre-approval requirements generally apply to transactions between companies within an insurance holding company system, depending on the size and nature of the transactions. Some state insurance holding company laws and regulations require prior regulatory approval or, in certain circumstances, prior notice of acquisitions, and certain material intercompany transfers of assets, as well as certain transactions between the regulated companies and their parent holding companies or affiliates. TPAS. Certain subsidiaries of United also are licensed as third-party administrators ("TPAs") where required. TPA regulations differ greatly from state to state, but generally contain certain required administrative procedures, periodic reporting obligations and minimum financial requirements. PPOS. Some United subsidiaries or products may be subject to PPO regulation in a particular state. PPO regulations generally contain network, contracting, financial and reporting requirements, which vary from state to state. UTILIZATION REVIEW REGULATIONS. Many states have enacted laws and/or adopted regulations governing utilization review activities, and these laws may apply to some United operations. Generally, these laws and regulations set specific standards for delivery of services, confidentiality, staffing and policies and procedures of private review entities, including the credentials required of personnel. MCOS. Many states have enacted laws that allow self-insured employers and/or insurance carriers to use a state-certified managed care organization ("MCO") to apply medical management and other managed care techniques to the medical benefit portion of workers' compensation. United's subsidiaries generally have sought MCO certification in states where it is available and where they market managed care workers compensation products. MCO laws differ significantly from state to state, but generally address network and utilization review activities. ERISA. ERISA regulates how goods and services are provided to or through certain types of employee health benefit plans. ERISA is a complex set of laws and regulations that is subject to periodic 8 interpretation by the United States Department of Labor. ERISA places controls on how United's business units may do business with employers covered by ERISA, particularly employers that maintain self-funded plans. The Department of Labor has an ongoing ERISA enforcement program, which may result in additional constraints on how ERISA-governed benefit plans conduct their activities. There recently have been legislative attempts to limit ERISA's preemptive effect on state laws. Such limitations could increase United's liability exposure under state law-based suits relating to employee health benefits offered by United's health plans and specialty businesses and permit greater state regulation of other aspects of those businesses' operations. YEAR 2000 ACTIVITIES Our business depends significantly on effective information systems, and we have many different information systems for our various businesses. Our information systems require ongoing enhancements to keep pace with the continuing changes in information technology, evolving industry standards, and customer preferences. We have been modifying our computer systems to accommodate the Year 2000. The Year 2000 problem exists throughout the global marketplace, as many computer systems and applications were developed to recognize the year as a two-digit number, with the digits "00" being recognized as the year 1900. Starting in 1995, our formal Year 2000 Project Office began implementing a remediation plan to ensure that critical information systems applications, end-user developed application tools, and critical business interfaces remain intact, and can function properly through the century change. We are on schedule to complete, test, and certify our Year 2000 remediation efforts by September 30, 1999. A more detailed description and current status of our Year 2000 activities follows. TECHNICAL INFRASTRUCTURE MAINFRAME TECHNOLOGY. In conjunction with our two vendors that provide support for our data center operations, we have completed, tested and certified 99% of our remediation efforts for the hardware, operating system and supporting software remediation efforts on our two primary mainframe computer systems. In addition, we are in the process of reviewing some of our smaller mainframe systems and making modifications as necessary. We expect to be 100% complete with all mainframe hardware and software technology Year 2000 modifications by March 31, 1999. We also have installed separate test environments (both mainframe and distributed) to test our business applications in a simulated Year 2000 environment. DESKTOP HARDWARE & SOFTWARE. We have inventoried all of our desktop hardware and software--over 40,000 computing devices of multiple makes and models. All non-compliant desktop hardware and software have been identified and are being modified or replaced with compliant systems by September 30, 1999. TELECOMMUNICATIONS. We have inventoried all of our telecommunication systems--more than 28,000 telecommunication devices, including traffic routers and phone switches. We are using two outside vendors to assist us in modifying or replacing non-compliant telecommunication systems. As of December 31, 1998, we were approximately 75% Year 2000 compliant with our data and voice networks. We expect all our telecommunication networks and devices will be Year 2000 compliant by September 30, 1999. BUSINESS APPLICATIONS SOFTWARE APPLICATIONS. We use 500 different software applications that include over 80 million lines of computer code. We have surveyed our software applications and have identified systems that will not be used after December 31, 1999, and systems that will be modified for Year 2000 compliance. We have determined that 36% of our software applications will not be used after December 31, 1999 due to conversions, consolidations and software replacements. Of the remaining applications, over 90% have been made Year 2000 compliant, tested and certified or are scheduled to be certified for compliance. The 9 balance of the applications are yet to be tested. We expect all critical Year 2000 software modifications to be completed by March 31, 1999, with further testing and certification during the remainder of 1999. END-USER DEVELOPED APPLICATIONS. End-user developed applications are analysis tools that have been internally developed by individual employees or operating segments primarily running on personal computers or client servers. The Year 2000 Project Office has continuously communicated with all employees explaining the risks of non-compliant applications and provided tools and techniques to make them compliant. We have identified and are tracking and assessing Year 2000 compliance issues with respect to all potentially critical end-user applications. OTHER YEAR 2000 MATTERS NON-INFORMATION TECHNOLOGY SYSTEMS. We have approximately 300 owned or leased facilities throughout the world. We have contacted all of our facility managers regarding Year 2000 compliance issues. In addition, we have contracted with a real estate management company to assist in our Year 2000 compliance efforts. All facilities are scheduled to be Year 2000 compliant by September 1, 1999. DEPENDENCE ON THIRD PARTIES. We have a contractual relationship with approximately 300,000 different medical providers and more than 92,000 vendors. Approximately 2,000 vendors have been identified as critical business partners and suppliers. We are currently in communication with these critical business partners to analyze their Year 2000 compliance efforts. We expect to complete our analysis of critical vendor readiness and identify alternative vendors, where necessary, by July 31, 1999. We will not be individually contacting all of the 300,000 medical providers we conduct business with regarding Year 2000 compliance issues. However, we will be testing and verifying the electronic collection of data with these providers through our EDI (electronic data interface) clearinghouse vendors. COSTS OF YEAR 2000 COMPLIANCE. The projected costs of our Year 2000 compliance efforts and the date on which we plan to complete the necessary Year 2000 remediation efforts are based on management's best estimates, which were derived utilizing various assumptions of future events. However, there can be no guarantee that these estimates will be achieved and actual results could differ significantly from our current plans. Specific factors that might cause significant differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct the relevant computer codes, and the ability of our significant vendors, providers, customers and others with whom we conduct business to identify and resolve their own Year 2000 issues. Costs associated with modifying internal use software for Year 2000 compliance are charged to expense as incurred. Purchases of hardware or software that replace existing hardware or software that is not Year 2000 compliant are capitalized and amortized over their useful lives. As of December 31, 1998, our historical and projected costs to complete our Year 2000 remediation plan are as follows (in millions):
COST INCURRED TO DATE PROJECTED COSTS ---------------------------- ---------------------------- YEAR RESOURCES AMORTIZATION RESOURCES AMORTIZATION TOTAL - ---------------------------------- ----------- --------------- ----------- --------------- --------- 1996.............................. $ 1 $ -- $ -- $ -- $ 1 1997.............................. 12 -- -- -- 12 1998.............................. 18 -- 18 1999.............................. -- -- 18 7 25 2000.............................. -- -- 3 9 12 2001.............................. -- -- -- 9 9 2002.............................. -- -- -- 2 2 ----- ----- ----- ----- --------- $ 31 $ -- $ 21 $ 27 $ 79 ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
BUSINESS RISKS OF NON-COMPLIANT SYSTEMS. Although we are committed to completing and testing our remediation plan well in advance of the Year 2000, there are risks if we do not meet our objectives by December 31, 1999. Operationally, the most severe risk is business interruption. Specific examples of 10 situations that could cause business interruption include, but are not limited to: 1) computer hardware or application software processing errors or failures, 2) facilities or infrastructure failures, or 3) critical outside providers, suppliers, or customers who may not be Year 2000 compliant. Depending on the extent and duration of business interruption resulting from non-compliant Year 2000 systems, such interruption may have a material adverse effect on our results of operations, liquidity, and financial condition. CONTINGENCY PLANS. Each area of our Year 2000 compliance effort is currently developing contingency plans to mitigate the risk of failure, and to provide for a speedy recovery from possible failures associated with the century change. The contingency plans detail strategies to implement in 1999 to prepare for the century rollover, and actions to execute if problems arise. The target date for completion of the initial contingency plans is April 1, 1999. Contingency plans will be final by July 31, 1999. MARKETING The Company's marketing strategy is defined and coordinated by each functional business unit's dedicated marketing staff. Within these business units, primary marketing responsibility generally resides with a marketing director and a direct sales force. In addition, several of the business units rely upon independent insurance agents and brokers to sell some of the Company's health plan, insurance, self-funded and specialized care products. Marketing efforts also include public relations efforts and advertising programs that may use television, radio, newspapers, magazines, billboards, direct mail and telemarketing. COMPETITION The managed health care industry evolved primarily because of health care buyers' concerns about rising health care costs. The industry has brought greater cost effectiveness and accountability into the health care system through managed care products, including health plans, PPOs, and specialized services such as mental health or pharmacy benefit programs. The industry also has helped increase the accessibility and quality of health care services. United operates in a highly competitive environment. Significant consolidation has occurred within the managed care industry, creating stronger and more diverse competitors. At the same time, new competitors have entered the marketplace, which also may increase competitive pressures. In certain areas, current competition may limit United's ability to price its products at levels United believes appropriate. These competitive factors could adversely affect United's financial results. As managed health care penetration of the health care market and the effects of health care reforms continue to increase nationwide, the Company expects it may become increasingly difficult to obtain new contracts for its health plans with large employer and government groups. The Company also expects competition for smaller employer groups to intensify. In addition, employers increasingly may choose to self-insure the health care risk, while seeking benefit administration and utilization review services from third parties to help them control and report health care costs. The Company's business lines compete for group and individual membership with other health insurance plans, Blue Cross/Blue Shield plans, health plans, HMOs, PPOs, third party administrators, health care management companies, and employers or groups that elect to self-insure. The Company also faces competition from hospitals, health care facilities, and other health care providers who have formed their own networks to contract directly with employer groups and other prospective customers for the delivery of health care services. The number and strength of the Company's competitors varies for each particular business unit and geographic area. The Company believes that the principal competitive factors affecting the Company and its products include price, the level and quality of products and service, provider network capabilities, market share, the offering of innovative products, product distribution systems, efficient administration operations, financial strength and marketplace reputation. The Company currently believes that its competitive strengths include the breadth of its product line, its geographic scope and diversity, the strength of its underwriting and pricing practices and staff, its significant market position in certain geographic areas, the strength of its distribution network, its financial 11 strength, its generally large provider networks that provide more member choice, its point-of-service products and experience, and its generally favorable marketplace reputation. In some markets, however, the Company may be at a disadvantage because of competitors with larger market shares, broader networks, narrower networks (which may allow greater cost control and lower prices) or a more-established marketplace name and reputation. The Company believes its recent operational realignment will allow the individual business units to more effectively compete in their respective markets. EMPLOYEES As of December 31, 1998, the Company employed approximately 29,226 individuals. As of December 31, 1998, approximately 239 of the Company's employees were represented by a union. The Company believes its employee relations are good. CAUTIONARY STATEMENTS The statements contained in this Form 10-K, and the Management's Discussion and Analysis of Financial Condition and Results of Operation and other sections of the Company's annual report to shareholders incorporated by reference in this document, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). When used in this Form 10-K 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 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 our 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, we are not undertaking to address or update each factor in future filings or communications regarding our business or results, and are 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 the Company's past, as well as current, forward-looking statements about future results. The Company's actual results in the future may differ materially from those expressed in prior communications. HEALTH CARE COSTS. We use a large portion of our revenue to pay the costs of health care services or supplies delivered to our members. Total health care costs we incur are affected by the number of individual services rendered and the cost of each service. Much of our premium revenue is priced before services are delivered and the related costs are incurred, usually on a prospective annual basis. Although we try to base the premiums we charge in part on our estimate of future health care costs over the fixed premium period, competition, and regulations and other circumstances may limit our ability to fully base premiums on estimated costs. In addition, many factors may and often do cause actual health care costs to exceed what was estimated and reflected in premiums. These factors may include increased use 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 earnings we report for any particular quarter include estimates of covered services incurred by our enrollees during that period for claims that have not been received or processed. Because these are estimates, our earnings may be adjusted later to reflect the actual costs. Relatively insignificant changes in the medical care ratio, because of the narrow margins of our health plan business, can create significant changes in our earnings. Our medical care ratio has generally increased over the past several fiscal periods. We are addressing the medical care ratio by altering benefit designs, recontracting with providers, and aggressively increasing 12 both our contemporaneous and retrospective claim management activities. Our inability to implement these changes successfully could lead to further increases in our medical care ratio. In addition, our operating results may be affected by the seasonal changes in the level of health care use during the calendar year. Although there are no assurances, per member medical costs generally have been higher in the first half than in the second half of each year. INDUSTRY FACTORS. The managed care industry receives significant negative publicity. This publicity has been accompanied by increased legislative activity, regulation and review of industry practices. These factors may adversely affect our ability to market our products or services, may require us to change our products and services, and may increase the regulatory burdens under which we operate, further increasing the costs of doing business and adversely affecting profitability. COMPETITION. In many of our geographic or product markets, we compete with a number of other entities, some of which may have certain characteristics or capabilities that give them a competitive advantage. We believe the barriers to entry in these markets are not substantial, so the addition of new competitors can occur relatively easily, and consumers enjoy significant flexibility in moving to new managed care providers. Certain Company customers may decide to perform functions or services we provide for themselves, which would decrease our revenues. Certain Company providers may decide to market products and services to our customers in competition with us. In addition, significant merger and acquisition activity has occurred in the industry in which we operate as well as in industries that act as suppliers to us, such as the hospital, physician, pharmaceutical and medical device industries. To the extent that there is strong competition or that competition intensifies in any market, our ability to retain or increase customers or providers, or maintain or increase our revenue growth, pricing flexibility, control over medical cost trends and our marketing expenses may be adversely affected. AARP CONTRACT. Under our long-term contract with the American Association of Retired Persons ("AARP"), we provide Medicare supplemental, hospital indemnity health insurance and other products to AARP members. As a result of the agreement, the number of members we serve, products we offer, and services we provide has grown significantly. Our portion of the AARP's insurance program represents approximately $3.5 billion in annual net premium revenue from approximately 4 million AARP members. The success of the AARP arrangement will depend, in part, on our ability to service these new members, develop additional products and services, price the products and services competitively, and respond effectively to federal and state regulatory changes. Additionally, events that adversely affect the AARP could have an adverse effect on the success of our arrangement with the AARP. MEDICARE OPERATIONS. In the second quarter of 1998, we experienced a significant rise in the medical care ratio for our Medicare operations. The increase in medical costs was primarily due to the business growth in new markets with higher and more volatile medical cost trends, coupled with lower reimbursement rates. In response, we announced in October 1998 our decision to withdraw Medicare product offerings from 86 of the 206 counties we currently serve. The decision, effective January 1, 1999, will affect approximately 60,000, or 13%, of current Medicare members. As a consequence of this withdrawal, we are precluded from re-entering these counties with Medicare product offerings until 5 years after the effective date. We will continue to offer Medicare products in strong and economically viable markets. However, our ability to improve the financial results of all of our Medicare operations will depend on a number of factors, including future premium increases, growth in markets where we have achieved sufficient size to operate efficiently, benefit design, provider contracting, and other factors. There can be no assurance that we will be able to successfully prevent future losses on our Medicare operations. REALIGNMENT OF OPERATIONS. We recognized a charge to earnings in the second quarter of 1998 for our realignment. In January 1998, we initiated a significant realignment of our operations into six business lines. As part of the realignment, we began shifting resources and activities to more directly support the operations of our businesses. Although we do not expect our realignment efforts to negatively affect our product offerings, provider relations, billing and collection disciplines, claims processing and payment 13 activities, or other business functions, there can be no assurance that such negative effects may not occur. Our second quarter charge to earnings for costs associated with the realignment was $725 million. Although we believe such charges are adequate, there can be no assurance that the costs associated with our realignment efforts will not exceed the charges we have taken for such costs. GOVERNMENT PROGRAMS AND REGULATION. Our business is heavily regulated on a federal, state and local level. The laws and rules governing our business and interpretations of those laws and rules are subject to frequent change. Broad latitude is given to the agencies administering those regulations. Existing or future laws and rules could force us to change how we do business, restrict revenue and enrollment growth, increase its health care and administrative costs and capital requirements, and increase our liability for medical malpractice or other actions. We must obtain and maintain regulatory approvals to market many of our products. Delays in obtaining or failure to obtain or maintain these approvals could adversely affect our revenue or the number of our members, or could increase our costs. A significant portion of our 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, generally are subject to frequent change, including changes that may reduce the number of persons enrolled or eligible, reduce the amount of reimbursement or payment levels, or may reduce or increase our administrative or health care costs under such programs. Such changes have adversely affected our results and willingness to participate in such programs in the past and may also do so in the future. The Company also is subject to various governmental reviews, audits and investigations. Such oversight 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 damage our reputation in various markets and make it more difficult for us to sell our products and services. The National Association of Insurance Commissioners (the "NAIC") is expected to adopt rules which, if implemented by the states, will require certain capitalization levels for health care coverage provided by insurance companies, HMOs and other risk bearing health care entities. The requirements would take the form of risk-based capital rules. Currently, similar risk-based capital rules apply generally to insurance companies. Depending on the nature and extent of the new minimum capitalization requirements ultimately implemented, there could be an increase in the capital required for certain of our subsidiaries and there may be some potential for disparate treatment of competing products. Federal solvency regulation of companies providing Medicare-related benefit programs may also be applied. PROVIDER RELATIONS. One of the significant techniques we use to manage health care costs and utilization and monitor the quality of care being delivered is contracting with physicians, hospitals and other providers. Because our health plans are geographically diverse and most of those health plans contract with a large number of providers, we currently believe our exposure to provider relations issues is limited. In any particular market, however, providers could refuse to contract, demand higher payments, or take other actions that could result in higher health care costs, less desirable products for customer 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. If these providers refuse to contract with us, use their market position to negotiate favorable contracts, or place us at a competitive disadvantage those activities could adversely affect our ability to market products or to be profitable in those areas. LITIGATION AND INSURANCE. We may be a party to a variety of legal actions that affect any business, such as 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 our business, we are subject to a variety of legal actions relating to our business operations. These could include: claims relating to the denial of health care benefits; medical malpractice actions; provider disputes over 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 14 calculations; and claims relating to customer audits and contract performance. Recent court decisions and legislative activity may increase our exposure for any of these types of claims. In some cases, substantial non-economic or punitive damages may be sought. We currently have insurance coverage for some of these potential liabilities. Other potential liabilities may not be covered by insurance, 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. Our business depends significantly on effective information systems, and we have many different information systems for its various businesses. Our information systems require an ongoing commitment of resources to maintain and enhance existing systems and develop new systems in order to keep pace with continuing changes in information processing technology, evolving industry standards, and changing customer preferences. In addition, we may from time to time obtain significant portions of our systems-related or other services or facilities from independent third parties, which may make our operations vulnerable to such third parties' failure to perform adequately. As a result of our acquisition activities, we have acquired additional systems and have been taking steps to reduce the number of systems and have upgraded and expanded our information systems capabilities. Failure to maintain effective and efficient information systems could cause loss of existing customers, difficulty in attracting new customers, customer and provider disputes, regulatory problems, increases in administrative expenses or other adverse consequences. THE YEAR 2000. We are in the process of modifying our computer systems to accommodate the Year 2000. We currently expect to complete this modification enough in advance of the Year 2000 to avoid adverse impacts on our operations. We are expensing the costs incurred to make these modifications. Our operations could be adversely affected if we were unable to complete our Year 2000 modifications in a timely manner or if other companies with which we do business fail to complete their Year 2000 modifications in a timely manner. ADMINISTRATIVE AND MANAGEMENT. Efficient and cost-effective administration of our operations is essential to our profitability and competitive positioning. While we attempt to effectively manage such expenses, staff-related and other administrative expenses may rise from time to time due to business or product start-ups or expansions, growth or changes in business, acquisitions, regulatory requirements or other reasons. These expense increases are not clearly predictable and may adversely affect results. We believe we currently have an experienced, capable management and technical staff. The market for management and technical personnel, including information systems professionals, in the health care industry is very competitive. Loss of certain managers or a number of such managers or technical staff could adversely affect our ability to administer and manage our business. MARKETING. We market our products and services through both employed sales people and independent sales agents. Although we have many sales employees and agents, the departure of certain key sales employees or agents or a large subset of such individuals could impair our ability to retain existing customers and members. In addition, certain of our 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 our health plans or other business units may not have obtained or maintained, or may not desire or be able to obtain or maintain, such rating accreditation or certification, which could adversely affect our ability to obtain or retain business with these customers. ACQUISITIONS AND DISPOSITIONS. The Company has made several large acquisitions in recent years and has an active ongoing acquisition and disposition program under which it may engage in transactions involving the acquisition or disposition of assets, products or businesses, some or all of which may be material. These acquisitions may entail certain risks and uncertainties and may affect ongoing business operations because of unknown liabilities, unforeseen administrative needs or increased efforts to integrate the acquired operations. Failure to identify liabilities, anticipate additional administrative needs or 15 effectively integrate acquired operations could result in reduced revenues, increased administrative and other costs, or customer confusion or dissatisfaction. DATA AND PROPRIETARY INFORMATION. Many of the products that are part of our knowledge and information services business depend significantly on the integrity of the data on which they are based. If the information contained in our databases were found or perceived to be inaccurate, or if such information were generally perceived to be unreliable, commercial acceptance of our database-related products would be adversely and materially affected. Furthermore, the use by our knowledge and information-related business of patient data is regulated at federal, state, and local levels. These laws and rules are changed frequently by legislation or administrative interpretation. These restrictions could adversely affect revenues from these products and, more generally, affect our business, financial condition and results of operations. The success of our knowledge and information services business also depends significantly on our ability to maintain proprietary rights to our products. We rely on our agreements with customers, confidentiality agreements with employees, and our trade secrets, copyrights and patents to protect our proprietary rights. We cannot assure that these legal protections and precautions will prevent misappropriation of our proprietary information. In addition, substantial litigation regarding intellectual property rights exists in the software industry, and we expect software products to be increasingly subject to third-party infringement claims as the number of products and competitors in this industry segment grows. Such litigation could have an adverse affect on the ability of our knowledge and information-related business to market and sell its products and on our business, financial condition and results of operations. STOCK MARKET. The market prices of the securities of the Company and certain of the publicly-held companies in the industry in which we operate 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. We cannot assure the level or stability of our share price at any time, or the impact of the foregoing or any other factors may have on our share price. 16 EXECUTIVE OFFICERS OF THE REGISTRANT
FIRST ELECTED AS NAME AGE POSITION AT 12/31/98 EXECUTIVE OFFICER - -------------------------------- --- -------------------------------------------------------- ----------------- President, Chairman, Chief Executive Officer and William W. McGuire, M.D......... 50 Director 1988 Stephen J. Hemsley.............. 46 Chief Operating Officer 1997 Arnold H. Kaplan................ 59 Chief Financial Officer 1998 David J. Lubben................. 47 General Counsel and Secretary 1996 Lois E. Quam.................... 37 CEO, Ovations 1998 Jeannine R. Rivet............... 50 CEO, UnitedHealthcare 1998 R. Channing Wheeler............. 47 CEO, Uniprise 1998
The Company's Board of Directors elects executive officers annually. The Company's executive officers serve until their successors are duly elected and qualified. Dr. McGuire became a director of UnitedHealth Group in February 1989 and the Chairman of the Board in May 1991. Dr. McGuire became an Executive Vice President of the Company in November 1988, was appointed the Company's Chief Operating Officer in May 1989, the Company's President in November 1989, and the Company's Chief Executive Officer in February 1991. Mr. Hemsley joined UnitedHealth Group in May 1997 and became Chief Operating Officer in September 1998. Prior to that time, he served as Senior Executive Vice President of the Company. Prior to joining the Company, Mr. Hemsley was with Arthur Andersen LLP where he served since 1974 in various capacities, including Chief Financial Officer and Managing Partner, Strategy and Planning. Mr. Kaplan joined UnitedHealth Group in July 1998 as Chief Financial Officer. Prior to joining the Company, Mr. Kaplan was associated with Air Products & Chemical where he served since 1976 in various capacities, including Senior Vice President, Chief Financial Officer, Vice President Purchasing and Controller. Mr. Lubben became UnitedHealth Group's General Counsel and Secretary in October 1996. Prior to joining the Company, he was a partner in the law firm of Dorsey & Whitney LLP. Mr. Lubben first became associated with Dorsey & Whitney in 1977. Ms. Quam joined UnitedHealth Group in 1989 and became the CEO, Ovations in April 1998. Prior to April 1998, Ms. Quam served in various capacities including CEO, AARP Division, Vice President, Public Sector Services and Director, Research. Prior to joining the Company, Ms. Quam served as Research Director from 1987-1989 for Partners National Health Plan. Ms. Rivet joined UnitedHealth Group in June 1990. Ms. Rivet was named CEO, UnitedHealthcare in April 1998 and has served as Executive Vice President of UnitedHealthcare since October 1994. She served as the Company's Senior Vice President, Health Plan Operations from September 1993 to September 1994 and the Company's Vice President of Health Service Operations from June 1990 to September 1993. Mr. Wheeler joined UnitedHealth Group in March 1995 and became CEO, Uniprise in May 1998. Prior to May 1998, he served in various capacities of the Company, including CEO, Northeast HealthPlans. ITEM 2. PROPERTIES As of December 31, 1998, the Company leased approximately 1.72 million aggregate square feet of space for its principal administrative offices in the greater Minneapolis/St. Paul, Minnesota area and in Hartford, Connecticut. Excluding these areas, as of December 31, 1998, the Company leased approximately 6.38 million aggregate square feet in the United States, and approximately 97,100 aggregate square 17 feet outside of the United States (including Puerto Rico). Such space accommodates health plans, managed care services, specialty programs or satellite administrative offices. The Company's leases expire at various dates through May 31, 2026. As of December 31, 1998, the Company owned approximately 310,700 aggregate square feet of space for administrative offices in various states and its staff model clinic operations in Florida. ITEM 3. LEGAL PROCEEDINGS Because of the nature of its business, United is subject to suits relating to the failure to provide or pay for health care or other benefits, poor outcomes for care delivered or arranged under United's programs, nonacceptance or termination of providers, failure to return withheld amounts from provider compensation, failure of a self-funded plan serviced by United to pay benefits, improper copayment calculations and other forms of legal actions. Some of these suits may include claims for substantial non-economic or punitive damages. United does not believe that any such actions, or any other types of actions, currently threatened or pending will, individually or in the aggregate, have a material adverse effect on United's financial position or results of operations. However, the likelihood or outcome of current or future suits cannot be accurately predicted, and they could adversely affect United's financial results. Six suits assert claims under the United States securities laws against United and certain of its current and former officers and directors. The plaintiffs are stockholders of United who purport to sue on behalf of a class of purchasers of common shares of United during the period February 12, 1998 through August 5, 1998 (the "Class Period"). Each complaint was filed in the United States District Court for the District of Minnesota. Each of the six actions claims violations of Sections 10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5. In substance, the complaints allege that United made materially false or misleading statements about the profitability and performance of the Company's Medicare business during the Class Period. Two of the complaints also allege that the Company made materially false statements about its medical costs and the expenses related to the Company's realignment. The complaints also allege that the statements were made with the intention of deceiving members of the investing public and with the intention that the price of United shares would rise, making it possible for insiders at the Company to profit by selling shares at a time when they knew the Company's true financial condition, but the investing public did not. The complaints allege that once the Company's true financial condition was revealed on August 6, 1998, the price of United common shares fell from a closing price of $52 7/8 on August 5, 1998, to a closing price of $37 7/8 on August 6, 1998. The complaints seek compensatory damages in unspecified amounts. On January 19, 1999, we received a consolidated amended complaint (IN RE UNITED HEALTHCARE CORPORATION SECURITIES LITIGATION, No. 98-1888 in the United States District Court for the District of Minnesota) for the six suits which essentially restates the allegations made in the earlier complaints. On March 22, 1999, two actions were filed in the United States District Court for the District of Minnesota by two pension funds against United, certain current and former officers and directors, and other individuals yet to be identified. The pension funds wish to "opt-out" of the aforementioned purported class action suits. These individual actions essentially restate the allegations made in the purported class actions and claim violations of Sections 10(b), 18(a) and 20 of the Securities Exchange Act. In addition, both actions assert a claim of negligent misrepresentation and securities claims under state law. In the aggregate, the plaintiff pension funds seek compensatory damages totaling approximately $12.1 million. The defendants intend to defend these actions vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS STOCK LISTING The Company's common stock is traded on the New York Stock Exchange under the symbol UNH. The following table shows the range of high and low sales prices for the Company stock as reported on the New York Stock Exchange Composite Tape for the calendar periods indicated through February 26, 1999. These prices do not include commissions or fees associated with the purchase or sale of this security:
HIGH LOW - ------------------------------------------------------------------------------ 1999 First Quarter 1999 Through February 26, 1999 $ 49.50 $39.4375 - ------------------------------------------------------------------------------ 1988 First Quarter $66.8125 $46.5625 Second Quarter $73.9375 $ 61.25 Third Quarter $ 66.50 $29.5625 Fourth Quarter $ 50.625 $ 33.375 - ------------------------------------------------------------------------------ 1997 First Quarter $ 55.25 $ 42.625 Second Quarter $ 56.75 $ 43.75 Third Quarter $ 60.125 $ 47.875 Fourth Quarter $ 54.75 $42.4375 - ------------------------------------------------------------------------------
AS OF FEBRUARY 26, 1999, THE COMPANY HAD 13,111 SHAREHOLDERS OF RECORD. DIVIDEND POLICY The Company's dividend policy, established by its board of directors in August 1990, requires the board to review the Company's audited consolidated financial statements following the end of each fiscal year and decide whether it is advisable to declare a dividend on the outstanding shares of common stock. Shareholders of record on April 3, 1997, received an annual dividend for 1997 of $0.03 per share, and shareholders of record on April 1, 1998, received an annual dividend for 1998 of $0.03 per share. On February 16, 1999, the Company's board of directors approved an annual dividend for 1999 of $0.03 per share to holders of the Company's common stock. The dividend will be paid on April 15, 1999, to shareholders of record at the close of business on April 1, 1999. II-1 ITEM 6. SELECTED FINANCIAL DATA FINANCIAL HIGHLIGHTS UNITEDHEALTH GROUP
For the Year Ended December 31, (in millions, except per share data) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ CONSOLIDATED OPERATING RESULTS Revenues $17,355 $11,794 $10,074 $5,671 $3,769 Earnings (Loss) From Operations $ (42)(1) $ 742 $ 581(2) $ 461(3) $ 506 - ------------------------------------------------------------------------------------------------------------ Net Earnings (Loss) Before Extraordinary Gain $ (166) $ 460 $ 356 $ 286 $ 288(4) Extraordinary Gain on Sale of Subsidiary, net of income tax effects -- -- -- -- 1,377(5) - ------------------------------------------------------------------------------------------------------------ Net Earnings (Loss) $ (166)(1) $ 460 $ 356(2) $ 286(3) $1,665 Convertible Preferred Stock Dividends (28) (29) (29) (7) -- Preferred Stock Redemption Premium (20) -- -- -- -- - ------------------------------------------------------------------------------------------------------------ Net Earnings (Loss) Applicable to Common Shareholders $ (214)(1) $ 431 $ 327 $ 279 $1,665 - ------------------------------------------------------------------------------------------------------------ Basic Net Earnings (Loss) per Common Share Basic Net Earnings (Loss) per Common Share Before Extraordinary Gain $ (1.12) $ 2.30 $ 1.80 $ 1.61 $ 1.69 Extraordinary Gain -- -- -- -- 8.06 - ------------------------------------------------------------------------------------------------------------ Basic Net Earnings (Loss) per Common Share $ (1.12) $ 2.30 $ 1.80 $ 1.61 $ 9.75 - ------------------------------------------------------------------------------------------------------------ Diluted Net Earnings (Loss) per Common Share Diluted Net Earnings (Loss) per Common Share Before Extraordinary Gain $ (1.12)(1) $ 2.26 $ 1.76(2) $ 1.57(3) $ 1.64(4) Extraordinary Gain -- -- -- -- 7.86(5) - ------------------------------------------------------------------------------------------------------------ Diluted Net Earnings (Loss) per Common Share $ (1.12)(1) $ 2.26 $ 1.76(2) $ 1.57(3) $ 9.50 - ------------------------------------------------------------------------------------------------------------ Basic Weighted-Average Number of Common Shares Outstanding 191 187 182 174 171 Weighted-Average Number of Common Shares Outstanding, Assuming Dilution 191 191 186 177 175 - ------------------------------------------------------------------------------------------------------------ Dividends Per Share Common Stock $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.03 Convertible Preferred Stock $ 56.03 $ 57.50 $ 57.50 $14.38 $ -- - ------------------------------------------------------------------------------------------------------------ CONSOLIDATED FINANCIAL CONDITION (As of December 31) Cash and Investments $ 4,424 $ 4,041 $ 3,453 $3,078 $2,769 Total Assets $ 9,701 $ 7,623 $ 6,997 $6,161 $3,489 Debt $ 708(6) $ -- $ -- $ -- $ -- Convertible Preferred Stock $ -- $ 500 $ 500 $ 500 $ -- Shareholders' Equity $ 4,038 $ 4,534 $ 3,823 $3,188 $2,795 - ------------------------------------------------------------------------------------------------------------
Financial Highlights should be read together with the accompanying Financial Review and Consolidated Financial Statements and Notes. (1) Excluding the operational realignment and other charges of $725 million, $175 million of charges related to contract losses associated with certain Medicare markets and other increases to commercial and Medicare medical costs payable estimates and the $20 million convertible preferred stock redemption premium from 1998 results, earnings from operations and net earnings applicable to common shareholders would have been $858 million and $509 million, or $2.62 diluted net earnings per common share. (2) Excluding the merger costs associated with the acquisition of HealthWise of America, Inc. of $15 million ($9 million after tax, or $0.05 diluted net earnings per common share) and the provision for future losses on two large 28 contracts of $45 million ($27 million after tax, or $0.15 diluted net earnings per common share), 1996 earnings from operations and net earnings would have been $641 million and $392 million, or $1.96 diluted net earnings per common share. (3) Excluding restructuring charges associated with the acquisition of The MetraHealth Companies, Inc., of $154 million ($97 million after tax, or $0.55 diluted net earnings per common share), 1995 earnings from operations and net earnings would have been $615 million and $383 million, or $2.12 diluted net earnings per common share. (4) Excluding the nonoperating merger costs associated with the acquisitions of Complete Health Services, Inc. and Ramsay-HMO, Inc., of $36 million ($22 million after tax, or $0.13 diluted net earnings per common share), 1994 earnings before extraordinary gain would have been $310 million or $1.77 diluted net earnings per common share. (5) In May 1994, the Company sold Diversified Pharmaceutical Services, Inc. for $2.3 billion in cash and recognized an extraordinary gain after transaction costs and income tax effects of $1.4 billion, or $7.86 diluted net earnings per common share. (6) During 1998, we issued notes and commercial paper aggregating $708 million, which remained outstanding at December 31, 1998. II-2 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION RESULTS OF OPERATIONS 1998 FINANCIAL PERFORMANCE HIGHLIGHTS 1998 was an important year of both challenges and successes for UnitedHealth Group. - - Excluding the effects of the unusual or nonrecurring events and transactions described below, we achieved record profits. Underlying earnings from operations, net earnings applicable to common shareholders, and diluted net earnings per common share were $858 million, $509 million and $2.62 per share, respectively, representing increases over 1997 of 16%, 18%, and 16%, respectively. - - We achieved record revenues of $17.4 billion, a 47% increase over 1997. This growth was driven primarily by same-store enrollment growth in our UnitedHealthcare business and from successful implementation of our $3.5 billion Medicare supplement insurance program with the AARP. - - Record cash flows of more than $1.0 billion were generated from operating activities, a 57% increase over 1997. - - We completed several financing initiatives to achieve a more efficient capital structure, including the redemption of our $500 million convertible preferred stock and the repurchase of 11.3 million shares of our common stock. - - We embarked on a major realignment of our operations into independent but strategically linked businesses, each focused on performance, growth and shareholder value. As a result of our evaluation of each business's strategic fit and contributions, analysis of our profitability in certain markets, and the adequacy of our medical costs payable estimates, we took actions that resulted in special operating charges of $900 million. 1998 OPERATING RESULTS OVERVIEW The following table summarizes our results for each of the last three years ended December 31 (in millions, except per share amounts).
