-----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, V4X8g1w3d8tGN2QN3pXFvVHY/IpiLaG2TZ6de8CXLz+9M2Ex3P/4dz+poainOlyC fty9yodFiVogriJLJOEq1A== 0001047469-97-005017.txt : 19971117 0001047469-97-005017.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-005017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED HEALTHCARE CORP CENTRAL INDEX KEY: 0000731766 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 411321939 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10864 FILM NUMBER: 97721574 BUSINESS ADDRESS: STREET 1: 300 OPUS CENTER STREET 2: 9900 BREN ROAD EAST CITY: MINNEAPOLIS STATE: MN ZIP: 55440-1459 BUSINESS PHONE: 6129361300 MAIL ADDRESS: STREET 1: PO BOX 1459 CITY: MINNEAPOLIS STATE: MN ZIP: 55440-1459 10-Q 1 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q --------------- (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares of Common Stock, par value $.01 per share, outstanding on November 10, 1997 was 188,336,595. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED HEALTHCARE CORPORATION INDEX
PAGE NUMBER ------------- PART I. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Balance Sheets at September 30, 1997 and December 31, 1996..................... 3 Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 1997 and 1996................................................................................... 4 Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1997 and 1996............................................................................................ 5 Notes to Condensed Consolidated Financial Statements.................................................. 6 Report of Independent Public Accountants.............................................................. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 9 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................................................... 14 ITEM 6. EXHIBITS...................................................................................... 14 Signatures.............................................................................................. 15
2 UNITED HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ ASSETS Current Assets Cash and cash equivalents......................................................... $ 444.3 $ 1,036.7 Short-term investments............................................................ 482.8 610.6 Accounts receivable, net.......................................................... 731.3 605.8 Assets under management........................................................... 120.8 155.1 Other............................................................................. 344.3 331.4 ------------- ------------ Total Current Assets............................................................ 2,123.5 2,739.6 Long-term Investments............................................................... 2,620.1 1,805.0 Goodwill and Other Intangible Assets, net........................................... 2,145.5 2,139.0 Property and Equipment, net......................................................... 352.2 313.0 ------------- ------------ TOTAL ASSETS........................................................................ $ 7,241.3 $ 6,996.6 ------------- ------------ ------------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Medical costs payable............................................................. $ 1,550.7 $ 1,516.1 Other policy liabilities.......................................................... 267.9 334.0 Accounts payable and other liabilities............................................ 514.6 564.4 Unearned premiums................................................................. 116.0 228.3 ------------- ------------ Total Current Liabilities....................................................... 2,449.2 2,642.8 Long-term Obligations............................................................... 20.5 30.8 Convertible Preferred Stock......................................................... 500.0 500.0 ------------- ------------ Shareholders' Equity Common stock, $.01 par value--500,000,000 shares authorized; 188,029,000 and 184,865,000 issued and outstanding.............................................. 1.9 1.8 Additional paid-in capital........................................................ 1,256.9 1,148.0 Retained earnings................................................................. 2,993.7 2,680.2 Net unrealized holding gains (losses) on investments available for sale, net of income tax effects.............................................................. 19.1 (7.0) ------------- ------------ Total Shareholders' Equity...................................................... 4,271.6 3,823.0 ------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................................... $ 7,241.3 $ 6,996.6 ------------- ------------ ------------- ------------
See notes to unaudited condensed consolidated financial statements 3 UNITED HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- REVENUES Premiums....................................................... $ 2,550.6 $ 2,199.3 $ 7,495.5 $ 6,208.7 Management Services and Fees................................... 350.9 343.9 1,072.9 1,053.5 Investment and Other Income.................................... 57.4 44.2 172.1 135.4 ---------- ---------- ---------- ---------- Total Revenues............................................... 2,958.9 2,587.4 8,740.5 7,397.6 ---------- ---------- ---------- ---------- OPERATING EXPENSES Medical Costs.................................................. 2,144.1 1,856.4 6,326.7 5,262.7 Selling, General and Administrative Costs...................... 590.5 547.8 1,757.5 1,598.1 Depreciation and Amortization.................................. 37.3 33.9 106.4 96.9 ---------- ---------- ---------- ---------- Total Operating Expenses..................................... 2,771.9 2,438.1 8,190.6 6,957.7 ---------- ---------- ---------- ---------- EARNINGS FROM OPERATIONS......................................... 187.0 149.3 549.9 439.9 Merger Costs................................................... -- -- -- (15.0) ---------- ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES..................................... 187.0 149.3 549.9 424.9 Provision for Income Taxes..................................... (70.9) (58.1) (209.2) (164.4) ---------- ---------- ---------- ---------- NET EARNINGS..................................................... 116.1 91.2 340.7 260.5 CONVERTIBLE PREFERRED STOCK DIVIDENDS............................ (7.2) (7.2) (21.6) (21.6) ---------- ---------- ---------- ---------- NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS................... $ 108.9 $ 84.0 $ 319.1 $ 238.9 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- NET EARNINGS PER COMMON SHARE.................................... $ 0.57 $ 0.45 $ 1.68 $ 1.29 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING....................... 192.0 187.1 190.5 185.0 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See notes to unaudited condensed consolidated financial statements 4 UNITED HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 1997 1996 ---------- ---------- OPERATING ACTIVITIES Net Earnings............................................................................. $ 340.7 $ 260.5 Non-cash Items: Depreciation and amortization........................................................ 106.4 96.9 Provision for future losses.......................................................... -- 45.0 Other................................................................................ (2.9) (21.0) Net Change in Other Operating Items: Accounts receivable and other assets................................................. (155.7) (93.5) Accounts payable and other liabilities............................................... (14.4) (119.6) Medical costs payable................................................................ 38.1 305.2 Other policy liabilities............................................................. (35.4) (14.7) Unearned premiums.................................................................... (111.9) (77.0) ---------- ---------- Cash Flows From Operating Activities............................................... 164.9 381.8 ---------- ---------- INVESTING ACTIVITIES Cash Paid for Acquisitions, net of cash assumed and other effects...................... -- (105.4) Cash Assumed in Acquisition, net of cash paid and other effects........................ -- 53.5 Purchases of Property and Equipment and Capitalized Software........................... (132.2) (110.8) Purchases of Investments Available for Sale............................................ (5,029.1) (3,113.8) Maturities/Sales of Investments Available for Sale..................................... 4,370.4 2,703.8 Purchases of Investments Held to Maturity.............................................. (40.9) (20.3) Maturities of Investments Held to Maturity............................................. 50.7 12.7 Other.................................................................................. (14.0) (11.7) ---------- ---------- Cash Flows Used for Investing Activities........................................... (795.1) (592.0) ---------- ---------- FINANCING ACTIVITIES Net Proceeds from Stock Option Exercises............................................... 60.1 29.5 Payment of Long-term Obligations....................................................... -- (.5) Dividends Paid Convertible Preferred Stock.......................................................... (21.6) (21.6) Common Stock......................................................................... (5.6) (5.3) Other................................................................................ 4.9 -- ---------- ---------- Cash Flows From Financing Activities............................................... 37.8 2.1 ---------- ---------- DECREASE IN CASH AND CASH EQUIVALENTS.................................................... (592.4) (208.1) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................... 1,036.7 940.1 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD................................................. $ 444.3 $ 732.0 ---------- ---------- ---------- ----------
See notes to unaudited condensed consolidated financial statements 5 UNITED HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the financial results for the interim periods presented. These financial statements include some amounts that are based on management's best estimates and judgments. The most significant estimates relate to medical costs payable and other policy liabilities, intangible asset valuations, and integration and restructuring reserves relating to the Company's acquisitions. These estimates are subject to adjustment as further information becomes available and any such adjustment could be significant. Pursuant to the rules and regulations of the Securities and Exchange Commission, footnote disclosures which would substantially duplicate the disclosures contained in the audited financial statements of the Company have been omitted from these interim financial statements. Although the Company believes that the disclosures presented below are adequate to make the interim financial statements presented not misleading, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 2. DIVIDENDS On February 13, 1997, the Company's Board of Directors approved an annual dividend for 1997 of $0.03 per share to holders of the Company's common stock. Dividends of $5.6 million were paid on April 15, 1997 to shareholders of record at the close of business on April 3, 1997. 3. STOCK REPURCHASE PROGRAM In November 1997, the Company's Board of Directors authorized a stock repurchase program pursuant to which up to 10% of the Company's outstanding common stock may be repurchased. Purchases may be made from time to time at prevailing prices in the open market, subject to certain restrictions relating to volume, pricing and timing. The repurchased shares will be available for reissuance pursuant to employee stock option and purchase plans and for other corporate purposes. 4. CASH AND INVESTMENTS As of September 30, 1997, the amortized cost, gross unrealized holding gains and losses and fair value of the Company's cash and investments were as follows (in millions):
GROSS UNREALIZED GROSS UNREALIZED AMORTIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE -------------- ----------------- ----------------- ----------- Cash and Cash Equivalents......................... $ 444.3 $ -- $ -- $ 444.3 Investments Available for Sale.................... 3,009.0 35.6 (4.8) 3,039.8 Investments Held to Maturity...................... 63.1 .2 -- 63.3 -------------- ----- ----- ----------- Total Cash and Investments...................... $ 3,516.4 $ 35.8 $ (4.8) $ 3,547.4 -------------- ----- ----- ----------- -------------- ----- ----- -----------
6 UNITED HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 5. RECENTLY ISSUED ACCOUNTING STANDARDS During March 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128), which changes the computation and disclosure of earnings per share. SFAS No. 128 is effective for both interim and annual periods ending after December 15, 1997 and earlier application is not permitted. Under the Company's current capital structure, the adoption of SFAS No. 128 will not have a material impact on the Company's determination of earnings per share. During June 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130), effective for fiscal years beginning after December 15, 1997. SFAS No. 130 will require the Company to report and display comprehensive income and its components, defined as changes in equity of a business enterprise during a period except those resulting from investments by owners and distributions to owners. The changes required by SFAS No. 130 will not effect net earnings or shareholders' equity as previously reported. 7 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To United HealthCare Corporation: We have reviewed the accompanying condensed consolidated balance sheet of United HealthCare Corporation (a Minnesota corporation) and Subsidiaries as of September 30, 1997, and the related condensed consolidated statements of operations for the three and nine month periods ended September 30, 1997 and 1996, and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 1997 and 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated financial statements of United HealthCare Corporation and Subsidiaries as of and for the year ended December 31, 1996 (not presented herein), and, in our report dated February 28, 1997, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Arthur Andersen LLP Minneapolis, Minnesota, November 6, 1997 8 UNITED HEALTHCARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto. In addition, the following discussion should be considered in light of a number of factors affecting the Company, the industry in which it operates, and business generally. These factors are set forth in Exhibit 99 to this Quarterly Report. SUMMARY OPERATING INFORMATION
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- ----------------------------------- PERCENT PERCENT OPERATING RESULTS 1997 1996 CHANGE 1997 1996(a) CHANGE - --------------------------------------------- --------- --------- ------------- --------- --------- ------------- (IN MILLIONS EXCEPT PER SHARE DATA) Total Revenues............................... $ 2,958.9 $ 2,587.4 14% $ 8,740.5 $ 7,397.6 18% Earnings from Operations..................... $ 187.0 $ 149.3 25% $ 549.9 $ 484.9 13% Net Earnings................................. $ 116.1 $ 91.2 27% $ 340.7 $ 297.1 15% Earnings Per Share........................... $ 0.57 $ 0.45 27% $ 1.68 $ 1.49 13% Medical Costs to Premium Revenues............ 84.1% 84.4% 84.4% 84.0% SG&A Expenses to Total Revenues.............. 20.0% 21.2% 20.1% 21.6%
SEPTEMBER 30, SEPTEMBER 30, PERCENT ENROLLMENT BY PRODUCT 1997 1996 CHANGE - -------------------------------------------------------------------------- ------------- ------------- ------------ (IN THOUSANDS) Health Plan Products Commercial.............................................................. 4,471 3,914 14% Medicare................................................................ 318 203 57% Medicaid................................................................ 526 524 -- ------------- ------------- --- Total Health Plan Products............................................ 5,315 4,641 15% Other Network-Based Products.............................................. 5,385 5,494(b) (2)% Indemnity Products........................................................ 2,321 3,119(b) (26)% ------------- ------------- --- Total Enrollment...................................................... 13,021 13,254 (2)% ------------- ------------- --- ------------- ------------- --- ENROLLMENT BY FUNDING ARRANGEMENT - -------------------------------------------------------------------------- Fully Insured Health Plan Products.................................................. 5,013 4,327 16% Other Network-Based Products.......................................... 694 742 (6)% Indemnity Products.................................................... 391 697 (44)% ------------- ------------- --- Total Fully Insured................................................. 6,098 5,766 6% ------------- ------------- --- Self-Funded Health Plan Products.................................................. 302 314 (4)% Other Network-Based Products.......................................... 4,691 4,752(b) (1)% Indemnity Products.................................................... 1,930 2,422(b) (20)% ------------- ------------- --- Total Self-Funded................................................... 6,923 7,488 (8)% ------------- ------------- --- Total Enrollment.................................................. 13,021 13,254 (2)% ------------- ------------- --- ------------- ------------- ---
