________________________________________________________________________________
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 June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number: 0-13253
UNITED HEALTHCARE CORPORATION
State of Incorporation: Minnesota
I.R.S. Employer Identification No: 41-1321939
Principal Executive Offices:
300 Opus Center
9900 Bren Road East
Minnetonka MN, 55343
Telephone Number: (612)936-1300
Indicate by check mark (x) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _______
The number of shares of Common Stock, par value $.01 per share, outstanding on
August 9, 1996 was 183,853,665.
________________________________________________________________________________
<PAGE>
UNITED HEALTHCARE CORPORATION
INDEX
Part I. Financial Information. Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the three
and six month periods ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
six month periods ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Report of Independent Public Accountants 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information
Item 5. Other Matters 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 995,679 $ 940,110
Short-term investments 740,016 863,815
Accounts receivable, net 618,323 550,313
Assets under management 166,430 309,170
Other 340,022 203,713
Total Current Assets 2,860,470 2,867,121
Goodwill, net 1,902,854 1,727,042
Long-term Investments 1,396,569 1,274,470
Property and Equipment, net 297,227 267,652
Intangible and Other Assets, net 38,102 24,701
TOTAL ASSETS $ 6,495,222 $ 6,160,986
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 67,290 $ 79,796
Accrued expenses 430,174 566,770
Medical costs payable 1,349,580 1,156,421
Other policy liabilities 403,843 457,528
Unearned premiums 93,395 173,481
Total Current Liabilities 2,344,282 2,433,996
Long-term Obligations and Minority Interests 47,055 38,970
Convertible Preferred Stock 500,000 500,000
Shareholders' Equity
Common stock, $.01 par value - 500,000,000 shares
authorized; 183,648,000 and 175,215,000 issued and
outstanding 1,836 1,752
Additional paid-in capital 1,109,337 822,429
Retained earnings 2,508,196 2,358,640
Net unrealized holding gains (losses) on investments
available for sale, net of income tax effects (15,484) 5,199
Total Shareholders' Equity 3,603,885 3,188,020
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,495,222 $ 6,160,986
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES
Premiums $2,095,066 $1,048,773 $4,009,430 $2,053,262
Management Services and Fees 351,791 68,749 709,632 133,973
Investment and Other Income 45,326 40,423 91,231 74,545
Total Revenues 2,492,183 1,157,945 4,810,293 2,261,780
OPERATING EXPENSES
Medical Costs 1,820,949 824,161 3,406,318 1,607,662
Selling, General and
Administrative Costs 541,830 169,519 1,049,864 327,097
Depreciation and Amortization 31,929 20,384 63,030 40,049
Total Operating Expenses 2,394,708 1,014,064 4,519,212 1,974,808
EARNINGS FROM OPERATIONS 97,475 143,881 291,081 286,972
Interest Expense (259) (378) (510) (558)
Merger Costs (14,968) -- (14,968) --
EARNINGS BEFORE INCOME TAXES
AND MINORITY INTERESTS 82,248 143,503 275,603 286,414
Provision for Income Taxes (32,077) (53,096) (105,552) (105,974)
Minority Interests in Net
(Earnings) Loss of
Consolidated Subsidiaries 149 (528) (785) (1,129)
NET EARNINGS 50,320 89,879 169,266 179,311
CONVERTIBLE PREFERRED STOCK
DIVIDENDS (7,188) -- (14,376) --
NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS $ 43,132 $ 89,879 $ 154,890 $ 179,311
NET EARNINGS PER COMMON SHARE $ 0.23 $ 0.51 $ 0.84 $ 1.02
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 186,657 176,304 183,733 176,390
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 169,266 $ 179,311
Non Cash Items
Depreciation and amortization 63,030 40,049
Provision for future losses 45,000 --
Other (5,306) (5,953)
Net Change in Other Operating Items, net of effects from
acquisitions
Accounts receivable and other current assets (194,089) (19,834)
Accounts payable (16,446) (28,556)
Accrued expenses (118,860) (27,446)
Medical costs payable 169,534 (13,042)
Other policy liabilities 23,344 --
Unearned premiums (81,176) 22,237
Cash Flows From Operating Activities 54,297 146,766
INVESTING ACTIVITIES
Cash Paid for Acquisitions, net of cash assumed
and other effects -- (546,054)
Cash Assumed in Acquisitions, net of cash paid
and other effects 59,136 --
Net Purchases of Property and Equipment (74,712) (44,348)
Purchases of Investments Available for Sale (1,915,642) (1,843,338)
Maturities/Sales of Investments Available for Sale 1,931,544 1,450,632
Purchases of Investments Held to Maturity (11,846) (7,239)
Maturities of Investments Held to Maturity 5,229 3,927
Other 3,021 (8,590)
Cash Flows Used for Investing Activities (3,270) (995,010)
FINANCING ACTIVITIES