1998(1) 1997 1996(2) - ----------------------------------------------------------------------- Earnings (Loss) From Operations $ (42) $ 742 $ 581 Net Earnings (Loss) Applicable to Common Shareholders $ (214) $ 431 $ 327 Diluted Net Earnings (Loss) per Common Share $(1.12) $2.26 $1.76 Medical Costs to Premium Revenues 87.2%(3) 84.3% 84.6% SG&A Expenses to Total Revenues 17.1% 20.0% 21.5% - -----------------------------------------------------------------------
(1) Excluding the effects of $725 million of operational realignment and other charges, $175 million of charges related to contract losses associated with certain Medicare markets and other increases to commercial and Medicare medical costs payable estimates, and the $20 million convertible preferred stock redemption premium, earnings from operations, net earnings applicable to common shareholders, and diluted net earnings per common share would have been $858 million, $509 million, and $2.62 per share, respectively. (2) Excluding the effects of a $45 million provision for future losses on two large multi-year contracts and $15 million of merger costs associated with the acquisition of HealthWise of America, Inc., earnings from operations, net earnings applicable to common shareholders, and diluted net earnings per common share would have been $641 million, $392 million, and $1.96 per share, respectively. (3)Includes $175 million of contract losses associated with certain Medicare markets and other increases to commercial and Medicare medical costs payable estimates. The company's ratio of medical costs to premium revenues for the year ended December 31, 1998, would have been 86.0% without these charges. In 1998, we reported a net loss applicable to common shareholders of $214 million, or $1.12 diluted net loss per common share. However, these results include certain large or unusual events and transactions as described below: - - In conjunction with our realignment and other initiatives, we recorded $725 million of charges to operations during the second quarter of 1998. The charges included $451 million of asset impairments and $274 million of estimated future costs associated with our initiatives, such as employee terminations; disposing of or discontinuing business units, product lines and contracts; and consolidating certain processing operations and associated real estate obligations. Although our realignment initiatives and the associated nonrecurring charges caused us to report a net loss for 1998, these actions position us to make long-term fundamental process and performance improvements. - - Our second quarter 1998 medical costs include $120 million related to contract losses and other increases to medical costs payable estimates in UnitedHealthcare's Medicare markets and $55 million related to increases to medical costs payable estimates associated with increased commercial medical costs in certain health plans. - - In conjunction with the redemption of our $500 million convertible preferred stock, we paid a $20 million redemption premium. This premium is added to 1998's net loss to arrive at net loss applicable to common shareholders. Excluding the effects of the events and transactions described above, 1998 underlying earnings from operations and diluted net earnings per common share were $858 million and $2.62 per share, respectively, representing increases of 16% over earnings from operations of $742 million and diluted net earnings per common share of $2.26 in 1997. These increases were primarily driven by improved margins in the commercial product offerings of our UnitedHealthcare business and successful integration and management of our services provided to the AARP, which began on January 1, 1998. The discussion that follows provides a more detailed analysis of our 1998, 1997 and 1996 operating results. II-3 1998 RESULTS COMPARED TO 1997 RESULTS REVENUES AND ENROLLMENT 1998 was a record year for UnitedHealth Group, with consolidated revenues of $17.4 billion, an increase of $5.6 billion, or 47%, over 1997. Our revenue growth was primarily derived from successful implementation of our $3.5 billion Medicare supplement insurance program with the AARP and same-store enrollment growth in our UnitedHealthcare business. On a year-over-year same-store basis, UnitedHealthcare's total revenues increased by $1.7 billion, or 16%, over 1997. The following table summarizes enrollment in all of our product offerings as of December 31: ENROLLMENT SUMMARY(1)
1998 1997 1996 ----------------------------- ----------------------------- ------- Amount Increase (Decrease) Amount Increase (Decrease) Amount - ---------------------------------------------------------------------------------------------------------------- Enrollment, excluding Ovations (as of December 31, in thousands) UnitedHealthcare Risk-Based: Health Plans 5,231 17% 4,475 13% 3,945 Other Network-Based and Indemnity 530 (14%) 613 (29%) 858 - ---------------------------------------------------------------------------------------------------------------- Total Commercial 5,761 13% 5,088 6% 4,803 Medicare 483 40% 345 54% 224 Medicaid 638 21% 526 0% 525 - ---------------------------------------------------------------------------------------------------------------- Total Risk-Based 6,882 15% 5,959 7% 5,552 Fee-Based: Commercial 1,725 7% 1,609 (29%) 2,279 - ---------------------------------------------------------------------------------------------------------------- Total UnitedHealthcare 8,607 14% 7,568 (3%) 7,831 - ---------------------------------------------------------------------------------------------------------------- Uniprise Risk-Based 261 (1%) 263 (9%) 288 Fee-Based 5,139 (2%) 5,226 (8%) 5,653 - ---------------------------------------------------------------------------------------------------------------- Total Uniprise 5,400 (2%) 5,489 (8%) 5,941 - ---------------------------------------------------------------------------------------------------------------- Total Enrollment, excluding Ovations 14,007 7% 13,057 (5%) 13,772 - ----------------------------------------------------------------------------------------------------------------
(1) Enrollment information includes growth resulting from our 1998 acquisition of HealthPartners of Arizona, Inc. (509,000 members). Additionally, the fee-based lives served by United HealthCare Administrators, Inc. are included in 1996 (666,000 members). We sold United HealthCare Administrators, Inc. on June 30, 1997. Our revenues are comprised of: 1) premium revenues associated with our risk-based products (those where we assume financial responsibility for health care costs); 2) management services and fees associated with administrative services only customers, managed health plans, and our Specialized Care Services and Ingenix businesses; and 3) investment and other income. The discussion that follows provides an analysis of our 1998 revenue trends for each of our three revenue components. PREMIUM REVENUES The following table summarizes premium revenues by business unit for the years ended December 31 (in millions):
Percent Increase 1998 1997 (Decrease) - ----------------------------------------------------------------------------- UnitedHealthcare $11,397 $ 9,507 20% Ovations 3,584 87 NM Uniprise 447 418 7% Specialized Care Services 337 291 16% Elimination of Inter-Unit Transactions (249) (168) NM - ----------------------------------------------------------------------------- $15,516 $10,135 53% - -----------------------------------------------------------------------------
NM - Not Meaningful Consolidated premium revenues in 1998 totaled $15.5 billion, an increase of $5.4 billion, or 53%, compared to 1997. On January 1, 1998, our Ovations business began delivering Medicare supplement insurance and other medical insurance coverage to approximately 4 million AARP members. Premium revenues from our portion of the AARP insurance offerings during 1998 were $3.5 billion. Excluding the AARP business, 1998 consolidated premium revenues totaled $12.0 billion, an increase of 19% over 1997. This increase is primarily the result of growth in our UnitedHealthcare business. On a year-over-year same-store basis, UnitedHealthcare's premium revenues increased $1.7 billion, or 18%, during 1998. The increase reflects same-store commercial health plan enrollment growth of 10% and average year-over-year premium yield increases on renewing commercial health plan groups of approximately 5% to 6%. Growth in UnitedHealthcare's Medicare programs also contributed to the increase in premium revenues, with same-store growth of 33% in Medicare enrollment. Significant growth in Medicare enrollment affects year-over-year comparability. The Medicare product generally has per member premium rates three times to four times higher than average commercial premium rates because Medicare members typically use proportionately more medical care services. On a year-over-year same- II-4 store basis, UnitedHealthcare's commercial health plan and Medicare products accounted for $1.8 billion of premium revenue growth during 1998. The increase in UnitedHealthcare's commercial health plan and Medicare product premium revenues was partially offset by a $240 million decrease from other network-based and indemnity products. We expect enrollment in UnitedHealthcare's other network-based and indemnity products will continue to decline through 1999. To the extent possible, we will convert these enrollees to UnitedHealthcare's commercial health plan products. MANAGEMENT SERVICES AND FEE REVENUES Management services and fee revenues during 1998 totaled $1.6 billion, representing an increase of approximately $160 million over 1997. The increase is primarily the result of acquisitions by Ingenix during 1997 and 1998. Additionally, our Specialized Care Services business -- most notably United Behavioral Health and Optum,-Registered Trademark- our telephone- and Internet-based health information and services business -- continues to increase the number of individuals it serves. INVESTMENT AND OTHER INCOME Investment and other income increased to $249 million in 1998 from $231 million in 1997. The increase of $18 million is primarily attributable to an increase in average cash and investments from $3.6 billion in 1997 to $4.1 billion in 1998. Net capital gains were $26 million in both 1998 and 1997. MEDICAL COSTS The combination of our pricing strategy and medical management efforts is reflected in the medical care ratio (medical costs as a percentage of premium revenues). The following table summarizes our medical care ratio by product line for the years ended December 31:
1998 1997 - ---------------------------------------------------------------------------- UnitedHealthcare: Commercial(1) 85.3% 85.7% Medicare 92.0% 83.3% Medicaid 85.2% 82.8% - ---------------------------------------------------------------------------- Total UnitedHealthcare 86.7% 85.1% - ---------------------------------------------------------------------------- Consolidated UnitedHealth Group 87.2% 84.3% - ---------------------------------------------------------------------------- Consolidated (excluding AARP) 85.8% 84.3% - ----------------------------------------------------------------------------
(1) Includes commercial health plan, other network-based and indemnity products. Our consolidated medical care ratio increased to 87.2% in 1998 from 84.3% in 1997. The year-over-year increase includes the effects of the AARP business on our medical care ratio. We experience a medical care ratio of approximately 92% related to our portion of the AARP insurance offerings, which we began delivering on January 1, 1998. Excluding the AARP business, on a year-over-year basis, the medical care ratio increased to 85.8%. The increase in the 1998 medical care ratio is primarily attributable to average Medicare premium rate increases of 2.5% that were more than offset by increased medical utilization, reflected mostly in hospital costs. In 13 of our 24 Medicare markets, representing half of our annual Medicare premiums of $2.4 billion, we incurred contract losses of $111 million. Six of these 13 markets are generally newer markets where we have been unable to achieve the scale of operations necessary to achieve profitability. In numerous counties in the other seven markets, we experienced high medical costs which exceeded the fixed Medicare premiums that increased only 2.5% on average. We are addressing our Medicare medical care ratio by altering benefit designs, recontracting with providers, and aggressively increasing both contemporaneous and retrospective claim management activities. We also are continuing to evaluate the markets we serve and products we offer. In addition, we will curtail activities or exit markets where we believe near term prospects are unacceptable. To that end, in October 1998, we announced our decision to withdraw Medicare product offerings from 86 of the 206 counties we then served. The decision, effective January 1, 1999, affected approximately 60,000, or 13%, of our Medicare members. We will continue to offer Medicare products in strong and economically viable markets. Annual revenues for 1998 from Medicare counties we exited were approximately $225 million. Despite increasing commercial medical cost trends in certain health plan markets, UnitedHealthcare's overall commercial medical care ratio improved slightly to 85.3% in 1998 from 85.7% in 1997. Commercial health plan premium rates are established based on anticipated health care costs. During 1998, commercial premium yield increases averaging 5% to 6% minimally exceeded medical cost trends of 4% to 5%. Looking to 1999, we expect average medical cost increases to remain stable in the 4% to 5% range, and we also expect that our medical care ratio will improve as a result of premium yield increases on new and renewal commercial business averaging 7% to 8%. OPERATING EXPENSES Selling, general and administrative expenses as a percent of total revenues (the SG&A ratio) decreased from 20.0% in 1997 to 17.1% in 1998. The improvement in the year-over-year SG&A ratio principally reflects the operating leverage we gained with the addition of the AARP business and planned cost reductions we have achieved to date from our realignment initiatives. On an absolute dollar basis, selling, general and administrative costs increased by $600 million, or 25%, over 1997. This increase primarily reflects the additional infrastructure needed to support the $5.4 billion, or 53%, increase in premium-based business. Depreciation and amortization was $185 million in 1998, and $146 million in 1997. This increase resulted from a combination of higher levels of capital expenditures to support business growth and amortization of goodwill and other intangible assets related to recent acquisitions. The $451 million of asset impairments recorded in the second quarter of 1998 will reduce depreciation and amortization by approximately $15 million annually. This decrease will be more than offset in 1999 by increased depreciation and amortization related to capital expenditures and intangible assets acquired in acquisitions during 1998. II-5 OPERATIONAL REALIGNMENT AND OTHER CHARGES In conjunction with our operational realignment, we developed and, in the second quarter of 1998, approved a comprehensive plan (the Plan) to implement our operational realignment. We recognized corresponding charges to operations of $725 million, which reflect the estimated costs we will incur under the Plan. The charges included costs associated with asset impairments; employee terminations; disposing of or discontinuing business units, product lines and contracts; and consolidating and eliminating certain processing operations and associated real estate obligations. These activities will result in a net reduction of more than 4,000 positions, affecting 6,000 people in various locations. Through December 31, 1998, we have eliminated approximately 2,000 positions pursuant to the Plan. Businesses we intend to dispose of include our managed workers' compensation business, and medical and behavioral health provider clinics. Markets where we plan to curtail or make changes to our operating presence include our small group health insurance business and three health plan markets that are in non-strategic locations. Our original provision for operational realignment and other charges was developed based on management's best judgment and estimates at that time. As we began to execute the Plan, we adjusted certain estimates based on more current information related to the amounts to be paid for severance and lease cancellation fees. In addition, based on continuing negotiations related to business dispositions, our original estimates for asset impairments and business disposition costs were revised. In total, our Operational Realignment and Other Charges did not change. The table below summarizes realignment activities for the year ended December 31, 1998 (in millions):
Additional Charges Incurred Recorded Charges ----------------- Accrual at Provision (Credits) Cash Noncash Year-End - ----------------------------------------------------------------------------------------------------------------- Provision for operational realignment and other charges: Asset Impairments $ 430 21 $ -- $(451) $ -- Severance and outplacement costs 142 (20) (19) -- 103 Noncancelable lease obligations 82 (9) (6) -- 67 Dispositions of business and other costs 71 8 (13) -- 66 - ----------------------------------------------------------------------------------------------------------------- Total provision $ 725 - $(38) $(451) $236 - -----------------------------------------------------------------------------------------------------------------
We have included in asset impairments the write off of $68 million of purchased in-process research and development associated with the acquisition of Medicode, Inc. The in-process projects were focused on the continued development and evolution of next generation medical databases and software solutions including clinical editing software, benchmarking databases and technologies. These technologies upon completion will enable both healthcare payers and providers to use the same data generated in the treatment documentation process to then be used in the financial transaction process, which involves provider compensation, care utilization review, trend analysis and management reporting. As of the date of acquisition, Medicode had invested $8.5 million in the in-process projects identified above. We estimate that it will be necessary to dedicate approximately $2.2 million over the next sixteen months in order to successfully complete these projects. Details of the asset impairments are as follows (in millions):
Triggering Event Expected Disposal Disposal Date - ------------------------------------------------------------------------------------------------------------------------------- UnitedHealthcare intangible and operating A decision to exit or Operating assets will be The carrying value assets of certain health plan and small reconfigure these abandoned or disposed of the assets will group insurance markets $291 businesses, markets of upon exit or be depreciated and products. reconfiguration of the over the estimated Specialized Care Services intangible market, business, or remaining life, and operating assets $ 39 products. with physical disposal during either the fourth quarter of 1998 or the first six months of 1999. - ------------------------------------------------------------------------------------------------------------------------------- Ingenix purchased in-process research The acquisition of Not applicable. Written down and development $ 68 Medicode, Inc. occurred during second in December 1997. quarter of 1998. The final allocation of purchase price and valuation of acquired intangibles was completed in June 1998. - ------------------------------------------------------------------------------------------------------------------------------ Corporate operating assets $ 53 Realignment initiatives Operating assets have The carrying resulted in operating been or will be written value of the assets to be abandoned or off, abandoned or assets will be disposed. disposed of upon exit of depreciated over certain businesses or as a the estimated result of other remaining life realignment initiatives. with physical disposal during either the fourth quarter of 1998 or the first six months of 1999. - ------------------------------------------------------------------------------------------------------------------------------ Total $451 - ------------------------------------------------------------------------------------------------------------------------------
We believe the aggregate reduction in our overall cost structure from our realignment and other cost reduction activities will approximate $300 million annually by the end of the year 2000. We expect to realize approximately $75 million of these reductions in 1999. The operational realignment charges do not cover certain aspects of the Plan, including new information systems, data conversions, process re-engineering and employee relocation and training. These costs will be charged to expense as incurred or capitalized, as appropriate. 1997 RESULTS COMPARED TO 1996 RESULTS PREMIUM REVENUES During 1997, consolidated premium revenues totaled $10.1 billion, representing an increase of $1.6 billion, or 19%, compared to 1996. Excluding the effects of acquisitions, premium revenues in 1997 increased by 17% over 1996. The increase in premium revenues in 1997 was primarily due to growth in year-over-year same-store commercial health plan revenues of $1.5 billion, or 25%. The increase reflected same-store commercial health plan enrollment growth of 13% and II-6 average year-over-year premium rate increases on renewing commercial groups of approximately 5%. Growth in our Medicare programs also contributed to the increase in premium revenues, with a year-over-year same-store increase of 53% in Medicare enrollment. The 1997 year-over-year increase in premium revenues from commercial and Medicare products was partially offset by a $220 million decrease from non-network-based indemnity products. Nearly $60 million of this decrease resulted because we discontinued our relationship with a broker who sold and administered small group indemnity business on our behalf, which led to the loss of 30,000 indemnity members effective July 1, 1997. The remaining decrease was from declining enrollment in these products, which is attributed to average rate increases of 10% to 20% that started in 1996 and continued into 1997, as well as other business factors. MANAGEMENT SERVICES AND FEE REVENUES Management services and fee revenues in 1997 totaled $1.4 billion, representing an increase of $30 million, or 2%, over 1996. The increase resulted from enrollment growth within managed health plans and an increase in individuals served by our Specialized Care Services business. Offsetting these increases, fee revenues from self-funded products decreased $15 million because of declining enrollment in these products. In addition, the June 30, 1997, sale of our subsidiary, United HealthCare Administrators, Inc., resulted in a $24 million decrease in these revenues in 1997 compared to 1996. INVESTMENT AND OTHER INCOME Investment and other income increased to $231 million in 1997 from $185 million in 1996. The increase of $46 million is primarily attributable to an increase in average cash and investments from $3.2 billion in 1996 to $3.6 billion in 1997. Additionally, 1997 investment and other income included net capital gains of $26 million compared with $4 million in 1996. MEDICAL COSTS During 1997, the medical care ratio increased slightly from 84.0% in 1996 (before nonrecurring charges) to 84.3%. The 1997 increase in the medical care ratio was the result of several factors: - - A few specific health plan markets had medical care ratios substantially higher than our other health plans in the aggregate. The reasons varied from plan to plan, but generally, medical cost controls and provider contracting initiatives were not being fully implemented and commercial premium yields were insufficient compared to corresponding medical costs. - - Several markets had recently introduced Medicare products, which had been well received and were growing rapidly. We generally experience higher medical care ratios during the early stage of Medicare product introductions. - - Medicaid premiums did not increase and, in fact, decreased in several markets. OPERATING EXPENSES During 1997, our SG&A ratio improved from 21.5% in 1996 to 20.0%. The improvement in the 1997 SG&A ratio reflected ongoing operating efficiencies as well as our diligence in managing operating expenses. On an absolute dollar basis, selling, general and administrative costs increased $199 million in 1997, or 9%, over 1996. This increase reflects the additional infrastructure needed to support the $1.6 billion increase in premium-based business, as well as the additional investment in new Medicare markets and increased support for our growing Specialized Care Services businesses. FINANCIAL CONDITION AND LIQUIDITY AS OF DECEMBER 31, 1998 During 1998, we generated more than $1.0 billion in cash from operating activities. We continued to maintain a strong financial condition and liquidity position, with cash and investments of $4.4 billion at December 31, 1998, an increase of $400 million over December 31, 1997. Our long-term investments, $2.6 billion as of December 31, 1998, are classified as available for sale and are periodically sold prior to their maturity date to fund working capital or for other purposes. During 1998, we also took several actions to improve our capital structure: - - We redeemed $500 million of convertible preferred stock with a cumulative dividend rate of 5.75% (a pre-tax effective rate of approximately 9.0%). The redemption of the preferred shares was financed with $650 million of unsecured notes payable at a weighted-average pre-tax effective interest rate of 6.0%, thereby decreasing our financing cost for this $500 million by 34% in the first year. The debt placement consisted of $400 million in unsecured notes due December 1999, with an interest rate of 5.65%, and $250 million in unsecured notes due December 2003, with an interest rate of 6.65%. - - We repurchased 11.3 million shares of our common stock for an aggregate cost of $436 million, an average cost of approximately $40 per share. Under our stock repurchase program, we may purchase up to 18.7 million shares of our outstanding common stock. Purchases may be made from time to time at prevailing prices, subject to certain restrictions relating to volume, pricing and timing. - - We established a $600 million commercial paper program, which provides increased flexibility in managing our capital structure. At December 31, 1998, there were $59 million in commercial paper borrowings outstanding at an average interest rate of 5.3%. In support of our commercial paper program, we entered into a $600 million credit arrangement with a group of banks. The agreement is comprised of a $300 million five-year revolving credit facility and a $300 million 364-day credit facility. No borrowings were outstanding under the credit facilities as of December 31, 1998. II-7 - - In January 1998, we filed a shelf registration statement with the Securities and Exchange Commission (SEC) to sell up to $200 million of debt securities and preferred or common shares. The shelf filing registered the securities and allows us to sell them from time to time in the event we need financing. Proceeds from sales of these securities may be used for a variety of general corporate purposes, including working capital, securities repurchases and acquisitions. In October 1998, we filed another shelf registration statement to sell up to $1.05 billion of debt securities, preferred stock, common stock, depository shares, warrants and trust preferred securities. These securities may not be sold until the SEC declares the registration statement effective. Cash generated from operating activities and proceeds received from our 1998 financing activities were used to redeem outstanding preferred stock, repurchase common stock, and for other general corporate purposes, including acquisitions. We expect our available cash and investment resources, operating cash flows, and financing capability to be sufficient to meet our current operating requirements and other corporate development initiatives. As further described under "Regulatory Capital and Dividend Restrictions," many of our subsidiaries are subject to various government regulations. After taking into account these regulations, approximately $500 million of our $4.4 billion of cash and investments at December 31, 1998, was available for general corporate use, including working capital needs. The Company's debt arrangements and credit facilities contain various covenants, the most restrictive of which place limitations on secured and unsecured borrowings and require the Company to exceed minimum interest coverage levels. At December 31, 1998, we were well within the requirements of all debt covenants. In the second quarter of 1998, we recognized special charges to operations of $725 million associated with the implementation of our operational realignment plan. We believe our after-tax cash outlay associated with these charges will be in the range of $75 million to $100 million over the next 12 months. Currently, we do not have any other material definitive commitments that require cash resources; however, we continually evaluate opportunities to expand our operations. This includes internal development of new products and programs and may include acquisitions. GOVERNMENT REGULATION Our primary business, offering health care coverage and health care management services, is heavily regulated at the federal and state levels. We strive to comply in all respects with applicable regulations and may be required to make changes from time to time in our services, products, marketing methods or organizational or capital structure. Regulatory agencies generally have broad discretion to issue regulations and interpret and enforce laws and rules. 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. These changes could affect our operations and financial results. Certain proposed changes in Medicare and Medicaid programs may improve opportunities to enroll people under products developed for these populations. Other proposed changes could limit available reimbursement and increase competition in those programs, with adverse effects on our financial results. Also, it could be more difficult for us to control costs if federal and state bodies continue to consider and enact significant and onerous managed care laws and regulations. Among the legislative proposals are proposals that could expand health plan liability or increase medical expenses. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) may represent the most significant federal reform of employee benefit law since the enactment of the Employee Retirement Income Security Act (ERISA) in 1974. Significant provisions of HIPAA include guaranteeing the availability of health insurance for certain employees, limiting the use of preexisting condition exclusions, prohibiting discrimination on the basis of health status, and making it easier to continue coverage in cases where a person is terminated or changes employers. Under HIPAA and other similar state laws, medical cost control through amended provider contracts and improved preventive and chronic care management may become more important. We believe our experience in these areas will allow us to compete effectively. A comprehensive set of claims regulations has been proposed by the United States Department of Labor (DOL) that could have a significant impact on the Company. These regulations are applicable to employee benefit plans subject to ERISA. In addition to various other requirements, the regulations would create new time frames for processing claims and giving notification of incomplete claims, would impose certain notification requirements following a claim determination, and would impose certain post-appeal disclosure obligations on the Company's insured and self-funded business. The DOL has solicited public comment on the proposals, and the regulations, if adopted, could vary significantly from the proposals. Health care fraud and abuse has become a top priority for the nation's law enforcement entities, which have focused on participants in federal government health care programs such as Medicare, Medicaid and the Federal Employees Health Benefits Program (FEHBP). We participate extensively in these programs. We also are subject to governmental investigations and enforcement actions. Included are actions relating to ERISA, which regulates insured and self-insured health coverage plans offered by employers; the FEHBP; Medicare and Medicaid; federal and state fraud and abuse laws; and laws relating to care management and health care delivery. Government actions could result in assessment of damages, civil or criminal fines or penalties, or other sanctions, including exclusion from participation in government programs. We currently are involved in various government investigations and audits, but we do not believe the results will have a material adverse effect on our financial position or results of operations. II-8 REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS The Company's operations are conducted through United HealthCare Corporation, its wholly-owned subsidiary United HealthCare Services, Inc. and their respective subsidiaries, which consist principally of Health Maintenance Organizations (HMOs) and insurance companies. HMOs and insurance companies are subject to state regulations that, among other things, may require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing and amount of dividends and other distributions that may be paid to their respective parent companies. Generally, the amount of dividend distributions that may be paid by regulated insurance and HMO companies, without prior approval by state regulatory authorities, is limited based on the entity's level of statutory net income and statutory capital and surplus. As of December 31, 1998, the Company's regulated subsidiaries had aggregate statutory capital and surplus of approximately $1.4 billion, compared with their aggregate minimum statutory capital and surplus requirements of $390 million. The amount of dividends that may be paid to the Company or United HealthCare Services, Inc., by their insurance and HMO subsidiaries at December 31, 1998, without prior approval by state regulatory authorities, is limited to approximately $120 million. There are no such restrictions on distributions from United HealthCare Services, Inc. to the Company or on distributions from the Company to its shareholders. The National Association of Insurance Commissioners has adopted rules which, to the extent that they are implemented by the states, will set new minimum capitalization requirements for insurance companies, HMOs and other entities bearing risk for health care coverage. The requirements take the form of risk-based capital rules. The change in rules for insurance companies was effective December 31, 1998. The new HMO rules are subject to state-by-state adoption, but few states had adopted the rules as of December 31, 1998. The HMO rules, if adopted by the states in their proposed form, would significantly increase the capital required for certain of our subsidiaries. However, we believe we can redeploy capital among our regulated entities to minimize the need for incremental capital investment of general corporate financial resources into regulated subsidiaries. As such, we do not anticipate a significant impact on our aggregate capital or investments in regulated subsidiaries. CONCENTRATIONS OF CREDIT RISK Investments in financial instruments such as marketable securities and commercial premiums receivable may subject UnitedHealth Group to concentrations of credit risk. Our investments in marketable securities are managed by professional investment managers within an investment policy authorized by the board of directors. This policy limits the amounts that may be invested in any one issuer. Concentrations of credit risk with respect to commercial premiums receivable are limited to the large number of employer groups that comprise our customer base. As of December 31, 1998, there were no significant concentrations of credit risk. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since the date of the Company's quarterly report filed on Form 10-Q for the quarter ended September 30, 1998, no material changes have occurred in the Company's exposure to market risk associated with our investments in market risk-sensitive financial instruments. We do not believe that our risk of a loss in future earnings or a decline in fair values or cash flow attributable to such investments is material. INFLATION Although the general rate of inflation has remained relatively stable and health care cost inflation has stabilized in recent years, the national health care cost inflation rate still exceeds the general inflation rate. We use various strategies to mitigate the negative effects of health care cost inflation, including setting commercial premiums based on anticipated health care costs, risk-sharing arrangements with various health care providers, and other health care cost containment measures. Specifically, health plans try to control medical and hospital costs through contracts with independent providers of health care services. Through these contracted care providers, our health plans emphasize preventive health care and appropriate use of specialty and hospital services. While we currently believe our strategies to mitigate health care cost inflation will continue to be successful, competitive pressures, new health care product introductions, demands from health care providers and customers, applicable regulations, or other factors may affect our ability to control the impact of health care cost increases. In addition, certain non-network-based products do not have health care cost containment measures similar to those in place for network-based products. As a result, there is added health care cost inflation risk with these products. YEAR 2000 ACTIVITIES Our business depends significantly on effective information systems, and we have many different information systems for our various businesses. Our information systems require ongoing enhancements to keep pace with the continuing changes in information technology, evolving industry standards, and customer preferences. We have been modifying our computer systems to accommodate the Year 2000. The Year 2000 problem exists throughout the global marketplace, as many computer systems and applications were developed to recognize the year as a two-digit number, with the digits "00" being recognized as the year 1900. Starting in 1995, our formal Year 2000 Project Office began implementing a remediation plan so that critical information systems applications, end-user developed application tools, and business interfaces remain intact and can function properly through the century change. We are on schedule to complete, test and certify our Year 2000 remediation efforts by September 30, 1999. A more detailed description and current status of our Year 2000 activities follows. II-9 TECHNICAL INFRASTRUCTURE MAINFRAME TECHNOLOGY In conjunction with our two vendors that provide support for our data center operations, we have completed, tested and certified 99% of our remediation efforts for the hardware, operating system and supporting software remediation efforts on our two primary mainframe computer systems. In addition, we are in the process of reviewing some of our smaller mainframe systems and making modifications as necessary. We expect to be 100% complete with all mainframe hardware and software technology Year 2000 modifications by March 31, 1999. We also have installed separate test environments (both mainframe and distributed) to test our business applications in a simulated Year 2000 environment. DESKTOP HARDWARE AND SOFTWARE We have inventoried all of our desktop hardware and software-- more than 40,000 computing devices of multiple makes and models. All noncompliant desktop hardware and software have been identified and are being modified or replaced with compliant systems by September 30, 1999. TELECOMMUNICATIONS We have inventoried all of our telecommunication systems-- more than 28,000 telecommunication devices, including traffic routers and phone switches. We are using two outside vendors to assist us in modifying or replacing noncompliant telecommunication systems. As of December 31, 1998, we were approximately 75% Year 2000 compliant with our data and voice networks. We expect all of our telecommunication networks and devices will be Year 2000 compliant by September 30, 1999. BUSINESS APPLICATIONS CRITICAL SOFTWARE APPLICATIONS We use 500 different software applications that include more than 80 million lines of computer code. We have surveyed our software applications and have identified systems that will not be used after December 31, 1999, and systems that will be modified for Year 2000 compliance. We have determined that 36% of our software applications will not be used after December 31, 1999, due to conversions, consolidations and software replacements. Of the remaining applications, over 90% have been made Year 2000 compliant, tested and certified or are scheduled to be certified for compliance. The balance of the applications are yet to be tested. We expect all critical Year 2000 software modifications to be completed by March 31, 1999, with further testing and certification during the remainder of 1999. END-USER DEVELOPED APPLICATIONS End-user developed applications are analysis tools that have been internally developed by individual employees or operating segments primarily running on personal computers or client servers. The Year 2000 Project Office has continuously communicated with all employees explaining the risks of noncompliant applications and provided tools and techniques to make them compliant. We have identified and are tracking and assessing Year 2000 compliance issues with respect to all potentially critical end-user applications. OTHER YEAR 2000 MATTERS NON-INFORMATION TECHNOLOGY SYSTEMS We have approximately 300 owned or leased facilities throughout the world. We have contacted all of our facility managers regarding Year 2000 compliance issues. In addition, we have contracted with a real estate management company to assist in our Year 2000 compliance efforts. All facilities are scheduled to be Year 2000 compliant by September 1, 1999. DEPENDENCE ON THIRD PARTIES We use approximately 300,000 different medical providers and more than 92,000 vendors. Approximately 2,000 vendors have been identified as critical business partners and suppliers. We are currently in communication with these critical business partners to analyze their Year 2000 compliance efforts. We expect to complete our analysis of critical vendor readiness and identify alternative vendors, where necessary, by July 31, 1999. We will not be individually contacting all of the 300,000 medical providers with whom we conduct business regarding Year 2000 compliance issues. However, we will be testing and verifying the electronic collection of data with our providers through our EDI (electronic data interface) clearinghouse vendors. COSTS OF YEAR 2000 COMPLIANCE The projected costs of our Year 2000 compliance efforts and the date on which we plan to complete the necessary Year 2000 remediation efforts are based on management's best estimates, which were derived using various assumptions of future events. However, there can be no guarantee that these estimates will be achieved, and actual results could differ significantly from our current plans. Specific factors that might cause significant differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct the relevant computer codes, and the ability of our significant vendors, providers, customers, and others with whom we conduct business to identify and resolve their own Year 2000 issues. Costs associated with modifying internal use software for Year 2000 compliance are charged to expense as incurred. Purchases of hardware or software that replace existing hardware or software that is not Year 2000 compliant are capitalized and amortized over their useful lives. As of December 31, 1998, our historical and projected costs to complete our Year 2000 remediation plan were as follows (in millions): Expenses Incurred to Date Projected Expenses ------------------------------ ------------------------------ Resources Depreciation Resources Depreciation Total - ------------------------------------------------------------------------------------------ 1996 $ 1 $ - $ - $ - $ 1 1997 12 - - - 12 1998 18 - - - 18 1999 - - 18 7 25 2000 - - 3 9 12 2001 - - - 9 9 2002 - - - 2 2 - ------------------------------------------------------------------------------------------ $ 31 $ - $ 21 $ 27 $ 79 - ------------------------------------------------------------------------------------------