- ------------------------------ (a) Amounts include post-acquisition operating results of PHP, Inc. (PHP) acquired on March 29, 1996, and HealthWise of America, Inc. (HealthWise) acquired on April 12, 1996. For comparability purposes, amounts exclude merger costs of $15.0 million ($9.1 million after tax) associated with the acquisition of HealthWise and the provision for future losses on two multi-year contracts of $45.0 million ($27.4 million after tax). (b) For comparability purposes, amounts exclude 676,000 self-funded other network-based and indemnity lives served by United HealthCare Administrators, Inc., which was sold June 30, 1997. 9 RESULTS OF OPERATIONS PREMIUM REVENUES Premium revenues of $2.6 billion in the third quarter of 1997 represent an increase of $351 million, or 16%, over the third quarter of 1996. For the nine months ended September 30, 1997, premium revenues of $7.5 billion represent an increase of $1.3 billion, or 21%, over the same period in 1996. Excluding the effects of the Company's 1996 acquisitions of HealthWise and PHP, the increase in premium revenues for the nine months ended September 30, 1997 over the same period in 1996 was 19%. The increase in premium revenues is primarily attributable to year-over-year same-store health plan premium revenue growth of $426 million, or 26%, for the quarter ended September 30, 1997, and $1.3 billion, or 27%, for the nine months ended September 30, 1997. The health plan premium revenue increase reflects same-store enrollment growth of 15% and an average year-over-year premium rate increase on renewing commercial groups exceeding 5%. Growth in the Company's Medicare programs also contributed to the increase in premium revenues. Included in the total health plan same-store enrollment growth of 15% are year-over-year same-store increases of 57% in the Company's Medicare enrollment. Significant growth in Medicare enrollment will affect year-over-year comparability of premium revenue. The Medicare product generally realizes per member premium rates three to four times higher than the average commercial premium rates because of the higher level of medical care services utilized by this population. The year-over-year increase in premium revenues from health plan operations was partially offset by an expected decrease in premium revenues of $144 million from fully insured non-network-based indemnity products. Nearly $30 million of this decrease is attributable to the Company's decision to discontinue its relationship with a broker which sold and administered small group indemnity business on behalf of the Company. This resulted in the loss of 30,000 indemnity members effective July 1, 1997. The remaining decrease is a result of declining enrollment in these products due to average 10% to 20% rate increases instituted in 1996 and into 1997, as well as other business factors. The Company expects enrollment decreases in the non-network-based indemnity products to continue through the remainder of 1997 and into 1998. To the extent practicable, the Company will attempt to convert these enrollees to its network-based managed care products. MEDICAL COSTS The combination of the Company's pricing strategy and its medical management efforts are reflected in its medical care ratio (the percent of premium revenues expensed as medical costs). The Company generally establishes new and renewal commercial health plan premium rates based on anticipated health care costs. The Company believes its current health care cost trend is in the 3% to 4% range. In response to this cost trend, the Company has been increasing premium rates in excess of 5% on new and existing commercial health plan business in the last half of 1996 and continuing throughout 1997. The medical care ratio for the third quarter of 1997 was 84.1%, a decrease of thirty basis points from the third quarter a year ago and down sequentially from the 84.7% reported in the second quarter of 1997. This sequential decline reflects the positive impact of various medical management programs, lower seasonal usage of health care services reported in the second half of the year, and higher premium prices on new and renewal commercial health plan business. For the nine months ended September 30, the medical care ratio increased from 84.0% in 1996 to 84.4% in 1997. The increase in the nine month 1997 medical care ratio is the result of several factors. A few health plan markets, most notably Maryland, Rhode Island and the Gulf Coast, had medical care ratios substantially higher than the Company's other health plans in the aggregate. While the reasons varied from plan to plan, these results can generally be attributed to medical cost controls and provider contracting 10 initiatives not being fully implemented and insufficient commercial premium yields relative to corresponding medical costs. The Company anticipates performance will improve in these markets; however, the Company believes these health plans will continue to moderate the Company's overall results through the remainder of 1997 and into 1998. The rapid growth associated with recently introduced Medicare products in several new markets (with the proportionately higher medical care ratios expected at this early stage of product introduction) and the absence of Medicaid premium increases also contributed to the increased medical care ratio. Further Medicaid premium reductions in certain markets are possible during the remainder of 1997 and beyond which may inhibit the Company's ability to improve its overall medical care ratio in the near term. In the second quarter of 1996, the Company recorded a provision to cover the estimated losses expected to be incurred through the remaining term of two large, multi-year contracts in its St. Louis health plan of $45.0 million. With the contract loss provision, the medical care ratio was 84.8% for the nine months ended September 30, 1996. MANAGEMENT SERVICES AND FEE REVENUES Management services and fee revenues for the three and nine months ended September 30, 1997 were $351 million and $1.1 billion compared to $344 million and $1.1 billion for the same periods in 1996. These revenues are primarily generated from self-funded products wherein the Company receives a fee for the provision of administrative services and generally assumes no financial responsibility for health care costs associated with these products. Additionally, the Company generates fee revenues from administrative services performed on behalf of managed health plans and for services provided by the Company's specialty managed care services. Management services and fee revenues from self-funded products decreased $20 million through the first nine months of 1997 compared to the same period in 1996 as a result of declining enrollment in these products. In addition, the June 30, 1997 sale of United HealthCare Administrators, Inc., a subsidiary of the Company, resulted in a $12 million decrease in these revenues. These decreases were offset by an increase in revenues generated from the Company's other sources of management services and fee revenues, including enrollment growth within the managed health plans and an increase in lives served by the specialty managed care services operations, most notably in the behavioral health and demand management businesses. SELLING, GENERAL AND ADMINISTRATIVE COSTS Selling, general and administrative costs as a percent of total revenues (the SG&A ratio) decreased from 21.2% in the third quarter of 1996 to 20.0% in the third quarter of 1997. This improvement in the SG&A ratio reflects ongoing operating efficiencies as well as the Company's diligence in managing these expenses. On an absolute dollar basis, selling, general and administrative costs through the first nine months of 1997 increased $156 million, or 10%, over the comparative period of 1996, reflecting the additional infrastructure necessary to support the corresponding $1.3 billion