Net Proceeds from Stock Option Exercises 24,796 11,239
Payment of Long-term Obligations (544) (4,594)
Dividends Paid
Convertible Preferred Stock (14,376) --
Common Stock (5,334) (5,192)
Cash Flows From Financing Activities 4,542 1,453
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 55,569 (846,791)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 940,110 1,519,049
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 995,679 $ 672,258
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
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 judgements. The most significant estimates relate to medical costs
payable and other policy liabilities, intangible asset valuations and
integration and restructuring reserves relating to the Company's recent
acquisitions. These estimates are subject to adjustment as more accurate
information becomes available and any such adjustment could be significant.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, footnote disclosures which would substantially duplicate the
disclosures contained in the audited financial statements of the Company have
been omitted from these interim financial statements. Although the Company
believes that the disclosures presented below are adequate to make the interim
financial statements presented not misleading, it is suggested that these
unaudited condensed consolidated financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
2. Acquisitions
On April 12, 1996, the Company completed its acquisition of HealthWise of
America, Inc. (HealthWise), a health care management company based in
Nashville, Tennessee. HealthWise owned or operated health plans in Maryland,
Kentucky, Tennessee and Arkansas, which served at the time of acquisition
154,000 members. The Company issued approximately 4.3 million shares of common
stock in exchange for all the outstanding shares of HealthWise. The
acquisition was accounted for as a pooling of interests in the second quarter;
however, the historical consolidated financial results of the Company were not
restated because the effects of this acquisition on the Company's consolidated
financial statements were not material. In connection with the HealthWise
acquisition, the Company incurred nonrecurring, non-operating merger costs of
$15.0 million, or $0.05 per common share.
On March 29, 1996, the Company completed its acquisition of PHP, Inc. (PHP), a
health plan based in Greensboro, North Carolina, which served 132,000 members
at the time of acquisition. The Company issued approximately 2.3 million
shares of common stock in exchange for all the outstanding shares of PHP. The
acquisition was accounted for using the purchase method of accounting. The
purchase price and costs associated with the acquisition exceeded the
estimated fair value of net assets acquired by $115.4 million. The pro forma
effects of the PHP acquisition on the Company's financial statements are not
material.
On October 2, 1995, the Company completed its acquisition of The MetraHealth
Companies, Inc. (MetraHealth), a managed health care coverage company and
health insurer. The total purchase price of the acquisition was $1.09 billion
in cash and $500.0 million of convertible preferred stock, for a total
consideration at closing of $1.59 billion.
<PAGE>
UNITED HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In addition, the former owners of MetraHealth are eligible to receive up to an
additional $350.0 million if MetraHealth achieves certain 1995 operating
results, as defined. Any consideration payable for this 1995 earnout in excess
of the initial $1.59 billion may, at the Company's sole discretion, be in the
form of cash, convertible debt, convertible preferred stock, or straight debt.
The 1995 earnout is currently being determined and is not finalized at this
time. Moreover, if the Company's post-acquisition combined net earnings for
1996 and 1997 reaches certain specified levels, certain of MetraHealth's
former owners will be eligible to receive up to an additional $175.0 million
in cash for each of those years. Any additional consideration paid pursuant to
these arrangements will be reflected as additional goodwill. Had the
MetraHealth acquisition occurred on January 1, 1995, the estimated combined
unaudited pro forma results for the six month period ended June 30, 1995 would
have been: revenues - $4.21 billion; net earnings - $213.1 million and net
earnings per common share - $1.13.
3. Provisions for Future Losses
In the second quarter of 1996, the Company recorded a charge to medical costs
of $45.0 million, or $0.15 per common share, to provide for the future
estimated losses expected to be incurred through the remaining term of two
multi-year contracts in its St. Louis health plan. These contracts cover
approximately 23% of the health plan's total commercial enrollment and run
through 1998.
