-----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, QOFZrlr47kC+o61/TJA84sRiQzbpt/1c+qiALtSeP94SR1U5GuITMuQk27uH1vKH Nn5x1PrdNZR1wOtxMIS4Ww== 0001047469-99-031947.txt : 19990816 0001047469-99-031947.hdr.sgml : 19990816 ACCESSION NUMBER: 0001047469-99-031947 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED HEALTHCARE CORP CENTRAL INDEX KEY: 0000731766 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 411321939 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10864 FILM NUMBER: 99689115 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-Q 1 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q --------------- (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________. COMMISSION FILE NUMBER: 1-10864 ------------------------ UNITED HEALTHCARE CORPORATION State of Incorporation: MINNESOTA I.R.S. Employer Identification No: 41-1321939 Principal Executive Offices: 300 OPUS CENTER 9900 BREN ROAD EAST MINNETONKA MN, 55343 Telephone Number: (612) 936-1300 ------------------------ Indicate by check mark (x) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares of Common Stock, par value $.01 per share, outstanding on August 9, 1999, was 173,353,248. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITEDHEALTH GROUP INDEX
PAGE NUMBER ---- PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Balance Sheets at June 30, 1999 and December 31, 1998............................................................. 3 Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 1999 and 1998........................... 4 Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 1999 and 1998................................. 5 Notes to Condensed Consolidated Financial Statements.................. 6 Report of Independent Public Accountants.............................. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................... 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 27 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.............................................. 28 ITEM 6. EXHIBITS....................................................... 29 Signatures................................................................ 30
2 UNITEDHEALTH GROUP PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) UNITEDHEALTH GROUP CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
JUNE 30, DECEMBER 31, 1999 1998 ----------- ------------- ASSETS Current Assets Cash and Cash Equivalents.............................................................. $ 1,230 $ 1,644 Short-Term Investments................................................................. 173 170 Accounts Receivable, net............................................................... 975 965 Assets Under Management................................................................ 1,199 1,155 Other Current Assets................................................................... 71 320 ----------- ------ Total Current Assets................................................................. 3,648 4,254 Long-Term Investments.................................................................. 3,205 2,610 Property and Equipment, net............................................................ 280 294 Goodwill and Other Intangible Assets, net.............................................. 2,621 2,517 ----------- ------ TOTAL ASSETS........................................................................... $ 9,754 $ 9,675 ----------- ------ ----------- ------ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Medical Costs Payable.................................................................. $ 2,982 $ 2,780 Other Policy Liabilities............................................................... 710 714 Accounts Payable and Accrued Liabilities............................................... 774 713 Short-Term Debt........................................................................ 400 459 Accrued Operational Realignment and Other Charges...................................... 168 236 Unearned Premiums...................................................................... 226 414 ----------- ------ Total Current Liabilities............................................................ 5,260 5,316 Long-Term Debt......................................................................... 249 249 Deferred Income Taxes and Other Liabilities............................................ 87 72 ----------- ------ Shareholders' Equity Common Stock, $.01 par value; 500,000,000 shares authorized; 173,954,000 and 183,930,000 issued and outstanding................................................... 2 2 Additional Paid-in Capital............................................................. 591 1,107 Retained Earnings...................................................................... 3,146 2,885 Accumulated Other Comprehensive Income: Net Unrealized Holding Gains on Investments Available for Sale, net of income tax effects............................................................................ 419 44 ----------- ------ Total Shareholders' Equity........................................................... 4,158 4,038 ----------- ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................. $ 9,754 $ 9,675 ----------- ------ ----------- ------
See notes to condensed consolidated financial statements 3 UNITEDHEALTH GROUP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1999 1998 1999 1998 --------- --------- --------- --------- REVENUES Premiums.............................................. $ 4,372 $ 3,773 $ 8,690 $ 7,455 Management Services and Fees.......................... 433 402 867 773 Investment and Other Income........................... 53 60 110 122 --------- --------- --------- --------- Total Revenues...................................... 4,858 4,235 9,667 8,350 --------- --------- --------- --------- OPERATING EXPENSES Medical Costs......................................... 3,746 3,435 7,466 6,587 Selling, General and Administrative Expenses.......... 832 706 1,645 1,418 Depreciation and Amortization......................... 55 48 110 90 Operational Realignment and Other Charges............. -- 725 -- 725 --------- --------- --------- --------- Total Operating Expenses............................ 4,633 4,914 9,221 8,820 --------- --------- --------- --------- EARNINGS (LOSS) FROM OPERATIONS......................... 225 (679) 446 (470) Interest Expense...................................... (11) -- (22) -- --------- --------- --------- --------- EARNINGS (LOSS) BEFORE INCOME TAXES..................... 214 (679) 424 (470) (Provision) Benefit for Income Taxes.................. (79) 114 (157) 37 --------- --------- --------- --------- NET EARNINGS (LOSS)..................................... 135 (565) 267 (433) CONVERTIBLE PREFERRED STOCK DIVIDENDS................... -- (7) -- (15) --------- --------- --------- --------- NET EARNINGS (LOSS) APPLICABLE TO COMMON SHAREHOLDERS... $ 135 $ (572) $ 267 $ (448) --------- --------- --------- --------- --------- --------- --------- --------- BASIC NET EARNINGS (LOSS) PER COMMON SHARE.............. $ 0.78 $ (2.96) $ 1.51 $ (2.33) --------- --------- --------- --------- --------- --------- --------- --------- DILUTED NET EARNINGS (LOSS) PER COMMON SHARE............ $ 0.76 $ (2.96) $ 1.48 $ (2.33) --------- --------- --------- --------- --------- --------- --------- --------- WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.... 174 193 177 192 DILUTIVE EFFECT OF OUTSTANDING STOCK OPTIONS............ 4 -- 3 -- --------- --------- --------- --------- WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, ASSUMING DILUTION..................................... 178 193 180 192 --------- --------- --------- --------- --------- --------- --------- ---------
See notes to condensed consolidated financial statements 4 UNITEDHEALTH GROUP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------- 1999 1998 --------- --------- OPERATING ACTIVITIES Net Earnings (Loss)..................................................... $ 267 $ (433) Noncash Items: Depreciation and Amortization......................................... 110 90 Deferred Income Taxes................................................. 63 (214) Asset Impairments..................................................... -- 451 Net Change in Other Operating Items: Accounts Receivable and Other Current Assets.......................... 19 (118) Medical Costs Payable................................................. 155 200 Accounts Payable and Accrued Liabilities.............................. 37 109 Accrued Operational Realignment and Other Charges..................... (68) 274 Unearned Premiums..................................................... (195) (142) --------- --------- Cash Flows From Operating Activities................................ 388 217 --------- --------- INVESTING ACTIVITIES Cash Paid for Acquisitions, net of cash assumed and other effects....... (104) (86) Proceeds from Disposal of Business...................................... 5 -- Purchases of Property and Equipment and Capitalized Software, net....... (97) (90) Purchases of Investments................................................ (943) (1,976) Maturities/Sales of Investments......................................... 937 1,867 --------- --------- Cash Flows Used for Investing Activities............................ (202) (285) --------- --------- FINANCING ACTIVITIES Proceeds from Stock Option Exercises.................................... 68 73 Common Stock Repurchases................................................ (603) (72) Payments of Short-term Borrowings....................................... (60) -- Dividends Paid.......................................................... (5) (20) --------- --------- Cash Flows Used for Financing Activities............................ (600) (19) --------- --------- DECREASE IN CASH AND CASH EQUIVALENTS................................... (414) (87) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................... 1,644 750 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD................................ $ 1,230 $ 663 --------- --------- --------- ---------