increase in premium-based business, as well as additional investment in new Medicare markets and increased support for its growing specialty managed care service operations. INFLATION Although the general rate of inflation has remained relatively stable and health care cost inflation has declined in recent years, the total national health care cost inflation rate still exceeds the general inflation rate. The Company uses various strategies to mitigate the negative effects of health care cost inflation, including setting commercial premiums based on its anticipated health care costs, risk-sharing arrangements with the Company's various health care providers, and other health care cost containment measures. Specifically, the Company's health plans attempt to control medical and hospital costs through contractual 11 arrangements primarily with independent providers of health care services. Cost-effective delivery of health care services by such health care providers is encouraged by emphasizing preventive health services, the appropriate use of specialty referral services, and the reduction of unnecessary hospitalizations. While the Company currently believes its strategies to mitigate health care cost inflation will continue to be successful, competitive pressures, new health care product introductions, demands from providers and customers, applicable regulations or other factors may adversely affect the Company's ability to control the impact of health care cost increases. In addition, certain non-network-based products do not have health care cost containment measures similar to those employed by the Company's network-based managed care products. As a result, the Company is subject to more health care cost inflation risk with these products. GOVERNMENT REGULATION The Company's primary business, offering health care coverage and health care management services, is heavily regulated at both the federal and state levels. The Company believes that it is in compliance in all material respects with the various federal and state regulations applicable to its current operations. To maintain such compliance, it may be necessary for the Company or one of its subsidiaries to make changes from time to time in its services, products, marketing methods, or organizational or capital structure. Government regulation of health care coverage products and services is a changing area of law that varies from jurisdiction to jurisdiction. Changes in applicable laws and regulations are continually being considered and the interpretation of existing laws and rules also may change from time to time. Regulatory agencies generally have broad discretion in promulgating regulations and in interpreting and enforcing laws and rules. While the Company is unable to predict what regulatory changes may occur or the impact on the Company of any particular change, the Company's operations and financial results could be negatively affected by regulatory revisions. Certain proposed changes in Medicare and Medicaid programs may increase the opportunities for the Company to enroll people under products developed for the Medicare- and Medicaid-eligible populations. Other proposed changes may limit the reimbursement available to the Company and increase competition in those programs, which could adversely affect the Company's financial results. The continued consideration and enactment of "anti-managed care" laws and regulations by federal and state bodies may make it more difficult for the Company to control medical costs and may adversely affect financial results. A number of jurisdictions have enacted small group insurance and rating reforms, which generally limit the ability of insurers and health plans to use risk selection as a method of controlling medical costs for small group business. These laws generally may limit or eliminate use of preexisting conditions exclusions, experience rating and industry class rating, and may limit the amount of rate increases from year to year. Under these laws, medical cost control through provider contracting and managing care may become more important. In addition to changes in applicable laws and rules, the Company is potentially subject to governmental audits, investigations and enforcement actions. These include possible government actions relating to the federal Employee Retirement Income Security Act (ERISA), which regulates insured and self-insured health coverage plans offered by employers, the Federal Employees Health Benefit Plan (FEHBP), federal and state fraud and abuse laws, and laws relating to utilization management and the delivery of health care. Any such government action could result in assessment of damages, civil or criminal fines or penalties, or other sanctions, including exclusion from participation in government programs. Although the Company is currently involved in various government audits, such as under the FEHBP or relating to services for ERISA plans, the Company currently does not believe the results of such audits will have a material adverse effect on the Company's financial position or results of operations. 12 FINANCIAL CONDITION AND LIQUIDITY Cash and investments at September 30, 1997 were $3.5 billion, a $13 million increase in the third quarter of 1997 and a $95 million increase compared to December 31, 1996. The increase in cash and investments since year-end is primarily a result of cash generated from operations of $165 million and proceeds received from common stock issuances of $60 million partially offset by $132 million in purchases of property and equipment and capitalized software. Under applicable state regulations, many of the Company's subsidiaries are required to maintain capital levels to support their operations. After giving effect to these regulations and certain business considerations, the Company had approximately $940 million in cash and investments available for general corporate use at September 30, 1997. The Company continues to focus on expanding its health care programs to the Medicare population. In connection with the introduction of a Medicare health plan product in a particular site, significant expenditures must be incurred. These start-up expenditures include a lengthy and detailed regulatory approval process, product-specific provider contracting and network configuration, high up-front sales and marketing costs, and staffing of service areas in advance of product sales. In addition, start-up markets generally experience a higher medical care ratio due to the low enrollment base. The Company expects to incur operating losses from its Medicare products in these start-up markets usually for the first 12 to 18 months until Medicare enrollment is sufficient to cover the corresponding administrative cost structure in each site and to absorb the medical risk attributable to these products. In February 1997, the Company completed a contract to deliver Medicare supplement insurance, and is developing an array of new products, for members of the American Association of Retired Persons (AARP) beginning in January 1998. Under the terms of the 10-year contract, the Company's portion of the AARP insurance offerings is expected to represent approximately $3.5 billion in annual premium revenue from over 4.5 million policyholders. The Company currently believes its available cash resources will be sufficient to meet its current operating requirements and internal development and integration initiatives. In addition, the Company believes that, based on its current financial condition and results of operations, it would be able to finance additional cash requirements in the public or private markets, if necessary. There currently are no other material definitive commitments for future use of the Company's available cash resources; however, management continually evaluates opportunities to expand its operations, which includes internal development of new products and programs and may include additional acquisitions. 13 UNITED HEALTHCARE CORPORATION PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The Company exchanged 349,463 shares of its common stock for all of the outstanding capital stock of O'Pin Systems, Inc. in a transaction that closed on May 2, 1997. The Company issued these shares in reliance on Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The Company made inquiries of the recipients of securities in this transaction and obtained representations from such persons to establish that such issuance qualified for an exemption from the registration requirements. ITEM 6. EXHIBITS (a) The following exhibits are filed in response to Item 601 of Regulation S-K.