II-10 BUSINESS RISKS OF NONCOMPLIANT SYSTEMS Although we are committed to completing and testing our remediation plan well in advance of the Year 2000, there are risks if we do not meet our objectives by December 31, 1999. Operationally, the most severe risk is business interruption. Specific examples of situations that could cause business interruption include, but are not limited to: computer hardware or application software processing errors or failures, facilities or infrastructure failures, or critical outside providers, suppliers, or customers who may not be Year 2000 compliant. Depending on the extent and duration of business interruption resulting from noncompliant Year 2000 systems, such interruption may have a material adverse effect on our results of operations, liquidity and financial condition. CONTINGENCY PLANS Each area of our Year 2000 compliance effort is currently developing contingency plans to mitigate the risk of failure, and to provide for a speedy recovery from possible failures associated with the century change. The contingency plans detail strategies to implement in 1999 to prepare for the century rollover, and actions to execute if problems emerge. The target date for completion of the initial contingency plans is April 1, 1999. Contingency plans will be final by July 31, 1999. LEGAL MATTERS Six suits assert claims under the U.S. securities laws against UnitedHealth Group and certain of its current and former officers and directors. The plaintiffs are shareholders of the Company who purport to sue on behalf of a class of purchasers of the Company's common shares during the period February 12, 1998, through August 5, 1998 (the "Class Period"). Each complaint was filed in the United States District Court for the District of Minnesota. Each of the six actions claims violations of Sections 10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5. In substance, the complaints allege that the Company made materially false or misleading statements about the profitability and performance of the Company's Medicare business during the Class Period. Two of the complaints also allege that the Company made materially false statements about its medical costs and the expenses related to its realignment. The complaints also allege that the statements were made with the intention of deceiving members of the investing public and with the intention that the price of the Company's shares would rise, making it possible for insiders at the Company to profit by selling shares at a time when they knew the Company's true financial condition, but the investing public did not. The complaints allege that once the Company's true financial condition was revealed on August 6, 1998, the price of its common shares fell from a closing price of $52 7/8 per share on August 5, 1998, to a closing price of $37 7/8 per share on August 6, 1998. The complaints seek compensatory damages in unspecified amounts. On January 19, 1999, we received a consolidated amended complaint (In re United HealthCare Corporation Securities Litigation, No. 98-1888 in the United States District Court for the District of Minnesota) for the six suits, which essentially restates the allegations made in the earlier complaints. On March 22, 1999, two actions were filed in the United States District Court for the District of Minnesota by two pension funds against United, certain current and former officers and directors, and other individuals yet to be identified. The pension funds wish to "opt-out" of the aforementioned purported class action suits. These individual actions essentially restate the allegations made in the purported class actions and claim violations of Sections 10(b), 18(a) and 20 of the Securities Exchange Act. In addition, both actions assert a claim of negligent misrepresentation and securities claims under state law. In the aggregate, the plaintiff pension funds seek compensatory damages totaling approximately $12.1 million. We intend to defend these actions vigorously. We are also involved in other legal actions that arise in the ordinary course of business. Although we cannot predict the outcomes of legal actions, it is our opinion that the resolution of all currently pending or threatened actions, including the class action lawsuit described above, will not have an adverse effect on our consolidated financial position or results of operations. CAUTIONARY STATEMENT REGARDING "FORWARD-LOOKING" STATEMENTS The statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operation, and other sections of this annual report to shareholders, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). When used herein, the words or phrases "believes," "expects," "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. Statements that are not strictly historical are "forward-looking" statements under the safe harbor provisions of the PSLRA. Forward-looking statements involve known and unknown risks, which may cause actual results and corporate developments to differ materially from those expected. Factors that could cause results and developments to differ materially from expectations include, without limitation, the effects of state and federal regulations, the effects of acquisitions and divestitures, and other risks described from time to time in each of UnitedHealth Group's SEC reports, including quarterly reports on Form 10-Q, annual reports on Form 10-K, and reports on Form 8-K. II-11 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since the date of the Company's Quarterly Report filed on Form 10-Q for the quarter ended September 30, 1998, no material changes have occurred in the Company's exposure to market risk associated with the Company's investments in market risk sensitive financial instruments. We do not believe that our risk of a loss in future earnings or a decline in fair values or cash flow attributable to such investments is material. II-12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF OPERATIONS UNITEDHEALTH GROUP For the Year Ended December 31, (in millions, except per share data) 1998 1997 1996 - ---------------------------------------------------------------------------------------- REVENUES Premiums $ 15,516 $ 10,135 $ 8,491 Management Services and Fees 1,590 1,428 1,398 Investment and Other Income 249 231 185 - ---------------------------------------------------------------------------------------- Total Revenues 17,355 11,794 10,074 - ---------------------------------------------------------------------------------------- OPERATING EXPENSES Medical Costs 13,523 8,542 7,180 Selling, General and Administrative Expenses 2,964 2,364 2,165 Depreciation and Amortization 185 146 133 Merger Costs -- -- 15 Operational Realignment and Other Charges 725 -- - ---------------------------------------------------------------------------------------- Total Operating Expenses 17,397 11,052 9,493 - ---------------------------------------------------------------------------------------- EARNINGS (LOSS) FROM OPERATIONS (42) 742 581 Interest Expense (4) -- -- - ---------------------------------------------------------------------------------------- EARNINGS (LOSS) BEFORE INCOME TAXES (46) 742 581 Provision for Income Taxes (120) (282) (225) - ---------------------------------------------------------------------------------------- NET EARNINGS (LOSS) (166) 460 356 CONVERTIBLE PREFERRED STOCK DIVIDENDS (28) (29) (29) CONVERTIBLE PREFERRED STOCK REDEMPTION PREMIUM (20) -- -- - ---------------------------------------------------------------------------------------- NET EARNINGS (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ (214) $ 431 $ 327 - ---------------------------------------------------------------------------------------- BASIC NET EARNINGS (LOSS) PER COMMON SHARE $ (1.12) $ 2.30 $ 1.80 - ---------------------------------------------------------------------------------------- DILUTED NET EARNINGS (LOSS) PER COMMON SHARE $ (1.12) $ 2.26 $ 1.76 - ---------------------------------------------------------------------------------------- BASIC WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 191 187 182 DILUTIVE EFFECT OF OUTSTANDING STOCK OPTIONS -- 4 4 - ---------------------------------------------------------------------------------------- WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, ASSUMING DILUTION 191 191 186 - ----------------------------------------------------------------------------------------
See notes to consolidated financial statements II-13 CONSOLIDATED BALANCE SHEETS UNITEDHEALTH GROUP
As of December 31, (in millions, except share and per share data) 1998 1997 - -------------------------------------------------------------------------------------- ASSETS Current Assets Cash and Cash Equivalents $1,644 $ 750 Short-Term Investments 170 506 Accounts Receivable, net of allowances of $64 and $45 991 768 Assets Under Management 1,155 28 Other Current Assets 320 141 - -------------------------------------------------------------------------------------- Total Current Assets 4,280 2,193 Long-Term Investments 2,610 2,785 Property and Equipment, net of accumulated depreciation of $463 and $350 294 364 Goodwill and Other Intangible Assets, net of accumulated amortization of $258 and $205 2,517 2,281 - -------------------------------------------------------------------------------------- Total Assets $9,701 $ 7,623 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Medical Costs Payable $2,780 1,565 Other Policy Liabilities 714 235 Accounts Payable and Accrued Liabilities 739 495 Short-Term Debt 459 -- Accrued Operational Realignment and Other Charges 236 -- Unearned Premiums 414 275 - -------------------------------------------------------------------------------------- Total Current Liabilities 5,342 2,570 Long-Term Debt 249 -- Other Long-Term Liabilities 72 19 Convertible Preferred Stock -- 500 Commitments and Contingencies (Note 14) - -------------------------------------------------------------------------------------- Shareholders' Equity Common Stock, $0.01 par value - 500,000,000 shares authorized; 183,930,000 and 191,111,000 issued and outstanding 2 2 Additional Paid-in Capital 1,107 1,398 Retained Earnings 2,885 3,105 Net Unrealized Holding Gains on Investments Available for Sale, net of income tax effects 44 29 - -------------------------------------------------------------------------------------- Total Shareholders' Equity 4,038 4,534 - -------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $9,701 $ 7,623 - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
See notes to consolidated financial statements. II-14 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY UNITEDHEALTH GROUP
Net Unrealized Holding Gains (Losses) on Common Stock Additional Investments Total ------------ Paid-in Retained Available Shareholders' Comprehensive (in millions, except per share data) Shares Amount Capital Earnings for Sale Equity Income (Loss) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 175 $ 2 $ 822 $ 2,359 $ 5 $ 3,188 Issuance of Common Stock Stock Plans and Related Tax Benefits 2 -- 56 -- -- 56 Acquisitions 8 -- 270 -- -- 270 Comprehensive Income Net Earnings -- -- -- 356 -- 356 $ 356 Other Comprehensive Income Adjustments Change in Net Unrealized Holding Losses on Investments Available for Sale, net of income tax effects -- -- -- -- (12) (12) (12) ------- Comprehensive Income -- -- -- -- -- -- $ 344 ------- Cash Dividends Common Stock ($0.03 per share) -- -- -- (6) -- (6) Convertible Preferred Stock ($57.50 per share) -- -- -- (29) -- (29) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 185 2 1,148 2,680 (7) 3,823 Issuance of Common Stock Stock Plans and Related Tax Benefits 3 -- 116 -- -- 116 Acquisitions 3 -- 144 -- -- 144 Stock Repurchases -- -- (10) -- -- (10) Comprehensive Income Net Earnings -- -- -- 460 -- 460 $ 460 Other Comprehensive Income Adjustments Change in Net Unrealized Holding Gains on Investments Available for Sale, net of income tax effects -- -- -- -- 36 36 36 ------ Comprehensive Income -- -- -- -- -- -- $ 496 ------ Cash Dividends Common Stock ($0.03 per share) -- -- -- (6) -- (6) Convertible Preferred Stock ($57.50 per share) -- -- -- (29) -- (29) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 191 2 1,398 3,105 29 4,534 Issuance of Common Stock Stock Plans and Related Tax Benefits 4 -- 131 -- -- 131 Acquisitions -- -- 14 -- -- 14 Stock Repurchases (11) -- (436) -- -- (436) Comprehensive Income (Loss) Net Loss -- -- -- (166) -- (166) $ (166) Other Comprehensive Income Adjustments Change in Net Unrealized Holding Gains on Investments Available for Sale, net of income tax effects -- -- -- -- 15 15 15 ------ Comprehensive Loss -- -- -- -- -- -- $ (151) ------ Cash Dividends Common Stock ($0.03 per share) -- -- -- (6) -- (6) Convertible Preferred Stock ($56.03 per share) -- -- -- (28) -- (28) Convertible Preferred Stock Redemption Premium -- -- -- (20) -- (20) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 184 $ 2 $ 1,107 $ 2,885 $ 44 $4,038 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. II-15 CONSOLIDATED STATEMENTS OF CASH FLOWS UNITEDHEALTH GROUP
For the Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Earnings (Loss) $ (166) $ 460 $ 356 Noncash Items Depreciation and Amortization 185 146 133 Deferred Income Taxes (184) 91 48 Asset Impairments 451 -- -- Provision for Future Losses -- -- 45 Other -- -- (8) Net Change in Other Operating Items, net of effects from acquisitions, sales of subsidiaries and changes in AARP balances Accounts Receivable and Other Current Assets 41 (84) (185) Medical Costs Payable 269 53 321 Accounts Payable and Other Current Liabilities 137 (30) (202) Accrued Operational Realignment and Other Charges 236 --- -- Unearned Premiums 102 47 54 - -------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities 1,071 683 562 - -------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Cash Paid for Acquisitions, net of cash assumed and other effects (464) -- (52) Purchases of Property and Equipment and Capitalized Software (210) (187) (165) Proceeds from Sales of Property and Equipment 59 -- -- Purchases of Investments (2,799) (6,706) (5,010) Maturities/Sales of Investments 3,435 5,889 4,755 - -------------------------------------------------------------------------------------------------- Cash Flows From(Used For) Investing Activities 21 (1,004) (472) - -------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from Issuance of Debt 708 -- -- Proceeds from Stock Option Exercises 84 79 42 Redemption of Convertible Preferred Stock (520) -- -- Stock Repurchases (436) (10) -- Dividends Paid Convertible Preferred Stock (28) (29) (29) Common Stock (6) (6) (6) - -------------------------------------------------------------------------------------------------- Cash Flows (Used For) From Financing Activities (198) 34 7 - -------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 894 (287) 97 - -------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 750 1,037 940 - -------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,644 $ 750 $ 1,037 - --------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. II-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNITEDHEALTH GROUP (1) DESCRIPTION OF BUSINESS UnitedHealth Group ("the Company," "we," "us," "our") is a national leader in offering health care coverage and related services to help people achieve improved health and well-being through all stages of life. We provide a broad spectrum of products and services and operate in all 50 states, the District of Columbia and Puerto Rico, as well as internationally. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION We have prepared the consolidated financial statements in accordance with generally accepted accounting principles and have included the accounts of UnitedHealth Group and its subsidiaries. We have eliminated all significant intersegment and intercompany accounts and transactions. USE OF ESTIMATES These financial statements include some amounts that are based on our best estimates and judgments. The most significant estimates relate to medical costs payable and other policy liabilities, intangible asset valuations and useful lives, integration reserves relating to acquisitions, and liabilities and asset impairments relating to our operational realignment activities. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant. REVENUE RECOGNITION Premium revenues are recognized in the period enrolled members are entitled to receive health care services. Premium payments received from our customers prior to such period are recorded as unearned premiums. Management services and fee revenues are recognized in the period the related services are performed. Premium revenues related to Medicare and Medicaid programs as a percentage of total premium revenues were 20% in 1998, 22% in 1997, and 19% in 1996. MEDICAL COSTS AND MEDICAL COSTS PAYABLE Medical costs include claims paid, claims adjudicated but not yet paid, estimates for claims received but not yet adjudicated, and estimates for claims incurred but not yet received. The estimates of medical costs and medical costs payable are developed using actuarial methods based upon historical data for payment patterns, cost trends, product mix, seasonality, utilization of health care services and other relevant factors including product changes. The estimates are subject to change as actuarial methods change or as underlying facts, upon which estimates are based, change. We did not change our actuarial methods during 1998, 1997 or 1996. The impact of any changes in estimates is included in the determination of earnings in the period of change. Management believes that the amount of medical costs payable is adequate to cover the Company's liability for unpaid claims as of December 31, 1998. CASH, CASH EQUIVALENTS, AND INVESTMENTS Cash and cash equivalents are highly liquid investments with an original maturity of three months or less. The fair value of cash and cash equivalents approximates their carrying value because of the short maturity of the instruments. Investments with a maturity of less than one year are classified as short-term. Investments held by trustees or agencies according to state regulatory requirements are classified as held-to-maturity based on our ability and intent to hold these investments to maturity. Such investments are reported at amortized cost and are included in long-term investments. All other investments are classified as available for sale and reported at fair value based on quoted market prices and are classified as short-term or long-term depending on their maturity term. Periodically, we sell investments classified as long-term prior to their maturity to fund working capital or for other purposes. Unrealized gains and losses on investments available for sale are excluded from earnings and reported as a separate component of shareholders' equity, net of income tax effects. To calculate realized gains and losses on the sale of investments available for sale, we use the specific cost of each investment sold. We have no investments classified as trading securities. ASSETS UNDER MANAGEMENT Under our 10-year agreement with the AARP, we are administering certain aspects of the AARP's insurance program that were transferred from the program's previous carrier (see Note 7). Pursuant to our agreement with the AARP, the associated assets are managed separately from our general investment portfolio and are used to fund expenditures associated with the AARP program. The assets are invested at our discretion, within certain investment guidelines approved by the AARP. At December 31, 1998, the assets were invested in marketable debt securities. Interest earnings and realized investment gains and losses on these assets accrue to the AARP policyholders and, as such, are not included in our determination of earnings. Assets under management are reported at their amortized cost. Unrealized gains and losses are included in the reserve stabilization fund associated with the AARP program (see Note 7). At December 31, 1998, the AARP investment portfolio included unrealized gains of $12 million. II-17 OTHER POLICY LIABILITIES Other policy liabilities principally relate to experience-rated indemnity products and primarily include retrospective rate credit reserves and customer balances. Retrospective rate credit reserves represent premiums we received in excess of claims and expenses charged under eligible contracts. Reserves established for closed policy years are based on actual experience, while reserves for open years are based on estimates of premiums, claims and expenses incurred. Customer balances consist principally of deposit accounts and reserves that have accumulated under certain experience-rated contracts. At the customer's option, these balances may be returned to the customer or may be used to pay future premiums or claims under eligible contracts. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is calculated using the straight-line method over the estimated useful life of the respective assets, ranging from three years to 30 years. The weighted-average useful life of property and equipment at December 31, 1998, was approximately six years. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the purchase price and transaction costs associated with businesses we acquired in excess of the estimated fair value of the net assets of these businesses. To the extent possible, a portion of the excess purchase price and transaction costs is assigned to certain identifiable intangible assets. Goodwill and other intangible assets are being amortized on a straight-line basis over useful lives ranging from three years to 40 years, with a weighted-average useful life of 34 years. The useful lives of goodwill and other intangible assets have been assigned based on our best judgment. We periodically evaluate whether certain circumstances may affect the estimated useful lives or the recoverability of the unamortized balance of goodwill or other intangible assets. The most significant components of goodwill and other intangible assets are comprised of goodwill of $1.6 billion in 1998 and $1.2 billion in 1997, and employer group contracts and supporting infrastructure, distribution networks, and institutional knowledge of $800 million in 1998 and $900 million in 1997, net of accumulated amortization. LONG-LIVED ASSETS We review long-lived assets for events or changes in circumstances that would indicate we may not recover their carrying value. We consider a number of factors, including estimated future undiscounted cash flows associated with the long-lived asset, to make this decision. We record assets held for sale at the lower of their carrying amount or fair value, less any costs associated with the final settlement. INCOME TAXES Deferred income tax assets and liabilities are recognized for the differences between the financial and income tax reporting bases of assets and liabilities based on enacted tax rates and laws. The deferred income tax provision or benefit generally reflects the net change in deferred income tax assets and liabilities during the year. The current income tax provision reflects the tax consequences of revenues and expenses currently taxable or deductible on various income tax returns for the year reported. STOCK-BASED COMPENSATION We use the intrinsic value method for determining stock-based compensation expenses. Under the intrinsic value method, we do not recognize compensation expense when the exercise price of an employee stock option equals or exceeds the fair market value of the stock on the date the option is granted. Information on what our stock-based compensation expenses would have been had we calculated those expenses using the fair market values of granted stock options is included in Note 12. NET EARNINGS (LOSS) PER COMMON SHARE Basic net earnings (loss) per common share is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares which might be issued upon exercise of common stock options. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, since their inclusion would be anti-dilutive. COMPREHENSIVE INCOME Comprehensive income and its components is reported in the Consolidated Statements of Changes in Shareholders' equity. Comprehensive income is defined as changes in the equity of our business excluding changes resulting from investments by and distributions to our shareholders. RECENTLY ISSUED ACCOUNTING STANDARD In June 1998, a new standard on accounting for derivative financial instruments and hedging activities was issued. This new standard will not materially affect our financial results or disclosures based upon our current investment portfolio. II-18 (3) ACQUISITIONS In October 1998, our UnitedHealthcare business acquired HealthPartners of Arizona, Inc. (HPA), with 509,000 members as of the acquisition date. We paid $235 million in cash in exchange for all outstanding shares of HPA. We accounted for the acquisition using the purchase method of accounting, which means the purchase price was allocated to assets and liabilities acquired based on their estimated fair values at the date of acquisition and only the post-acquisition results of HPA are included in our consolidated financial statements. The purchase price and costs associated with the acquisition exceeded the preliminary estimated fair value of net assets acquired by $223 million, which has been assigned to goodwill. The pro forma effects of the HPA acquisition on our consolidated financial statements were not material. During 1998, our Ingenix business segment acquired Kern-McNeill International (KMI), a New Jersey-based contract research organization, and St. Anthony Publishing, Inc. (St. Anthony), a leader in the health care coding and reimbursement publications market. In the aggregate, we paid $188 million in cash and assumed liabilities of $17 million in exchange for all of the common stock of KMI and St. Anthony. We accounted for these acquisitions using the purchase method of accounting. The purchase price and costs associated with these acquisitions exceeded the preliminary estimated fair value of net assets acquired by $205 million, which has preliminarily been assigned to identifiable intangible assets and goodwill. The pro forma effects of these acquisitions on our consolidated financial statements were not material. In December 1997, Ingenix acquired Medicode, Inc. (Medicode), a leading provider of health care information products. We issued 2.4 million shares of common stock and 507,000 common stock options with a total fair value of $127 million in exchange for all outstanding shares of Medicode. We accounted for the acquisition using the purchase method of accounting. The purchase price and costs associated with the acquisition exceeded the preliminary estimated fair value of net assets acquired by $123 million, which was preliminarily assigned to goodwill. During the second quarter of 1998, the Company completed the valuation of the intangible assets acquired in the Medicode transaction. Pursuant to the valuation, we expensed $68 million of the excess purchase price representing purchased in-process technology that previously had been assigned to goodwill. In management's judgment, this amount reflects the amount we would reasonably expect to pay an unrelated party for each project included in the technology. The value of in-process research and development of $68 million represented approximately 48% of the purchase price and was determined by estimating the costs to develop the purchased technology into commercially viable products, then estimating the resulting net cash flows from each project that was incomplete at the acquisition date, and discounting the resulting net cash flows to their present value. The amount of research and development expended by Medicode on these projects prior to the acquisition date totaled $8.5 million, with another $2.2 million expected to be spent to complete these research and development projects. The in-process technology has not yet reached technological feasibility and has no alternative future use. The in-process projects were focused on the continued development and evolution of next-generation medical databases and software solutions. The $68 million charge is included as a component of Operational Realignment and Other Charges in the accompanying Consolidated Statements of Operations for the year ended December 31, 1998. Based on the final valuation, the remaining excess purchase price of $55 million was assigned to existing technologies, trade names and goodwill. The pro forma effects of the Medicode acquisition on our consolidated financial statements were not material. In April 1996, we completed the acquisition of HealthWise of America, Inc. (HealthWise). HealthWise owned or operated health plans in Maryland, Kentucky, Tennessee and Arkansas that served 154,000 members at the time of acquisition. We issued 4.3 million shares of common stock in exchange for all outstanding shares of HealthWise. We accounted for the acquisition as a pooling of interests; however, we did not restate our historical financial results because the effects of this acquisition on our consolidated financial statements were not material. In connection with the HealthWise acquisition, we incurred merger costs of $15 million. In March 1996, we completed the acquisition of PHP, Inc. (PHP), a North Carolina-based health plan that served 132,000 members at the time of acquisition. We issued 2.3 million shares of common stock, with a fair value of $140 million, in exchange for all outstanding shares of PHP. We accounted for the acquisition 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 million, which has been assigned to goodwill. The pro forma effects of the PHP acquisition on our consolidated financial statements were not material. We acquired MetraHealth in October 1995. MetraHealth was formed in January 1995 by combining the group health care insurance operations of Metropolitan Life Insurance Company and The Travelers Insurance Group. We accounted for the acquisition using the purchase method of accounting. The excess purchase price over the fair value of net assets acquired of $1.2 billion was assigned to identifiable intangibles of $635 million in the Indemnity, Administrative Services Only and Specialty businesses consisting of employer group contracts and the supporting infrastructure, distribution networks and institutional knowledge being amortized over periods ranging from 10 to 40 years, with the remaining $560 million assigned to goodwill being amortized over 40 years. (4) SPECIAL OPERATING CHARGES OPERATIONAL REALIGNMENT AND OTHER CHARGES In conjunction with our operational realignment initiatives, we developed and, in the second quarter of 1998, approved a comprehensive plan (the Plan) to implement our operational realignment. We recognized corresponding charges to operations of $725 million in the quarter, which reflect the estimated costs we will incur under the Plan. The charges included costs associated with asset impairments; employee terminations; disposing of or discontinuing business units, product lines and contracts; and consolidating and eliminating certain processing operations and associated real estate obligations. These activities will result in a net reduction of more than 4,000 positions affecting 6,000 people in various locations. Through December 31, 1998, we have eliminated approximately 2,000 positions pursuant to the Plan. II-19 Our original provision for operational realignment and other charges was developed based on management's best judgment and estimates at that time. As we began to execute the Plan, we adjusted certain estimates based on more current information related to the amounts to be paid for severance and lease cancellation fees. In addition, based on continuing negotiations related to business dispositions, our original estimates for asset impairments and business disposition costs were revised. In total, our Operational Realignment and Other Charges did not change. The following table summarizes the components of the operational realignment and other charges for the year ended December 31, 1998 (in millions):
Additional Charges Incurred Recorded Charges ------------------ Accrual at Provision (Credits) Cash Noncash Year-End - --------------------------------------------------------------------------------------- Provision for operational realignment and other charges: Asset Impairments $ 430 21 $ - $ (451) $ - Severance and outplacement costs 142 (20) (19) - 103 Noncancelable lease obligations 82 (9) (6) - 67 Dispositions of business and other costs 71 8 (13) - 66 - --------------------------------------------------------------------------------------- Total provision $ 725 - $ (38) $ (451) $ 236 - ---------------------------------------------------------------------------------------
The asset impairments consist principally of goodwill and other long-lived assets, including fixed assets, computer hardware and software and leasehold improvements, from: 1) businesses we intend to dispose of or discontinue, 2) markets where we plan to curtail our operations or change the nature of our operating presence, or 3) the allocation of the purchase price for the acquisition of Medicode. Businesses we intend to dispose of include our managed workers' compensation business, and medical and behavioral health provider clinics. Markets where we plan to curtail or make changes to our operating presence include our small group health insurance business and three health plan markets that are in non-strategic locations. We prepared a forecast of expected undiscounted cash flows, where appropriate, to determine whether asset impairments existed. We used discounted cash flows to determine the fair value and measure the write-downs for two of the three health plans. We estimated proceeds on the sale of the managed workers' compensation, small group health insurance, clinical and other health plan businesses in order to determine the fair value and amount of asset write-down for these businesses. The final allocation of the purchase price for the acquisition of Medicode was based on an independent valuation. The asset impairments also consist of other operating assets written down to their net realizable value as a result of operational realignment activities. The carrying value of the net assets held for sale or disposal is approximately $20 million as of December 31, 1998. Our accompanying financial statements include the operating results of businesses to be disposed of or discontinued in connection with the operational realignment. The losses anticipated on the disposition of these businesses, including severance, impairment of assets, abandoned facilities and additional exit costs, represent approximately $175 million and are included in the $725 million of operational realignment and other charges. Our accompanying Consolidated Statements of Operations include revenues and operating losses from these businesses as follows (in millions):
Year Ended December 31, 1998 1997 - ----------------------------------------------------------------------- Revenues $ 674 $ 644 Loss Before Income Taxes $ (31) $ (31) - -----------------------------------------------------------------------