4. Restructuring Charges
In connection with its acquisition of MetraHealth, the Company developed a
comprehensive plan to integrate the business activities of the combined
companies (the Plan). The Plan encompasses, among other matters, the
disposition, discontinuance and restructuring of certain businesses and
product lines, and the recognition of certain asset impairments. In the fourth
quarter of 1995, the Company recorded $153.8 million in restructuring charges
associated with the Plan. The restructuring charges include $102.3 million
for activities under the Plan which are expected to be completed through 1996
and $51.5 million for asset impairment.
The charges included $24.0 million for severance and outplacement costs which
are based on the projected impact of the Plan on employment levels. The
Company expects approximately 800 positions to be eliminated through December
31, 1996 under the restructuring efforts. As of June 30, 1996, 216 positions
have been eliminated which resulted in severance and outplacement payments of
$6.1 million.
Also included in the restructuring charges is a $58.1 million provision
representing costs associated with the termination of certain contracts and
the elimination of certain products, networks and systems related to changes
in strategies resulting from the MetraHealth acquisition. Expenditures related
to these activities of $20.5 million have been incurred through June 30, 1996.
The restructuring charges also included a $20.2 million provision for property
and lease discontinuances at certain office locations, resulting primarily
from various exit strategies and payment of portions of non-cancelable lease
obligations. As of June 30, 1996, the Company paid $3.4 million related to the
closing of 29 office locations.
<PAGE>
UNITED HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. Dividends
On February 13, 1996, the Company's Board of Directors approved an annual
dividend for 1996 of $0.03 per share to holders of the Company's common stock.
Dividends of $5.3 million were paid on April 15, 1996 to shareholders of
record at the close of business on April 3, 1996.
6. Cash and Investments
As of June 30, 1996, the amortized cost, gross unrealized holding gains and
losses and fair value of the Company's cash and investments were as follows
(in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 995,679 $ -- $ -- $ 995,679
Investments Available for Sale 2,100,473 4,862 (30,247) 2,075,088
Investments Held to Maturity 61,497 262 (220) 61,539
Total Cash and Investments $3,157,649 $ 5,124 $ (30,467) $3,132,306
</TABLE>
<PAGE>
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
June 30, 1996, and the related condensed consolidated statements of operations
for the three and six month periods ended June 30, 1996 and 1995, and the
condensed consolidated statements of cash flows for the six month periods
ended June 30, 1996 and 1995. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United HealthCare Corporation and
Subsidiaries as of December 31, 1995 (not presented herein), and, in our
report dated February 29, 1996, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1995, is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 8, 1996
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The consolidated financial results and related comparisons presented in this
discussion include several recent transactions which affect the year-to-year
comparability of the Company's consolidated financial position and results of
operations. The most significant of these transactions was the Company's
October 2, 1995, acquisition of The MetraHealth Companies, Inc. (MetraHealth).
MetraHealth was formed in January 1995 by combining the group health care
operations of Metropolitan Life Insurance Company and The Travelers Insurance
Group. At the time of acquisition, MetraHealth served over 10 million
individuals, including 5.9 million in network-based care programs, 469,000 of
whom were health plan members. In 1996, the Company acquired two other
companies with health plan operations. On April 12, 1996, the Company
acquired HealthWise of America, Inc. (HealthWise), a health care management
company which owned or operated health plans in Maryland, Kentucky, Tennessee
and Arkansas, serving 154,000 members at the time of acquisition. On March
29, 1996, the Company acquired PHP, Inc. (PHP), a health plan based in
Greensboro, North Carolina, which served 132,000 members at the time of
acquisition. The MetraHealth and PHP acquisitions were accounted for as
purchase transactions. The HealthWise acquisition was accounted for as a
pooling of interests; however, the Company's consolidated financial results
were not restated because the effects of the acquisition on the Company's
consolidated financial statements were not material. Accordingly, only the
post-acquisition results of all of these acquired companies are included in
the Company's consolidated financial results.
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements and notes thereto.