See notes to condensed consolidated financial statements 5 UNITEDHEALTH GROUP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION Unless the context otherwise requires, the use of the terms the "Company," "we," "us," and "our" in the following refers to UnitedHealth Group and its subsidiaries. The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting solely of normal recurring adjustments, needed to present the financial results for these interim periods fairly. These financial statements include certain amounts that are based on our best estimates and judgments. The most significant estimates relate to medical costs, medical costs payable and other policy liabilities, intangible asset valuations and 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. Following the rules and regulations of the Securities and Exchange Commission, we have omitted footnote disclosures that would substantially duplicate the disclosures contained in our annual audited financial statements. Read together with the disclosures below, we believe the interim financial statements are presented fairly. However, these unaudited condensed consolidated financial statements should be read together with the consolidated financial statements and the notes included in our Annual Report on Form 10-K, as amended by our Form 10-K/A, for the year ended December 31, 1998. 2. RECLASSIFICATIONS Certain 1998 amounts in the condensed consolidated financial statements have been reclassified to conform to the 1999 presentation. These reclassifications have no effect on net earnings (loss) or shareholders' equity as previously reported. 3. 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 second quarter of 1998, which reflected the estimated costs to be incurred 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 claims processing operations and associated real estate obligations. The asset impairments consisted principally of purchased in-process research and development associated with our acquisition of Medicode, Inc. and goodwill and other long-lived assets including fixed assets, computer hardware and software and leasehold improvements associated with businesses we intend to dispose of or markets where we plan to curtail our operations or change our operating presence, and other realignment initiatives. During the second quarter of 1999, we revised our estimates for severance and outplacement costs, non-cancelable lease obligations, and losses on businesses held for disposal. The total of our operational realignment and other charges did not change. After eliminating approximately 2,800 positions, we now estimate total severance and outplacement costs will be approximately $100 million. The decrease of $22 million from our original estimate is primarily attributable to lower than anticipated costs per employee and a substantially higher rate of 6 UNITEDHEALTH GROUP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. OPERATIONAL REALIGNMENT AND OTHER CHARGES (CONTINUED) position reductions accomplished through attrition among affected employee groups. We currently estimate that final execution of the Plan will result in the reduction of approximately 5,200 positions, affecting approximately 6,400 people in various locations. In June 1999, we completed the sale of our medical provider clinics. As a result of differences between our original estimate and the final terms of the sale agreement, we increased our accrual by $9 million to reflect the actual losses incurred on the disposition of this business. During the second quarter of 1999, we also completed the disposition of our behavioral health provider clinics. The balances accrued in our operational realignment charge were sufficient to cover actual costs associated with this disposition. Another business we intend to dispose of is our managed workers' compensation business. We have completed negotiations with a prospective buyer and expect to close on the sale of this business in August 1999. The balances accrued in our operational realignment charge will be sufficient to cover actual losses on the disposition of this business. Remaining markets where we plan to curtail or make changes to our operating presence include two health plan markets that are in non-strategic markets. With regard to these markets, we have revised our plan of disposition in response to current market conditions. In one market, we currently expect to sell or commence formal liquidation of this business prior to December 31, 1999. In the other non-strategic health plan market, we have revised our original plan of reconfiguration to a complete market exit. As a result, we have increased our estimate of noncancelable lease obligations by $13 million to include the incremental costs to be incurred in the exit of this market. We have completed the reconfiguration of our small group insurance business and a third non-strategic health plan market. Our original operational realignment charge covered asset impairments and other costs incurred in the reconfiguration of these businesses. The following is a roll-forward of accrued operational realignment and other charges through June 30, 1999 (in millions):
SEVERANCE AND NONCANCELABLE DISPOSITION OF ASSET OUTPLACEMENT LEASE BUSINESSES AND IMPAIRMENTS COSTS OBLIGATIONS OTHER COSTS TOTAL ------------- --------------- --------------- --------------- --------- Balance at December 31, 1997.......................... $ -- $ -- $ -- $ -- $ -- Provision for Operational Realignment and Other Charges............................................. 430 142 82 71 725 Additional Charges/(Credits).......................... 21 (20) (9) 8 -- Cash Payments......................................... -- (19) (6) (13) (38) Non-cash Charges...................................... (451) -- -- -- (451) ----- ----- ----- ----- --------- Balance at December 31, 1998.......................... -- 103 67 66 236 Cash Payments......................................... -- (9) (2) (14) (25) ----- ----- ----- ----- --------- Balance at March 31, 1999............................. -- 94 65 52 211 Additional Charges/(Credits).......................... -- (22) 13 9 -- Cash Payments......................................... -- (15) (6) (22) (43) ----- ----- ----- ----- --------- Balance at June 30, 1999.............................. $ -- $ 57 $ 72 $ 39 $ 168 ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
7 UNITEDHEALTH GROUP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. OPERATIONAL REALIGNMENT AND OTHER CHARGES (CONTINUED) Our accompanying financial statements include the operating results of businesses and markets to be disposed of or discontinued in connection with the operational realignment. The carrying value of the net assets held for sale or disposal is approximately $25 million as of June 30, 1999. Our accompanying Consolidated Statements of Operations include revenues and operating losses from businesses disposed of or to be disposed, and markets we plan to exit, for the three and six month periods ended June 30 as follows (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenues............................. $ 199 $ 242 $ 432 $ 475 Operating income (loss) before income taxes.............................. $ (9) $ (7) $ (24) $ (23)
The table above does not include operating results from the counties where we will be withdrawing our Medicare product offerings, effective January 1, 2000. Annual revenues for 1999 from the Medicare markets we are exiting are expected to be approximately $230 million. In regard to the purchased research and development, as of the date of our December 1997 acquisition, Medicode had invested approximately $8.5 million in in-process research and development projects. An additional $4.5 million was expended through June 30, 1999, with another $0.3 million expected to be spent over the next three months to complete these research and development projects. The operational realignment and other 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. During the three and six month periods ended June 30, 1999, we incurred expenses of approximately $19 million and $34 million, respectively, related to these activities. The original operational realignment plan provided for substantial completion in 1999. We continue to implement our original realignment plan, however, certain divestitures and market realignment activities are requiring additional time to complete, and accordingly, will extend into the third and fourth quarters of 1999. Other initiatives, including the consolidation of certain claims and administrative processing operations, are requiring additional time to fully implement and will continue into the year 2000. Based on current facts and circumstances, we believe the remaining realignment reserve is adequate to cover the costs to be incurred in executing the remainder of the Plan. However, as we proceed with the execution of the Plan and more current information becomes available, it may be necessary to adjust our estimates for severance, lease obligations on exited facilities, and losses on businesses held for disposal. 8 UNITEDHEALTH GROUP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 4. CASH AND INVESTMENTS As of June 30, 1999, 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 AMORTIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE --------------- ------------------- ------------------- ----------- Cash and Cash Equivalents......................... $ 1,230 $ -- $ -- $ 1,230 Debt Securities--Investments Available for Sale... 2,532 14 (32) 2,514 Equity Securities--Investments Available for Sale............................................ 91 685 -- 776 Debt Securities--Held to Maturity................. 88 -- -- 88 ------ ----- ----- ----------- Total Cash and Investments...................... $ 3,941 $ 699 $ (32) $ 4,608 ------ ----- ----- ----------- ------ ----- ----- -----------