EXHIBIT NUMBER DESCRIPTION - --------------- -------------------------------------------------------------------------------------------- Exhibit 10 -- United HealthCare Corporation 1987 Supplemental Stock Option Plan, as amended Exhibit 11 -- Statements Re Computation of Per Share Earnings Exhibit 15 -- Letter Re Unaudited Interim Financial Information Exhibit 99 -- Cautionary Statements
(b) The Company did not file any reports on Form 8-K during the three month period ended September 30, 1997. 14 UNITED HEALTHCARE CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED HEALTHCARE CORPORATION
/s/ WILLIAM W. MCGUIRE, M.D. - ------------------------------ President and Chief Dated: November 6, 1997 William W. McGuire, M.D. Executive Officer /s/ DAVID P. KOPPE - ------------------------------ Chief Financial Officer Dated: November 6, 1997 David P. Koppe
15 UNITED HEALTHCARE CORPORATION EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------------- -------------------------------------------------------------------------------------------- Exhibit 10 -- United HealthCare Corporation 1987 Supplemental Stock Option Plan, as amended Exhibit 11 -- Statements Re Computation of Per Share Earnings Exhibit 15 -- Letter Re Unaudited Interim Financial Information Exhibit 99 -- Cautionary Statements
16 EX-10 2 EXHIBIT 10 Exhibit 10 UNITED HEALTHCARE CORPORATION 1987 SUPPLEMENTAL STOCK OPTION PLAN, AS AMENDED 1. PURPOSE OF PLAN. This Plan shall be known as the "United HealthCare Corporation 1987 Supplemental Stock Option Plan" and is hereinafter referred to as the "Plan." The purpose of the Plan is to attract and retain the services of experienced and knowledgeable non-employee directors of United HealthCare Corporation (the "Company") and to provide additional incentive for such directors to increase their interest in the Company's long term success and progress. Options granted under this Plan shall be nonqualified stock options which do not qualify as Incentive Stock Options within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended, (the "Code"). 2. STOCK SUBJECT TO PLAN. Subject to the provisions of Section 10 hereof, the stock to be subject to options under the Plan (the "Shares") shall be the Company's authorized Common Stock, par value $0.01 per share (the "Common Stock"). Such shares will be authorized but unissued shares. Subject to the adjustment as provided in Section 10 hereof, the maximum number of shares on which options may be exercised under this Plan shall be 400,000 shares. If an option under the Plan expires, or for any reason is terminated or unexercised with respect to any shares, such shares shall again be available for options thereafter granted during the term of the Plan. 3. ADMINISTRATION OF PLAN. The Plan shall be administered by a committee (the "Committee") of two or more persons appointed by the Board of Directors of the Company. Grants of stock options under the Plan and the amount and nature of the awards to be granted shall be automatic as described in Section 4. However, all questions of interpretation of the Plan or of any options issued under it shall be determined by the Committee and such determination shall be final and binding upon all persons having an interest in the Plan. 4. ELIGIBILITY. Upon approval of the Plan by the Board of Directors, but subject to approval of the Plan by the stockholders of the Company pursuant to Section 13 hereof, each director of the Company who is not otherwise an employee of the Company or any subsidiary of the Company (an "Eligible Director") shall receive an option to acquire 8,000 Shares under the Plan for each year of service as a director of the Company begun prior to such approval by the Board of Directors. Thereafter, each Eligible Director who is in office on his or her anniversary date of becoming a director of the Company (commencing after August 31, 1987) shall automatically be granted on that date an option to acquire 8,000 Shares under the Plan until such Eligible Director has been granted a total of 80,000 shares hereunder. -1- 5. PRICE. The option price for all options granted under the Plan shall be the fair market value of the Shares covered by the option at the time the option is granted. For the purpose of the preceding sentence, the "fair market value" of the Company's Common Stock shall be the closing sale price of the Common Stock on the date of grant of an option, as reported on the National Association of Securities Dealers Automated Quotation System, if applicable, or if the Common Stock is then traded on a national securities exchange, as reported on such exchange. If on the date of grant of any option granted under the Plan, the Common Stock of the Company is not publicly traded, the Board of Directors shall make a good faith attempt to satisfy the option price requirement of this Section 5 and in connection therewith shall take such action as it deems necessary or advisable. 6. TERM. Each option and all rights and obligations thereunder shall, subject to the provisions of Section 8 herein, expire not more than ten (10) years from the date of granting of the option. 7. EXERCISE OF OPTION. (a) Options granted under the Plan shall not be exercisable for a period of six months after the date of grant, or until shareholder approval of the Plan has been obtained, whichever occurs later, but thereafter will be exercisable in full at any time or from time to time during the term of the option, subject to the provisions of Section 8 hereof. (b) The exercise of any option granted hereunder shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of Common Stock pursuant to such exercise will not violate any state or federal securities or other laws. An optionee desiring to exercise an option may be required by the Company, as a condition of the effectiveness of any exercise of an option granted hereunder, to agree in writing that all Common Stock to be acquired pursuant to such exercise shall be held for his or her own account without a view to any further distribution thereof, that the certificates for such shares shall bear an appropriate legend to that effect and that such shares will not be transferred or disposed of except in compliance with applicable federal and state securities laws. (c) An optionee electing to exercise an option shall give written notice to the Company of such election and of the number of shares subject to such exercise. The full purchase price of such shares shall be tendered with such notice of exercise. Payment shall be made to the Company either in cash (including check, bank draft or money order), or (i) by delivering the Company's Common Stock already owned by the Optionee having a fair market value equal to the full purchase price of the Shares, or (ii) by any combination of cash and the method specified in (i) of this sentence. For purposes of the preceding sentence, the "fair market value" of the Shares shall be the average closing sale price of the Common Stock, for the thirty calendar days immediately preceding the date as of which the fair market value is being determined, as reported on the National Association of Securities Dealers Automated Quotation System, if applicable, or if the Common Stock is then traded on a national securities exchange, as reported on such exchange. Until such person has been issued a certificate or certificates for the shares subject to such exercise, he or she shall possess no rights as a stockholder with respect to such shares. -2- 8. EFFECT OF TERMINATION OF DIRECTORSHIP OR DEATH OR DISABILITY. (a) In the event that an optionee shall cease to be a director of the Company for any reason other than his or her gross and willful misconduct or his or her death or disability, such optionee shall have the right to exercise the option at any time after such termination of the directorship to the extent of the full number of shares he or she was entitled to