Summary of Operating Information (in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
Percent Percent
1996 1995 Increase 1996 1995 Increase
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $2,492,183 $1,157,945 115 % $4,810,293 $2,261,780 113%
Earnings from Operations<F4> $ 97,475 $ 143,881 (32)% $ 291,081 $ 286,972 1%
Medical Costs to Premium
Revenue<F4> 86.9% 78.6% 85.0% 78.3%
SG&A Expenses to Total
Revenues 21.7% 14.6% 21.8% 14.5%
Total Operating Margin<F4> 3.9% 12.4% 6.1% 12.7%
Enrollment (at period end) June 30, 1996 June 30, 1995
Health Plan Products
Commercial 3,727<F1><F2><F3> 2,342<F1>
Medicaid 183<F3> 125
Medicare 392<F3> 313
Total 4,302 2,780
Other Network-Based Products 5,682<F1> 274<F1>
Indemnity Products 3,865<F1> --
Total Enrollment 13,849 3,054
<FN>
<F1> Amounts include both fully insured and self-funded enrollment. As of June 30, 1996 and
1995, self-funded enrollment was as follows: Commercial Health Plan Products - 303,000 in 1996
and 190,000 in 1995; Other Network-Based Products - 4,918,000 in 1996 and 274,000 in 1995;
Indemnity Products - 3,061,000 in 1996.
<F2> Includes PHP, Inc. (North Carolina) acquired on March 29, 1996. PHP, Inc. had 137,000
members as of June 1996. Consistent with purchase accounting, no prior period restatement was
made.
<F3> Includes HealthWise of America, Inc. acquired on April 12, 1996. HealthWise's health plan
operations had 136,000 commercial members, 6,000 medicare members, and 18,000 medicaid members as
of June 1996. The acquisition was accounted for as a pooling of interests, but prior period
financial information was not restated due to the immaterial effects of the acquisition.
<F4> Excluding the provision for future losses on two multi-year contracts of $45.0 million,
earnings from operations for the three and six month periods ended June 30, 1996 would have been
$142.5 million and $336.0 million; medical cost to premium revenue 84.8% and 83.8% and total
operating margin 5.7% and 7.0%.
</FN>
</TABLE>
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Net earnings for the second quarter of 1996 include two large nonrecurring
charges. In connection with the HealthWise acquisition, the Company recorded
non-operating merger costs of $15.0 million, or $0.05 per common share,
consisting principally of professional fees and other direct costs associated
with the acquisition. In addition, the Company recorded a provision to cover
the estimated losses expected to be incurred through the remaining term of two
large multi-year contracts in its St. Louis health plan of $45.0 million, or
$0.15 per common share. These contracts cover approximately 23% of the health
plan's total commercial insured enrollment and run through 1998.
Second quarter 1996 net earnings excluding these charges were $86.9 million,
compared to $89.9 million for the second quarter of 1995. For the six months
ended June 30, 1996, net earnings excluding these charges were $205.9 million,
a 15% increase over comparable 1995 net earnings of $179.3 million. Including
these charges, net earnings for the three and six months ended June 30, 1996
were $50.3 million and $169.3 million, respectively.
Revenues
Premium revenues for the three and six months ended June 30, 1996 of $2.10
billion and $4.01 billion nearly doubled premium revenues for the comparable
1995 periods. Excluding the effects of the Company's acquisitions of
MetraHealth, HealthWise and PHP, the increase in premium revenues in the three
and six months ended June 30, 1996 over the same periods in 1995 was 27% and
26%, respectively, primarily reflecting year-over-year total health plan
enrollment growth of 24% and an average premium rate increase on renewing
commercial groups of approximately 0% to 1%. The balance of the increase in
premium revenues is attributable to growth in the Company's Medicare programs.
Included in the total health plan enrollment growth of 24% is year-over-year
same store increases of 43% in the Company's Medicare enrollment. Significant
growth in Medicare enrollment will impact year-over-year comparability of
premium revenues as the Medicare product generally realizes per member premium
rates three to four times higher than the average commercial premium rates.
New and renewal commercial health plan premium rates are generally established
by the Company based on anticipated health care costs. Over the past several
years, the Company has been able to effectively manage health care costs and
maintain the rate at which its health care costs have grown within the
commercial health plan line of business to low single-digit percentage
increases. However, competition for commercial enrollment in certain of the
Company's health plan markets has increased in recent years, particularly
within calendar 1995 and the January 1996 renewal period. The January renewal
period is significant as approximately 45% of the Company's existing
commercial health plan enrollment renews in that month. In addition, when
establishing premium rates in late 1995 and January 1996 for new and renewing
commercial health plan business, the Company believed that its commercial
health plan health care cost trend for 1996 would be 1% to 2%, similar to the
corresponding health care cost trend experienced in 1995. However, the Company
believes the current health care cost trend experienced by its commercial
health plan business is 3% to 4%. In addition,
anticipated health care provider contract savings associated with the
MetraHealth health plan products had not been realized in time to match the
pricing decisions made for these products in late 1995 and into 1996. As a
result of all of these factors, the health plan premium rates achieved during
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
late 1995 and January 1996 were less than the corresponding increase in the
Company's health care costs.