Gross realized gains of $3 million and $7 million, and gross realized losses of $2 million and $1 million were recognized for the three month periods ended June 30, 1999 and 1998, respectively, and are included in investment and other income in the accompanying Condensed Consolidated Statements of Operations. Gross realized gains of $7 million and $15 million, and gross realized losses of $5 million and $3 million were recognized for the six month periods ended June 30, 1999 and 1998, respectively. At June 30, 1999, our equity securities include a $682 million gross unrealized gain related to our investment in approximately 9 million shares of Healtheon Corporation common stock. 5. DEBT Debt consists of the following:
JUNE 30, 1999 DECEMBER 31, 1998 ------------------------ ------------------------ CARRYING CARRYING PAR VALUE VALUE PAR VALUE VALUE ----------- ----------- ----------- ----------- 5.65% Senior Unsecured Note due December 1999........... $ 400 $ 400 $ 400 $ 400 6.60% Senior Unsecured Note due December 2003........... 250 249 250 249 Commercial Paper........................................ -- -- 60 59 ----- ----- ----- ----- 650 649 710 708 Less: Current Portion................................... (400) (400) (460) (459) ----- ----- ----- ----- Total Long-Term Debt.................................. $ 250 $ 249 $ 250 $ 249 ----- ----- ----- ----- ----- ----- ----- -----
The carrying value of the Company's outstanding debt approximates its fair value at June 30, 1999. In August 1999, we increased our commercial paper program and our supporting credit arrangement with a group of banks to an aggregate of $900 million. The supporting credit arrangement is comprised of a $300 million revolving credit facility, expiring in 2003, and a $600 million 364-day facility, expiring in August 2000. In July 1999, we also developed the financing flexibility to issue approximately $150 million of 9 UNITEDHEALTH GROUP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 5. DEBT (CONTINUED) extendible commercial notes (ECN's). At June 30, 1999, we had no borrowings outstanding under our commercial paper program, supporting credit facilities, or ECN's. 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. We are well within the requirements of all debt covenants. 6. AMERICAN ASSOCIATION OF RETIRED PERSONS CONTRACT 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 Condensed 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 covered by underwriting gains in future periods of the contract. The RSF balance was $509 million as of December 31, 1998, and is $534 million as of June 30, 1999. 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 policy 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 AARP program-related assets and liabilities are included in our Condensed Consolidated Balance Sheets (in millions):
BALANCE AS OF BALANCE AS OF DESCRIPTION JUNE 30, 1999 DECEMBER 31, 1998 - ------------------------------------------------------- ----------------- ----------------- Assets Under Management................................ $ 1,199 $ 1,155 Receivables............................................ $ 290 $ 287 Medical Costs Payable.................................. $ 872 $ 830 Other Policy Liabilities............................... $ 534 $ 509 Accounts Payable and Accrued Liabilities............... $ 83 $ 103
The effects 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. 10 UNITEDHEALTH GROUP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 7. STOCK REPURCHASE PROGRAM During the first quarter of 1999, we announced the completion of our first share repurchase program aggregating 18.7 million shares at a total cost of $807 million. We also announced a program to repurchase up to approximately 9.0 million shares, or 5% of then outstanding shares, through November 1999. During the six months ended June 30, 1999, we repurchased an aggregate 12.4 million shares for $603 million, bringing total purchases since inception of the programs to 23.5 million shares, for $1,049 million. Under our current authorization, we may repurchase an additional 4.2 million shares. 8. COMPREHENSIVE INCOME The table below presents comprehensive income, defined as changes in the equity of our business excluding changes resulting from investments by and distributions to our shareholders, for the three and six-month periods ended June 30 (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net Earnings (Loss).................. $ 135 $ (565) $ 267 $ (433) Change in Net Unrealized Holding Gains (Losses) on Investments Available for Sale, net of income tax effects........................ 252 10 375 2 ----- ----- ----- ----- Comprehensive Income (Loss).......... $ 387 $ (555) $ 642 $ (431) ----- ----- ----- ----- ----- ----- ----- -----
9. SEGMENT FINANCIAL INFORMATION Our reportable operating segments are organized and defined by a combination of economic characteristics, including the types of products and services offered and customer segments served by each segment. The following is a description of the types of products and services from which each of our business segments derives its revenues: - HEALTH CARE SERVICES consists of UnitedHealthcare and Ovations and provides the majority of our risk-based managed care product offerings. UnitedHealthcare operates locally based organized health systems to serve employers, their employees and dependents, as well as individuals, including those enrolled in Medicare and Medicaid programs. Ovations includes underwriting and services in support of AARP Health Care Options, the group insurance program of the American Association of Retired Persons, and EverCare, which delivers medical care to elderly residents of nursing homes. - UNIPRISE provides comprehensive employee benefits administrative services to large multi-site employers, addressing all aspects of employee benefit administration, including integrated enrollment and claims processing, customer service, medical management and utilization review services. Uniprise also provides administrative services to intermediary businesses such as insurance companies, health plans, organized provider entities and governmental agencies. Uniprise's revenues are primarily fee-based and we generally assume no financial responsibility for health care costs associated with these products. 11 UNITEDHEALTH GROUP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 9. SEGMENT FINANCIAL INFORMATION (CONTINUED) - SPECIALIZED CARE SERVICES provides specialized products and services using independent networks, including behavioral health and substance abuse services, employee assistance services, consumer health and well-being information products, and disease management and transplant-related products and services. These products are often included in products offered by UnitedHealthcare and Uniprise, in addition to being marketed as stand-alone products and services. - INGENIX consists of products and services that use knowledge and technology to provide customers with high-value information, data analysis, research and consulting. Customers include drug and medical device manufacturers, employers, providers, payers and government agencies. 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. Assets and liabilities that are jointly used are assigned to each segment using estimates of pro-rata usage. Cash and investments are assigned such that each segment has minimum specified levels of regulatory capital and working capital. The "Corporate and Eliminations" column includes unassigned cash and investments, investment income derived from these unassigned assets, company-wide costs associated with core process improvement initiatives and eliminations of intersegment transactions and balances. The following tables present segment financial information for the three and six month periods ended June 30, 1999 and 1998 (in millions):