The table above does not include operating results from the counties where we will be withdrawing our health plan Medicare product offerings effective January 1, 1999. Annual revenues for 1998 from the Medicare counties we are exiting were approximately $225 million. The operational realignment charges do not cover certain aspects of the Plan, including new information systems, data conversions, process re-engineering, and employee relocation and training. These costs will be charged to expense as incurred or capitalized, as appropriate. MEDICAL COSTS During the second quarter of 1998, we recorded $175 million of medical cost charges. Of this amount, $101 million related to Medicare contract losses, $19 million related to other increases to Medicare medical costs payable estimates, and $55 million related to increases to commercial medical costs payable estimates. The $101 million of contract losses were incurred in 13 of our 24 Medicare markets. These plans contribute half of our annual Medicare premiums of $2.4 billion. Six of these markets are generally newer markets where we have been unable to achieve the scale of operations necessary to achieve profitability. In numerous counties in the seven other markets, we experienced high medical costs which exceeded the fixed Medicare premiums that only increased 2.5% on average. We incurred $38 million of these Medicare losses during the second quarter and accrued $63 million at June 30, 1998, to cover estimated future losses to be incurred in the third and fourth quarters. We actually incurred $73 million of losses in the third and fourth quarters, and we recorded the additional $10 million as medical costs in the fourth quarter. II-20 (5) METRAHEALTH RESTRUCTURING CHARGES In connection with our acquisition of The MetraHealth Companies, Inc. (MetraHealth) in 1995, we developed a comprehensive plan to integrate the business activities of the combined companies (the Plan). The Plan included, among other things, the disposition, discontinuance and restructuring of certain businesses and product lines, and the recognition of certain asset impairments. In the fourth quarter of 1995, we recorded $154 million in restructuring charges associated with the Plan. In conjunction with ongoing integration efforts, we modified the Plan during 1996. The restructuring reserves established with the original Plan were an accurate estimation of the costs incurred; however, we needed to reallocate the reserve estimates among the associated activities as the original Plan evolved. A reconciliation of MetraHealth restructuring activities for the years ended December 31 is as follows (in millions):
1998 1997 1996 1995 - -------------------------------------------------------------------------------------------- Balance at beginning of year $ 11 $ 28 $ 141 $ - Provision for restructuring costs: Severance and Outplacement - - (10) 24 Contract Terminations - - 3 58 Noncancelable Lease Obligations - - 7 20 Asset Impairments - - - 52 Cash Payments: Severance and Outplacement - (3) (9) (2) Contract Terminations (4) (9) (39) (9) Noncancelable Lease Obligations (7) (5) (13) (2) Noncash Activities Property, Equipment and Software Write-downs - - (52) - - -------------------------------------------------------------------------------------------- Balance at end of year $ - $ 11 $ 28 $ 141 - --------------------------------------------------------------------------------------------
(6) PROVISION FOR FUTURE LOSSES In the second quarter of 1996, we recorded a provision to medical costs of $45 million to cover estimated losses we expected to incur through the remaining terms of two large 28 contracts in our St. Louis health plan. One of the contracts expired in December 1998 and contained a premium rate increase cap of 2.5% per year. The other contract expires in December 2000 and generally limits premium rate increases to annual Consumer Price Index adjustments. As of December 31, 1998, there were approximately 35,000 members under this contract. Our estimate of future revenues and losses under these contracts is as follows (in millions):
Revenues Losses - ----------------------------------------------------------------------------- 1999 estimate $ 59 $ (6) 2000 estimate $ 61 $ (7) - -----------------------------------------------------------------------------
We believe the remaining balance in the accrual for future losses of $13 million, which is included in medical costs payable in the accompanying Consolidated Balance Sheets, will be sufficient to cover expected future losses from the remaining contract. (7) AMERICAN ASSOCIATION OF RETIRED PERSONS On January 1, 1998, we entered into a ten-year contract to provide insurance products and services to members of the AARP. Under the terms of the contract, we are compensated for claims administration and other services as well as for assuming underwriting risk. We are also engaged in product development activities to complement the insurance offerings under this program. The AARP has also contracted with certain other vendors to provide other member and marketing services. We report premium revenues associated with the AARP program net of the administrative fees paid to these vendors and an administrative allowance we pay to the AARP. Our underwriting results related to the AARP business are recorded as an increase or decrease to a rate stabilization fund (RSF). The RSF is included in other policy liabilities in the accompanying Consolidated Balance Sheets. The primary components of our underwriting results are premium revenue, medical costs, investment income, administrative expenses, member service expenses, marketing expenses and premium taxes. To the extent we incur underwriting losses that exceed the balance in the RSF, we would be required to fund the deficit. Any deficit we fund could be recovered by underwriting gains in future periods of the contract. The RSF balance was $192 million as of January 1, 1998, and is $509 million as of December 31, 1998. We believe the RSF balance is sufficient to cover any potential future underwriting or other risks associated with the contract. We assumed the policy and other liabilities related to the AARP program and received cash and premiums receivables from the previous insurance carrier equal to the carrying value of the liabilities assumed as of January 1, 1998. The following assets and liabilities were transferred from the program's previous carrier and are included in our Consolidated Balance Sheets (in millions):
Amounts Balance Transferred as of as of December January 1, 31, 1998 1998 - ------------------------------------------------------------------------------------- Assets Under Management $ 959 $ 1,155 Accounts Receivable $ 300 $ 287 Medical Costs Payable $ 1,024 $ 830 Other Policy Liabilities $ 192 $ 509 Accounts Payable and Accrued Liabilities $ 43 $ 103 - -------------------------------------------------------------------------------------
The effect of changes in balance sheet amounts associated with the AARP program accrue to the AARP policyholders through the RSF balance. Accordingly, we do not include the effect of such changes in our Consolidated Statements of Cash Flows. II-21 (8) CASH AND INVESTMENTS As of December 31, 1998 and 1997, the amortized cost, gross unrealized holding gains and losses, and fair value of cash and investments were as follows (in millions):
Gross Unrealized Gross Unrealized 1998 Amortized Cost Holding Gains Holding Losses Fair Value - --------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents $ 1,644 $ -- $ -- $ 1,644 - --------------------------------------------------------------------------------------------------------------- Investments Available for Sale U.S. Government and Agencies 668 10 -- 678 State and State Agencies 675 27 -- 702 Municipalities 535 20 -- 555 Corporate 628 10 (2) 636 Other 105 6 -- 111 - --------------------------------------------------------------------------------------------------------------- Total Investments Available for Sale 2,611 73 (2) 2,682 - --------------------------------------------------------------------------------------------------------------- Investments Held to Maturity U.S. Government and Agencies 53 -- -- 53 State and State Agencies 16 -- -- 16 Municipalities 1 -- -- 1 Corporate 17 -- -- 17 Other 11 -- -- 11 - --------------------------------------------------------------------------------------------------------------- Total Investments Held to Maturity 98 -- -- 98 - --------------------------------------------------------------------------------------------------------------- Total Cash and Investments $ 4,353 $ 73 $ (2) $ 4,424 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- 1997 - --------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents $ 750 $ -- $ -- $ 750 - --------------------------------------------------------------------------------------------------------------- Investments Available for Sale U.S. Government and Agencies 685 9 (3) 691 State and State Agencies 775 17 -- 792 Municipalities 845 18 -- 863 Corporate 439 6 -- 445 Other 435 -- -- 435 - --------------------------------------------------------------------------------------------------------------- Total Investments Available for Sale 3,179 50 (3) 3,226 - --------------------------------------------------------------------------------------------------------------- Investments Held to Maturity U.S. Government and Agencies 38 -- -- 38 State and State Agencies 2 -- -- 2 Municipalities 1 -- -- 1 Corporate 18 -- -- 18 Other 6 -- -- 6 - --------------------------------------------------------------------------------------------------------------- Total Investments Held to Maturity 65 -- -- 65 - --------------------------------------------------------------------------------------------------------------- Total Cash and Investments $ 3,994 $ 50 $ (3) $ 4,041 - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
As of December 31, 1998, the contractual maturities of cash and cash equivalents and investments were as follows (in millions):
Less Than One to More Than Five to More Than Years to Maturity One Year Five Years Ten Years Ten Years Total - ---------------------------------------------------------------------------------------------------------------- At Amortized Cost: Cash and Cash Equivalents $ 1,644 $ -- $ -- $ -- $ 1,644 Investments Available for Sale 139 891 716 865 2,611 Investments Held to Maturity 30 60 7 1 98 - ---------------------------------------------------------------------------------------------------------------- Total Cash and Investments $ 1,813 $ 951 $ 723 $ 866 $ 4,353 - ---------------------------------------------------------------------------------------------------------------- At Fair Value: Cash and Cash Equivalents $ 1,644 $ -- $ -- $ -- $ 1,644 Investments Available for Sale 140 910 744 888 2,682 Investments Held to Maturity 30 60 7 1 98 - ---------------------------------------------------------------------------------------------------------------- Total Cash and Investments$ $ 1,814 $ 970 $ 751 $ 889 $ 4,424 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
Mortgage-backed securities that do not have a single maturity date have been presented in the above tables based on their estimated maturity dates. II-22 Gross realized gains of $31 million, $24 million, and $10 million and gross realized losses of $5 million, $11 million, and $6 million were recognized in 1998, 1997 and 1996, respectively, and are included in investment and other income in the accompanying Consolidated Statements of Operations. (9) DEBT In November 1998, we issued $650 million of unsecured notes payable at a weighted-average interest rate of 6.0%. The debt placement consisted of $400 million in unsecured notes due December 1, 1999, with an interest rate of 5.65% and $250 million in unsecured notes due December 1, 2003, with an interest rate of 6.65%. In December 1998, we also established a $600 million commercial paper program, thereby providing increased flexibility in managing our capital structure. At December 31, 1998, we had $59 million in commercial paper borrowings outstanding at an average interest rate of 5.3%. In support of our commercial paper program, we entered into a $600 million credit arrangement with a group of banks. The agreement is comprised of a $300 million five-year revolving credit facility and a $300 million 364-day credit facility. No borrowings were outstanding as of December 31, 1998, under the credit facilities. Debt consists of the following as of December 31, 1998:
Carrying (in millions) Par Value Value - ------------------------------------------------------------------------ 5.65% Senior Unsecured Note due December 1999 $ 400 $ 400 6.65% Senior Unsecured Note due December 2003 250 249 Commercial Paper 60 59 - ------------------------------------------------------------------------ 710 708 Less: Current Portion (460) (459) - ------------------------------------------------------------------------ Total Long-Term Debt $ 250 $ 249 - ------------------------------------------------------------------------
The Company's debt arrangements and credit facilities contain various covenants, the most restrictive of which place limitations on secured and unsecured borrowings and require the Company to exceed minimum interest coverage levels. As of December 31, 1998, we are well within the requirements of all debt covenants. Maturities of debt for the years ending December 31, are as follows (in millions):
1999 2000 2001 2002 2003 - --------------------------------------------------- $ 459 $ - $ - $ - $ 249 - ---------------------------------------------------
The carrying value of the Company's outstanding debt approximates its fair value at December 31, 1998. (10) CONVERTIBLE PREFERRED STOCK In December 1998, we redeemed all 500,000 outstanding shares of 5.75% Series A Convertible Preferred Stock (the Preferred Stock). The Preferred Stock was issued to certain former shareholders of MetraHealth as a portion of the total consideration of our 1995 acquisition of MetraHealth. The redemption price per share of stock was $1,040 per share, or $520 million in the aggregate, which included a redemption premium of $40 per share, or $20 million in the aggregate. The redemption premium of $20 million is deducted from net earnings (loss) to arrive at net earnings (loss) applicable to common shareholders in the accompanying Consolidated Statements of Operations. (11) SHAREHOLDERS' EQUITY REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS The Company's operations are conducted through United HealthCare Corporation, its wholly-owned subsidiary United HealthCare Services, Inc. and their respective subsidiaries, which consist principally of Health Maintenance Organizations (HMOs) and insurance companies. HMOs and insurance companies are subject to state regulations that, among other things, may require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing and amount of dividends and other distributions that may be paid to their respective parent companies. Generally, the amount of dividend distributions that may be paid by regulated insurance and HMO companies, without prior approval by state regulatory authorities, is limited based on the entity's level of statutory net income and statutory capital and surplus. As of December 31, 1998, the Company's regulated subsidiaries had aggregate statutory capital and surplus of approximately $1.4 billion, compared with their aggregate minimum statutory capital and surplus requirements of $390 million. The amount of dividends that may be paid to the Company or United HealthCare Services, Inc. by their insurance and HMO subsidiaries at December 31, 1998, without prior approval by state regulatory authorities, is limited to approximately $120 million. There are no such restrictions on distributions from United HealthCare Services, Inc. to the Company or on distributions from the Company to its shareholders. II-23 The National Association of Insurance Commissioners has adopted rules which, to the extent that they are implemented by the states, will set new minimum capitalization requirements for insurance companies, HMOs, and other entities bearing risk for health care coverage. The requirements take the form of risk-based capital rules. The change in rules for insurance companies was effective December 31, 1998. The new HMO rules are subject to state-by-state adoption, but few states had adopted the rules as of December 31, 1998. The HMO rules, if adopted by the states in their proposed form, would significantly increase the capital required for certain of our subsidiaries. However, we believe we can redeploy capital among our regulated entities to minimize the need for incremental capital investment of general corporate financial resources into regulated subsidiaries. As such, we do not anticipate a significant impact on our aggregate capital or investments in regulated subsidiaries. STOCK REPURCHASE PROGRAM Pursuant to a board of directors' authorization, we are operating an 18.7 million share common stock repurchase program. These repurchases may be made from time to time at prevailing prices, subject to certain restrictions on volume, pricing and timing. During 1998, we repurchased 11.3 million shares for an aggregate cost of $436 million, an average cost of approximately $40 per share. DIVIDENDS On February 16, 1999, the board of directors approved an annual dividend for 1999 of $0.03 per share payable on April 15, 1999, to holders of common stock as of close of business April 1, 1999. (12) STOCK-BASED COMPENSATION PLANS We have stock and incentive plans (the Stock Plans) for the benefit of eligible employees. As of December 31, 1998, the Stock Plans allowed for the future granting of up to 5 million shares as incentive or non-qualified stock options, stock appreciation rights, restricted stock awards, and performance awards to employees. In 1995, we adopted the Non-employee Director Stock Option Plans (the 1995 Plan) to benefit members of the board of directors who are not employees. As of December 31, 1998, 34,000 shares were available for future grants of non-qualified stock options under the 1995 Plan. Stock options are generally granted at an exercise price not less than the fair market value of the common stock at the date of grant. They may be exercised over varying periods up to 10 years from the date of grant. Do Not Use A summary of the activity under our Stock Plans and the 1995 Plan during 1998, 1997 and 1996 is presented in the table below (shares in thousands):
1998 1997 1996 - -------------------------------------------------------------------------------------------------------- Weighted - Weighted - Weighted - Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - -------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 17,113 $ 34 16,894 $ 29 14,927 $ 28 Granted 5,847 $ 39 4,366 $ 44 4,125 $ 33 Issued in acquisition -- $ -- 507 $ 4 -- $ -- Exercised (3,379) $ 23 (3,095) $ 20 (1,336) $ 19 Forfeited (1,207) $ 39 (1,559) $ 35 (822) $ 33 - -------------------------------------------------------------------------------------------------------- Outstanding at end of year 18,374 $ 37 17,113 $ 34 16,894 $ 29 - -------------------------------------------------------------------------------------------------------- Exercisable at end of year 6,725 $ 33 6,702 $ 28 6,914 $ 23 - --------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1998 (shares in thousands):
Options Outstanding Options Exercisable ---------------------------------------------------------------------------------------- Weighted-Average Number Remaining Weighted-Average Number Weighted-Average Range of Exercise Prices Outstanding Option Term (years) Exercise Price Exercisable Exercise Price - --------------------------------------------------------------------------------------------------------------------- $ 0 - $22 1,672 3.8 $13 1,491 $14 $23 - $35 7,364 8.0 $33 2,265 $31 $36 - $46 6,099 7.7 $42 2,041 $41 $47 - $55 3,156 8.2 $50 888 $49 $56 - $73 83 9.2 $66 40 $73 - --------------------------------------------------------------------------------------------------------------------- $ 0 - $73 18,374 7.6 $37 6,725 $33 - ---------------------------------------------------------------------------------------------------------------------
II-24 We increased additional paid-in capital $47 million in 1998, $37 million in 1997, and $15 million in 1996 to reflect the tax benefit we received upon the exercise of non-qualified stock options. We do not recognize compensation expense in connection with stock option grants because we grant stock options at exercise prices that equal or exceed the fair market value of the stock at the time options are granted. If we had determined compensation expense using fair market values for stock options granted, net earnings (loss) would have been reduced to the following pro forma amounts:
1998 1997 1996 - ---------------------------------------------------------------------- Net Earnings (Loss) (in millions) As Reported $(166) $ 460 $ 356 Pro Forma $(206) $ 430 $ 332 - ----------------------------------------------------------------------- Diluted Net Earnings (Loss) Per Common Share As Reported $(1.12) $2.26 $1.76 Pro Forma $(1.33) $2.10 $1.63 - ----------------------------------------------------------------------- Weighted-Average Fair Value Per Share of Options Granted $ 16 $ 25 $ 23 - -----------------------------------------------------------------------
To determine compensation cost under the fair value method, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Principal assumptions used in applying the Black-Scholes model were as follows:
1998 1997 1996 - ---------------------------------------------------------------------- Risk-Free Interest Rate 5.2% 6.0% 6.6% Expected Volatility 46% 56% 57% Expected Dividend Yield 0.1% 0.1% 0.1% Expected Life in Years 5.8 5.6 5.0 - -----------------------------------------------------------------------
Because we did not apply the fair value method of accounting to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of what can be expected in future years. EMPLOYEE STOCK OWNERSHIP PLAN We have a non-leveraged Employee Stock Ownership Plan (the ESOP) for the benefit of all eligible employees. Company contributions to the ESOP are made at the discretion of the board of directors. We made contributions to the ESOP of $4 million in 1998, $4 million in 1997, and $3 million in 1996. EMPLOYEE STOCK PURCHASE PLAN The Employee Stock Purchase Plan (the ESPP) allows all eligible employees to purchase shares of common stock on semiannual offering dates at a price that is the lesser of 85% of the fair market value of the shares on the first day or the last day of the semiannual period. Employee contributions were $19 million for 1998, $17 million for 1997, and $16 million for 1996. Through the ESPP, we issued to employees 206,000 shares in 1998, 422,000 in 1997, and 392,000 shares in 1996. As of December 31, 1998, 3.0 million shares were available for future issuance. (13) INCOME TAXES Components of the Provision (Benefit) for Income Taxes
Year Ended December 31, (in millions) 1998 1997 1996 - ---------------------------------------------------------------------- Current Federal $ 273 $ 171 $ 159 State 31 20 18 - ---------------------------------------------------------------------- Total Current 304 191 177 Deferred (184) 91 48 - ---------------------------------------------------------------------- Total Provision $ 120 $ 282 $ 225 - ----------------------------------------------------------------------
Reconciliation of the Tax Provision at the U.S. Federal Statutory Rate to the Provision for Income Taxes
Year Ended December 31, (in millions) 1998 1997 1996 - ---------------------------------------------------------------------- Tax Provision (Benefit) at U.S. Federal statutory rate $ (16) $ 259 $ 203 State income taxes, net of federal benefit 19 21 14 Tax-Exempt investment income (25) (21) (11) Non-deductible asset impairments and amortization 124 21 18 Non-deductible losses and expenses 12 7 2 Other, net 6 (5) (1) - ---------------------------------------------------------------------- Provision for Income Taxes $ 120 $ 282 $ 225 - ----------------------------------------------------------------------
Components of Deferred Income Tax Assets and Liabilities
December 31, (in millions) 1998 1997 - ---------------------------------------------------------------------- Deferred Income Tax Assets Accrued operational realignment and other charges, and restructuring reserves $ 138 $ 23 Bad debt allowance 13 9 Medical costs payable and other policy liabilities 22 22 Loss reserve discounting 51 10 Unearned premiums 68 19 Intangible amortization 7 3 Net operating loss carryforwards 34 6 Other 8 2 - ---------------------------------------------------------------------- Subtotal 341 94 Less: Valuation allowance (34) (6) - ---------------------------------------------------------------------- Total Deferred Income Tax Assets 307 88 - ---------------------------------------------------------------------- Deferred Income Tax Liabilities Capitalized software development (31) (19) Depreciation (12) -- Unrealized gains on investments available for sale (23) (18) Other (2) (10) - ---------------------------------------------------------------------- Total Deferred Income Tax Liabilities (68) (47) - ---------------------------------------------------------------------- Net Deferred Income Tax Assets $ 239 $ 41 - ----------------------------------------------------------------------
II-25 Valuation allowances are provided when it is considered unlikely that deferred tax assets will be realized. The valuation allowance relates to future tax benefits on certain purchased domestic and foreign net operating losses. We paid income taxes of $245 million in 1998, $124 million in 1997, and $96 million in 1996. Consolidated income tax returns for fiscal years 1995 and 1994 were examined by the Internal Revenue Service (IRS). The audit was concluded with no material impact on our consolidated operating results or financial position. Consolidated income tax returns for fiscal years 1997 and 1996 are currently being examined by the IRS. We do not believe any adjustments that may result will have a material effect on our consolidated operating results or financial position. (14) COMMITMENTS AND CONTINGENCIES LEASES We lease facilities, computer hardware and other equipment under long-term operating leases that are noncancelable and expire on various dates through 2011. Rent expense under all operating leases was $119 million in 1998, $104 million in 1997, and $114 million in 1996. At December 31, 1998, future minimum annual lease payments under all noncancelable operating leases were as follows (in millions):
1999 2000 2001 2002 2003 Thereafter - ---------------------------------------------------------- $105 $88 $70 $52 $37 $157 - ----------------------------------------------------------
SERVICE AGREEMENTS In June 1996 and November 1995, we entered into separate 10-year contracts with nonaffiliated third parties for information technology services. Under the terms of the contracts, the third parties assumed responsibility for certain data center operations and support. In September 1996, we entered into a 10-year contract with a third party for certain data network and voice communication services. Future payments under all of these contracts are estimated to be $1.3 billion; however, the actual timing and amount of payments will vary based on usage. Expenses incurred in connection with these agreements were $162 million in 1998, $125 million in 1997, and $70 million in 1996. LEGAL PROCEEDINGS Six suits assert claims under the United States securities laws against UnitedHealth Group and certain of its current and former officers and directors. The plaintiffs are shareholders of the Company who purport to sue on behalf of a class of purchasers of the Company's common shares during the period February 12, 1998, through August 5, 1998 (the "Class Period"). Each complaint was filed in the United States District Court for the District of Minnesota. Each of the six actions claims violations of Sections 10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5. In substance, the complaints allege that the Company made materially false or misleading statements about the profitability and performance of the Company's Medicare business during the Class Period. Two of the complaints also allege that the Company made materially false statements about its medical costs and the expenses related to its realignment. The complaints also allege that the statements were made with the intention of deceiving members of the investing public and with the intention that the price of the Company's shares would rise, making it possible for insiders at the Company to profit by selling shares at a time when they knew the Company's true financial condition, but the investing public did not. The complaints allege that once the Company's true financial condition was revealed on August 6, 1998, the price of its common shares fell from a closing price of $52 7/8 per share on August 5, 1998, to a closing price of $37 7/8 per share on August 6, 1998. The complaints seek compensatory damages in unspecified amounts. On January 19, 1999, we received a consolidated amended complaint (In re United HealthCare Corporation Securities Litigation, No. 98-1888 in the United States District Court for the District of Minnesota) for the six suits which essentially restates the allegations made in the earlier complaints. On March 22, 1999, two actions were filed in the United States District Court for the District of Minnesota by two pension funds against United, certain current and former officers and directors, and other individuals yet to be identified. The pension funds wish to "opt-out" of the aforementioned purported class action suits. These individual actions essentially restate the allegations made in the purported class actions and claim violations of Sections 10(b), 18(a) and 20 of the Securities Exchange Act. In addition, both actions assert a claim of negligent misrepresentation and securities claims under state law. In the aggregate, the plaintiff pension funds seek compensatory damages totaling approximately $12.1 million. We intend to defend these actions vigorously. We are also involved in other legal actions that arise in the ordinary course of business. Although we cannot predict outcomes of legal actions, it is our opinion that the resolution of all currently pending or threatened actions, including the class action lawsuit described above, will not have an adverse effect on our consolidated financial position or results of operations. BUSINESS RISKS Certain factors relating to the health care industry and our business should be carefully considered. Companies offering health care coverage and health care management services are heavily regulated at federal and state levels. While we cannot predict regulatory changes or their impact, it is possible that operations and financial results could be negatively affected. After several years of moderate increases in health care costs and utilization, the industry experienced a pronounced increase during 1996. Although the rate of these increases appears to have stabilized, there is no assurance that health care costs and utilization will not continue to increase at a more rapid pace. If they do, we may not be able to meet our objective of maintaining price increases at least sufficient to cover health care cost increases. Additionally, the health care industry is highly competitive and has seen significant consolidation over the past few years. The current competitive markets in certain areas may limit our ability to price products at appropriate levels. These competitive factors may adversely affect our consolidated financial results. II-26 CONCENTRATIONS OF CREDIT RISK Investments in financial instruments such as marketable securities and commercial premiums receivable may subject UnitedHealth Group to concentrations of credit risk. Our investments in marketable securities are managed by professional investment managers within an investment policy authorized by the board of directors. This policy limits the amounts that may be invested in any one issuer. Concentrations of credit risk with respect to commercial premiums receivable are limited to the large number of employer groups that comprise our customer base. As of December 31, 1998, there were no significant concentrations of credit risk. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since the date of the Company's quarterly report filed on Form 10-Q for the quarter ended September 30, 1998, no material changes have occurred in the Company's exposure to market risk associated with our investments in market risk-sensitive financial instruments. We do not believe that our risk of a loss in future earnings or a decline in fair values or cash flow attributable to such investments is material. (15) SEGMENT FINANCIAL INFORMATION Our accounting policies for our business segment operations are the same as those described in the Summary of Significant Accounting Policies (see Note 2). Transactions between business segments are recorded at their estimated fair value, as if they were purchased from or sold to third parties. All intersegment transactions are eliminated in consolidation. Generally accepted accounting principles provide for the combined reporting of segments with similar economic characteristics. Accordingly, the financial results of UnitedHealthcare and Ovations have been combined to form the Health Care Services segment in the tables presented below (in millions):
Specialized Health Care Care Corporate 1998 Services Uniprise Services Ingenix and Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------- Revenues - External Customers $ 15,463 $ 1,238 $ 274 $ 131 $ -- $ 17,106 Revenues - Intersegment -- 357 339 52 (748) -- Investment and Other Income 149 29 5 1 65 249 - ----------------------------------------------------------------------------------------------------------------- Total Revenues $ 15,612 $ 1,624 $ 618 $ 184 $ (683) $ 17,355 - ----------------------------------------------------------------------------------------------------------------- Earnings (Loss) From Operations $ (46) $ 10 $ 14 $ (66) $ 46 $ (42) Total Assets(1) $ 6,585 $ 1,592 $ 231 $ 472 $ 555 $ 9,435(1) Net Assets(1) $ 2,428 $ 1,024 $ 89 $ 388 $ 555 $ 4,484(1) Purchases of Property and Equipment and Capitalized Software $ 80 $ 93 $ 27 $ 10 $ -- $ 210 Depreciation and Amortization $ 90 $ 59 $ 14 $ 22 $ -- $ 185 - ----------------------------------------------------------------------------------------------------------------- 1997 - ----------------------------------------------------------------------------------------------------------------- Revenues - External Customers $ 10,103 $ 1,182 $ 255 $ 23 $ -- $ 11,563 Revenues - Intersegment -- 297 291 59 (647) -- Investment and Other Income 106 11 3 1 110 231 - ----------------------------------------------------------------------------------------------------------------- Total Revenues $ 10,209 $ 1,490 $ 549 $ 83 $ (537) $ 11,794 - ----------------------------------------------------------------------------------------------------------------- Earnings From Operations $ 379 $ 159 $ 92 $ 2 $ 110 $ 742 Total Assets(1) $ 4,038 $ 1,533 $ 208 $ 204 $ 1,599 $ 7,582(1) Net Assets(1) $ 2,066 $ 1,094 $ 116 $ 170 $ 1,599 $ 5,045(1) Purchases of Property and Equipment and Capitalized Software $ 80 $ 79 $ 23 $ 5 $ -- $ 187 Depreciation and Amortization $ 78 $ 54 $ 12 $ 2 $ -- $ 146 - -----------------------------------------------------------------------------------------------------------------
(1) In 1998, total assets and net assets exclude, where applicable, debt of $708 million, income tax-related assets of $266 million, and income tax-related liabilities of $4 million. In 1997, total assets and net assets exclude, where applicable, redeemable preferred stock of $500 million, income tax-related assets of $41 million, and income tax-related liabilities of $52 million. Excluding the $725 million operational realignment and other charges and $175 million of charges related to contract losses associated with certain Medicare markets and other increase to commercial and Medicare medical costs payable estimates, 1998 earnings from operations were $503 million for Health Care Services, $161 million for Uniprise, $109 million for Specialized Care Services, $20 million for Ingenix, $65 million for Corporate and $858 million for consolidated UnitedHealth Group. II-27 (16) QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly results of operations for the years ended December 31, 1998 and 1997 (in millions, except per share data):
Quarters Ended ------------------------------------------------ March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------------------------------- 1998 Revenues $ 4,115 $ 4,235 $ 4,360 $ 4,645 Operating Expenses $ 3,906 $ 4,914 $ 4,146 $ 4,431 Net Earnings (Loss) $ 132 $ (565) $ 135 $ 132 Net Earnings (Loss) Applicable to Common Shareholders $ 125 $ (572)(1) $ 128 $ 106(2) Basic Net Earnings (Loss) per Common Share $ 0.65 $ (2.96) $ 0.67 $ 0.57 Diluted Net Earnings (Loss) per Common Share $ 0.63 $ (2.96)(1) $ 0.66 $ 0.57(2) - ------------------------------------------------------------------------------------------------------- 1997 Revenues $ 2,851 $ 2,931 $ 2,958 $ 3,054 Operating Expenses $ 2,673 $ 2,746 $ 2,771 $ 2,862 Net Earnings $ 109 $ 116 $ 116 $ 119 Net Earnings Applicable to Common Shareholders $ 102 $ 108 $ 109 $ 112 Basic Net Earnings per Common Share $ 0.55 $ 0.58 $ 0.58 $ 0.59 Diluted Net Earnings per Common Share $ 0.54 $ 0.57 $ 0.57 $ 0.58 - -------------------------------------------------------------------------------------------------------
(1) Includes $725 million of operational realignment and other charges and $175 million of charges related to contact losses associated with certain Medicare markets and other increases to commercial and Medicare medical costs payable estimates. Excluding these charges, net earnings applicable to common shareholders would have been $132 million, or $0.66 diluted net earnings per common share. (2) Includes $20 million convertible preferred stock redemption premium. Excluding the effects of the convertible preferred stock redemption premium, net earnings applicable to common shareholders would have been $125 million, or $0.67 diluted net earnings per common share. II-28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS AND DIRECTORS OF UNITEDHEALTH GROUP: We have audited the accompanying consolidated balance sheets of UnitedHealth Group and its corporate entity, United HealthCare Corporation (a Minnesota Corporation), and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of UnitedHealth Group and Subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, February 18, 1999 REPORT OF MANAGEMENT The management of UnitedHealth Group is responsible for the integrity and objectivity of the consolidated financial information contained in this annual report. The consolidated financial statements and related information were prepared according to generally accepted accounting principles and include some amounts that are based on management's best estimates and judgements. To meet its responsibility, management depends on its accounting systems and related internal accounting controls. These systems are designed to provide reasonable assurance, at an appropriate cost, that financial records are reliable for use in preparing financial statements and that assets are safeguarded. Qualified personnel throughout the organization maintain and monitor these internal accounting controls on an ongoing basis. Internal auditors review the accounting practices, systems of internal control and compliance with these practices and controls. The Audit Committee of the board of directors, composed entirely of directors who are not employees of the Company, meets periodically and privately with the Company's independent public accountants and its internal auditors, as well as management, to review accounting, auditing, internal control, financial reporting and other matters. William W. McGuire, M.D. President, Chairman and Chief Executive Officer Stephen J. Hemsley Chief Operating Officer Arnold H. Kaplan Chief Financial Officer II-29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. II-30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information included under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 12, 1999, is incorporated herein by reference. Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, information regarding executive officers of the Company is provided in Part I of this Form 10-K under separate caption. ITEM 11. EXECUTIVE COMPENSATION The information included under the heading "Executive Compensation" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 12, 1999, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information included under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 12, 1999, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions that appears under the heading "Certain Relationships and Transactions" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 12, 1999, is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following consolidated financial statements of the Company are included in Part II above: Consolidated Statements of Operations for each of the three years ended December 31, 1998. Consolidated Balance Sheets as of December 31, 1998 and 1997. Consolidated Statements of Changes in Shareholders' Equity for the years ended as of December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the three years ended December 31, 1998. Notes to Consolidated Financial Statements. Report of Independent Public Accountants. (a) 2. FINANCIAL STATEMENT SCHEDULES None (a) 3. EXHIBITS 3(a) Copy of the Company's Second Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996.) 3(b) Amended and Restated Bylaws of United HealthCare Corporation, as amended. (Incorpo- rated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998.)