The Company currently believes that the competitive premium environment has
somewhat improved and it is seeking and realizing higher premium rates for
post January 1996 commercial health plan business. These rating actions have
resulted in the realization of 4% to 5% renewal rate increases from February
through June 1996, and new group pricing has been similarly increased to
reflect the new higher health cost trends the Company has recently experienced
in its commercial health plan products. Depending on the level of future
competition or other external factors beyond the Company's control, there can
be no assurance that the Company's recent enrollment growth trends will
continue or that the Company will be able to price consistent with health care
cost trends.
As a result of its acquisition of MetraHealth, the Company had approximately
804,000 enrollees at June 30, 1996, in fully insured non-network-based
indemnity products, primarily from small group employers. These products do
not utilize similar health care cost containment measures as the Company's
network-based products and, accordingly, are priced differently. In response
to increased medical costs associated with these products in early 1995, the
Company instituted rate increases ranging from 15% to 25% during the second
half of 1995 and into 1996. These rating actions appear to have been
sufficient to cover the corresponding increases in medical costs. As a result
of these pricing decisions and other factors, the Company has seen enrollment
decreases in the non-network based indemnity products and expects these
decreases to continue throughout 1996. To the extent practicable, the Company
will attempt to convert these enrollees to its network-based managed care
products. While these recent rate increases were based on the Company's
estimate of health care cost trends within the non-network-based products,
there can be no assurance that these rate increases will be consistent with
the related future health care cost experience.
Management services and fees revenue for the three and six months ended June
30, 1996, were five times more than the comparable 1995 revenues. Prior to the
MetraHealth acquisition, these revenues were primarily comprised of
administrative fees relating to services performed on behalf of the Company's
managed health plans and fees generated by the Company's specialty managed
care services. However, at June 30, 1996, the Company had approximately
8,283,000 enrollees in self-funded products, most of which related to the
former MetraHealth business. Under these funding arrangements, the Company
receives a fee for the provision of administrative services and generally
assumes no financial responsibility for health care costs associated with
these products. In the three and six months ended June 30, 1996, the Company
recorded management services and fees revenue related to the former
MetraHealth self-funded products of $197.9 million and $404.6 million,
respectively.
Operating Expenses
The combination of the Company's pricing strategy and its medical management
efforts are reflected in its medical expense ratio (the percent of premium
revenues expensed as medical costs). The medical expense ratio for the second
quarter of 1996 was 86.9% compared to 78.6% for the same period in 1995.
Through the first six months of 1996, this ratio increased to 85.0% from 78.3%
for the comparable 1995 period. A large portion of the year-over-year
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
increases in the ratio is generally attributable to the former MetraHealth
products (included in 1996 results, but not in 1995) which have a higher
medical cost ratio as compared to the Company's previous products. Also
contributing to the year-over-year increases is the second quarter 1996
provision for future losses on two multi-year St. Louis contracts of $45.0
million. The second quarter 1996 medical expense ratio also reflects the
increasing health care cost trend previously discussed. In particular, the
Company experienced increases in some health care cost components within its
health plan commercial products, led by outpatient services, physician
utilization and prescription drugs. Decreases in inpatient hospital
utilization in the health plans did not fully offset the increases in these
other services. Accordingly, the second quarter 1996 medical expense ratio,
excluding the contract loss provision, of 84.8% represents a sequential
increase over the ratio for the first quarter of 1996 of 82.8%.
The SG&A ratio (selling, general and administrative expenses as a percent of
total revenues)increased from 14.6% in the second quarter of 1995 to 21.7% in
the second quarter of 1996. Through the first six months of 1996, the ratio
increased to 21.8% from 14.5% for the comparable 1995 period. The MetraHealth
acquisition had a significant impact on selling, general and administrative
expenses (in total dollars as well as a percentage of revenue) because a
greater proportion of the former MetraHealth business consists of fee-based,
self-funded products rather than products which generate full premium revenue.