HEALTH CARE SPECIALIZED CORPORATE & THREE MONTHS ENDED JUNE 30, 1999 SERVICES UNIPRISE CARE SERVICES INGENIX ELIMINATIONS - ----------------------------------------------- ------------ ----------- --------------- ----------- ------------- Revenues--External Customers................... $ 4,338 $ 352 $ 78 $ 37 $ -- Revenues--Intersegment......................... -- 112 97 16 (225) Investment and Other Income.................... 39 7 2 1 4 ------ ----- ----- ----- ----- Total Revenues................................. $ 4,377 $ 471 $ 177 $ 54 $ (221) ------ ----- ----- ----- ----- Earnings from Operations....................... $ 140 $ 64 $ 30 $ 2 $ (11) ------ ----- ----- ----- ----- ------ ----- ----- ----- ----- THREE MONTHS ENDED JUNE 30, 1999 CONSOLIDATED - ----------------------------------------------- ------------- Revenues--External Customers................... $ 4,805 Revenues--Intersegment......................... -- Investment and Other Income.................... 53 ------ Total Revenues................................. $ 4,858 ------ Earnings from Operations....................... $ 225 ------ ------
HEALTH CARE SPECIALIZED CORPORATE & THREE MONTHS ENDED JUNE 30, 1998 SERVICES UNIPRISE CARE SERVICES INGENIX ELIMINATIONS - ----------------------------------------------- ------------ ----------- --------------- ----------- ------------- Revenues--External Customers................... $ 3,768 $ 309 $ 70 $ 28 $ -- Revenues--Intersegment......................... -- 82 82 17 (181) Investment and Other Income.................... 32 6 -- -- 22 ------ ----- ----- ----- ----- Total Revenues................................. $ 3,800 $ 397 $ 152 $ 45 $ (159) ------ ----- ----- ----- ----- Earnings (Loss) from Operations................ $ (435) $ (94) $ (68) $ (85) $ 3 ------ ----- ----- ----- ----- ------ ----- ----- ----- ----- THREE MONTHS ENDED JUNE 30, 1998 CONSOLIDATED - ----------------------------------------------- ------------- Revenues--External Customers................... $ 4,175 Revenues--Intersegment......................... -- Investment and Other Income.................... 60 ------ Total Revenues................................. $ 4,235 ------ Earnings (Loss) from Operations................ $ (679) ------ ------
12 UNITEDHEALTH GROUP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 9. SEGMENT FINANCIAL INFORMATION (CONTINUED)
HEALTH CARE SPECIALIZED CORPORATE & SIX MONTHS ENDED JUNE 30, 1999 SERVICES UNIPRISE CARE SERVICES INGENIX ELIMINATIONS - ----------------------------------------------- ------------ ----------- --------------- ----------- ------------- Revenues--External Customers................... $ 8,644 $ 687 $ 150 $ 76 $ -- Revenues--Intersegment......................... -- 221 188 30 (439) Investment and Other Income.................... 81 13 3 1 12 ------ ----- ----- ----- ----- Total Revenues................................. $ 8,725 $ 921 $ 341 $ 107 $ (427) ------ ----- ----- ----- ----- Earnings from Operations....................... $ 280 $ 110 $ 59 $ 4 $ (7) ------ ----- ----- ----- ----- ------ ----- ----- ----- ----- SIX MONTHS ENDED JUNE 30, 1999 CONSOLIDATED - ----------------------------------------------- ------------- Revenues--External Customers................... $ 9,557 Revenues--Intersegment......................... -- Investment and Other Income.................... 110 ------ Total Revenues................................. $ 9,667 ------ Earnings from Operations....................... $ 446 ------ ------
HEALTH CARE SPECIALIZED CORPORATE & SIX MONTHS ENDED JUNE 30, 1998 SERVICES UNIPRISE CARE SERVICES INGENIX ELIMINATIONS - ----------------------------------------------- ------------ ----------- --------------- ----------- ------------- Revenues--External Customers................... $ 7,437 $ 611 $ 134 $ 46 $ -- Revenues--Intersegment......................... -- 167 164 32 (363) Investment and Other Income.................... 64 11 1 -- 46 ------ ----- ----- ----- ----- Total Revenues................................. $ 7,501 $ 789 $ 299 $ 78 $ (317) ------ ----- ----- ----- ----- Earnings (Loss) from Operations................ $ (311) $ (62) $ (40) $ (84) $ 27 ------ ----- ----- ----- ----- ------ ----- ----- ----- ----- SIX MONTHS ENDED JUNE 30, 1998 CONSOLIDATED - ----------------------------------------------- ------------- Revenues--External Customers................... $ 8,228 Revenues--Intersegment......................... -- Investment and Other Income.................... 122 ------ Total Revenues................................. $ 8,350 ------ Earnings (Loss) from Operations................ $ (470) ------ ------
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 increases to commercial and Medicare medical costs payable estimates, 1998 results would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1998 JUNE 30, 1998 --------------------- ------------------- Health Care Services................................. $ 114 $ 238 Uniprise............................................. 57 89 Specialized Care Services............................ 27 55 Ingenix.............................................. 1 2 Corporate and Eliminations........................... 22 46 ----- ----- Consolidated Earnings from Operations.............. $ 221 $ 430 ----- ----- ----- -----
13 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Directors of UnitedHealth Group: We have reviewed the accompanying condensed consolidated balance sheet of UnitedHealth Group, its corporate entity, United HealthCare Corporation (a Minnesota corporation), and Subsidiaries as of June 30, 1999 and the related condensed consolidated statements of operations and cash flows for the three and six month periods ended June 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated financial statements of UnitedHealth Group and Subsidiaries as of and for the year-ended December 31, 1998 (not presented herein), and, in our report dated February 18, 1999, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Arthur Andersen LLP Minneapolis, Minnesota, August 5, 1999 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read together with the accompanying condensed consolidated financial statements and notes. In addition, the following discussion should be considered in light of a number of factors that affect the Company, the industry in which we operate, and business generally. These factors are described in Exhibit 99 to this Quarterly Report. SECOND QUARTER 1999 FINANCIAL PERFORMANCE HIGHLIGHTS Summary highlights of our second quarter 1999 results include: - Earnings per share reached $0.76, an increase of 15% from $0.66 per share reported in the second quarter of 1998 (excluding 1998 second quarter special operating charges) and up $0.04 per share, or 6%, sequentially over the first quarter of 1999. - Consolidated revenues increased 15% over the second quarter of 1998 to $4.9 billion, reflecting strong and balanced growth across all business segments. - We reported cash flows from operations of $388 million for the six-month period ended June 30, 1999, an increase of $171 million, or 79%, over 1998 levels. - Net earnings applicable to common shareholders increased to $135 million during the second quarter of 1999. The increase of $3 million, or 2%, in net earnings applicable to common shareholders is not commensurate with our 15% increase in earnings per share largely as a result of foregone investment income on cash and investments used to repurchase our common stock. - We repurchased an additional 4.5 million shares of our common stock during the second quarter, bringing our total shares repurchased since inception of our stock repurchase activities in November 1997 to 23.5 million shares through June 30, 1999. During the past 12 months, we repurchased approximately 22 million shares of our common stock for approximately $1.0 billion. - The second quarter ratio of SG&A expenses to total revenues increased forty basis points on a year-over-year basis. This expected increase reflects additional costs associated with core process improvement initiatives. SUMMARY OPERATING INFORMATION
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------------------------------- ------------------------------------- 1998 1998 -------------------------- PERCENT -------------------------- 1999 REPORTED ADJUSTED(a) CHANGE(b) 1999 REPORTED ADJUSTED(a) --------- ----------- ------------- ------------- --------- ----------- ------------- Total Revenues......................... $ 4,858 $ 4,235 $ 4,235 15% $ 9,667 $ 8,350 $ 8,350 Earnings (Loss) from Operations........ $ 225 $ (679) $ 221 2% $ 446 $ (470) $ 430 Net Earnings (Loss) Applicable to Common Shareholders.................. $ 135 $ (572) $ 132 2% $ 267 $ (448) $ 256 Net Earnings (Loss) Per Common Share, Assuming Dilution.................... $ 0.76 $ (2.96) $ 0.66 15% $ 1.48 $ (2.33) $ 1.29 Medical Costs to Premium Revenues...... 85.7% 91.0% 86.4% 85.9% 88.4% 86.0% Medical Costs to Premium Revenues, Excluding AARP....................... 84.1% 90.8% 84.7% 84.3% 87.3% 84.2% SG&A Expenses to Total Revenues........ 17.1% 16.7% 16.7% 17.0% 17.0% 17.0% PERCENT CHANGE(b) ------------- Total Revenues......................... 16% Earnings (Loss) from Operations........ 4% Net Earnings (Loss) Applicable to Common Shareholders.................. 4% Net Earnings (Loss) Per Common Share, Assuming Dilution.................... 15% Medical Costs to Premium Revenues...... Medical Costs to Premium Revenues, Excluding AARP....................... SG&A Expenses to Total Revenues........