4(a) Senior Indenture, dated as of November 15, 1998, between United HealthCare Corporation and the Bank of New York. (Incorporated by reference to Registration Statement on Form S-3 filed by the Company on October 22, 1998.) 4(b) Form of Security for 5.65% Notes due December 1, 1999. 4(c) Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. The Company agrees to furnish a copy thereof to the Securities and Exchange Commission upon request. *10(a) United HealthCare Corporation 1990 Stock and Incentive Plan, as amended. (Incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.) *10(b) United HealthCare Corporation Amended and Restated 1991 Stock and Incentive Plan, Amended and Restated Effective May 14, 1997. (Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) *10(c) United HealthCare Corporation Non-employee Director Stock Option Plan. (Incorporated by reference to Exhibit 10(x) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) *10(d) United HealthCare Corporation 1997 Long-Term Incentive Plan. (Incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) *10(e) United HealthCare Corporation 1998 Management Incentive Plan. *10(f) United HealthCare Corporation 1998 Executive Savings Plan Brochure. *10(g) Employment Agreement, dated as of January 6, 1996, between United HealthCare Corporation and William W. McGuire, M.D. (Incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995.) *10(h) Employment Agreement, dated as of October 16, 1998, between United HealthCare Ser- vices, Inc. and Jeannine Rivet. *10(i) Employment Agreement, dated as of May 20, 1998, between United HealthCare Ser- vices, Inc. and R. Channing Wheeler. (Incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report of Form 10-Q for the quarterly period ended June 30, 1998.) *10(j) Employment Agreement, dated as of October 16, 1998, between United HealthCare Ser- vices, Inc. and David J. Lubben. *10(k) Separation and Release Agreement, dated as of January 1, 1999, between United HealthCare Corporation and Travers H. Wills, and Consulting Agreement, dated as of January 2, 1999, between United HealthCare Services, Inc. and Travers H. Wills. *10(l) Employment Agreement, dated as of June 30, 1998, between United HealthCare Corporation and David Koppe. +10(m) Information Technology Services Agreement between The MetraHealth Companies, Inc. and Integrated Systems Solutions Corporation dated as of November 1, 1995. (Incorporated by reference to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995.) +10(n) AARP Health Insurance Agreement by and among American Association of Retired Persons, Trustees of the AARP Insurance Plan and United HealthCare Insurance Company dated as of February 26, 1997. (Incorporated by reference to Exhibit 10(p) to the Company's Annual Report on Form 10-K/A for the period ended December 31, 1996.)
+10(o) First Amendment to the AARP Health Insurance Agreement by and among American Asso- ciation of Retired Persons, Trustees of the AARP Insurance Plan and United HealthCare Insurance Company effective January 1, 1998. (Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report of Form 10-Q for the quarterly period ended June 30, 1998.) +10(p) Second Amendment to the AARP Health Insurance Agreement by and among American Association of Retired Persons, Trustees of the AARP Insurance Plan and United HealthCare Insurance Company effective January 1, 1998. (Incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report of Form 10-Q for the quarterly period ended June 30, 1998.) +10(q) Information Technology Services Agreement between United HealthCare Services, Inc., a wholly owned subsidiary of the Company, and Unisys Corporation dated June 1, 1996. (Incorporated by reference to Exhibit 10 to the Company's Quarterly Report of Form 10-Q for the quarterly period ended March 31, 1998.) 21 Subsidiaries of the Registrant. 23 Consent of Independent Public Accountants. 24 Powers of Attorney. 27 Financial Data Schedule. (E.D.G.A.R. version only) + Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of these Exhibits have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. * Denotes management contracts and compensation plans in which certain directors and named executive officers participate and which are being filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.
(b) REPORTS ON FORM 8-K The Company filed the following report on Form 8-K during the three month period ended December 31, 1998. 1. Form 8-K Dated December 1, 1998. The items reported were items 5 and 7 concerning the announcement that on November 19, 1998 it had priced its private placement of $650 million in principal amount of senior unsecured notes offered pursuant to Rule 144A and other registration exemptions under the Securities Act of 1933, as amended. (c) See Exhibits listed in Item 14 hereof and the Exhibits attached as a separate section of this Report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 31, 1999 UNITED HEALTHCARE CORPORATION By: /s/ WILLIAM W. MCGUIRE, M.D. ----------------------------------------- William W. McGuire, M.D. CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Director, Chief Executive - ------------------------------ Officer (principal March 31, 1999 William W. McGuire, M.D. executive officer) Chief Financial Officer - ------------------------------ (principal financial and March 31, 1999 Arnold H. Kaplan accounting officer) * - ------------------------------ Director March 31, 1999 William C. Ballard, Jr. * - ------------------------------ Director March 31, 1999 Richard T. Burke * - ------------------------------ Director March 31, 1999 James A. Johnson * - ------------------------------ Director March 31, 1999 Thomas H. Kean * - ------------------------------ Director March 31, 1999 Douglas W. Leatherdale
23
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- * - ------------------------------ Director March 31, 1999 Walter F. Mondale * - ------------------------------ Director March 31, 1999 Mary O. Mundinger * - ------------------------------ Director March 31, 1999 Robert L. Ryan * - ------------------------------ Director March 31, 1999 William G. Spears * - ------------------------------ Director March 31, 1999 Gail R. Wilensky *By /s/ WILLIAM W. MCGUIRE, M.D. - ------------------------------ Director March 31, 1999 William W. McGuire, M.D. AS ATTORNEY-IN-FACT
24 EXHIBITS INDEX 3(a) Copy of the Company's Second Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996.) 3(b) Amended and Restated Bylaws of United HealthCare Corporation, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998.) 4(a) Senior Indenture, dated as of November 15, 1998, between United HealthCare Corporation and the Bank of New York. (Incorporated by reference to Registration Statement on Form S-3 filed by the Company on October 22, 1998.) 4(b) Form of Security for 5.65% Notes due December 1, 1999. 4(c) Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. The Company agrees to furnish a copy thereof to the Securities and Exchange Commission upon request. 10(a) United HealthCare Corporation 1990 Stock and Incentive Plan, as amended. (Incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.) 10(b) United HealthCare Corporation Amended and Restated 1991 Stock and Incentive Plan, Amended and Restated Effective May 14, 1997. (Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) 10(c) United HealthCare Corporation Non-employee Director Stock Option Plan. (Incorporated by reference to Exhibit 10(x) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(d) United HealthCare Corporation 1997 Long-Term Incentive Plan. (Incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) 10(e) United HealthCare Corporation 1998 Management Incentive Plan. 10(f) United HealthCare Corporation 1998 Executive Savings Plan Brochure. 10(g) Employment Agreement, dated as of January 6, 1996, between United HealthCare Corporation and William W. McGuire, M.D. (Incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995.) 10(h) Employment Agreement, dated as of October 16, 1998, between United HealthCare Services, Inc. and Jeannine Rivet. 10(i) Employment Agreement, dated as of May 20, 1998, between United HealthCare Services, Inc. and R. Channing Wheeler. (Incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report of Form 10-Q for the quarterly period ended June 30, 1998.) 10(j) Employment Agreement, dated as of October 16, 1998, between United HealthCare Services, Inc. and David J. Lubben. 10(k) Separation and Release Agreement, dated as of January 1, 1999, between United HealthCare Corporation and Travers H. Wills, and Consulting Agreement, dated as of January 2, 1999, between United HealthCare Services, Inc. and Travers H. Wills. 10(l) Employment Agreement, dated as of June 30, 1998, between United HealthCare Corporation and David Koppe.
25 10(m) Information Technology Services Agreement between The MetraHealth Companies, Inc. and Integrated Systems Solutions Corporation dated as of November 1, 1995. (Incorporated by reference to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995.) 10(n) AARP Health Insurance Agreement by and among American Association of Retired Persons, Trustees of the AARP Insurance Plan and United HealthCare Insurance Company dated as of February 26, 1997. (Incorporated by reference to Exhibit 10(p) to the Company's Annual Report on Form 10-K/A for the period ended December 31, 1996.) 10(o) First Amendment to the AARP Health Insurance Agreement by and among American Association of Retired Persons, Trustees of the AARP Insurance Plan and United HealthCare Insurance Company effective January 1, 1998. (Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report of Form 10-Q for the quarterly period ended June 30, 1998.) 10(p) Second Amendment to the AARP Health Insurance Agreement by and among American Association of Retired Persons, Trustees of the AARP Insurance Plan and United HealthCare Insurance Company effective January 1, 1998. (Incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report of Form 10-Q for the quarterly period ended June 30, 1998.) 10(q) Information Technology Services Agreement between United HealthCare Services, Inc., a wholly owned subsidiary of the Company, and Unisys Corporation dated June 1, 1996. (Incorporated by reference to Exhibit 10 to the Company's Quarterly Report of Form 10-Q for the quarterly period ended March 31, 1998.) 21 Subsidiaries of the Registrant. 23 Consent of Independent Public Accountants. 24 Powers of Attorney. 27 Financial Data Schedule. (E.D.G.A.R. version only)
26 EX-4.(B) 2 EXHIBIT 4(B) THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A) BY THE INITIAL INVESTOR (1) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (2) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (B) BY SUBSEQUENT INVESTORS, AS SET FORTH IN (A) ABOVE AND, IN ADDITION, TO AN INSTITUTIONAL ACCREDITED INVESTOR IN A TRANSACTION EXEMPT FROM REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN EACH CASE (A) AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES. THIS NOTE IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY (AS DEFINED IN THE INDENTURE) OR A NOMINEE THEREOF. THIS NOTE IS EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND, UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION, TO THE COMPANY (AS DEFINED BELOW) OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. REGISTERED UNITED HEALTHCARE $ CORPORATION CUSIP NO. 5.65% NOTES DUE DECEMBER 1, 1999 NO. 910581 AB 3 UNITED HEALTHCARE CORPORATION, a Minnesota corporation (hereinafter called the "Company", which term includes any successor corporation under the Indenture referred to below), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of __________________ DOLLARS ($_____________) on December 1, 1999 (the "Stated Maturity"), and to pay interest thereon from __________________ or from the most recent date to which interest has been paid or duly provided for, semi-annually on June 1 and December 1 in each year (each, an "Interest Payment Date"), commencing __________________ , and at Maturity, at the rate of 5.65% per annum, until the principal hereof is paid or duly made available for payment. Interest on this Note shall be calculated on the basis of a 360-day year consisting of twelve 30-day months. The interest so payable and punctually paid or duly provided for on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on the "Regular Record Date" for such interest, which shall be the May 15 or the November 15 (whether or not a Business Day) next preceding such Interest Payment Date; PROVIDED, HOWEVER, that interest payable at the Maturity of this Note shall be payable to the Person to whom principal shall be payable. Any such interest which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date shall forthwith cease to be payable to the registered Holder hereof on the relevant Regular Record Date by virtue of having been such Holder, and may be paid (i) to the Person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to the Holder of this Note not less than 10 days prior to such Special Record Date or (ii) in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause (ii), such manner of payment shall be deemed practicable by the Trustee. In the event that any Interest Payment Date or date of Maturity is not a Business Day, the interest and, with respect to the date of Maturity, principal otherwise payable on such date will be paid on the next succeeding Business Day with the same force and effect as if made on such Interest Payment Date or on such date of Maturity. "Business Day" shall mean any day that is not a Saturday or Sunday and that, in the City of New York, is not a day on which banking institutions are generally authorized or obligated by law to close. Payment of the principal of and the interest on this Note will be made at the office or agency of the Company maintained for that purpose in The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; PROVIDED, HOWEVER, that, at the option of the Company, interest may be paid by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Payment of the principal of and interest on this Note due at Maturity will be made in immediately available funds upon presentation of this Note. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by or on behalf of the Trustee under the Indenture by the manual signature of one of its authorized signatories, this Note shall not be entitled to any benefits under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: November 24, 1998 UNITED HEALTHCARE CORPORATION By: ____________________ Name: Allan J. Weiss Title: Vice President and Treasurer Attest: ____________________ Name: David J. Lubben Title: General Counsel and Secretary TRUSTEE'S CERTIFICATE OF AUTHENTICATION THIS IS ONE OF THE SECURITIES OF THE SERIES DESIGNATED HEREIN AND ISSUED PURSUANT TO THE WITHIN-MENTIONED INDENTURE. DATED: NOVEMBER 24, 1998 THE BANK OF NEW YORK, as Trustee By:________________________ Authorized Signatory UNITED HEALTHCARE CORPORATION 5.65% NOTES DUE DECEMBER 1, 1999 [REVERSE SIDE OF NOTE] This Note is one of a duly authorized issue of securities of the Company (herein called the "Notes") issued and to be issued in one or more series under an Indenture dated as of November 15, 1998, as supplemented pursuant to Section 301 thereof by the Officers' Certificate and Company Order dated November 24, 1998 (herein called, the "Indenture") between the Company and The Bank of New York, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Notes, and the terms upon which the Notes are, and are to be, authenticated and delivered. This Note is one of the series designated on the face hereof, limited in aggregate principal amount to $ . REDEMPTION The Notes are not subject to redemption prior to the Stated Maturity. MISCELLANEOUS PROVISIONS If an Event of Default with respect to the Notes shall occur and be continuing, the principal of the Notes may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions for defeasance at any time of the Company's obligations in respect of (i) the entire indebtedness of this Note or (ii) certain restrictive covenants with respect to this Note, in each case upon compliance with certain conditions set forth therein. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series issued under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding of each series affected thereby. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities of any series at the time Outstanding to waive certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Notes issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Note, at the time, place and rate, and in the coin or currency, herein and in the Indenture prescribed. As provided in the Indenture and subject to certain limitations set forth therein and in this Note, the transfer of this Note is registrable in the registry books of the Company, upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for the purpose in any place where the principal of (and premium, if any) and interest on this Note are payable, duly endorsed, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by the Holder hereof or by his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Notes of this series are issuable only in fully registered form without coupons in minimal initial purchase amounts of $100,000 and any amount in excess thereafter which is an integral multiple of $1,000. As provided in the Indenture and subject to certain limitations therein set forth, Notes of this series are exchangeable for a like aggregate principal amount of Notes of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith, other than in certain cases provided in the Indenture. Prior to due presentment of this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. This Note shall be governed by and construed in accordance with the laws of the State of New York. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. --------------------------------- ABBREVIATIONS The following abbreviations, when used in this instrument, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM--as tenants in common TEN ENT--as tenants by the entireties JT TEN--as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT--_______________Custodian_______________ (Cust) (Minor) under Uniform Gift to Minors Act _______________________ (State) Additional abbreviations may be used though not in the above list. --------------------------------- ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ------------------------------------------- | | ------------------------------------------- - ------ (Please print or typewrite name and address, including postal zip code of assignee) the within Note and all rights thereunder and hereby irrevocably constitutes and appoints _________________________________________ to transfer said Note on the books of the Company, with full power of substitution in the premises. Dated _______________ NOTICE: The signature on this assignment must correspond with the name as written upon the face of the within Note in every particular, without alteration or enlargement or any change whatsoever. Signature Guarantee SIGNATURE GUARANTEE: Signatures must be guaranteed by an "eligible institution" meeting the requirements of the [Registrar], which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the [Registrar] in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. CERTIFICATE OF TRANSFER In connection with any transfer of this Note occurring prior to the date that is two years after the later of November 24, 1998 and the last date on which this Note (or any predecessor Note) was owned by the Company or any affiliate of the Company, the undersigned confirms that this Note is being transferred: CHECK ONE BOX BELOW ___ (a) As long as this Note is eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended, to a person the undersigned reasonably believes is a "qualified institutional buyer" (a "QIB") as defined in such Rule 144A that purchases for its own account or for the account of a QIB to whom notice is given that the transfer is being made in reliance on such Rule 144A; ___ (b) to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended) that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter can be obtained from the Trustee); or ___ (c) pursuant to an exemption from registration under the Securities Act of 1933, as amended, pursuant to Rule 144 thereunder; or ___ (d) to the Company. Unless the certificate of authentication hereon has been executed by or on behalf of the Trustee under the Indenture by the manual signature of one of its authorized signatories, this Note shall not be entitled to any benefits under the Indenture or be valid or obligatory for any purpose. Dated:________________ SIGNATURE Signature Guaranteed: SIGNATURE TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is acquiring this Note for its own account or an account with respect to which it exercises sole investment discretion and that it or any such account , as the case may be, is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated:______________________ NOTICE: To be executed by an executive officer EX-10.(E) 3 EXHIBIT 10(E) 1998 Management Incentive Plan - ------------------------------------------------------------------------------ [LOGO] - ------------------------------------------------------------------------------ 1998 MANAGEMENT INCENTIVE PLAN The realignment of United HealthCare into six strategically aligned, but independent business segments established a framework for our company's ongoing growth and opportunity well into the next century. One of the principal advantages the new structure offers is the capability to leverage our considerable resources and capacity, while still nurturing and sustaining the entrepreneurial spirit that brought us to where we are today. Our compensation programs have been and will continue to be structured to encourage leaders to strive for and be rewarded for excellence and continuous improvement. The belief in pay for performance is inherent in our culture. The 1998 Management Incentive Program carries this philosophy forward within the framework of our new organization by aligning incentive pools and measurement goals not only with overall company and individual results, but also more closely with business segment and business/corporate unit results. We will measure our success against the goals we set for ourselves, not against the benchmarks or predictions set by Wall Street. To be truly great, we must reach for the future. We must believe in ourselves and in what we are capable of achieving. This is and will continue to be a challenging year. While part of our energies must go into continuing to shape and construct our new organization, we also must achieve even higher levels of growth and financial performance in a dynamic and competitive environment. We must deliver high quality service and improved product choices for our customers. And we must remain focused on appropriate health care delivery, operating and medical cost trends. As leaders of United HealthCare, we set the standards of excellence for the organization. I believe we can achieve great things. William W. McGuire, MD President, Chairman and Chief Executive Officer 2 1998 MANAGEMENT INCENTIVE PLAN - ------------------------------------------------------------------------------ OVERVIEW Annual management incentive plan funding and payout amounts are determined by the overall performance of United HealthCare, as well as the performance of your Business Segment, Business Unit/Corporate or Enterprise Services group and your individual performance as compared to the goals and objectives established in our internal business planning process as shown in the diagram on page 4 and as described below: 1) The OVERALL PERFORMANCE OF UNITED HEALTHCARE will be measured by accomplishment of strategic initiatives, employment of capital and resources, market valuation, merger and acquisition activity, and public image and recognition, as well as financial results in the following categories: earnings, earnings per share, revenue, operating costs, medical care ratio, growth and membership. Strategic and financial goals have been determined by the Office of the Chairman and are imbedded in our current year operating plans. 2) United HealthCare is now organized into six business segments. The OVERALL FINANCIAL AND STRATEGIC PERFORMANCE OF EACH BUSINESS SEGMENT WILL BE DETERMINING FACTORS FOR EACH BUSINESS SEGMENT AND BUSINESS UNIT PARTICIPANT. If you are part of a United HealthCare business segment, your strategic and financial goals will be determined jointly by Senior Leaders and the Office of the Chairman. 3) The OVERALL FINANCIAL AND STRATEGIC PERFORMANCE OF YOUR BUSINESS UNIT/ CORPORATE OR ENTERPRISE SERVICES GROUP WILL BE CONSIDERED. If you are part of a business unit, goals will be developed jointly by your Senior Leader and the person to whom they report. If you are part of the corporate or enterprise services group, goals will be established by the appropriate Senior Leader and the person to whom they report. 4) INDIVIDUAL PERFORMANCE and accomplishment of individual goals and objectives are also considered in determining incentive awards. All four performance measures are used to determine incentive pools and incentive awards. This blend of performance measurements helps ensure that all of United HealthCare works together toward common goals and allows us the greatest opportunities for success professionally and personally. The company's internal targeted goals and measures always exceed the externally anticipated results held by the investment community. 3 OVERVIEW OF THE MIP PROCESS The diagram below graphically depicts the MIP program process detailed above. [DIAGRAM] 4 INCENTIVE POOLS Incentive pools for 1998 will be more closely aligned with the results of the business segments and business units to reflect the operational realignment of the organization. Performance against the internal goals at these levels and the company's overall performance will determine the size of the incentive pools. Corporate and Enterprise Service units will be aligned with overall company performance and the results of their unit objectives. INCENTIVE TARGETS Incentives are an important part of your total compensation package. Each participant is assigned an MIP Incentive Target percent. This target percent is determined by your grade, overall level of responsibility within the organization and market competitiveness. The calculation of the incentive pools will generally be determined as follows with the final decision on incentive pools subject to the discretion of the company's top management:
- ------------------------------------------------------------------------------------------------------------------------------ GENERAL DETERMINERS OF INCENTIVE POOLS - ------------------------------------------------------------------------------------------------------------------------------ ORGANIZATION LEVEL OVERALL COMPANY BUSINESS SEGMENT BUSINESS UNIT CORP. & ENTERPRISE RESULTS RESULTS RESULTS SERVICES RESULTS - ------------------------------------------------------------------------------------------------------------------------------ CORPORATE & ENTERPRISE SERVICES LEADERS AND MANAGERS: Critical Very Important Very Important Critical Incentive pool will be primarily based on overall United HealthCare Results and results of Corporate/Enterprise Services Scorecard. BUSINESS SEGMENT LEADERS AND MANAGERS: Very Important Critical Critical Important The incentive pool will be primarily based on the performance of your business segment and units and the overall company BUSINESS UNIT LEADERS AND MANAGERS: Important Very Important Critical Important The incentive pool will be primarily based on the performance of your business unit with consideration of the overall business segment performance. - ------------------------------------------------------------------------------------------------------------------------------
5 - ------------------------------------------------------------------------------ Your targeted incentive award is determined by your eligible base earnings paid during the fiscal year multiplied by your MIP Target percent (or prorated target percent if it changed during the year). Your senior business leader will communicate this year's overall company, business segment, business unit/corporate or enterprise services and individual goals. MIP PROGRAM 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 review the overall financial and strategic results of each business segment in order to determine the overall company performance and the total amount available in the incentive pool. The Compensation and Stock Option Committee will approve an incentive pool amount. STEP 2 - ESTABLISHMENT OF BUSINESS SEGMENT, CORPORATE & ENTERPRISE SERVICES POOLS Business segment and business unit performance will play an increased role in determining incentive pools. Once the company overall incentive pool is established, Senior Leaders will determine the performance and incentive pools specific to the business segments. The ratings for determining incentive pool amounts for individual business segments and units may exceed or be less than that of the overall company rating. STEP 3 - ESTABLISHMENT OF BUSINESS UNIT POOLS Business segment senior leaders and corporate top management will be responsible for allocating the pools among the business units and corporate divisions based on their relative performance. STEP 4 - ESTABLISHMENT OF INDIVIDUAL INCENTIVE PAYMENTS After pools are established and allocated to each entity, management will then shift the focus to the individuals in their groups to determine individual incentive awards. Incentive awards will be based on individual performance and accomplishment of objectives. 6 ELIGIBILITY Generally, full-time regular employees grade 28 and above are eligible for MIP awards. At this level, positions are directly accountable for meeting key corporate/enterprise, business segment or business unit objectives, generally 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 and promotions to MIP eligible positions in the FOURTH QUARTER of a plan year are eligible for the plan in the following year but are not eligible to participate in the plan for the current year. However, employees who were eligible for the performance incentive plan (PIP) or business incentive plan (BIP) prior to their promotion in the fourth quarter are eligible for a year-end PIP or BIP award. - - Participants eligible for a full or partial year MIP award are not eligible for PIP or BIP. - - If you are promoted to a position that carries a higher management incentive target, any incentive paid to you would be based on a combination of both your existing and new incentive targets. The targets are weighted according to the time you held each position. Your bonus is based on your eligible fiscal year base earnings and MIP target (prorated if necessary). - - If you are on leave of absence during the performance measurement period, any pay received during the leave (e.g., short term disability) will not be included in your eligible base earnings for purposes of calculating the amount of the incentive payment. - - If a participant transfers during the year from an MIP eligible position to a non-eligible position (e.g. sales), they will not be eligible for a partial MIP incentive. Employees must be classified as eligible at year-end to receive an MIP award. - - If an MIP participant is reclassified to part-time or temporary status, they are eligible for an MIP award in the current year if the reclassification occurs after year-end. - - MIP payout for employees rehired in the same MIP year will only be based on eligible base earnings from the employees date of re-hire. Earnings from service prior to their rehire date will not be considered. - - 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 paid-out are not eligible for any awards. If you are on a leave of absence and are scheduled to receive an incentive, you will receive that award upon your return to work. Employees who do not return to work from leave are not eligible to receive 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. 7 401(K) PLAN AND ESOP CONTRIBUTIONS Management Incentive Plan payments are considered compensation under the United HealthCare 401(k) plan and Employee Stock Ownership Plan. In addition, incentive payments are included in benefits compensation for employees enrolled in the flexible benefit plans. However, management incentive payments are not eligible for contributions to the United HealthCare Employee Stock Purchase Plan. PAYMENTS Management Incentive Plan payments generally are made during the first quarter following the close of the corporate and business segment books for the fiscal year. For questions regarding the Management Incentive Plan, contact your manager, the head of your business unit or your human resources generalist. 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 THE MANAGEMENT INCENTIVE PLAN AT ANY TIME AND WITHOUT NOTICE. CHANGES TO THIS PLAN MUST BE MADE IN WRITING BY THE SENIOR VICE PRESIDENT OF HUMAN RESOURCES OR THE CHIEF EXECUTIVE OFFICER OF THE COMPANY. UNITED HEALTHCARE ALSO HAS THE DISCRETION TO UNILATERALLY MAKE BOTH 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. 8 EX-10.(F) 4 EXHIBIT 10(F) 1998 EXECUTIVE SAVINGS PLANS BROCHURE [LOGO] TABLE OF CONTENTS Advantages of the Executive Savings Plans for You.......................... 1 Important Information About the Executive Savings Plans.....................2 Why Executive Savings Plans..............................................2 Who is Eligible..........................................................2 How the Plans Work..........................................................4 Automatic Restoration Option Mirrors 401(k)..............................4 Incentive (MIP) Deferral Option Offers Company Match.....................4 Salary Deferral Option Offers Flexibility................................5 Limited Bonus Deferral Option............................................5 Making Changes...........................................................5 Investing Your Savings......................................................6 Changing Your Investment Choices.........................................6 More About Your Investment Credit Choices................................7 Receiving Information About Your Account.................................7 Distributions From the ESP..................................................8 Receiving Your Distributions.............................................8 Choosing Your Distribution Method........................................8 What to Do Next.............................................................9 Important Questions and Answers About the Executive Savings Plans Options..10