purchase under the option on the date of termination, subject to the condition that no option shall be exercisable after the expiration of the term of the option. (b) In the event that an optionee shall cease to be a director of the Company by reason of his or her gross and willful misconduct during the course of his or her service as a director of the Company, including but not limited to wrongful appropriation of funds of the Company, or the commission of a gross misdemeanor or felony, the option shall be terminated as of the date of the misconduct. (c) If the optionee shall die while serving as a director of the Company or within three months after termination of his or her directorship for any reason other than gross and willful misconduct, or become disabled (within the meaning of Code Section 105(d)(4)) while serving as a director of the Company and such optionee shall not have fully exercised the option, such option may be exercised at any time within twelve months after his or her death or disability by the personal representatives, administrators, or if applicable, guardian, of the optionee or by any person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of shares he or she was entitled to purchase under the option on the date of death, disability, or termination of directorship, if earlier, and subject to the condition that no option shall be exercisable after the expiration of the term of the option. 9. NON-TRANSFERABILITY. No option granted under the Plan shall be transferable by optionee, otherwise than by will or the laws of descent or distribution as provided in Section 8(c) herein. Except as provided in Section 8 herein with respect to disability of the optionee, during the lifetime of an optionee the option shall be exercisable only by such optionee. The Board of Directors of the Company shall have the authority to waive the provisions of this Section with respect to any grant of options under the Plan subject to such terms, conditions or limitations as they may, in their discretion, impose. 10. DILUTION OR OTHER ADJUSTMENTS. If there shall be any change in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend (of whatever amount), stock split or other change in the corporate structure, appropriate adjustments in the Plan and outstanding options shall be made by the Board of Directors. In the event of any such changes, adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan, the number of shares and the price per share subject to outstanding options in order to prevent dilution or enlargement of option rights. -3- 11. AMENDMENT OR DISCONTINUANCE OF PLAN. The Board of Directors may amend or discontinue the Plan at any time. However, subject to the provisions of Section 10 no amendment of the Plan shall, without stockholder approval: (1) increase the maximum number of Shares with respect to which options may be granted under the Plan as provided in Section 2 hereof, (ii) modify the eligibility requirements for participation in the Plan as provided in Section 4 hereof, or (iii) change the date of grant or exercise price of, or the number of Shares subject to, options granted or to be granted to Eligible Directors, as provided in Sections 4 and 5 hereof. The Board of Directors shall not alter or impair any option theretofore granted under the Plan without the consent of the holder of the option. 12. TIME OF GRANTING. Nothing contained in the Plan or in any resolution adopted or to be adopted by the Board of Directors or by the stockholders of the Company, and no action taken by the Board of Directors (other than the execution and delivery of an option), shall constitute the granting of an option hereunder. 13. EFFECTIVE DATE AND TERMINATION OF PLAN. (a) The Plan was approved by the Board of Directors on August 31, 1987, and shall be approved by the stockholders of the Company within twelve (12) months thereafter. (b) Unless the Plan shall have been discontinued as provided in Section 11 hereof, the Plan shall terminate on August 31, 1997. No option may be granted after such termination, but termination of the Plan shall not, without the consent of the optionee, alter or impair any rights or obligations under any option theretofore granted. -4- grpg\chuey\corp\sop87 EX-11 3 EXHIBIT 11 EXHIBIT 11 UNITED HEALTHCARE CORPORATION STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS(A) (IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- PRIMARY - ------------------------------------------------------------------------- NET EARNINGS............................................................. $ 116.1 $ 91.2 $ 340.7 $ 260.5 LESS CONVERTIBLE PREFERRED STOCK DIVIDENDS............................... (7.2) (7.2) (21.6) (21.6) --------- --------- --------- --------- NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS........................... $ 108.9 $ 84.0 $ 319.1 $ 238.9 --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares outstanding............................... 187.3 184.1 184.9 180.6 Additional equivalent shares issuable from assumed exercise of common stock options and warrants............................................. 4.7 3.0 5.6 4.4 --------- --------- --------- --------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................... 192.0 187.1 190.5 185.0 --------- --------- --------- --------- --------- --------- --------- --------- NET EARNINGS PER COMMON SHARE............................................ $ 0.57 $ 0.45 $ 1.68 $ 1.29 --------- --------- --------- --------- --------- --------- --------- --------- FULLY DILUTED(B) - ------------------------------------------------------------------------- NET EARNINGS............................................................. $ 116.1 $ 91.2 $ 340.7 $ 260.5 --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares outstanding............................... 187.3 184.1 184.9 180.6 Additional equivalent shares issuable from assumed exercise of common stock options and warrants............................................. 4.7 3.4 5.6 4.4 Assumed conversion of convertible preferred stock........................ 10.1 10.1 10.1 10.1 --------- --------- --------- --------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................... 202.1 197.6 200.6 195.1 --------- --------- --------- --------- --------- --------- --------- --------- NET EARNINGS PER COMMON SHARE............................................ $ 0.57 $ 0.46 $ 1.70 $ 1.34 --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (a) As discussed more fully in Footnote 4 to the condensed consolidated financial statements, the Company is required to implement a new methodology for determining earnings per share in the fourth quarter of 1997. The impact of this new methodology is not expected to be material. (b) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. 17 EX-15 4 EXHIBIT 15 EXHIBIT 15 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION November 6, 1997 To United HealthCare Corporation: We are aware that United HealthCare Corporation and Subsidiaries has incorporated by reference in its Registration Statements No. 33-3558, 2-95342, 33-22310, 33-27208, 33-36579, 33-50282, 33-67918, 33-68300, 33-75846, 33-79632, 33-79634, 33-79636, 33-59083, 33-59623, 33-63885, 333-05717, 333-02525, 333-04875, 333-04401, 333-06533, 333-01517, 333-01915, 333-25923 and 333-05291, its Form 10-Q for the quarter ended September 30, 1997, which includes our report dated November 6, 1997, covering the unaudited interim condensed consolidated financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen LLP 18 EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNITED HEALTHCARE CORPORATION FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 444,300 3,102,900 777,500 46,200 0 2,123,500 667,000 314,800 7,241,300 2,449,200 0 500,000 0 1,900 4,269,700 7,241,300 8,568,400 8,740,500 8,084,200 8,190,600 106,400 0 0 549,900 209,200 340,700 0 0 0 340,700 1.68 1.70