- ------------------------------ (a) Excludes the effects of $725 million of operational realignment and other charges, and $175 million of charges related to contract losses associated with certain Medicare markets and other increases to commercial and Medicare medical costs payable estimates. (b) Calculated as percentage change between 1999 results and 1998 results, as adjusted. 15 The following table summarizes people served by product and funding arrangement as of June 30 (in thousands):
INCREASE 1999(a) 1998 (DECREASE) --------- --------- ------------- UnitedHealthcare Commercial Risk-Based: Health Plans............................................ 5,295 4,730 12% Other Network-Based and Indemnity....................... 508 546 (7)% --------- --------- --- Total Risk Based...................................... 5,803 5,276 10% Fee-Based................................................. 1,811 1,611 12% --------- --------- --- Total Commercial...................................... 7,614 6,887 11% Medicare.................................................... 445 419 6% Medicaid.................................................... 531 511 4% --------- --------- --- Total UnitedHealthcare................................ 8,590 7,817 10% Uniprise Risk-Based................................................ 222 301 (26)% Fee-Based................................................. 5,671 5,076 12% --------- --------- --- Total Uniprise........................................ 5,893 5,377 10% --------- --------- --- Total people served, excluding Ovations....................... 14,483 13,194 10% --------- --------- --- --------- --------- ---
- ------------------------ (a) Includes the 338,000 commercial, 25,000 Medicare, and 121,000 Medicaid people served by HealthPartners of Arizona, acquired in October 1998, and the 27,000 commercial people served by Principal Health Care of Texas, which was acquired in August 1998. RESULTS OF OPERATIONS CONSOLIDATED FINANCIAL RESULTS Revenues 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 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 following is a discussion of consolidated revenue trends for each of our three components. PREMIUM REVENUES Premium revenues in the second quarter of 1999 totaled $4,372 million, an increase of $599 million, or 16%, over the second quarter of 1998. For the six months ended June 30, 1999, premium revenues of $8,690 million increased $1,235 million, or 17%, over the same period in 1998. These increases were primarily driven by UnitedHealthcare's 10% year-over-year increase in risk-based membership and average year-over-year premium yield increases on commercial groups exceeding 7%. MANAGEMENT SERVICES AND FEE REVENUES Management services and fee revenues during the three and six month periods ended June 30, 1999 totaled $433 million and $867 million, representing increases of $31 million and $94 million, respectively, 16 over the same periods in 1998. The overall increase in management services and fee revenues is primarily the result of strong growth in Uniprise's multi-site customer base and modest price increases in fee business. Additionally, acquisitions and growth from our Ingenix business during 1998 contributed to the increase in management services and fees in the first six months of 1999. INVESTMENT AND OTHER INCOME Investment and other income during the three and six month periods ended June 30, 1999 totaled $53 and $110 million, representing decreases of $7 million and $12 million, respectively, from the same periods in 1998. These decreases are primarily attributable to a decrease in net capital gains from the sale of investments. Net capital gains were $1 million and $2 million, respectively, during the three and six-month periods ended June 30, 1999, compared with $6 million and $12 million during the same periods in 1998. Additionally, the purchase of approximately 22 million shares of our common stock for approximately $1.0 billion over the past twelve months decreased the level of cash and investments available for investment purposes. Operating Costs 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 consolidated medical care ratios for the three-month and six-month periods ended June 30:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------- ----------------------------------- 1999 1998 1999 1998 --------- ------------------------ --------- ------------------------ REPORTED ADJUSTED(a) REPORTED ADJUSTED(a) ----------- ----------- ----------- ----------- Consolidated UnitedHealth Group..... 85.7% 91.0% 86.4% 85.9% 88.4% 86.0% --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- Consolidated, excluding AARP........ 84.1% 90.8% 84.7% 84.3% 87.3% 84.2% --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
- ------------------------ (a) Excludes the effects of $175 million of contract losses associated with certain Medicare markets and other increases to commercial and Medicare medical costs payable estimates. Our consolidated medical care ratio decreased from 86.4% in the second quarter of 1998 to 85.7% in the second quarter of 1999. Excluding the AARP business, on a year-over-year basis, the medical care ratio decreased from 84.7% to 84.1%. On a sequential basis, our medical care ratio, excluding AARP, decreased from 84.5% in the first quarter of 1999 to 84.1% in the second quarter of 1999. The decreases in our year-over-year medical care ratios are primarily attributable to commercial premium yield increases in excess of underlying medical cost trends. On an absolute dollar basis, the increase of $486 million, or 15%, in medical costs in the second quarter of 1999 over the comparable prior year period is largely commensurate with the 16% growth in premium revenues. During the first six months of 1999, we estimate our aggregate medical cost trend was 4.5% to 5.5% compared with the full-year 1998 medical cost trend of approximately 4%. We are now pricing renewal commercial business with 8% or higher premium yield increases, in line with our projected medical cost trends of 5% to 6% for 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses as a percent of total revenues (the SG&A ratio) increased from 16.7% during the second quarter of 1998 to 17.1% during the second quarter of 1999. For the three and six month periods ended June 30, 1999, selling, general and administrative expenses 17 increased $126 million and $227 million, or 18% and 16%, respectively over the comparable periods in 1998. These increases reflect the additional costs to support the corresponding 16% increase in revenues in 1999, as well incremental operating expenses related to core process improvement initiatives and platform system conversions. BUSINESS SEGMENTS The following summarizes the operating results of our business segments for three-month and six-month periods ended June 30 (in millions): REVENUES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------- --------------------------------- PERCENT PERCENT 1999 1998 CHANGE 1999 1998 CHANGE --------- --------- ----------- --------- --------- ----------- Health Care Services......................... $ 4,377 $ 3,800 15% $ 8,725 $ 7,501 16% Uniprise..................................... 471 397 19% 921 789 17% Specialized Care Services.................... 177 152 16% 341 299 14% Ingenix...................................... 54 45 20% 107 78 37% Corporate and Eliminations................... (221) (159) 39% (427) (317) 35% --------- --------- --- --------- --------- --- Consolidated Revenues...................... $ 4,858 $ 4,235 15% $ 9,667 $ 8,350 16% --------- --------- --- --------- --------- --- --------- --------- --- --------- --------- ---
EARNINGS FROM OPERATIONS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------------- ------------------------------------- 1999 1998 1999 1998 --------- -------------------------- --------- -------------------------- REPORTED ADJUSTED(a) REPORTED ADJUSTED(a) ----------- ------------- ----------- ------------- Health Care Services................... $ 140 $ (435) $ 114 $ 280 $ (311) $ 238 Uniprise............................... 64 (94) 57 111 (62) 89 Specialized Care Services.............. 30 (68) 27 57 (40) 55 Ingenix................................ 2 (85) 1 4 (84) 2 Corporate and Eliminations............. (11) 3 22 (6) 27 46 --------- ----- ----- --------- ----- ----- Consolidated Earnings (Loss) from Operations......................... $ 225 $ (679) $ 221 $ 446 $ (470) $ 430 --------- ----- ----- --------- ----- ----- --------- ----- ----- --------- ----- -----
- ------------------------ (a) Excludes $725 million of operational realignment and other charges and $175 million of charges related to contract losses associated with certain Medicare markets and other increases to commercial and Medicare medical costs payable estimates. HEALTH CARE SERVICES The Health Care Services segment, comprised of UnitedHealthcare and Ovations, posted record revenues of $4,377 million, representing an increase of $577 million, or 15%, over the second quarter of 1998. For the six months ended June 30, 1998, Health Care Services revenues grew to $8,725 million, an increase of $1,244 million, or 16%, over the same period in 1998. UnitedHealthcare increased its risk-based commercial enrollment by 10% and realized average premium yield increases of over 7% on renewing commercial groups. Year-over-year growth of 6% in UnitedHealthcare's Medicare enrollment also contributed to the increase in revenues. Increases in Medicare enrollment affect the year-over-year comparability of revenues. The Medicare product generally has per member premium rates three to four times higher than average commercial premium rates because Medicare members typically use proportionately more medical care services. 18 Despite the year-over-year growth in Medicare enrollment at June 30, 1999, we are projecting Medicare enrollment to remain relatively flat during the remainder of 1999. Effective January 1, 1999, we withdrew Medicare+Choice product offerings from 86 counties, affecting approximately 60,000, or 12% of our Medicare members as of December 31, 1998. On July 1, 1999, we announced plans for withdrawal from the Medicare+Choice product program in another 49 counties affecting 40,000 existing members, as well as the filing of significant benefit adjustments, effective January 1, 2000. Annual revenues for 1999 from the Medicare markets we are exiting are expected to be approximately $230 million. These actions are expected to further reduce the Company's enrollment, but better position this program in the long-term in terms of profitability relative to its cost of capital and required resource management. We will continue to evaluate the markets we serve and, where necessary, we will alter benefit designs and claim management activities. These actions may result in further withdrawals of Medicare product offerings or reductions in membership. The Health Care Services segment contributed earnings from operations of $140 million and $280 million during the three and six month periods ended June 30, 1999, representing increases of $26 million, or 23%, and $42 million, or 18%, over the comparable 1998 periods (excluding 1998 special operating charges). The increases in earnings are primarily attributable to enrollment growth, commercial premium yield increases, and expense management initiatives. UnitedHealthcare's commercial medical care ratio has improved on a year-over-year basis, driven by premium yield increases in excess of underlying medical cost trends. The following table summarizes UnitedHealthcare's medical care ratios by product line for the three and six month periods ended June 30:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------- ----------------------------------- 1999 1998 1999 1998 --------- ---------------------- --------- ------------------------ REPORTED ADJUSTED(a) REPORTED ADJUSTED(a) --------- ----------- ----------- ----------- UnitedHealthcare: Commercial........................ 84.5% 88.1% 85.3% 84.6% 86.2% 84.8% Medicare.......................... 89.5% 109.2% 88.2% 89.2% 98.5% 87.6% Medicaid.......................... 86.0% 84.0% 84.0% 86.1% 81.8% 81.8% --------- --------- ----------- --------- ----------- ----------- Total UnitedHealthcare.......... 85.6% 92.2% 85.8% 85.6% 88.4% 85.2% --------- --------- ----------- --------- ----------- ----------- --------- --------- ----------- --------- ----------- -----------