As an executive of United HealthCare, you are eligible to participate in the Executive Savings Plans. These plans have been enhanced for 1998 to make them more effective for you by clarifying the deferral opportunities and simplifying the enrollment procedures. This brochure outlines the changes and provides details of how you can benefit from these special compensation deferral plans. ADVANTAGES OF THE EXECUTIVE SAVINGS PLANS FOR YOU As an important component of United HealthCare's competitive benefits program, the Executive Savings Plans (ESP) offer you a tremendous opportunity to save for your future. The Plans: - - Enable you to postpone taxes by deferring your compensation until a later date when you leave the company, or until the event of total permanent disability or death; - - Ensure that you receive the advantages of the 401(k) Savings Plan, including the maximum tax deferral opportunity and company matching contributions, by automatically enrolling you in the ESP Automatic Restoration Option and allowing you to defer your MIP bonus under the Incentive (MIP) Deferral Option; and - - Have been designed to be flexible and allow you to choose among the various options to develop an individual deferral strategy that best meets your personal financial needs. For 1998, the ESP Options include: - - Automatic Restoration Option - - Incentive (MIP) Deferral Option - - Salary Deferral Option - - Limited Bonus Deferral Option 1 IMPORTANT INFORMATION ABOUT THE EXECUTIVE SAVINGS PLANS WHY EXECUTIVE SAVINGS PLANS At United HealthCare, we are committed to providing you opportunities that help you prepare for a financially secure future. The 401(k) Savings Plan, Employee Stock Ownership Plan and Employee Stock Purchase Plan offer all eligible employees options for accumulating savings and retirement assets. However, these plans are subject to restrictive tax rules. Recognizing that these rules limit the amount you can defer into those plans, United HealthCare created the Executive Savings Plans. These non-qualified deferred compensation plans allow you to defer virtually as much of your compensation as you wish through means that leverage the current tax environment. The Plans are not subject to the same restrictions placed upon qualified plans, such as the annual 401(k) elective deferral dollar limits or compensation limits. The Plans are unfunded plans, which means that funds or contributions are not set aside in a trust and are subject to the claims of the general creditors of United HealthCare. Each plan is intended to be an unfunded pension plan maintained by United HealthCare for a select group of management or highly compensated employees. WHO IS ELIGIBLE To participate in the Executive Savings Plans, you must meet certain eligibility requirements. 1. For all Options, you must be an employee with at least 30 days of service in an eligible class at United HealthCare. The following are eligible classes in 1998: AUTOMATIC RESTORATION OPTION, INCENTIVE (MIP) DEFERRAL OPTION AND SALARY DEFERRAL OPTION: - Grades 33 and above - Medical Directors M2 - M4 - Clinical Medical Staff DC2 - CD3, CM2 - CM3 LIMITED BONUS DEFERRAL OPTION: - As designated by the Board of Directors 2 2. Participation under the Plans is available the first day of the calendar month following completion of the 30-day eligibility requirement. Employees who become newly eligible during the year will receive enrollment materials prior to their eligibility date. 3. To participate in the Automatic Restoration Option, you must participate in the 401(k) Savings Plan and reach one of the following IRS limits during 1998: - Earn $160,000 in eligible compensation (the same limit was applicable in 1997) - Make 401(k) Savings Plan deferrals that reach the 1998 IRS annual limit of $10,000 (increased from $9,500 in 1997) YOU WILL AUTOMATICALLY BE ENROLLED IN THIS OPTION, AS DESCRIBED IN FURTHER DETAIL ON THE NEXT PAGE, UNLESS YOU ELECT NOT TO PARTICIPATE. 4. You may enroll in the Incentive (MIP) Deferral Option for 1998 only during the December 1997 enrollment period or when you become newly eligible during the year. 5. Enrollment for the Salary Deferral Option may be made for 1998 during the December 1997 enrollment period or during the 1998 calendar year for future 1998 earnings. 3 HOW THE PLANS WORK AUTOMATIC RESTORATION OPTION MIRRORS 401(K) As long as you participate in the 401(k) Savings Plan, you automatically participate in the ESP Automatic Restoration Option. The Option: - - Automatically defers the same percentage amount of your eligible pay on a pre-tax basis that you contribute to the 401(k) Savings Plan, after your 401(k) Savings Plan elective deferrals reach the 1998 IRS dollar limit of $10,000 or when you earn $160,000 in eligible pay; and - - Provides a United HealthCare matching contribution of 50 cents for each dollar deferred, up to the first six percent of your eligible pay. These matching contributions receive the same investment credits that you elect for your own contributions. When you reach one of the IRS 401(k) annual limits (listed above), your Automatic Restoration Option deferrals begin in the following pay period. If you do not wish to participate in the Automatic Restoration Option, you may "opt out" by electing not to participate in this Option on the Deferral Election Form. INCENTIVE (MIP) DEFERRAL OPTION OFFERS COMPANY MATCH This Option allows you to defer a portion or all of your Management Incentive Plan (MIP) bonus (1997 MIP bonus paid in 1998) into the ESP and receive a company matching contribution. Enrollment in this Option is the only way to get an employer match on your MIP bonus. You may defer 6 percent, 25 percent, 50 percent, 75 percent, or 100 percent of your bonus by making a one-time election prior to the beginning of each calendar year. You may not change your incentive deferral election during the year. You will receive a company matching contribution of 50 cents on every dollar you defer up to 6 percent of your total Incentive (MIP) Deferral Option amount. 4 SALARY DEFERRAL OPTION OFFERS FLEXIBILITY With this Option, you can defer from 1 percent to 100 percent of all 1998 eligible pay, excluding MIP bonus payments. Salary Deferral Option contributions begin within your first eligible pay period in 1998. There is no employer match in this Option. During the course of the year, you may make an election that will allow you to increase your deferral percentage or stop your deferral entirely. This election must be made at least one full pay period in advance of the date when you want this change to become effective. LIMITED BONUS DEFERRAL OPTION This Option is available only to those United HealthCare executives who are eligible for special bonus amounts that are declared by United HealthCare's Board of Directors or Compensation Committee or their designees. If you are eligible to make deferrals of special bonuses under the Limited Bonus Deferral Option, you will be notified in advance. At that time, you will receive an enrollment form. You may defer from 1 percent to 100 percent of any 1998 special bonuses before they are earned. MAKING CHANGES Under the current tax laws, once your deferral election is made, it is irrevocable. However, you may increase or stop your deferral during the year under the Salary Deferral Option. Once the deferrals are suspended, they may not be resumed until the beginning of the next calendar year. If you wish to increase or stop your payroll deductions, call the Plan Administrator at (612) 936-1653 to obtain the appropriate Executive Savings Plans form. 5 INVESTING YOUR SAVINGS You may elect to have your ESP deferrals and matching United HealthCare contributions credited with investment earnings from one or more of the four investment credit funds offered under the Plans. These funds include the: - - First American Prime Obligations Fund - - Loomis Sayles Bond Fund - - First American Equity Index Fund - - PBHG Growth Fund As you select your investment credit fund(s), keep in mind that your elections are subject to investment risk. As with any investment, if the returns credited on the fund(s) you choose are positive, your account balance will have positive credits. If the returns credited are negative, your account balance will decline. Remember, as unfunded plans, the investment credit funds are merely measuring tools to determine the value of your account under the Plans, and United HealthCare is not required to purchase such investments. Please review the fund information provided with your enrollment materials before making your decision. If you make no investment credit election, you will receive credits as if you had elected the Loomis Sayles Bond Fund. CHANGING YOUR INVESTMENT CHOICES You may change your investment credit choices once per calendar quarter on any business day during that quarter. To make a change, you must complete and submit an Investment Credit Election Form to the Plan Administrator. If the form is received by the Plan Administrator by noon Central time, the change will become effective the following business day. You also may elect to have your future contributions credited differently from your existing account balance for investment return purposes. When you make your investment election for 1998, it will not affect your existing account balance unless you actively elect to reallocate it. To reallocate your existing account balance, complete the Investment Credit Election Form. 6 MORE ABOUT YOUR INVESTMENT CREDIT CHOICES You can elect to have your account credited with the investment performance of one or any combination of the following four funds: - - FIRST AMERICAN PRIME OBLIGATIONS FUND. The fund's investment objective is maximum current income to the extent consistent with the preservation of capital and the maintenance of liquidity. The fund invests in money market instruments including debt obligations issued by the U.S. government, its agencies or instrumentalities, and corporate obligations including high-grade commercial paper, non-convertible corporate debt and loan participation interests. The fund may also invest in repurchase agreements related to these securities. - - LOOMIS SAYLES BOND FUND. The fund's investment objective is high total investment return through a combination of current income and capital appreciation. The fund seeks to attain its objective by normally investing substantially all of its assets in debt securities (including convertibles), although up to 20 percent of its assets may be invested in preferred stocks. At least 65 percent of the fund's total assets may be invested in bonds. The fund may invest any portion of its assets in securities of Canadian issuers, and a limited portion of its assets in securities of other foreign issuers. The fund will also invest less than 35 percent of its assets in securities of below investment grade quality. - - FIRST AMERICAN EQUITY INDEX FUND. This fund seeks to achieve investment results that correspond to the performance of the Standard and Poor's 500 Composite Stock Price Index (S&P 500). The fund invests substantially in common stocks included in the S&P 500. The fund's advisor believes that its objective can best be achieved by investing in the common stocks of approximately 250 to 500 of the issues included in the S&P 500. - - PBHG GROWTH FUND. The fund seeks capital appreciation and invests primarily in common stocks of small and medium capitalization companies believed to have an outlook for strong earnings growth and the potential for significant capital appreciation. The average market capitalizations or annual revenues of holdings in the portfolio may fluctuate over time as a result of market valuation levels and the availability of specific investment opportunities. You may elect to have your accounts credited with investment performance in any combination of the investment credit funds in 1 percent increments, as long as your total investment percentage equals 100 percent. If you make no investment credit election, you will receive credits as if you had elected the Loomis Sayles Bond Fund. RECEIVING INFORMATION ABOUT YOUR ACCOUNT You will receive a statement, currently on a quarterly basis, showing the status of your account credits in the ESP. In addition, you have daily access to information about your account by calling the Retirement Plans Service Center at 1-888-842-2756. 7 DISTRIBUTIONS FROM THE ESP RECEIVING YOUR DISTRIBUTIONS Distributions will be available only upon termination, permanent total disability or death. You can expect to receive your lump sum or first installment distribution beginning the February following the end of the calendar year in which the distribution event occurs. The distribution method is chosen upon your initial enrollment in the Plans and cannot be changed. CHOOSING YOUR DISTRIBUTION METHOD You have three distribution methods to choose from. The method you choose will be used for distributions for all four options in the Executive Savings Plans. If you do not elect a distribution option, you will automatically receive a lump sum payout of your account balance the February following the year of your termination, permanent total disability or death. - - LUMP SUM: A single payment of your entire account balance is paid out to you in February following the year in which you terminate, become disabled or die. For example, if you terminate employment on January 12, 1998, you will receive a single lump sum distribution in February 1999. - - THREE-YEAR INSTALLMENTS: The three installments will be paid annually beginning the February following the end of the calendar year in which you terminate, become disabled or die. For example, if you terminate employment on November 1, 1998, your installments will be paid in February 1999, February 2000 and February 2001. - - FIVE-YEAR INSTALLMENTS: The five installments are paid annually beginning the February following the end of the calendar year in which you terminate, become disabled or die. For example, if you terminate employment on April 25, 1998, your installments will be paid in February 1999, February 2000, February 2001, February 2002 and February 2003. 8 WHAT TO DO NEXT - - If you make a deferral election in the 401(k) Savings Plan, you will be enrolled automatically in the Automatic Restoration Option at your then current 401(k) Savings Plan deferral percentage. If you wish to "opt out" of this election, you must indicate so on a Deferral Election form. - - Decide whether or not participating in one of the other ESP Options is right for you. You may find it helpful to consult with a tax or financial advisor. Then, if you decide to enroll, complete and return the appropriate ESP election and beneficiary forms included in your packet. If you do not designate a beneficiary, your benefits will be paid in accordance with the Plan's provisions in the event of your death. - - If you have questions, call the Plan Administrator at (612) 936-1645. 9 IMPORTANT QUESTIONS AND ANSWERS ABOUT THE EXECUTIVE SAVINGS PLANS OPTIONS Q1. WHAT ARE THE DIFFERENCES BETWEEN THE EXECUTIVE SAVINGS PLANS AND THE 401(k) SAVINGS PLAN? A1. The United HealthCare 401(k) Savings Plan is a "qualified plan" under the Internal Revenue Code. Under 401(k) plans, participants can defer income into a trust fund, subject to certain limits. The chief limitations of 401(k) plans for executives are the various IRS-imposed caps on the amount that can be deferred. Because the Executive Savings Plans apply only to a select group of senior management and highly compensated employees and are not qualified plans, these limitations do not apply. Non-qualified plans are more flexible in their design and can be more selective in terms of the employees who are allowed to participate. The main advantages of these Plans are the substantially greater deferral opportunity they can offer, as well as the 50 cents per dollar match on the first six percent of salary deferred in the Automatic Restoration Option, or first six percent of MIP bonuses deferred into the Incentive (MIP) Deferral Option. The main disadvantage is that the Plans are not funded nor are assets held in a trust, but rather the account balances are paid directly by United HealthCare out of its general assets. As a result, there is not the same security as in a qualified plan. Participation in the Executive Savings Plans does not affect your ability to participate in the 401(k) Savings Plan. You can participate in either or both Plans. However, you will be enrolled in the Executive Savings Plans Automatic Restoration Option only if you are participating in the 401(k) Savings Plan. Q2. WHAT ARE MY CHOICES FOR RECEIVING DISTRIBUTIONS FROM THE PLANS? A2. When you enroll in the Plans, you need to elect the form of payment you wish to receive upon termination, death or disability: - One lump sum payment; - Annual installments over a three-year period; or - Annual installments over a five-year period. IF YOU DO NOT ELECT HOW YOU WANT YOUR ACCOUNT BALANCE DISTRIBUTED, IT WILL BE PAID OUT IN ONE LUMP SUM PAYMENT THE FEBRUARY FOLLOWING THE YEAR OF YOUR TERMINATION, PERMANENT TOTAL DISABILITY OR DEATH. THE DISTRIBUTION METHOD YOU ELECT DURING YOUR INITIAL ENROLLMENT FOR ESP IS IRREVOCABLE. YOU CANNOT CHANGE YOUR DISTRIBUTION METHOD IN THE FUTURE. 10 Q3. WHY DO I HAVE TO MAKE A DEFERRAL ELECTION BEFORE I KNOW WHAT I WILL BE PAID? A3. In exchange for the opportunity to defer taxation on unearned income, the IRS requires that an irrevocable election to defer income must be made before the income is actually earned. Since your election will remain in effect for an entire year, you may want to be conservative in your deferral amount. Q4. WHAT WOULD HAPPEN TO MY DEFERRALS IN THE EVENT THAT UNITED HEALTHCARE DECLARES BANKRUPTCY? A4. In the unlikely event that United HealthCare declares bankruptcy, ESP participants would be viewed as general creditors and the claims for their accounts would be treated in the manner and sequence stipulated by the bankruptcy laws. Typically, ESP participants would share, on a pro-rata basis with all other general unsecured creditors of the company, in any assets that remain after payment of the company's obligations to secured creditors. In contrast, benefits under the United HealthCare 401(k) Savings Plan would not be affected by the bankruptcy of United HealthCare since they already are funded in trust. Q5. ARE DISTRIBUTIONS ELIGIBLE TO BE ROLLED OVER INTO AN IRA? A5. No. Because these are not IRS tax-qualified plans, you cannot roll over your ESP distributions into an IRA or to another employer's qualified plan when you leave United HealthCare. When electing a non-qualified plan distribution, we encourage you to seek professional tax advice to determine the best course of action for your individual financial circumstances. Q6. HOW DO I KNOW HOW WELL THE INVESTMENT CREDIT OPTIONS ARE PERFORMING? A6. You have daily access to your account and the performance of the investment credit options by calling the Retirement Plans Service Center at 1-888-842-2756. In addition, you will receive a statement of your account balance (currently quarterly). The statement includes a chart showing the investment credit performance of each of the fund options. Of course, past performance is not a guarantee of future performance. 11 Q7. WHY AM I CREDITED WITH AN EMPLOYER MATCH CONTRIBUTION ON MY DEFERRALS UNDER THE AUTOMATIC RESTORATION OPTION AND INCENTIVE (MIP) DEFERRAL OPTION, BUT NOT UNDER MY DEFERRALS FOR THE SALARY DEFERRAL OPTION? A7. The Automatic Restoration Option and the Incentive (MIP) Deferral Option are intended to provide you with deferral and matching contribution opportunities that are similar to what would be available to you under the 401(k) Savings Plan, but which are not available to you because you are prevented from making further 401(k) Savings Plan deferrals as a result of reaching the 1998 $10,000 IRS deferral limit or the $160,000 compensation limit. The Salary Deferral Option is not designed or intended to "make up" for the 401(k) Savings Plan limitations, thus you are not credited with an employer match on deferrals you make under this Option. Q8. CAN I CHANGE MY DISTRIBUTION ELECTION AFTER I BEGIN PARTICIPATING IN THE PLANS? A8. No. Once your election has been made to defer funds into the Plans, the IRS prevents you from exercising any control over the form or timing of your distribution. This concept is referred to as "constructive receipt." Q9. IS THE EMPLOYER MATCH IN THE PLANS SUBJECT TO SOCIAL SECURITY (FICA) AND/OR INCOME TAXES? A9. The employer match is subject to FICA tax at the time that the match is credited to your ESP account. Whether the match is actually taxed depends on whether, at the time it is credited, you have exceeded the Social Security taxable wage base. The match will always be subject to and taxed under the OASDI portion of the FICA tax. The match is not, however, subject to federal or state income taxes at the time it is credited to your account. Instead, the match is generally subject to income tax when you receive a distribution from the Plans. 12 [LOGO] EX-10.(H) 5 EXHIBIT 10(H) EMPLOYMENT AGREEMENT This Agreement, effective as of October 16, 1998 (the "Effective Date"), is made by and between Jeannine M. Rivet ("Executive") and United HealthCare Services, Inc. ("United HealthCare") for the purpose of setting forth the terms and conditions of Executive's employment by United HealthCare, or an affiliate or subsidiary of United HealthCare, and to protect United HealthCare's knowledge, expertise, customer relationships and the confidential information United HealthCare has developed about its customers, products, operations and services. Unless the context otherwise requires, when used in this Agreement "United HealthCare" includes any entity affiliated with United HealthCare. WHEREAS, as additional consideration for entering into this Agreement Executive shall receive, upon execution of this Agreement, a nonqualified stock option to purchase 60,000 shares of United HealthCare Corporation ("UHC") common stock with a grant date the same as the Effective Date pursuant to the terms of the UHC Amended and Restated 1991 Stock and Incentive Plan. WHEREAS, Executive and United HealthCare desire to enter into this Agreement, which shall supersede any and all other prior employment-related agreements between Executive and United HealthCare. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows: 1. EMPLOYMENT AND DUTIES; TERMINATION OF PRIOR AGREEMENTS. A. EMPLOYMENT. United HealthCare hereby employs Executive, either directly or through an affiliate or subsidiary of United HealthCare, and Executive hereby accepts such employment on the terms and conditions set forth in this Agreement. Except as specifically superseded by this Agreement, Executive's employment hereunder shall be subject to all of United HealthCare's policies and procedures in regard to its employees. Executive's employment hereunder shall begin on the Effective Date and shall continue until terminated as set forth in Section 3 hereof. B. DUTIES. Executive shall initially hold the executive level position of CEO, Health Plans and perform the duties associated therewith. Executive shall perform such other executive level responsibilities as are reasonably assigned Executive from time to time. Executive agrees to devote substantially all of Executive's business time and energy to the performance of Executive's duties in a diligent and proper manner. C. TERMINATION OF PRIOR AGREEMENTS. As of the Effective Date all other prior employment related agreements between Executive and United HealthCare will terminate in their entirety and no longer be of any force or effect. 2. COMPENSATION. A. BASE SALARY. Executive shall initially be paid a base annual salary in the amount of $400,000, payable bi-weekly, less all applicable withholdings and deductions (the "Initial Base Salary"). Executive shall receive a periodic performance review and consideration for an increase in the Initial Base Salary. B. BONUS AND STOCK PLANS. Executive shall be eligible to participate in the incentive compensation plans and the stock option and grant plans maintained by United HealthCare or an affiliate or subsidiary of United HealthCare, in the sole discretion of United HealthCare and in accordance with the terms and conditions of those plans and applicable laws and regulations. C. EMPLOYEE BENEFITS. Executive shall be eligible to participate in the employee benefit plans maintained by either United HealthCare or an affiliate or subsidiary of United HealthCare, including without limitation, any life, health, dental, short-term and long-term disability insurance coverages and any retirement plans, in the sole discretion of United HealthCare and in accordance with the terms and conditions of those plans and applicable laws and regulations. D. VACATION; ILLNESS. Executive shall be eligible for paid vacation and sick leave each year in accordance with the then-current policies of either United HealthCare or an affiliate or subsidiary of United HealthCare, in the sole discretion of United HealthCare and in accordance with the terms and conditions of those plans and applicable laws and regulations. 3. TERM AND TERMINATION. A. TERM. The term of this Agreement shall begin on the Effective Date and shall continue until terminated as set forth in Section 3B. B. TERMINATION OF AGREEMENT. 1. BY MUTUAL AGREEMENT. This Agreement and Executive's employment hereunder may be terminated at any time by the mutual written agreement of the parties. 2. BY UNITED HEALTHCARE. United HealthCare may terminate this Agreement and Executive's employment hereunder on 30 days' written notice. 3. BY EXECUTIVE. Executive may terminate this Agreement and Executive's employment hereunder on 30 days' written notice. 4. DEATH, DISABILITY, ETC. This Agreement and Executive's employment by United HealthCare shall terminate immediately upon Executive's death. This Agreement and Executive's employment hereunder shall automatically terminate in the event of a permanent and total disability which renders Executive incapable of -2- performing Executive's duties, with or without reasonable accommodation. United HealthCare has the sole discretion to determine whether Executive is permanently or totally disabled with the meaning of this Section 3B4, and the effective date on which Executive was rendered so disabled. C. EMPLOYEE BENEFITS. On the effective date of the termination of this Agreement and Executive's employment by United HealthCare, Executive shall cease to be eligible for all employee benefit plans maintained by United HealthCare, except as required by federal or state continuation of coverage laws ("COBRA Benefits"). If Executive elects COBRA Benefits, Executive shall pay the entire cost of such benefits either through after-tax payroll deductions from the cash component of any severance compensation Executive receives or directly if Executive does not receive such severance compensation or if such severance compensation ceases. D. SEVERANCE EVENTS AND BENEFITS. If a Severance Event, as hereinafter defined, occurs, Executive shall receive the severance benefits set forth in this Section 3D for a period of 12 months from the effective date of the applicable Severance Event (the "Severance Period"). For purposes of this Agreement a Severance Event shall occur if and when: (i) United HealthCare (a) terminates this Agreement and Executive's employment without Cause, as hereinafter defined, or (b) terminates this Agreement without terminating Executive's employment and Executive elects to treat such termination of this Agreement as a Change in Employment, as hereinafter defined (collectively a "Termination without Cause"), or (ii) Within two years following a Change in Control, as hereinafter defined, either (a) United HealthCare terminates this Agreement and Executive's employment without Cause, or (b) a Change in Employment occurs and Executive elects to treat such Change in Employment as a termination of Executive's employment (collectively a "Termination following a Change in Control"). 1. SEVERANCE COMPENSATION. Executive shall receive the following severance compensation (the "Severance Compensation"): a) TERMINATION WITHOUT CAUSE. Subject to Section 3D(1)(b) below, upon a Termination without Cause Executive shall receive biweekly payments equal to 1/26 of two times the sum of (1) Executive's annualized base salary as of the date of the Severance Event, less all applicable withholdings or deductions required by law and Executive's COBRA Benefit payments, if any, plus (2) one-half of the total of any bonus or incentive compensation paid or payable to Executive for the two most recent calendar years (excluding any special or one-time bonus or incentive compensation payments), or if Executive has been eligible for such bonus or incentive compensation payments for less than two such periods, the last such payment paid or payable to Executive (excluding any special or one-time bonus or incentive compensation payments). -3- b) TERMINATION FOLLOWING A CHANGE IN CONTROL. Upon a Termination following a Change in Control, Executive shall receive biweekly payments equal to 1/26 of three times the sum of (1) Executive's highest annualized base salary during the 2 year period immediately preceding the Severance Event, less all applicable withholdings or deductions required by law and Executive's COBRA Benefit payments, if any, plus (2) the greater of (i) all bonuses that would be payable to Executive under any incentive compensation plans in which Executive then participates at Executive's then-current target level, or (ii) one-half of the total of any bonus or incentive compensation paid or payable to Executive for the two most recent calendar years (excluding any special or one-time bonus or incentive compensation payments), or if Executive has been eligible for such bonus or incentive compensation payments for less than two such periods, the last such payment paid or payable to Executive (excluding any special or one-time bonus or incentive compensation payments. 2. CASH PAYMENT. Executive shall receive a one-time cash payment within a reasonable time following commencement of the Severance Period in an amount equal to the portion of the premiums that United HealthCare, or its affiliate or subsidiary, as applicable, subsidizes for employee-only health, dental and group term life benefit coverages (the "Cash Payment"). The Cash Payment shall cover the Severance Period and shall be determined as of the effective date of the applicable Severance Event. 3. JOB SEARCH FEES. For a period not to exceed the Severance Period, United HealthCare shall pay to an outplacement firm selected by United HealthCare an amount deemed reasonable by United HealthCare for outplacement and job search services for Executive. 4. EXCISE TAX PAYMENT. If any portion of the Severance Compensation payable upon a Termination following a Change in Control constitutes an Excess Parachute Payment, as hereinafter defined, such that an Excise Tax, as hereinafter defined, is due, Executive shall receive a one-time cash payment in an amount sufficient to cover (a) the full cost of the Excise Tax plus (b) Executive's federal, state and city income, employment and Excise Tax on this one-time cash payment and on all such iterative payments so that Executive is made entirely whole for the impact of the Excise Tax (collectively the "Gross-Up Payment"). United HealthCare shall calculate these amounts on a timely and accurate basis, and for this purpose Executive shall be deemed to be in the highest marginal rate of federal, state and city taxes. The Gross-Up Payment shall be made within 30 days following the effective date of Executive's employment termination. For purposes of this Agreement the term "Excess Parachute Payment" shall have the meaning set forth in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). For purposes of this Agreement the term "Excise Tax" shall mean the tax imposed on an Excess Parachute Payment pursuant to Sections 280G and 4999 of the Code. -4- This Section 3D shall be the sole liability of United HealthCare to Executive upon the termination of this Agreement and Executive's employment hereunder, and shall replace and be in lieu of any payments or benefits which otherwise might be owed Executive under any other severance plan or program maintained by United HealthCare. Such compensation and benefits shall be conditioned on receipt by United HealthCare of a separation agreement and a release of claims by Executive on terms and conditions acceptable to United HealthCare in its sole discretion. E. DEFINITIONS AND PROCEDURES. 1. CAUSE. For purposes of this Agreement "Cause" shall mean (a) the refusal of Executive to follow the reasonable direction of the Board of Directors of United HealthCare or Executive's supervisor or to perform any duties reasonably required on material matters by United HealthCare, (b) material violations of United HealthCare's Code of Conduct or (c) the commission of any criminal act or act of fraud or dishonesty by Executive in connection with Executive's employment by United HealthCare. Prior to the termination of Executive's employment under subsection (a) of this definition of Cause, United HealthCare shall provide Executive with a 30 day notice specifying the basis for Cause. If the Cause described in the notice is cured to United HealthCare's reasonable satisfaction prior to the end of the 30 day notice period, Executive's employment hereunder shall not be terminated on that basis. 2. CHANGE IN CONTROL. For purposes of this Agreement "Change in Control" shall mean (a) the acquisition by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than United HealthCare or any employee benefit plan of United HealthCare, of beneficial ownership (as defined in the Exchange Act) of 20% or more of the common stock of UHC or the combined voting power of UHC's then-outstanding voting securities in a transaction or series of transactions not approved in advanced by a vote of at least three-quarters of the directors of UHC; (b) a change in 50% or more of the directors of UHC in any 12 month period; (c) the approval by the shareholders of UHC of a reorganization, merger, consolidation, liquidation or dissolution of UHC or of the sale (in one transaction or a series of related transactions) of all or substantially all of the assets of UHC other than a reorganization, merger, consolidation, liquidation, dissolution or sale approved in advance by a vote of at least three-quarters of the directors; (d) the first purchase under any tender offer or exchange offer (other than an offer by UHC) pursuant to which shares of UHC common stock are purchased; or (e) at least a majority of the directors of UHC determine in their sole discretion that there has been a change of control of UHC. 3. CHANGE IN EMPLOYMENT. For purposes of this Agreement a "Change in Employment" shall be deemed to have occurred (a) if (i) Executive's duties are materially and adversely changed without Executive's prior consent, (ii) Executive's salary or benefits are reduced other than as a general reduction of salaries and -5- benefits by United HealthCare, (iii) without terminating Executive's employment United HealthCare terminates this Agreement, or (iv) the geographic location for the performance of Executive's duties hereunder is moved more than 50 miles from the geographic location at the Effective Date without Executive's prior consent, and (b) if in each case under subsections (a) (i), (ii), (iii) and (iv), in the period beginning 90 days before the time the Change in Employment occurs, Cause does not exist or if Cause does exist United HealthCare has not given Executive written notice that Cause exists. Notwithstanding the foregoing, an isolated, insubstantial or inadvertent action by United HealthCare, which is remedied by United HealthCare within 30 days after receipt of notice thereof by Executive, shall not constitute a Change in Employment. Executive may elect to treat a Change in Employment as a termination of this Agreement and Executive's employment hereunder. To do so Executive shall send written notice of such election to United HealthCare within 90 days after the date Executive receives notice from United HealthCare or otherwise is definitively informed of the events constituting the Change in Employment. No Change in Employment shall be deemed to have occurred if Executive fails to send the notice of election within the 90 day period. Executive's failure to treat a particular Change in Employment as a termination of employment shall not preclude Executive from treating a subsequent Change in Employment as a termination of employment. The effective date of a Change in Employment termination shall be the date 30 days after United HealthCare receives the written notice of election. 4. PROPERTY RIGHTS, CONFIDENTIALITY, NON-DISPARAGEMENT, NON-SOLICIT AND NON-COMPETE PROVISIONS. A. UNITED HEALTHCARE'S PROPERTY. 1. ASSIGNMENT OF PROPERTY RIGHTS. Executive shall promptly disclose to United HealthCare in writing all inventions, discoveries and works of authorship, whether or not patentable or copyrightable, which are conceived, made, discovered, written or created by Executive alone or jointly with another person, group or entity, whether during the normal hours of employment at United HealthCare or on Executive's own time, during the term of this Agreement. Executive assigns all rights to all such inventions and works of authorship to United HealthCare. Executive shall give United HealthCare any assistance it reasonably requires in order for United HealthCare to perfect, protect, and use its rights to inventions and works of authorship. This provision shall not apply to an invention for which no equipment, supplies, facility or trade secret information of United HealthCare was used and which was developed entirely on the Executive's own time and which (1) does not relate to the business of United HealthCare or to United HealthCare's anticipated research or development, or (2) does not result from any work performed by the Executive for United HealthCare. -6- 2. NO REMOVAL OF PROPERTY. Executive shall not remove any records, documents, or any other tangible items (excluding Executive's personal property) from the premises of United HealthCare in either original or duplicate form, except as is needed in the ordinary course of conducting business for United HealthCare. 3. RETURN OF PROPERTY. Executive shall immediately deliver to United HealthCare, upon termination of employment with United HealthCare, or at any other time upon United HealthCare's request, any property, records, documents, and other tangible items (excluding Executive's personal property) in Executive's possession or control, including data incorporated in word processing, computer and other data storage media, and all copies of such records, documents and information, including all Confidential Information, as defined below. B. CONFIDENTIAL INFORMATION. During the course of employment Executive will develop, become aware of and accumulate expertise, knowledge and information regarding United HealthCare's organization, strategies, business and operations and United HealthCare's past, current or potential customers and suppliers. United HealthCare considers such expertise, knowledge and information to be valuable, confidential and proprietary and it shall be considered Confidential Information for purposes of this Agreement. During this Agreement and at all times thereafter Executive shall not use such Confidential Information or disclose it to other persons or entities except as is necessary for the performance of Executive's duties for United HealthCare or as has been expressly permitted in writing by United HealthCare. This Section 4B shall survive the termination of this Agreement. C. NON-DISPARAGEMENT. Executive agrees that he will not criticize, make any negative comments or otherwise disparage or put in disrepute United HealthCare, or those associated with United HealthCare, in any way, whether orally, in writing or otherwise, directly or by implication in communication with any person, including but not limited to customers or agents of United HealthCare. This Section 4C shall survive the termination of this Agreement. D. NON-SOLICITATION. During (i) the term of this Agreement, (ii) the Severance Period or any period in which Executive receives severance compensation pursuant to United HealthCare' election under Section 4E, as applicable (iii) any period following the termination or expiration of this Agreement during which Executive remains employed by United HealthCare and (iv) for a period of one year after the last day of the latest of any period described in (i), (ii) or (iii), Executive shall not (y) directly or indirectly attempt to hire away any then-current employee of United HealthCare or a subsidiary of United HealthCare or to persuade any such employee to leave employment with United HealthCare, or (z) directly or indirectly solicit, divert, or take away, or attempt to solicit, divert, or take away, the business of any person, partnership, company or corporation with whom United HealthCare (including any subsidiary or affiliated company in which United HealthCare has a more than 20% equity interest) has established or is actively seeking to establish a business or customer relationship. This Section 4D shall survive the termination of this Agreement. -7- E. NON-COMPETITION. During (i) the term of this Agreement, (ii) the Severance Period or any period in which Executive receives severance compensation pursuant to United HealthCare' election under this Section 4E, as applicable, and (iii) any period following the termination or expiration of this Agreement during which Executive remains employed by United HealthCare, Executive shall not, without United HealthCare's prior written consent, engage or participate, either individually or as an employee, consultant or principal, partner, agent, trustee, officer or director of a corporation, partnership or other business entity, in any business in which United HealthCare (including any subsidiary or affiliated company in which United HealthCare has more than a 20% equity interest) is engaged. If Executive terminates this Agreement, and as of such termination or within 90 days of such termination Executive also terminates Executive's employment by United HealthCare, United HealthCare may elect to have the provisions of this Section 4E be in effect for up to 24 months following the effective date of Executive's employment termination if, during the period up to 24 months specified by United HealthCare, United HealthCare pays Executive severance compensation equal to biweekly payments of 1/26 of the Severance Compensation and the Cash Payment. United HealthCare must send written notice of such election within 10 days after it receives written notice of Executive's termination of employment. This Section 4E shall survive the termination of this Agreement. 