EX-99 6 EXHIBIT 99 EXHIBIT 99 CAUTIONARY STATEMENTS The statements contained in this Form 10-Q include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases, presentations to securities analysts or investors, and in oral statements made by or with the approval of an 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 the Company's business that investors and others should consider. This discussion is intended to take advantage of the "safe harbor" provisions of the PSLRA. In making these cautionary statements, the Company is not undertaking to address or update each factor in future filings or communications regarding the Company's business or results, and is not undertaking to address how any of these factors may have caused results to differ from discussions or information contained in previous filings or communications. In addition, any of the matters discussed below may have affected the Company's past, as well as current, forward-looking statements about future results, so that the Company's actual results in the future may differ materially from those expressed in prior communications. HEALTH CARE COSTS. A large portion of the revenue received by the Company is used to pay the costs of health care services or supplies delivered to its members. The total health care costs incurred by the Company are affected by the number of individual services rendered and the cost of each service. Much of the Company's premium revenue is set in advance of the actual delivery of services and incurrence of the related costs, usually on a prospective annual basis. While the Company attempts to base the premiums it charges at least in part on its estimate of future health care costs over the fixed premium period, competition, regulations and other circumstances may limit the Company's ability to fully base premiums on estimated costs. In addition, many factors may and often do cause actual health care costs to exceed that estimated and reflected in premiums. These factors may include increased utilization of services, increased cost of individual services, catastrophes, epidemics, the introduction of new or costly treatments, general inflation, new mandated benefits or other regulatory changes, and insured population characteristics. In addition, the Company's earnings reported for any particular quarter include estimates of covered services incurred by the Company's enrollees during that period but for which a claim has not been received or processed. These are estimates and therefore the Company's earnings may be subject to later adjustment based on the actual costs. In addition, as a result of changes in the level of health care utilization during the calendar year, the Company's operating results may be affected by the seasonal nature of medical costs. Although there are no assurances, per member medical costs generally have been higher in the first half of a year than the second half. INDUSTRY FACTORS. The managed care industry periodically receives significant amounts of negative publicity. This publicity, in turn, has contributed to increased legislative activity, regulation and review of industry practices. These factors may adversely affect the Company's ability to market its products or services, could necessitate changes in the Company's products and services, and may increase regulatory burdens under which the Company operates, further increasing the costs of doing business and adversely affecting profitability. 19 COMPETITION. In many of its geographic or product markets, the Company competes with a number of other entities, some of which may have certain characteristics or capabilities that give them an advantage in competing with the Company. The Company believes the barriers to entry in these markets are not substantial, so that the addition of new competitors can occur relatively easily. Certain of the Company's customers may decide to perform for themselves functions or services formerly provided by the Company, which would result in a decrease in the Company's revenues. Certain of the Company's providers may decide to market products and services to Company customers in competition with the Company. In addition, significant merger and acquisition activity has occurred in the industry in which the Company operates as well as in industries that act as suppliers to the Company, such as the hospital, physician, pharmaceutical and medical device industries. This activity may create stronger competitors or result in higher health care costs. To the extent that there is strong competition or that competition intensifies in any market, the Company's ability to retain or increase customers or providers, its revenue growth, its pricing flexibility, its control over medical cost trends and its marketing expenses may all be adversely affected. AARP CONTRACT. In early 1997, the Company finalized its contract arrangements with the American Association of Retired Persons ("AARP") under which the Company will provide Medicare supplement and hospital indemnity health insurance products to AARP members, effective January 1, 1998. As a result of this agreement, the Company will significantly expand the number of members served, the products offered and the services provided. The success of the AARP arrangement will depend, in part, on the Company's ability to service these new members, develop additional products and services, and price the products and services competitively. GOVERNMENT PROGRAMS AND REGULATION. The Company's business is heavily regulated on a federal, state and local level. The laws and rules governing the Company's business and interpretations of those laws and rules are subject to frequent change and broad latitude is given to the agencies administering those regulations. Existing or future laws and rules could force the Company to change how it does business, may restrict the Company's revenue and enrollment growth, increase its health care and administrative costs and capital requirements, and increase the Company's liability for medical malpractice or other actions. Regulatory approvals must be obtained and maintained to market many of the Company's products and services. Delays in obtaining or failure to obtain or maintain such approvals could adversely affect the Company's revenue or the number of its members, or could increase costs. A significant portion of the Company's revenues relates to federal, state and local government health care coverage programs. These types of programs, such as the federal Medicare program and the federal and state Medicaid programs, are generally subject to frequent change including changes that may reduce the number of persons enrolled or eligible, reduce the revenue received by the Company or increase the Company's administrative or health care costs under such programs. Such changes have in the past and may in the future adversely affect the Company's results and its willingness to participate in such programs. The Company is also subject to various governmental reviews, audits and investigations. Such activities could result in the loss of licensure or the right to participate in certain programs, or the imposition of fines, penalties and other sanctions. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect the Company's reputation in various markets and make it more difficult for the Company to sell its products and services. The National Association of Insurance Commissioners (the "NAIC") has an effort underway that would require new minimum capitalization limits for health care coverage provided by insurance companies, HMOs and other risk bearing health care entities. The requirements would take the form of risk-based capital rules. Currently, similar risk-based capital rules apply only to insurance companies. Depending on the nature and extent of the new minimum capitalization requirements ultimately adopted, there could be an increase in the capital required for certain of the Company's subsidiaries and there may be some potential for disparate treatment relative to competing products. Failure of the NAIC to act may result in some form of federal solvency regulation of companies providing Medicare-related benefit programs. 