- ------------------------ (a) Excludes the effects of $175 million of contract losses associated with certain Medicare markets and other increases to commercial and Medicare medical costs payable estimates. UNIPRISE Uniprise's revenues increased by $74 million, or 19%, over the second quarter of 1998 driven primarily by growth in its multi-site customer base and modest price increases on fee-based business. For the six months ended June 30, 1998, Uniprise's revenues grew to $921 million, an increase of $132 million, or 17%, over the same period in 1998. Uniprise's earnings from operations grew by $22 million, or 25%, over the first half of 1998 as a result of the increased revenues and reduced operating costs as a percentage of revenues, driven by ongoing process improvement initiatives. SPECIALIZED CARE SERVICES Specialized Care Services revenues increased by $25 million, or 16%, over the second quarter of 1998. This increase was primarily driven by an increase in the number of individuals served by United Behavioral Health, our mental health and substance abuse business. For the six months ended June 30, 1998, Specialized Care Services revenues grew to $341 million, an increase of $42 million, or 14%, over the same period in 1998. Earnings from operations of $30 million increased by 11% compared with the second 19 quarter of 1998. Earnings from operations in 1999 have not increased commensurate with revenue growth as a result of development costs associated with new product initiatives. INGENIX Revenues increased by $9 million over the comparable prior year period as a result of acquisitions during the second half of 1998. For the six months ended June 30, 1998, Ingenix's revenues grew to $107 million, an increase of $29 million, or 37%, over the same period in 1998. Earnings from operations were relatively flat with the prior year primarily as a result of increased goodwill amortization expense associated with Ingenix's acquisitions. Ingenix's earnings in the second half of 1999 will improve as product integration efforts continue and its publishing business moves into its seasonably strong fourth quarter. CORPORATE AND ELIMINATIONS Corporate includes investment income derived from cash and investments not assigned to operating segments and the company-wide costs associated with core process improvement initiatives. The decrease in Corporate earnings is attributable to a decline in the level of unassigned cash and investments, and associated investment income, primarily resulting from common stock repurchases, and incremental 1999 core process improvement costs. 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 second quarter of 1998, which reflected the estimated costs to be incurred 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 claims processing operations and associated real estate obligations. The asset impairments consisted principally of purchased in-process research and development associated with our acquisition of Medicode, Inc. and goodwill and other long-lived assets including fixed assets, computer hardware and software and leasehold improvements associated with businesses we intend to dispose of or markets where we plan to curtail our operations or change our operating presence, and other realignment initiatives. During the second quarter of 1999, we revised our estimates for severance and outplacement costs, non-cancelable lease obligations, and losses on businesses held for disposal. The total of our operational realignment and other charges did not change. After eliminating approximately 2,800 positions, we now estimate total severance and outplacement costs will be approximately $100 million. The decrease of $22 million from our original estimate is primarily attributable to lower than anticipated costs per employee and a substantially higher rate of position reductions accomplished through attrition among affected employee groups. We currently estimate that final execution of the Plan will result in the reduction of approximately 5,200 positions, affecting approximately 6,400 people in various locations. In June 1999, we completed the sale of our medical provider clinics. As a result of differences between our original estimate and the final terms of the sale agreement, we increased our accrual by $9 million to reflect the actual losses incurred on the disposition of this business. During the second quarter of 1999, we also completed the disposition of our behavioral health provider clinics. The balances accrued in our operational realignment charge were sufficient to cover actual costs associated with this disposition. Another business we intend to dispose of is our managed workers' compensation business. We have completed negotiations with a prospective buyer and expect to close on the sale of this business in 20 August 1999. The balances accrued in our operational realignment charge will be sufficient to cover actual losses on the disposition of this business. Remaining markets where we plan to curtail or make changes to our operating presence include two health plan markets that are in non-strategic markets. With regard to these markets, we have revised our plan of disposition in response to current market conditions. In one market, we currently expect to sell or commence formal liquidation of this business prior to December 31, 1999. In the other non-strategic health plan market, we have revised our original plan of reconfiguration to a complete market exit. As a result, we have increased our estimate of noncancelable lease obligations by $13 million to include the incremental costs to be incurred in the exit of this market. We have completed the reconfiguration of our small group insurance business and a third non-strategic health plan market. Our original operational realignment charge covered asset impairments and other costs incurred in the reconfiguration of these businesses. The following is a roll-forward of accrued operational realignment and other charges through June 30, 1999 (in millions):
SEVERANCE AND DISPOSITION OF ASSET OUTPLACEMENT NONCANCELABLE BUSINESSES AND IMPAIRMENTS COSTS LEASE OBLIGATIONS OTHER COSTS ------------- --------------- ----------------- ----------------- Balance at December 31, 1997.......................... $ -- $ -- $ -- $ -- Provision for Operational Realignment and Other Charges............................................. 430 142 82 71 Additional Charges/(Credits).......................... 21 (20) (9) 8 Cash Payments......................................... -- (19) (6) (13) Non-cash Charges...................................... (451) -- -- -- ----- ----- --- --- Balance at December 31, 1998.......................... -- 103 67 66 Cash Payments......................................... -- (9) (2) (14) ----- ----- --- --- Balance at March 31, 1999............................. -- 94 65 52 Additional Charges/(Credits).......................... -- (22) 13 9 Cash Payments......................................... -- (15) (6) (22) ----- ----- --- --- Balance at June 30, 1999.............................. $ -- $ 57 $ 72 $ 39 ----- ----- --- --- ----- ----- --- --- TOTAL --------- Balance at December 31, 1997.......................... $ -- Provision for Operational Realignment and Other Charges............................................. 725 Additional Charges/(Credits).......................... -- Cash Payments......................................... (38) Non-cash Charges...................................... (451) --------- Balance at December 31, 1998.......................... 236 Cash Payments......................................... (25) --------- Balance at March 31, 1999............................. 211 Additional Charges/(Credits).......................... -- Cash Payments......................................... (43) --------- Balance at June 30, 1999.............................. $ 168 --------- ---------
Our accompanying financial statements include the operating results of businesses and markets to be disposed of or discontinued in connection with the operational realignment. The carrying value of the net assets held for sale or disposal is approximately $25 million as of June 30, 1999. Our accompanying Consolidated Statements of Operations include revenues and operating losses from businesses disposed of or to be disposed, and markets we plan to exit, for the three and six month periods ended June 30 as follows (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenues............................. $ 199 $ 242 $ 432 $ 475 Operating income (loss) before income taxes.............................. $ (9) $ (7) $ (24) $ (23)