5. MISCELLANEOUS. A. ASSIGNMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties and their successors and assigns, but may not be assigned by either party without the prior written consent of the other party, except that United HealthCare in its sole discretion may assign this Agreement to an entity controlled by United HealthCare at the time of the assignment. If United HealthCare subsequently loses or gives up control of the entity to which this Agreement is assigned, such entity shall become United HealthCare for all purposes under this Agreement, beginning on the date on which United HealthCare loses or gives up control of the entity. Any successor to United HealthCare shall be deemed to be United HealthCare for all purposes of this Agreement. B. NOTICES. All notices under this Agreement shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed by registered or certified mail, return receipt requested, postage prepaid, to the party to receive the same at the address set forth below or at such other address as may have been furnished by proper notice. United HealthCare: 300 Opus Center 9900 Bren Road East Minnetonka, MN 55343 Attn: General Counsel Executive: -8- C. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties with respect to its subject matter and may be amended or modified only by a subsequent written amendment executed by the parties. This Agreement replaces and supersedes any and all prior employment or employment related agreements and understandings, including any letters or memos which may have been construed as agreements, between the Executive and United HealthCare. D. CHOICE OF LAW. This Agreement shall be construed and interpreted under the applicable laws and decisions of the State of Minnesota. E. WAIVERS. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy under this Agreement shall operate as a waiver; nor shall any single or partial exercise of any right or remedy preclude any other or further exercise of any right or remedy. F. ADEQUACY OF CONSIDERATION. Executive acknowledges and agrees that Executive has received adequate consideration from United HealthCare to enter into this Agreement. G. DISPUTE RESOLUTION AND REMEDIES. Any dispute arising between the parties relating to this Agreement or to Executive's employment by United HealthCare shall be resolved by binding arbitration pursuant to United HealthCare' Employment Arbitration Policy. The arbitrators shall not ignore or vary the terms of this Agreement and shall be bound by and apply controlling law. The parties acknowledge that Executive's failure to comply with the Confidential Information, Non-Solicitation and Non-Competition provisions of this Agreement will cause immediate and irreparable injury to United HealthCare 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. H. NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer or be deemed or construed to confer any rights or benefits upon any person other than the parties. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE ENFORCED BY THE PARTIES. IN WITNESS WHEREOF, this Agreement has been signed by the parties hereto as of the Effective Date set forth above. United HealthCare Services, Inc. Executive By /s/ Robert J. Backes /s/ Jeannine M. Rivet -------------------------------- -------------------------- Its Senior Vice President, Human Resources -9- This memorandum of understanding, effective as of October 16, 1998, supplements and amends the employment agreement, effective as of October 16, 1998, between Jeannine Rivet and United HealthCare Services, Inc. as set forth below. 1. The parties agree that Section 3(D)(i) is amended in its entirety to read: United HealthCare (a) terminates this Agreement and Executive's employment without Cause, as hereinafter defined, or (b) a Change in Employment, as hereinafter defined occurs (collectively a "Termination without Cause"), or 2. The parties confirm that a change in responsibility, in and of itself will not constitute a Change in Employment, acknowledging that so long as Executive retains senior executive level functional, administrative, or operational responsibility no Change of Employment shall have occurred solely as a result of such change in responsibility or title. 3. For purposes of the non-competition provisions of Section 4(E), the parties concur that employment in the health care industry is not absolutely prohibited by Section 4(E), it being the intent of the parties in Section 4 (E) to limit Executive's future employment by managed care, health care insurance, physician management, or other, similar type of organization. 4. The references in Section 4(E) to "24 months" are amended to read "12 months." In all other respects the parties reaffirm and agree to be bound by the provisions of the Employment Agreement, effective as of the date set forth above. United HealthCare Services, Inc. Executive By /s/ Robert J. Backes /s/ Jeannine M. Rivet -------------------------------- -------------------------- Its Senior Vice President, Jeannine M. Rivet Human Resources EX-10.(J) 6 EXHIBIT 10(J) EMPLOYMENT AGREEMENT This Agreement, effective as of October 16, 1998 (the "Effective Date"), is made by and between David J. Lubben ("Executive") and United HealthCare Services, Inc. ("United HealthCare") for the purpose of setting forth the terms and conditions of Executive's employment by United HealthCare, or an affiliate or subsidiary of United HealthCare, and to protect United HealthCare's knowledge, expertise, customer relationships and the confidential information United HealthCare has developed about its customers, products, operations and services. Unless the context otherwise requires, when used in this Agreement "United HealthCare" includes any entity affiliated with United HealthCare. WHEREAS, as additional consideration for entering into this Agreement Executive shall receive, upon execution of this Agreement, a nonqualified stock option to purchase 50,000 shares of United HealthCare Corporation ("UHC") common stock with a grant date the same as the Effective Date pursuant to the terms of the UHC Amended and Restated 1991 Stock and Incentive Plan. WHEREAS, Executive and United HealthCare desire to enter into this Agreement, which shall supersede any and all other prior employment-related agreements between Executive and United HealthCare. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows: 1. EMPLOYMENT AND DUTIES; TERMINATION OF PRIOR AGREEMENTS. A. EMPLOYMENT. United HealthCare hereby employs Executive, either directly or through an affiliate or subsidiary of United HealthCare, and Executive hereby accepts such employment on the terms and conditions set forth in this Agreement. Except as specifically superseded by this Agreement, Executive's employment hereunder shall be subject to all of United HealthCare's policies and procedures in regard to its employees. Executive's employment hereunder shall begin on the Effective Date and shall continue until terminated as set forth in Section 3 hereof. B. DUTIES. Executive shall initially hold the executive level position of General Counsel and perform the duties associated therewith. Executive shall perform such other executive level responsibilities as are reasonably assigned Executive from time to time. Executive agrees to devote substantially all of Executive's business time and energy to the performance of Executive's duties in a diligent and proper manner. C. TERMINATION OF PRIOR AGREEMENTS. As of the Effective Date all other prior employment related agreements between Executive and United HealthCare will terminate in their entirety and no longer be of any force or effect. 2. COMPENSATION. A. BASE SALARY. Executive shall initially be paid a base annual salary in the amount of $300,000, payable bi-weekly, less all applicable withholdings and deductions (the "Initial Base Salary"). Executive shall receive a periodic performance review and consideration for an increase in the Initial Base Salary. B. BONUS AND STOCK PLANS. Executive shall be eligible to participate in the incentive compensation plans and the stock option and grant plans maintained by United HealthCare or an affiliate or subsidiary of United HealthCare, in the sole discretion of United HealthCare and in accordance with the terms and conditions of those plans and applicable laws and regulations. C. EMPLOYEE BENEFITS. Executive shall be eligible to participate in the employee benefit plans maintained by either United HealthCare or an affiliate or subsidiary of United HealthCare, including without limitation, any life, health, dental, short-term and long-term disability insurance coverages and any retirement plans, in the sole discretion of United HealthCare and in accordance with the terms and conditions of those plans and applicable laws and regulations. D. VACATION; ILLNESS. Executive shall be eligible for paid vacation and sick leave each year in accordance with the then-current policies of either United HealthCare or an affiliate or subsidiary of United HealthCare, in the sole discretion of United HealthCare and in accordance with the terms and conditions of those plans and applicable laws and regulations. 3. TERM AND TERMINATION. A. TERM. The term of this Agreement shall begin on the Effective Date and shall continue until terminated as set forth in Section 3B. B. TERMINATION OF AGREEMENT. 1. BY MUTUAL AGREEMENT. This Agreement and Executive's employment hereunder may be terminated at any time by the mutual written agreement of the parties. 2. BY UNITED HEALTHCARE. United HealthCare may terminate this Agreement and Executive's employment hereunder on 30 days' written notice. 3. BY EXECUTIVE. Executive may terminate this Agreement and Executive's employment hereunder on 30 days' written notice. -2- 4. DEATH, DISABILITY, ETC. This Agreement and Executive's employment by United HealthCare shall terminate immediately upon Executive's death. This Agreement and Executive's employment hereunder shall automatically terminate in the event of a permanent and total disability which renders Executive incapable of performing Executive's duties, with or without reasonable accommodation. United HealthCare has the sole discretion to determine whether Executive is permanently or totally disabled with the meaning of this Section 3B4, and the effective date on which Executive was rendered so disabled. C. EMPLOYEE BENEFITS. On the effective date of the termination of this Agreement and Executive's employment by United HealthCare, Executive shall cease to be eligible for all employee benefit plans maintained by United HealthCare, except as required by federal or state continuation of coverage laws ("COBRA Benefits"). If Executive elects COBRA Benefits, Executive shall pay the entire cost of such benefits either through after-tax payroll deductions from the cash component of any severance compensation Executive receives or directly if Executive does not receive such severance compensation or if such severance compensation ceases. D. SEVERANCE EVENTS AND BENEFITS. If a Severance Event, as hereinafter defined, occurs, Executive shall receive the severance benefits set forth in this Section 3D for a period of 12 months from the effective date of the applicable Severance Event (the "Severance Period"). For purposes of this Agreement a Severance Event shall occur if and when: (i) United HealthCare (a) terminates this Agreement and Executive's employment without Cause, as hereinafter defined, or (b) terminates this Agreement without terminating Executive's employment and Executive elects to treat such termination of this Agreement as a Change in Employment, as hereinafter defined (collectively a "Termination without Cause"), or (ii) Within two years following a Change in Control, as hereinafter defined, either (a) United HealthCare terminates this Agreement and Executive's employment without Cause, or (b) a Change in Employment occurs and Executive elects to treat such Change in Employment as a termination of Executive's employment (collectively a "Termination following a Change in Control"). 1. SEVERANCE COMPENSATION. Executive shall receive the following severance compensation (the "Severance Compensation"): a) TERMINATION WITHOUT CAUSE. Subject to Section 3D(1)(b) below, upon a Termination without Cause Executive shall receive biweekly payments equal to 1/26 of two times the sum of (1) Executive's annualized base salary as of the date of the Severance Event, less all applicable withholdings or deductions required by law and Executive's COBRA Benefit -3- payments, if any, plus (2) one-half of the total of any bonus or incentive compensation paid or payable to Executive for the two most recent calendar years (excluding any special or one-time bonus or incentive compensation payments), or if Executive has been eligible for such bonus or incentive compensation payments for less than two such periods, the last such payment paid or payable to Executive (excluding any special or one-time bonus or incentive compensation payments). b) TERMINATION FOLLOWING A CHANGE IN CONTROL. Upon a Termination following a Change in Control, Executive shall receive biweekly payments equal to 1/26 of three times the sum of (1) Executive's highest annualized base salary during the 2 year period immediately preceding the Severance Event, less all applicable withholdings or deductions required by law and Executive's COBRA Benefit payments, if any, plus (2) the greater of (i) all bonuses that would be payable to Executive under any incentive compensation plans in which Executive then participates at Executive's then-current target level, or (ii) one-half of the total of any bonus or incentive compensation paid or payable to Executive for the two most recent calendar years (excluding any special or one-time bonus or incentive compensation payments), or if Executive has been eligible for such bonus or incentive compensation payments for less than two such periods, the last such payment paid or payable to Executive (excluding any special or one-time bonus or incentive compensation payments. 2. CASH PAYMENT. Executive shall receive a one-time cash payment within a reasonable time following commencement of the Severance Period in an amount equal to the portion of the premiums that United HealthCare, or its affiliate or subsidiary, as applicable, subsidizes for employee-only health, dental and group term life benefit coverages (the "Cash Payment"). The Cash Payment shall cover the Severance Period and shall be determined as of the effective date of the applicable Severance Event. 3. JOB SEARCH FEES. For a period not to exceed the Severance Period, United HealthCare shall pay to an outplacement firm selected by United HealthCare an amount deemed reasonable by United HealthCare for outplacement and job search services for Executive. 4. EXCISE TAX PAYMENT. If any portion of the Severance Compensation payable upon a Termination following a Change in Control constitutes an Excess Parachute Payment, as hereinafter defined, such that an Excise Tax, as hereinafter defined, is due, Executive shall receive a one-time cash payment in an amount sufficient to cover (a) the full cost of the Excise Tax plus (b) Executive's federal, state and city income, employment and Excise Tax on this one-time cash payment and on all such iterative payments so that Executive is made entirely -4- whole for the impact of the Excise Tax (collectively the "Gross-Up Payment"). United HealthCare shall calculate these amounts on a timely and accurate basis, and for this purpose Executive shall be deemed to be in the highest marginal rate of federal, state and city taxes. The Gross-Up Payment shall be made within 30 days following the effective date of Executive's employment termination. For purposes of this Agreement the term "Excess Parachute Payment" shall have the meaning set forth in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). For purposes of this Agreement the term "Excise Tax" shall mean the tax imposed on an Excess Parachute Payment pursuant to Sections 280G and 4999 of the Code. This Section 3D shall be the sole liability of United HealthCare to Executive upon the termination of this Agreement and Executive's employment hereunder, and shall replace and be in lieu of any payments or benefits which otherwise might be owed Executive under any other severance plan or program maintained by United HealthCare. Such compensation and benefits shall be conditioned on receipt by United HealthCare of a separation agreement and a release of claims by Executive on terms and conditions acceptable to United HealthCare in its sole discretion. E. DEFINITIONS AND PROCEDURES. 1. CAUSE. For purposes of this Agreement "Cause" shall mean (a) the refusal of Executive to follow the reasonable direction of the Board of Directors of United HealthCare or Executive's supervisor or to perform any duties reasonably required on material matters by United HealthCare, (b) material violations of United HealthCare's Code of Conduct or (c) the commission of any criminal act or act of fraud or dishonesty by Executive in connection with Executive's employment by United HealthCare. Prior to the termination of Executive's employment under subsection (a) of this definition of Cause, United HealthCare shall provide Executive with a 30 day notice specifying the basis for Cause. If the Cause described in the notice is cured to United HealthCare's reasonable satisfaction prior to the end of the 30 day notice period, Executive's employment hereunder shall not be terminated on that basis. 2. CHANGE IN CONTROL. For purposes of this Agreement "Change in Control" shall mean (a) the acquisition by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than United HealthCare or any employee benefit plan of United HealthCare, of beneficial ownership (as defined in the Exchange Act) of 20% or more of the common stock of UHC or the combined voting power of UHC's then-outstanding voting securities in a transaction or series of transactions not approved in advanced by a vote of at least three-quarters of the directors of UHC; (b) a change in 50% or more of the directors of UHC in any 12 month period; (c) the approval by the shareholders of UHC of a reorganization, merger, -5- consolidation, liquidation or dissolution of UHC or of the sale (in one transaction or a series of related transactions) of all or substantially all of the assets of UHC other than a reorganization, merger, consolidation, liquidation, dissolution or sale approved in advance by a vote of at least three-quarters of the directors; (d) the first purchase under any tender offer or exchange offer (other than an offer by UHC) pursuant to which shares of UHC common stock are purchased; or (e) at least a majority of the directors of UHC determine in their sole discretion that there has been a change of control of UHC. 3. CHANGE IN EMPLOYMENT. For purposes of this Agreement a "Change in Employment" shall be deemed to have occurred (a) if (i) Executive's duties are materially and adversely changed without Executive's prior consent, (ii) Executive's salary or benefits are reduced other than as a general reduction of salaries and benefits by United HealthCare, (iii) without terminating Executive's employment United HealthCare terminates this Agreement, or (iv) the geographic location for the performance of Executive's duties hereunder is moved more than 50 miles from the geographic location at the Effective Date without Executive's prior consent, and (b) if in each case under subsections (a) (i), (ii), (iii) and (iv), in the period beginning 90 days before the time the Change in Employment occurs, Cause does not exist or if Cause does exist United HealthCare has not given Executive written notice that Cause exists. Notwithstanding the foregoing, an isolated, insubstantial or inadvertent action by United HealthCare, which is remedied by United HealthCare within 30 days after receipt of notice thereof by Executive, shall not constitute a Change in Employment. Executive may elect to treat a Change in Employment as a termination of this Agreement and Executive's employment hereunder. To do so Executive shall send written notice of such election to United HealthCare within 90 days after the date Executive receives notice from United HealthCare or otherwise is definitively informed of the events constituting the Change in Employment. No Change in Employment shall be deemed to have occurred if Executive fails to send the notice of election within the 90 day period. Executive's failure to treat a particular Change in Employment as a termination of employment shall not preclude Executive from treating a subsequent Change in Employment as a termination of employment. The effective date of a Change in Employment termination shall be the date 30 days after United HealthCare receives the written notice of election. 4. PROPERTY RIGHTS, CONFIDENTIALITY, NON-DISPARAGEMENT, NON-SOLICIT AND NON-COMPETE PROVISIONS. A. UNITED HEALTHCARE'S PROPERTY. 1. ASSIGNMENT OF PROPERTY RIGHTS. Executive shall promptly disclose to United HealthCare in writing all inventions, discoveries and works of authorship, whether or not patentable or copyrightable, which are conceived, made, discovered, written -6- or created by Executive alone or jointly with another person, group or entity, whether during the normal hours of employment at United HealthCare or on Executive's own time, during the term of this Agreement. Executive assigns all rights to all such inventions and works of authorship to United HealthCare. Executive shall give United HealthCare any assistance it reasonably requires in order for United HealthCare to perfect, protect, and use its rights to inventions and works of authorship. This provision shall not apply to an invention for which no equipment, supplies, facility or trade secret information of United HealthCare was used and which was developed entirely on the Executive's own time and which (1) does not relate to the business of United HealthCare or to United HealthCare's anticipated research or development, or (2) does not result from any work performed by the Executive for United HealthCare. 2. NO REMOVAL OF PROPERTY. Executive shall not remove any records, documents, or any other tangible items (excluding Executive's personal property) from the premises of United HealthCare in either original or duplicate form, except as is needed in the ordinary course of conducting business for United HealthCare. 3. RETURN OF PROPERTY. Executive shall immediately deliver to United HealthCare, upon termination of employment with United HealthCare, or at any other time upon United HealthCare's request, any property, records, documents, and other tangible items (excluding Executive's personal property) in Executive's possession or control, including data incorporated in word processing, computer and other data storage media, and all copies of such records, documents and information, including all Confidential Information, as defined below. B. CONFIDENTIAL INFORMATION. During the course of employment Executive will develop, become aware of and accumulate expertise, knowledge and information regarding United HealthCare's organization, strategies, business and operations and United HealthCare's past, current or potential customers and suppliers. United HealthCare considers such expertise, knowledge and information to be valuable, confidential and proprietary and it shall be considered Confidential Information for purposes of this Agreement. During this Agreement and at all times thereafter Executive shall not use such Confidential Information or disclose it to other persons or entities except as is necessary for the performance of Executive's duties for United HealthCare or as has been expressly permitted in writing by United HealthCare. This Section 4B shall survive the termination of this Agreement. C. NON-DISPARAGEMENT. Executive agrees that he will not criticize, make any negative comments or otherwise disparage or put in disrepute United HealthCare, or those associated with United HealthCare, in any way, whether orally, in writing or otherwise, directly or by implication in communication with any person, including but not limited to -7- customers or agents of United HealthCare. This Section 4C shall survive the termination of this Agreement. D. NON-SOLICITATION. During (i) the term of this Agreement, (ii) the Severance Period or any period in which Executive receives severance compensation pursuant to United HealthCare' election under Section 4E, as applicable (iii) any period following the termination or expiration of this Agreement during which Executive remains employed by United HealthCare and (iv) for a period of one year after the last day of the latest of any period described in (i), (ii) or (iii), Executive shall not (y) directly or indirectly attempt to hire away any then-current employee of United HealthCare or a subsidiary of United HealthCare or to persuade any such employee to leave employment with United HealthCare, or (z) directly or indirectly solicit, divert, or take away, or attempt to solicit, divert, or take away, the business of any person, partnership, company or corporation with whom United HealthCare (including any subsidiary or affiliated company in which United HealthCare has a more than 20% equity interest) has established or is actively seeking to establish a business or customer relationship. This Section 4D shall survive the termination of this Agreement. 5. MISCELLANEOUS. A. ASSIGNMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties and their successors and assigns, but may not be assigned by either party without the prior written consent of the other party, except that United HealthCare in its sole discretion may assign this Agreement to an entity controlled by United HealthCare at the time of the assignment. If United HealthCare subsequently loses or gives up control of the entity to which this Agreement is assigned, such entity shall become United HealthCare for all purposes under this Agreement, beginning on the date on which United HealthCare loses or gives up control of the entity. Any successor to United HealthCare shall be deemed to be United HealthCare for all purposes of this Agreement. B. NOTICES. All notices under this Agreement shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed by registered or certified mail, return receipt requested, postage prepaid, to the party to receive the same at the address set forth below or at such other address as may have been furnished by proper notice. United HealthCare: 300 Opus Center 9900 Bren Road East Minnetonka, MN 55343 Executive: -8- C. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties with respect to its subject matter and may be amended or modified only by a subsequent written amendment executed by the parties. This Agreement replaces and supersedes any and all prior employment or employment related agreements and understandings, including any letters or memos which may have been construed as agreements, between the Executive and United HealthCare. D. CHOICE OF LAW. This Agreement shall be construed and interpreted under the applicable laws and decisions of the State of Minnesota. E. WAIVERS. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy under this Agreement shall operate as a waiver; nor shall any single or partial exercise of any right or remedy preclude any other or further exercise of any right or remedy. F. ADEQUACY OF CONSIDERATION. Executive acknowledges and agrees that Executive has received adequate consideration from United HealthCare to enter into this Agreement. G. DISPUTE RESOLUTION AND REMEDIES. Any dispute arising between the parties relating to this Agreement or to Executive's employment by United HealthCare shall be resolved by binding arbitration pursuant to United HealthCare' Employment Arbitration Policy. The arbitrators shall not ignore or vary the terms of this Agreement and shall be bound by and apply controlling law. The parties acknowledge that Executive's failure to comply with the Confidential Information, Non-Solicitation and Non-Competition provisions of this Agreement will cause immediate and irreparable injury to United HealthCare 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. H. NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer or be deemed or construed to confer any rights or benefits upon any person other than the parties. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE ENFORCED BY THE PARTIES. -9- IN WITNESS WHEREOF, this Agreement has been signed by the parties hereto as of the Effective Date set forth above. United HealthCare Services, Inc. Executive By /s/ Robert J. Backes /s/ David J. Lubben ---------------------------- ---------------------------- Its Senior Vice President, David J. Lubben Human Resources -10- EX-10.(K) 7 EXHIBIT 10(K) SEPARATION AND RELEASE AGREEMENT THIS SEPARATION AND RELEASE AGREEMENT ("Release") is made and entered into between Travers H. Wills ("I," "Me," and "My") and United HealthCare Corporation, including its present and former subsidiaries and affiliated corporations ("Employer"). RECITALS: A. My employment with Employer will terminate on January 1, 1999. B. It is the Employer's policy to require employees who receive separation payments to sign a release of claims. In exchange for the consideration set forth in this Agreement, I have agreed to the provisions of this Agreement and to release Employer from any claims arising out of my employment or termination of employment. AGREEMENT In consideration of the recitals stated above and the mutual promises made below, Employer and I agree as follows: 1. TERMINATION. My last day of work will be January 1, 1999 and my termination shall be effective as of that date. I agree that I will not be entitled to any severance payments under my employment agreement. 2. PAYMENTS. Employer will pay me my final payroll check for work through January 1, 1999. I will be eligible for the 1998 MIP and will receive any additional payment in accordance with company guidelines. 3. CONSULTING AGREEMENT. Employer and I have entered into a consulting agreement concurrent herewith in the form attached to this agreement pursuant to which I will be entitled to receive monthly payments of $49,000 through July 1, 2000, all in accordance with such agreement. 4. ADDITIONAL CONSIDERATION. As additional consideration for my agreement to the terms contained herein, Employer agrees to: continue to vest through December 31, 1999 any unvested stock option grants awarded to me under Employer's stock option plans. Such options shall vest (a) at a rate of at least 20% of the total number of shares covered by each such option grant on the anniversary date of the option grant for grants made before July 1, 1996; and (b) at a rate of at least 25% of the total number of shares covered by each such option grant on the anniversary date of the option grant for grants made after July 1, 1996. In addition the option grant of October 1997 will be considered for vesting by March 31, 2000. I shall have until December 31, 2002 to exercise vested options including options that vest through December 31, 1999 and the options vesting in the first quarter of 2000. Employer also agrees to continue health care coverage in accordance with COBRA for an additional 18 months after the date of termination of employment. Following the COBRA eligibility period, Employer agrees to offer me the ability to purchase health insurance under the United HealthCare policy at company rates until I am eligible for Medicare or become eligible for other health insurance through new employment and similarly agrees to offer my spouse the ability so to purchase health insurance until my spouse is eligible for Medicare or becomes eligible for other health insurance through new employment. I shall be responsible for the premiums payable with respect to such health care coverage. In addition, Employer agrees to pay me the pro rata share of Employer's Long Term Incentive Plan for the two-year period ending December 31, 1998. This payment will be made in the Spring of 1999 in accordance with the Long Term Incentive Plan. 5. RELEASE. In exchange for these payments, I agree to release Employer from all claims, demands, actions or liabilities I may have against Employer of whatever kind, including but not limited to those which are related to my employment with Employer or the termination of that employment. I agree that this also releases from liability Employer's subsidiary and affiliated corporations, their predecessors, and each of their present or former agents, directors, officers, employees, representatives, shareholders, successors and assigns ("those associated with Employer"), whether in their official or individual capacities. I agree that I have executed this Release on my own behalf, and also on behalf of any heirs, agents, representatives, successors and assigns that I may have now or in the future. I also agree that this Release covers claims under any federal, state or local statute, regulation or common law doctrine regarding or relating to employment discrimination, terms and conditions of employment, or termination of employment including, but not limited to, the following: Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866, the Civil Rights Act of 1991, the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Rehabilitation Act of 1973, the Americans With Disabilities Act, the Employee Retirement Income Security Act of 1974, and all applicable amendments; state human rights or fair employment practices laws; breach of contract, promissory estoppel, or any other contract theory; defamation, employment negligence, or any other tort theory; and rights in any welfare benefit plan or any pension or retirement plan sponsored by Employer. However, this Release does not preclude my right to obtain the vested and non-forfeitable balance in my accounts under any pension or retirement plan sponsored by the Employer or preclude me from exercising my right to continuation coverage or my conversion rights, if any, under Employer's welfare benefit plans. I also agree that with respect to any released claim(s), that I will never file a lawsuit or demand for arbitration, or institute a claim of any kind against Employer, or those associated with Employer, including, but not limited to, claims 2 related to my employment with Employer or the termination of that employment. Nothing contained herein, however, shall be construed to constitute a waiver of future claims, or to prohibit me from seeking recourse through a government agency. However, this Release includes a release of my right to file a court action or to seek individual remedies or damages in any court action filed by any such government agency and my release of these rights shall apply with full force and effect to any proceedings arising from or relating to such recourse including, but not limited to, the right to monetary damages or other individual legal or equitable relief awarded by any governmental agency. If I violate this Release by breaching any of the promises contained herein, including but not limited to filing a lawsuit or demand for arbitration, or instituting a claim against Employer or those associated with Employer, I agree that I will return all separation payments received pursuant to this Release. I further agree that I will pay all costs and expenses of defending against the suit, arbitration, or claim incurred by Employer or those associated with Employer, including reasonable attorneys' fees. Nothing in the foregoing release, however, shall be construed to limit Employer's obligation to indemnify me for my actions while employed by Employer as provided in Employer's governing documents or to limit my ability to pursue a claim against Employer for not complying with its indemnification obligations. 6. PERIOD TO CONSIDER SIGNING RELEASE. I have been given a period of twenty-one (21) days to consider whether I want to sign this Release. 7. REVOCATION PERIOD. This Release does not become effective for a period of seven days after it is signed by me and I have the right to revoke it during that period. Any revocation must be in writing and delivered to Robert J. Backes, Senior Vice President, Human Resources, 9900 Bren Road East, MN008-8317, Minnetonka, Minnesota, 55343 within the seven-day period. If this person does not RECEIVE a written revocation by the end of the seven-day period, this Release will become fully enforceable at that time. I understand that if I revoke this Release, I will not be entitled to receive the additional separation payments. 8. COOPERATION WITH EMPLOYER. I agree to cooperate with Employer with respect to any administrative or legal investigations or proceedings concerning matters that arose during my employment. My cooperation includes making myself available to assist with such matters as requested by Employer. I acknowledge that I am not entitled to further compensation or consideration from Employer for such cooperation or assistance, except to the extent any witness fees are mandated under federal or state law. 9. CONSULTING AN ATTORNEY. I acknowledge that I have been advised to consult with an attorney and that any legal consultation will be at my own expense. I have 3 had adequate opportunity to consult with an attorney, and I have read and understand the terms of this Release and am voluntarily signing this Release. 