20 PROVIDER RELATIONS. One of the significant techniques the Company uses to manage health care costs and utilization and monitor the quality of care being delivered is contracting with physicians, hospitals and other providers. Because of the geographic diversity of its health plans and the large number of providers with which most of those health plans contract, the Company currently believes it has a limited exposure to provider relations issues. In any particular market, however, providers could refuse to contract with, demand higher payments or take other actions that could result in higher health care costs, less desirable products for customers and members, or difficulty meeting regulatory or accreditation requirements. In some markets, certain providers, particularly hospitals, physician/hospital organizations or multi-specialty physician groups, may have significant market positions or near monopolies. In addition, physician or practice management companies, which aggregate physician practices for purposes of administrative efficiency and marketing leverage, continue to expand. These providers may compete directly with the Company. If such providers refuse to contract with the Company, use their market position to negotiate favorable contracts, or place the Company at a competitive disadvantage, the Company's ability to market products or to be profitable in those areas could be adversely affected. LITIGATION AND INSURANCE. The Company may be a party to a variety of legal actions to which any corporation may be subject, including employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, tort claims, shareholder suits, including for securities fraud, and intellectual property related litigation. In addition, because of the nature of its business, the Company is subject to a variety of legal actions relating to its business operations, such as claims relating to the denial of health care benefits, medical malpractice actions, provider disputes including disputes over withheld compensation and termination of provider contracts, disputes related to self-funded business including actions alleging claim administration errors and the failure to disclose network rate discounts and other fee and rebate arrangements, disputes over copayment calculations, and claims relating to customer audits and contract performance. Recent court decisions and legislative activity may have the effect of increasing the Company's exposure for any of these types of claims. In some cases, substantial non-economic or punitive damages may be sought. While the Company currently has insurance coverage for some of these potential liabilities, others may not be covered by insurance, the insurers may dispute coverage or the amount of insurance may not be enough to cover the damages awarded. In addition, certain types of damages, such as punitive damages, may not be covered by insurance and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future. INFORMATION SYSTEMS. The Company's business is significantly dependent on effective information systems, and the Company has many different information systems for its various businesses. The Company's information systems require an ongoing commitment of resources to maintain and enhance existing systems and develop new systems. As a result of the Company's acquisition activities, the Company is in the process of reducing the number of systems and also upgrading and expanding its information systems capabilities. Failure to maintain effective and efficient information systems could result in loss of existing customers, difficulty in attracting new customers, customer and provider disputes, regulatory problems, increases in administrative expenses or other adverse consequences. In addition, the Company may from time to time obtain significant portions of its systems-related or other services or facilities from independent third parties, which may make the Company's operations vulnerable to such third parties' failure to perform adequately. THE YEAR 2000. The Company is in the process of modifying its computer systems to accommodate the year 2000 and currently expects to complete this modification sufficiently in advance of the year 2000 so as to not adversely affect its operations. The Company is expensing the costs incurred to make these modifications. The inability of the Company to complete timely its year 2000 modifications or the inability of other companies with which the Company does business to complete timely their year 2000 modifications could adversely affect the Company's operations. 21 ADMINISTRATION AND MANAGEMENT. Efficient and cost-effective administration of the Company's operations is integral to the Company's profitability and competitive positioning. While the Company attempts to effectively manage such expenses, increases in staff-related and other administrative expenses may occur from time-to-time due to business or product start-ups or expansions, growth or changes in business, acquisitions, regulatory requirements or other reasons. Such expense increases are not clearly predictable and increases in administrative expenses may adversely affect results. The Company believes it currently has a relatively experienced, capable management staff. The market for management personnel in the health care industry is very competitive. Loss of certain managers or a number of such managers could adversely affect the Company's ability to administer and manage its business. MARKETING. The Company markets its products and services through both employed sales people and independent sales agents. Although the Company has a number of such sales employees and agents, if certain key sales employees or agents or a large subset of such individuals were to leave the Company, its ability to retain existing customers and members could be impaired. In addition, certain of the Company's customers or potential customers consider rating, accreditation or certification of the Company by various private or governmental bodies or rating agencies necessary or important. Certain of the Company's health plans or other business units may not have obtained or may not desire or be able to obtain or maintain such accreditation or certification, which could adversely affect the Company's ability to obtain or retain business with such customers. ACQUISITIONS. The Company has made several large acquisitions in recent years and has an active ongoing acquisition program. These acquisitions may entail certain risks and uncertainties in addition to those present in its ongoing business operations, unknown liabilities, unforeseen administrative needs or increased efforts to integrate the acquired operations. Failure to identify liabilities, anticipate additional administrative needs or effectively integrate acquired operations could result in reduced revenues, increased administrative and other costs, or customer confusion or dissatisfaction. STOCK MARKET. The market prices of the securities of the Company and certain of the publicly-held companies in the industry in which the Company operates have shown volatility and sensitivity in response to many factors, including general market trends, public communications regarding managed care, legislative or regulatory actions, health care cost trends, pricing trends, competition, earnings or membership reports of particular industry participants, and acquisition activity. There can be no assurance regarding the level or stability of the Company's share price at any time or of the impact of these or any other factors on the share price. 22 -----END PRIVACY-ENHANCED MESSAGE-----