The table above does not include operating results from the counties where we will be withdrawing our Medicare product offerings, effective January 1, 2000. Annual revenues for 1999 from the Medicare markets we are exiting are expected to be approximately $230 million. 21 The operational realignment and other 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. During the three and six month periods ended June 30, 1999, we incurred expenses of approximately $19 million and $34 million, respectively, related to these activities. The original operational realignment plan provided for substantial completion in 1999. We continue to implement our original realignment plan, however, certain divestitures and market realignment activities are requiring additional time to complete, and accordingly, will extend into the third and fourth quarters of 1999. Other initiatives, including the consolidation of certain claims and administrative processing operations, are requiring additional time to fully implement and will continue into the year 2000. Based on current facts and circumstances, we believe the remaining realignment reserve is adequate to cover the costs to be incurred in executing the remainder of the Plan. However, as we proceed with the execution of the Plan and more current information becomes available, it may be necessary to adjust our estimates for severance, lease obligations on exited facilities, and losses on businesses held for disposal. FINANCIAL CONDITION AND LIQUIDITY AT JUNE 30, 1999 During the first six months of 1999, we generated cash from operations of $388 million. We continued to maintain a strong financial condition and liquidity position, with cash and investments of $4.6 billion at June 30, 1999. Total cash and investments increased by $184 million since December 31, 1998. 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 $175 million of our $4.6 billion of cash and investments at June 30, 1999, was available for general corporate use, including working capital needs. At June 30, 1999, outstanding debt consists of $400 million of unsecured notes due December 1999 and $250 million of unsecured notes due December 2003. In August 1999, we increased our commercial paper program and our supporting credit arrangement with a group of banks to an aggregate of $900 million. The supporting credit arrangement is comprised of a $300 million revolving credit facility, expiring in 2003, and a $600 million 364-day facility, expiring in August 2000. In July 1999, we also developed the financing flexibility to issue approximately $150 million of extendible commercial notes (ECN's). At June 30, 1999, we had no borrowings outstanding under our commercial paper program, supporting credit facilities, or ECN's. In April 1999, the Securities and Exchange Commission declared effective the shelf registration statement we had filed in October 1998. The shelf registration covers $1.05 billion of debt securities, preferred stock, common stock, depository shares, warrants and trust preferred securities. Including an earlier shelf registration with $200 million of registered but unissued securities, the aggregate initial public offering price of all securities covered by the shelf registrations is $1.25 billion. The Company may publicly offer such securities from time to time at prices and terms to be determined at the time of offering. 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 June 30, 1999, we were well within the requirements of all debt covenants. Our senior debt is rated "A" by Standard & Poors and Duff & Phelps, and "A3" by Moody's. Our commercial paper and ECN's are rated "A-1" by Standard & Poors, "D-1" by Duff & Phelps, and "P-2" by Moody's. 22 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 remaining after-tax cash outlay associated with these charges will be approximately $85 to $100 million over the next 12 months. During the first quarter of 1999, we announced the completion of our first share repurchase program aggregating 18.7 million shares at a total cost of $807 million. We also announced a program to repurchase up to approximately 9 million shares, or 5% of then outstanding shares, through November 1999. During the six months ended June 30, 1999, we repurchased an aggregate 12.4 million shares for $603 million, bringing total purchases since inception of the programs to 23.5 million shares, for $1,049 million. Under our current authorization, we may repurchase an additional 4.2 million shares. 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. A substantial portion of our long-term investments, $3.1 billion as of June 30, 1999, are classified as available for sale. These investments are periodically sold prior to their maturity to fund working capital or for other purposes. 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 need 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 Medicare and Medicaid programs changes could limit available reimbursement in those programs, with adverse affects on our financial results. Also, it could be more difficult for us to control medical costs if federal and state bodies continue to consider and enact significant and onerous managed care and privacy laws and regulations. Among the legislative proposals are proposals that could expand health plan liability, increase medical expenses, increase administrative costs or limit network management options. 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 23 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-funded health coverage plans offered by employers; the FEHBP; federal and state fraud and abuse and related 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. 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, which comprise approximately 10% of our consolidated risk-based membership. 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 on-going 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 mission critical Year 2000 activities follows. 24 TECHNICAL INFRASTRUCTURE MAINFRAME TECHNOLOGY. In conjunction with our two vendors that provide support for our data center operations, we have completed, tested and certified 100% of our remediation efforts for the hardware, and operating systems on our two primary mainframe computer systems. We are also at compliant version levels for all of our supporting software at both data centers. In addition, we have made modifications to some of our smaller mainframe systems to make them compliant. We have also 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 will be modified or replaced with compliant systems by September 30, 1999. As of June 30, 1999, we are 83% compliant with our desktop hardware and software systems. TELECOMMUNICATIONS. We have inventoried our entire system of over 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. Our data network is 100% compliant and our voice network is 94% compliant as of June 30, 1999. We expect all our telecommunication networks and devices will be Year 2000 compliant by September 30, 1999. BUSINESS APPLICATIONS SOFTWARE APPLICATIONS. We use approximately 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 33% of our software applications will not be used after December 31, 1999 due to conversions, consolidations and software replacements. Of the remaining applications, over 98% 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. All mission critical Year 2000 software modifications were 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. Over 50% of employee workstations have been assessed or remediated. We are on schedule to meet a September 30, 1999 completion date. OTHER YEAR 2000 MATTERS NON-INFORMATION TECHNOLOGY SYSTEMS. We have approximately 300 owned or leased facilities throughout the world. Over 50% of our mission critical facilities are compliant. 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 mission critical facilities are scheduled to be Year 2000 compliant, or compliant with a work-around process by September 1, 1999. DEPENDENCE ON THIRD PARTIES. We have a contractual relationship with approximately 300,000 different medical providers and over 92,000 vendors. Over 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 have completed our analysis of corporate critical vendor readiness and continue to identify alternative vendors, where necessary. Individual business units continue to analyze additional vendors for compliance and Year 2000 readiness. We will continue to distribute Year 2000 25 educational materials to our medical providers with whom we conduct business. As appropriate, we will be testing and verifying the electronic collection of data with selected 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 which 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 June 30, 1999, our historical and projected costs to complete our Year 2000 remediation plan are as follows (amounts in millions):
YEAR RESOURCES AMORTIZATION RESOURCES AMORTIZATION TOTAL - -------------------------------------------- ----------- ------------- ----------- ------------- ----- COST INCURRED TO DATE PROJECTED COSTS -------------------------- -------------------------- 1996........................................ $ 1 $ -- $ -- $ -- $ 1 1997........................................ 12 -- -- -- 12 1998........................................ 18 -- -- -- 18 1999........................................ 9 3 5 4 21 2000........................................ -- -- 3 9 12 2001........................................ -- -- -- 9 9 2002........................................ -- -- -- 2 2 --- --- --- --- --- $ 40 $ 3 $ 8 $ 24 $ 75 --- --- --- --- --- --- --- --- --- ---
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 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 mission critical area of our Year 2000 compliance effort has developed 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. Contingency plans are being reviewed for consistency and completeness. These plans are being incorporated into the year end plans and will be retained for reference in the Year 2000 Event Center. 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 26 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 June 30, 1999, the Company's regulated subsidiaries had aggregate statutory capital and surplus of approximately $1.3 billion, compared with their aggregate minimum statutory capital and surplus requirements of approximately $470 million. 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 June 30, 1999. 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 June 30, 1999, there were no significant concentrations of credit risk. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since the date of the Company's Annual Report on Form 10-K, as amended by our Form 10-K/A, for the year ended December, 31, 1998, a change has occurred in the company's exposure to market risk associated with the Company's investments in equity securities. We own approximately nine million shares of Healtheon Corporation (Healtheon) common stock. With Healtheon's recent public stock offering in February 1999 and subsequent increases to the fair value of Healtheon's stock, we have recorded a $682 million unrealized gain, or $430 million, net of income tax effects, in shareholders' equity as of June 30, 1999. Assuming an immediate decrease of 50% in Healtheon's stock price, the hypothetical reduction in shareholders' equity related to these holdings is estimated to be $215 million (net of income tax effects), or 5.2% of total shareholders' equity at June 30, 1999. We do not believe that our risks of loss in future earnings or a decline in fair values attributable to our investment portfolio are material to our consolidated financial position or results of operations. 27 UNITEDHEALTH GROUP PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Because of the nature of its business, United is subject to suits which allege failures to provide or pay for health care or other benefits, poor outcomes for care delivered or arranged under United's programs, impermissible nonacceptance or termination of providers, failures to return withheld amounts from provider compensation, failures to pay benefits by a self-funded plan serviced by United, improper copayment calculations and other allegations. 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. 28 ITEM 6. EXHIBITS (a) The following exhibits are filed in response to Item 601 of Regulation S-K.