10. CONFIDENTIALITY. The terms of this Release will be treated as confidential by me and Employer and neither of us shall disclose its terms to anyone except I may disclose the terms of this Release to my spouse, legal counsel, accountant, and as required by law. Employer may disclose the terms of this Release to its officers and directors, outside auditors, and to employees or agents of it or its parent corporation who have a legitimate need to know the terms in the course of performing their duties, and as required by law. I recognize and agree that this confidentiality provision was a significant inducement for the Employer to enter into this Release. In the event of a breach by me of the terms of this paragraph, all payments to me shall cease and I shall reimburse all payments made under this Release. 11. NO FUTURE EMPLOYMENT WITH EMPLOYER. I agree that I will not, at any time in the future, apply for or accept employment with Employer or any corporation that is an affiliate of Employer. I agree that any such corporation has the right not to consider my application for future employment and the right to deny me future employment without any recourse. 12. CONFIDENTIAL OR PROPRIETARY INFORMATION. During the course of my employment, I may have developed knowledge regarding Employer's organization, strategies, business and operation, and Employer's past, current or potential customers and suppliers. I acknowledge that Employer considers such information to be valuable, confidential, and proprietary. I understand that I may not disclose confidential or proprietary information obtained by me during my employment with Employer. 13. NON-ADMISSION. Nothing in this Release is intended to be, nor will be deemed to be, an admission of liability by the Employer that it has violated any state or federal statute, local ordinance, or principle of common law, or that it has engaged in any wrongdoing. 14. CONTINUATION RIGHTS. All benefits and coverages will cease on the effective date of my termination, except in accordance with the terms of the benefit plan or applicable law. 15. NON-DISPARAGEMENT AND NON-SOLICITATION. I agree that I will not criticize, make any negative comments or otherwise disparage or put in disrepute Employer, or those associated with Employer in any way, whether orally, in writing or otherwise, directly or by implication in communication with any person, including but not limited to customers or agents of Employer. In addition, for the one-year period after I cease receiving any payments pursuant to this Release, I agree that I will not directly or indirectly recruit, induce, or solicit any employee of Employer for employment. Employer agrees that in response to written inquiries 4 concerning my employment, it will provide only my dates of employment and last position held with Employer. 16. DISCLOSURE. I acknowledge that I have advised Employer's legal counsel completely and candidly of all facts that I am aware of that constitute or might constitute violations of Employer's ethical or legal obligations or standards. 17. INVALIDITY. In case any one or more of the provisions of this Release shall be invalid, illegal, or unenforceable in any respect, the validity, legality, and enforceability of the remaining provisions contained in this Release will not in any way be affected or impaired thereby. 18. GOVERNING LAW. This Release will be construed and interpreted in accordance with the laws of the State of Minnesota. 19. ENFORCEABILITY. In case any part of this Release shall be invalid, or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired. Any claim that I bring to enforce the terms of this Release will be subject to Employer's Arbitration Policy. 20. ENTIRE AGREEMENT. I have signed this Release with the understanding that this is the entire agreement between me and Employer relating to my employment and termination from employment. This Release includes all prior discussions and agreements between me and Employer. I acknowledge that this Release cannot be changed except by writing signed by both me and Employer. United HealthCare Corporation By: /s/ Robert J. Backes ----------------------------- Its: Senior Vice President ---------------------------- /s/ Travers H. Wills - ------------------------------- Travers H. Wills Date: January 14, 1999 -------------------------- 5 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (the "Agreement") is made by and among United HealthCare Services, Inc. ("UHS") and Travers H. Wills ("Contractor") to be effective as of January 2, 1999 (the "Effective Date") for the purpose of setting forth the terms and conditions under which Contractor shall provide certain services to UHS. When used in this Agreement, "UHS" includes any affiliated entity of UHS. WHEREAS, UHS desires to retain Contractor to render consulting and advisory services for UHS on the terms and conditions set forth in this agreement, and Contractor desires to be retained by UHS on such terms and conditions. NOW, THEREFORE, in consideration of the premises, the respective covenants and commitments of UHS and Contractor set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, UHS and Contractor agree as follows: 1. RETENTION OF CONTRACTOR, SERVICES TO BE PERFORMED. UHS hereby retains Contractor to render consulting services regarding strategic and business issues related to UHS as mutually agreed upon from time to time by the parties. Contractor shall perform the services called for by this Agreement in accordance with the highest standards of the industry. 2. TERM AND TERMINATION. Unless earlier terminated as set forth herein, this Agreement shall commence on the Effective Date and shall continue through July 1, 2000. Notwithstanding the foregoing, this Agreement may be terminated at any time by either party on 30 days' prior written notice, and this Agreement shall immediately terminate in the event of the death or disability of Contractor. If UHS terminates this Agreement prior to July 1, 2000, UHS shall pay Contractor any sums that remain payable under Section 3A through July 1, 2000. Provided, however, UHS shall not be obligated to make such payments if it terminates this Agreement because Contractor has materially breached this Agreement and has not satisfactorily remedied the breach within 30 days following UHS' notice of breach. 3. COMPENSATION. As compensation in full for the services to be provided hereunder, UHS shall pay Contractor the following amounts: A. RETAINER. UHS shall pay Contractor a retainer of $49,000 per month, commencing on the Effective Date. B. EXPENSE REIMBURSEMENT. UHS will reimburse Contractor for all reasonable out-of-pocket expenses related to the provision of services hereunder in accordance with the UHS's expense reimbursement policies. 4. CONFIDENTIALITY. Contractor acknowledges that in the course of providing services to UHS, he may become aware of or come into possession of certain confidential or proprietary information and documents belonging to UHS. Contractor shall not copy any such information without UHS's prior written permission, shall not disclose such information to any other person, shall not use such information for any purpose other than performing services under this Agreement and shall return all copies of any such information when all services to be performed under this Agreement have been performed or immediately upon request by UHS. This Section 4 shall survive termination of this Agreement. 5. OWNERSHIP OF WORK PRODUCT. Contractor acknowledges that any work product of any type generated by Contractor under this Agreement belongs solely to UHS, and Contractor hereby assigns and transfers to UHS any and all rights which Contractor might have asserted to such work product, including any copyright, patent, trademark, trade secret or other intellectual property rights. Contractor will cooperate with UHS and will execute any documentation required by UHS to assert or protect its property rights in the work product. This Section 5 shall survive termination of this Agreement. 6. RELATIONSHIP OF PARTIES. The sole relationship of the parties is that of independent contractors and nothing in this Agreement or otherwise shall be deemed or construed to create any other relationship, including one of employment, joint venture or agency. Contractor shall be solely responsible for any taxes of any type, including social security taxes, workers' compensation taxes or costs, unemployment compensation taxes or costs or any other similar taxes, costs or charges or any other taxes or charges related to Contractor's receipt of compensation and performance of services under this Agreement, and shall indemnify and hold UHS harmless against any such taxes or charges. This Section 6 shall survive termination of this Agreement. 7. INDEMNIFICATION. Contractor indemnifies and holds harmless UHS, its directors, officers and employees from any claims, liability, judgments, damages or costs, including reasonable attorneys' fees, asserted or awarded against or incurred by UHS, its directors, officers or employees as a result of any act or omission of Contractor. This Section 7 shall survive termination of this Agreement. 8. DISPUTES. Any dispute relating to or arising under this Agreement shall be resolved by binding arbitration pursuant to the Commercial Rules of the American Arbitration Association. This Section 8 shall survive termination of this Agreement. 9. NON-DISPARAGEMENT AND NON-SOLICITATION. Contractor agrees that he will not criticize, make any negative comments or otherwise disparage or put in disrepute UHS, or those associated with UHS in any way, whether orally, in writing or otherwise, directly or by implication in communication with any person, including but not limited to customers or agents of UHS. In addition, during the term of this Agreement, during any successive terms thereafter, and for one year after the termination of this Agreement, Contractor will not directly or indirectly recruit, induce, or solicit any employee of UHS for employment. This Section 9 shall survive termination of this Agreement. 10. MISCELLANEOUS. A. ENTIRE AGREEMENT: This Agreement contains the entire understanding of the parties and may be amended only in writing signed by the parties. This Agreement shall supersede any prior agreements between the parties in regard to the same subject matter for services rendered after the effective date. B. ASSIGNMENT: Contractor may not assign this Agreement or any rights and obligations under it this unless UHS has given its prior written consent to such assignment. C. GOVERNING LAW: This Agreement shall by governed by and construed in accordance with the laws of the State of Minnesota. D. INJUNCTIVE RELIEF: Contractor acknowledges that it would be difficult to fully compensate UHS for damages resulting from any breach by Contractor of the provisions of Sections 4, 5, 9 or 10 of this Agreement. Accordingly, in the event of any actual or threatened breach of such provisions, UHS shall, in addition to any other remedies it may have, be entitled to temporary and/or permanent injunctive relief to enforce such provisions, and such relief may be granted without the necessity of proving actual damages. E. SEVERABILITY: To the extend any provision of this Agreement shall be determined to be invalid or unenforceable, such provision shall be deleted from this Agreement, and the validity and enforceability of the remainder of such provision and of this Agreement shall be unaffected. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date. United HealthCare Services, Inc. /s/ Travers H. Wills By /s/ David J. Lubben ----------------------------- ----------------------------------- Travers H. Wills Date Date 1/04/99 --------------------------------- ----------------------------- EX-10.(L) 8 EXHIBIT 10(L) EXHIBIT A EMPLOYMENT AGREEMENT This Agreement is made by and between David Koppe ("Employee") and United HealthCare Services, Inc. ("UHS") (when used in this Agreement, UHS includes any affiliated entity of UHS) for the purpose of setting forth certain terms and conditions of Employee's employment by UHS and to protect UHS's knowledge, expertise, customer relationships and the confidential information UHS has developed about its customers, products, operations and services. As of the Effective Date, this Agreement supersedes any prior employment-related agreement or agreements between Employee and UHS or any subsidiary or affiliate of UHS but does not supersede the Release Agreements that UHS and I execute. 1. EMPLOYMENT AND DUTIES. A. EMPLOYMENT. UHS hereby directly or through its subsidiaries employs Employee. Employee accepts such employment on the terms and conditions set forth in this Agreement and, except as specifically superseded by this Agreement, subject to all of UHS's policies and procedures in regard to its employees. B. DUTIES. Employee shall perform such duties as are commonly associated with his/her position or as are reasonably assigned to Employee by his/her supervisor from time-to-time. Employee acknowledges that he will not be employed as Chief Financial Officer effective July 1, 1998. After that date, Employee will provide services to UHS regarding financial and other related issues as requested by senior management on a flexible work schedule to be mutually determined by Employee and the Senior Executive Vice-President. Employee shall be generally available to senior management during regular business hours and shall remain classified as a full-time employee. 2. COMPENSATION. A. BASE SALARY. Employee shall be paid a base annual salary in the amount of $367,500 payable bi-weekly, less all applicable withholdings and deductions. B. VACATION; ILLNESS. Employee shall be entitled to paid vacation and sick leave each year in accordance with UHS's then-current policies. C. MIP AND LTIP PAYMENTS. UHS also agrees to pay Employee pursuant to the Long Term Incentive Plan ("LTIP") for the 1997-1998 cycle according to the terms of the plan and continue Employee's eligibility for the MIP for 1998 according to the terms of the plan. This MIP payment will be made pursuant to the terms of the Plan but no later than March, 1999. Employee's MIP payment for 1998 will be at least one-half Employee's target under the MIP. D. STOCK OPTION VESTING. For the period December 1, 1998 through September 30, 1999, UHS also agrees to vest Employee's United HealthCare performance based stock option grants in the following manner: (1) for grants made before July 1, 1996, UHS agrees to vest the grants at a rate of 20% of the number of shares covered by the option or grant on the anniversary date of the option or grant; (2) for grants or options made after July 1, 1996, UHS agrees to vest the grant at a rate of 25% of the number of shares covered by the grant on the anniversary date of the option or grant. E. OTHER BENEFITS. Employer shall continue provide Employee with the same employee benefit coverages that it is currently providing to Employee subject to his elections. Employer agrees to provide Employee with use of UHS' voice-mail and computer e-mail. 3. TERM AND TERMINATION. A. TERM. The term of this Agreement shall begin on July 1, 1998 (the "Effective Date") and shall continue until the earlier of the date of termination pursuant to Section 3B or September 30, 1999. B. TERMINATION OF AGREEMENT AND/OR EMPLOYMENT. i. This Agreement may be terminated at any time by the mutual written agreement of the parties. ii. UHS may terminate Employee's employment or terminate this Agreement for Cause (as defined below) by giving written notice of termination which is received by Employee at least 30 days before the effective date of termination of employment or of this Agreement, as the case may be. UHS will specify the reasons for the termination and provide Employee with the reasonable opportunity to respond to the reasons stated. If Employee has not adequately resolved the issue that gave rise to the termination, the termination will become effective on the date specified by UHS. iii. Employee may terminate his/her employment by giving written notice of termination of employment which is received by UHS at least 30 days before the effective date of termination of employment. iv. This Agreement shall automatically terminate on the effective date of the termination of Employee's employment or on the date of Employee's death, retirement or permanent and total disability which renders Employee incapable of performing Employee's duties; provided, however, notwithstanding such termination, (i) in the event of Employee's death, UHS shall continue to pay to Employee or his estate or representative the base salary scheduled to be made in accordance with Section 2A of this Agreement through September 30, 1999; (ii) in the event of Employee's permanent and total disability, UHS will continue to pay Employee the difference between his base salary and any disability payments that Employee receives through September 30, 1999; and (iii) in the event of Employee's death or permanent and total disability, UHS will vest all of Employee's stock options, will provide the health coverage to the extent applicable to Employee's family members and pursuant to the terms of the post career coverage program included in the attached second release, and will allow Employee's estate, personal representative or heirs to have the extended stock option exercise date (September 30, 2002) included in the attached second release. UHS has the sole right, in its reasonable discretion, to determine whether Employee is permanently or totally disabled within the meaning of this Section 3B4. 4. SEVERANCE EVENTS AND COMPENSATION. A. In the event Employee's employment with UHS is terminated by UHS pursuant to Section 3B(ii) with Cause, then: i. This Agreement shall also be terminated along with all future payments, stock vesting and benefits described in this Agreement. UHS will not execute the Second Release attached to this Agreement. ii. As of the effective date of termination of employment, Employee shall cease to be eligible for all benefit plans maintained by UHS, except as required by federal or state continuation of coverage laws. 2 B. In the event Employee's employment with UHS is terminated by Employee pursuant to Section 3B(iii), then: i. This Agreement shall also be terminated. However, UHS shall continue to pay Employee his bi-weekly base salary, less withholdings and deductions, through September 30, 1999. As of the effective date of termination, however, Employee shall not receive any future stock vesting, LTIP or MIP Payments described in this Agreement. ii. UHS will execute the Second Release attached to this Agreement within 21 days of Employee's termination of employment. C. Definitions and Procedure. i. For purposes of this Agreement, "Cause" shall mean the (a) the willful failure or refusal of Employee to follow the reasonable directions of UHS's Board of Directors or Employee's supervisor or to perform any duties reasonably required by UHS, (b) a failure to adequately meet reasonable performance expectations, (c) material violations of UHS's Code of Conduct or (d) the commission of any criminal act or act of fraud or dishonesty by Employee in connection with Employee's employment by UHS. In the event that UHS terminates Employee's employment under subsections (a), (b) or (c) of this Cause definition, UHS shall specify in the notice of termination the basis for Cause. If the Cause described in the notice is cured to UHS's reasonable satisfaction prior to the end of the 30 day notice period, the notice of termination of employment shall be withdrawn. 5. PROPERTY RIGHTS, CONFIDENTIALITY, NON-SOLICIT AND NON-COMPETE PROVISIONS. A. UHS'S PROPERTY. i. Except for inventions, discoveries or works referred to in the next paragraph, Employee shall promptly disclose to UHS in writing all inventions, discoveries and works of authorship, whether or not patentable or copyrightable, which are conceived, made, discovered, written or created by Employee alone or jointly with another person, group or entity, whether during the normal hours of employment at UHS or on Employee's own time, during the term of this Agreement. Employee assigns all rights to all such inventions and works of authorship to UHS. Employee shall give UHS any assistance it reasonably requires in order for UHS to perfect, protect, and use its rights to inventions and works of authorship. This provision shall not apply to an invention, discovery or work for which no equipment, supplies, facility or trade secret information of UHS was used and which was developed entirely on the Employee's own time and which (1) does not relate to the business of UHS or to UHS's anticipated research or development, or (2) does not result from any work performed by the Employee for UHS. ii. Employee shall not remove any records, documents, or any other tangible items (excluding Employee's personal property) from the premises of UHS in either original or duplicate form, except as is needed in the ordinary course of conducting business for UHS. iii. Employee shall immediately deliver to UHS, upon termination of employment with UHS, or at any other time upon UHS's request, any property, records, documents, and other tangible items (excluding Employee's personal property) in Employee's possession or 3 control, including data incorporated in word processing, computer and other data storage media, and all copies of such records, documents and information, including all Confidential Information, as defined below. UHS agrees that Employee can purchase his personal computer from UHS at the depreciated value, according to the Company's records. B. CONFIDENTIAL INFORMATION. During the course of his employment Employee will develop, become aware of and accumulate expertise, knowledge and information regarding UHS's organization, strategies, business and operations and UHS's past, current or potential customers and suppliers. UHS considers such expertise, knowledge and information to be valuable, confidential and proprietary and it shall be considered Confidential Information for purposes of this Agreement. During this Agreement and at all times thereafter Employee shall not use such Confidential Information or disclose it to other persons or entities except as is necessary for the performance of Employee's duties for UHS or as has been expressly permitted in writing by UHS unless such information is available to the public at the time of its disclosure by Employee in which case such information is no longer Confidential Information. C. NON-SOLICITATION. During (i) the term of this Agreement, (ii) any period for which Employee is receiving payments under Section 4B of this Agreement, (iii) any period following the termination or expiration of this Agreement during which Employee remains employed by UHS and (iv) for a period of one year after the last day of the latest of any period described in (i), (ii) or (iii), Employee shall not (y) directly or indirectly attempt to hire away any then-current employee of UHS or a subsidiary of UHS or to persuade any such employee to leave employment with UHS, or (z) directly or indirectly solicit, divert, or take away, or attempt to solicit, divert, or take away, the business of any person, partnership, company or corporation with whom UHS (including any subsidiary or affiliated company in which UHS has a more than 20% equity interest) has established or is actively seeking to establish a business or customer relationship, in each case, on the date hereof. D. NON-COMPETITION. During (i) the term of this Agreement, (ii) any period for which Employee is receiving payments under Section 4B of this Agreement, and (iii) any period following the termination or expiration of this Agreement during which Employee remains employed by UHS, Employee shall not, without UHS's prior written consent, engage or participate, either individually or as an employee, consultant or principal, partner, agent, trustee, officer or director of a corporation, partnership or other business entity, in any business in which UHS (including any subsidiary or affiliated company in which UHS currently has a more than 20% equity interest) is engaged on the date hereof. Notwithstanding anything contained in this Section 4D, after (i), (ii), and (iii) above, Employee may become employed by or consult with (i) any hospital, physician or other medical group excluding for these purposes any HMO, PPO, physician practice management type company, or similar entity controlled by such hospital, physician, or medical group, (ii) any medical device or supply company, (iii) any securities or venture capital firm, money management entity, or (iv) consulting firm even if the firm provides consulting services in the health care area (provided that employee does not provide any services in the health care or health care management area), or (v) to any pharmaceutical company or pharmacy benefits company. 6. MISCELLANEOUS. A. ASSIGNMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties and their successors and assigns, but may not be assigned by either party without the prior written consent of the other party, except that UHS in its sole discretion may assign this Agreement to an entity controlled by UHS at the time of the assignment. If UHS subsequently loses or gives up control of the entity to which this Agreement is assigned, such entity shall become UHS for all purposes under this Agreement, beginning on the date on which UHS loses or gives up control of the entity. Any successor to UHS shall be deemed to be UHS for all purposes of this Agreement. 4 B. NOTICES. All notices under this Agreement shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed by registered or certified mail, return receipt requested, postage prepaid, to the party to receive the same at the address set forth below or at such other address as may have been furnished by proper notice. UHS: 300 Opus Center 9900 Bren Road East Minnetonka, MN 55343 Attn: Senior Vice President Human Resources Employee: C. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties with respect to its subject matter and may be amended or modified only by a subsequent written amendment executed by the parties. This Agreement replaces and supersedes any and all prior employment or employment related agreements and understandings, including any letters or memos which may have been construed as agreements, between the Employee and UHS or any of its subsidiaries and affiliated companies. D. CHOICE OF LAW. This Agreement shall be construed and interpreted under the applicable laws and decisions of the State of Minnesota. E. WAIVERS. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy under this Agreement shall operate as a waiver; nor shall any single or partial exercise of any right or remedy preclude any other or further exercise of any right or remedy. F. ADEQUACY OF CONSIDERATION. Employee acknowledges and agrees that he has received adequate consideration from UHS to enter into this Agreement. G. DISPUTE RESOLUTION AND REMEDIES. Any dispute arising between the parties relating to this Agreement or to Employee's employment by UHS shall be resolved by binding arbitration pursuant to UHS's Employment Arbitration Policy. 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 parties acknowledge that Employee's failure to comply with the Confidentiality, Non-Solicit and Non-Compete provisions of this Agreement will cause immediate and irreparable injury to UHS 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. H. NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer or be deemed or construed to confer any rights or benefits upon any person other than the parties. I. SECOND RELEASE. UHS and Employee agree to execute the second release within 21 days of employee's termination from employment unless Employee is terminated of employment for Cause, as defined in Section 4C of this Agreement. 5 THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE ENFORCED BY THE PARTIES. UNITED HEALTHCARE SERVICES, INC. By /s/ Robert J. Backes /s/ David Koppe ------------------------------ -------------------------------- Employee Date 6/30/98 Date 6/30/98 ------------------------------ ---------------------------- 6 EX-21 9 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
- --------------------------------------- --------------------- ------------------------------ ----------------------------- - --------------------------------------- --------------------- ------------------------------ ----------------------------- Name of Entity State of Subsidiary of What Entity "Doing Business As" Name(s) Incorporation - --------------------------------------- --------------------- ------------------------------ ----------------------------- - --------------------------------------- --------------------- ------------------------------ ----------------------------- Ingenix, Inc. Delaware United HealthCare Corporation - --------------------------------------- --------------------- ------------------------------ ----------------------------- - --------------------------------------- --------------------- ------------------------------ ----------------------------- Ovations, Inc. Delaware United HealthCare Corporation - --------------------------------------- --------------------- ------------------------------ ----------------------------- - --------------------------------------- --------------------- ------------------------------ ----------------------------- Specialized Care Services, Inc. Delaware United HealthCare Corporation - --------------------------------------- --------------------- ------------------------------ ----------------------------- - --------------------------------------- --------------------- ------------------------------ ----------------------------- Unimerica, Inc. Delaware United HealthCare Corporation - --------------------------------------- --------------------- ------------------------------ ----------------------------- - --------------------------------------- --------------------- ------------------------------ ----------------------------- Uniprise, Inc. Delaware United HealthCare Corporation - --------------------------------------- --------------------- ------------------------------ ----------------------------- - --------------------------------------- --------------------- ------------------------------ ----------------------------- UnitedHealthcare, Inc. Delaware United HealthCare Corporation - --------------------------------------- --------------------- ------------------------------ ----------------------------- - --------------------------------------- --------------------- ------------------------------ ----------------------------- UnitedHealth Capital, Inc. Delaware United HealthCare Corporation - --------------------------------------- --------------------- ------------------------------ ----------------------------- - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare Insurance Company Connecticut United HealthCare Corporation - --------------------------------------- --------------------- ------------------------------ ----------------------------- MetraHealth Care Management Delaware United HealthCare Insurance Corporation Company - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of California, Inc. California MetraHealth Care Management Corporation - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Colorado, Inc. Colorado MetraHealth Care Management Corporation - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of New Jersey, Inc. New Jersey MetraHealth Care Management Corporation - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of New York, Inc. New York United HealthCare Insurance Company - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare Insurance Company Illinois United healthcare Insurance of Illinois Company - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare Insurance Company Ohio United HealthCare Insurance of Ohio Company - --------------------------------------- --------------------- ------------------------------ ----------------------------- The MetraHealth Employee Benefits Connecticut United HealthCare Insurance Company, Inc. Company - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare Services, Inc. Minnesota United HealthCare Corporation EverCare, Optum, United Resource Networks, United HealthCare - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Alabama, Inc. Alabama United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Arizona, Inc. Arizona United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Arkansas Arkansas United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of California, Inc. California United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Colorado, Inc. Colorado United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Florida, Inc. Florida United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Georgia, Inc. Georgia United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Illinois, Inc. Illinois United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Kentucky, Ltd. Kentucky United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Louisiana, Inc. Louisiana United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Mississippi, Inc. Mississippi United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Nevada, Inc. Nevada United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of New England, Inc. Rhode Island United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ -----------------------------
- --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of New Jersey, Inc. New Jersey United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of New York, Inc. New York United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of North Carolina, North Carolina United HealthCare Services, Inc. Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Ohio, Inc. Ohio United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Oregon, Inc. Oregon United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Tennessee, Inc. Tennessee United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Texas, Inc. Texas United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Utah Utah United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Virginia, Inc. Virginia United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of Washington, Inc. Washington United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of the Maryland United HealthCare Services, Mid-Atlantic, Inc. Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of the Midlands Nebraska United HealthCare Services, Network, Inc. Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare of the Midlands, Nebraska United HealthCare Services, Inc. Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- CAC Medical Centers, Inc. Florida United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- Commonwealth Physicians Services, Inc. Kentucky United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- Coordinated Vision Care, Inc. Delaware United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- GenCare Dental Plan, Inc. Missouri United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- HealthPartners of Arizona, Inc. Arizona United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- HealthWise of Arkansas, Inc. Tennessee United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- MetraComp, Inc. Connecticut United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- PrimeCare Health Plan, Inc. Wisconsin United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United Behavioral Health California United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ ----------------------------- United HealthCare Service Corp. New York United HealthCare Services, Inc. - --------------------------------------- --------------------- ------------------------------ -----------------------------
EX-23 10 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 18, 1999 included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 2-95342, 33-3558, 33-22310, 33-27208, 33-36579, 33-50282, 33-67918, 33-68300, 33-75846, 33-79632, 33-79634, 33-79636, 33-79638, 33-59083, 33-59623, 33-63885, 333-01517, 333-01915, 333-02525, 333-04875, 333-04401, 333-05717, 333-05291, 333-06533, 333-25923, 333-27277, 333-44569, 333-44613, 333-45319, 333-41661, 333-45289, 333-50461 and 333-55777. /s/ ARTHUR ANDERSEN LLP Minneapolis, Minnesota, March 31, 1999 EX-24 11 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints William W. McGuire, M.D., Stephen J. Hemsley, and David J. Lubben, and each of them, his or her true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign an Annual Report on Form 10-K of United HealthCare Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: March 31, 1999 /s/ William C. Ballard, Jr. /s/ Walter F. Mondale - --------------------------- --------------------------- William C. Ballard, Jr. Walter F. Mondale /s/ Richard T. Burke /s/ Mary O. Mundinger - --------------------------- --------------------------- Richard T. Burke Mary O. Mundinger /s/ James A. Johnson /s/ Robert L. Ryan - --------------------------- --------------------------- James A. Johnson Robert L. Ryan /s/ Thomas H. Kean /s/ William G. Spears - --------------------------- --------------------------- Thomas H. Kean William G. Spears /s/ Douglas W. Leatherdale /s/ Gail R. Wilensky - --------------------------- --------------------------- Douglas W. Leatherdale Gail R. Wilensky EX-27 12 EXHIBIT 27
5 1,000,000 3-MOS 3-MOS DEC-31-1998 DEC-31-1997 OCT-01-1998 OCT-01-1997 DEC-31-1998 OCT-01-1997 1,644 750 2,780 3,291 1,055 813 (64) (45) 0 0 320 141 757 714 (463) (350) 9,701 7,623 5,342 2,570 0 0 0 0 0 500 2 2 4,036 4,532 9,701 7,623 4,581 2,944 4,645 3,054 4,379 2,822 4,435 2,862 52 40 0 0 4 0 210 192 (78) (73) 132 119 0 0 0 0 0 0 106 112 .57 .59 .57 .58 INCLUDES $20 MILLION CONVERTIBLE PREFERRED STOCK REDEMPTION PREMIUM. EXCLUDING THE REDEMPTION PREMIUM FROM FOURTH QUARTER OPERATING RESULTS. NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS WOULD HAVE BEEN $126 MILLION, OR $0.67 DILUTED NET EARNINGS PER SHARE.
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