EXHIBIT NUMBER DESCRIPTION - ------------ ------------------------------------------------------------ Exhibit 15 --Letter Re Unaudited Interim Financial Information Exhibit 99 --Cautionary Statements
29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED HEALTHCARE CORPORATION /s/ STEPHEN J. HEMSLEY - --------------------------- Chief Operating Officer Dated: August 13, 1999 Stephen J. Hemsley /s/ ARNOLD H. KAPLAN - --------------------------- Chief Financial Officer Dated: August 13, 1999 Arnold H. Kaplan /s/ PATRICK J. ERLANDSON - --------------------------- Chief Accounting Officer Dated: August 13, 1999 Patrick J. Erlandson 30 UNITED HEALTHCARE CORPORATION EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------------ ------------------------------------------------------------ Exhibit 15 --Letter Re Unaudited Interim Financial Information Exhibit 99 --Cautionary Statements
31 EX-15 2 EXHIBIT 15 EXHIBIT 15 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION August 5, 1999 UnitedHealth Group: We are aware that UnitedHealth Group has incorporated by reference in its Registration Statements Nos. 2-95342, 33-03558, 33-22310, 33-27208, 33-36579, 33-50282, 33-59083, 33-59623, 33-63885, 33-67918, 33-68300, 33-75846, 33-79632, 33-79634, 33-79636, 33-79638, 333-01517, 333-01915, 333-02525, 333-04401, 333-04875, 333-05291, 333-05717, 333-06533, 333-25923, 333-27277, 333-41661, 333-44569, 333-44613, 333-45289, 333-45319, 333-50461, 333-55777, 333-71007 and 333-81337, its Form 10-Q for the quarter ended June 30, 1999, which includes our report dated August 5, 1999 covering the unaudited interim condensed consolidated financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our Firm or a report prepared or certified by our Firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ ARTHUR ANDERSEN LLP EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNITEDHEALTH GROUP'S FORM 10-Q FOR THE SIX MONTH PERIODS ENDING JUNE 30, 1999 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS 6-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 JUN-30-1999 JUN-30-1998 1,230 663 3,378 3,406 1,058 1,285 (83) (66) 0 0 71 178 783 727 (503) (394) 9,754 8,888 5,260 4,236 249 0 0 0 0 500 2 2 4,156 4,129 9,754 8,888 9,557 8,228 9,667 8,350 9,111 8,005 9,221 8,095 0 725 0 0 22 0 424 (470) (157) 37 267 (433) 0 0 0 0 0 0 267 (448) 1.51 (2.33) 1.48 (2.33)
EX-99 4 EXHIBIT 99 EXHIBIT 99 CAUTIONARY STATEMENTS The statements contained in this Form 10-Q include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases, presentations to securities analysts or investors, and in oral statements made by or with the approval of an 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, 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 years. We are addressing the medical care ratio by altering benefit designs, recontracting with providers, and aggressively increasing 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 our costs of doing business and adversely affecting our profitability. 32 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 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 $3.4 billion in annual net premium revenue from approximately 3.8 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 then served. The decision, effective January 1, 1999, affected approximately 60,000, or 12%, of Medicare members as of December 31, 1998. On July 1, 1999, we announced plans for withdrawal from the Medicare+Choice product program in another 49 counties affecting 40,000 existing members, as well as the filing of significant benefit adjustments, effective January 1, 2000. These actions may result in further withdrawals of Medicare product offerings or reductions in membership. As a consequence of these withdrawals, we are precluded from re-entering these counties with Medicare product offerings until 5 years after the effective date of withdrawal. 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 in the second quarter of 1998 to earnings for our realignment. In January 1998, we initiated a significant realignment of our operations into five businesses. As part of the realignment, we are 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 activities, or other business functions, there can be no assurance that such negative effects may not occur. Our second quarter 1998 charge to earnings for costs associated with the realignment was $725 million. Since the charges were recorded, certain estimates have changed, however, we continue to believe the aggregate of such charges is adequate to cover costs to be incurred. However, there can be no assurance that the costs associated with our realignment efforts will not exceed the charges we have taken for such costs. 33 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 our 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 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. We are also 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 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 June 30, 1999. The HMO rules, if adopted by the states in their proposed form, would significantly increase the capital required for certain of our subsidiaries. Although we believe we can redeploy capital among our regulated entities, such rule changes may require incremental investments of general corporate resources into regulated subsidiaries. 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, either individually or collectively through unions, 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. In addition, physician or practice management companies, which aggregate physician practices for administrative efficiency and marketing leverage, continue to expand. These providers may compete directly with us. 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, anti-competitive 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; claims of vicarious liability for providers' actions; provider disputes over compensation and termination of provider contracts; disputes related to self-funded 34 business, including actions alleging claim administration errors and the failure to disclose network rate discounts and other fee and rebate arrangements; disputes over copayment calculations; and claims relating to customer audits and contract performance. Recent court decisions and legislative activity may 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 our 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 are 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. We have made several large acquisitions in recent years and have an active ongoing acquisition and disposition program under which we 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 35 of unknown liabilities, unforeseen administrative needs or increased efforts to integrate the acquired operations. Failure to identify liabilities, anticipate additional administrative needs or effectively integrate acquired operations could result in reduced revenues, increased administrative and other costs, or customer confusion or dissatisfaction. DATA AND PROPRIETARY INFORMATION. Many of the products that are part of our knowledge and information-related 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 all of our 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. There are various proposals addressing the use of patient data from federal and state legislative and regulatory bodies currently under consideration. If enacted, some of these proposals may impose restrictions on our use of patient data and may increase our cost to use patient data. The success of our knowledge and information-related 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 effect 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. 36 -----END PRIVACY-ENHANCED MESSAGE-----