Since the MetraHealth acquisition at the beginning of the fourth quarter of
1995, the Company has achieved selling, general and administrative
efficiencies resulting in a decrease in the SG&A ratio from 24.2% in the
fourth quarter of 1995 to 21.8% in the first six months of 1996.
INFLATION
Although the general rate of inflation has remained relatively stable and
health care cost inflation has declined in recent years, the total health care
cost inflation rate still exceeds the general inflation rate. The Company uses
various strategies to mitigate the negative effects of health care cost
inflation, including setting commercial premiums based on its anticipated
health care costs, risk-sharing arrangements with the Company's various health
care providers, and other health care cost containment measures. Specifically,
the Company's health plans attempt to control medical and hospital costs
through contractual arrangements primarily with independent providers of
health care services. Cost-effective delivery of health care services by such
health care providers is achieved by the reduction of unnecessary
hospitalizations, appropriate use of specialty referral services, and
emphasizing preventive health services. While the Company currently believes
its strategies to mitigate health care cost inflation will continue to be
successful, competitive pressures, demands from providers and customers,
applicable regulations or other factors may adversely affect the Company's
ability to control the impact of health care cost increases. In addition,
certain non-network-based products of the former MetraHealth business do not
have similar health care cost containment measures as the Company's
network-based managed care products. As a result, the Company is subject to
more health care cost inflation risk with these products.
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash and investments increased from $3.08 billion at December
31, 1995, to $3.13 billion at June 30, 1996. The increase of $54.0 million
during the first six months of 1996 primarily reflects cash generated from
operations.
The Company generally invests a large portion of its cash resources in high
quality, long-term investments. At June 30, 1996, the Company had working
capital of $516.2 million, a current ratio of 1.2, which is reflective of its
longer-term investment strategy. At December 31, 1995 the Company had working
capital of $433.1 million and a current ratio of 1.2. Under applicable state
regulations, certain of the Company's subsidiaries are required to retain cash
generated from their operations. After giving effect to these restrictions,
the Company had approximately $784.8 million in cash and investments available
for general corporate use at June 30, 1996.
In connection with the Company's acquisition of MetraHealth, the former owners
of MetraHealth are eligible to receive up to an additional $350.0 million if
MetraHealth achieves certain 1995 operating results, as defined. Any
consideration payable for this 1995 earnout may, at the Company's sole
discretion, be in the form of cash, convertible debt, convertible preferred
stock, or straight debt. The 1995 earnout is currently being determined and
is not finalized at this time. Moreover, if the Company's post-acquisition
combined net earnings for 1996 and 1997 reaches certain specified levels,
certain of MetraHealth's former owners will be eligible to receive up to an
additional $175.0 million in cash for each of those years.
As described more fully in Note 2 to the condensed consolidated financial
statements, the Company acquired, in separate transactions, PHP on March 29,
1996 and HealthWise on April 12, 1996. These transactions were completed
through the exchange of shares of the Company's common stock for all the
outstanding shares of PHP and HealthWise and, with the exception of
transaction costs, did not require the use of cash.
The Company currently believes its available cash resources will be sufficient
to meet its current operating requirements and internal development and
integration initiatives. There currently are no other material definitive
commitments for future use of the Company's available cash resources; however,
management continually evaluates opportunities to expand its operations, which
includes internal development of new products and programs and may include
additional acquisitions.
CAUTIONARY STATEMENTS
A number of factors should be considered in conjunction with any discussion of
operations or results by the Company or its representatives, including any
forward-looking discussion, as well as comments contained in press releases,
presentations to securities analysts or investors, or communications by the
Company. These factors are set forth in Exhibit 99 to this Quarterly Report.
<PAGE>
UNITED HEALTHCARE CORPORATION
Part II. Other Information
Item 5. Other Matters
Litigation. On August 9, 1996, a lawsuit was filed in federal court in
Minnesota against the Company and certain of its officers and directors. The
lawsuit alleges securities fraud and other claims related to the recent
decline in the Company's stock price. The Company believes that the
litigation is without merit and intends to vigorously defend against these
claims.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed in response to Item 601 of Regulation
S-K.
Exhibit No. Exhibit
Exhibit 11 - Statements Re Computation of Per Share Earnings.
Exhibit 15 - Letter Re Unaudited Interim Financial Information.
Exhibit 99 - Cautionary Statements
(b) Reports on Form 8-K.
During the quarter for which this report is filed, the Registrant filed
Form 8-K Current Reports with the Securities and Exchange Commission as
follows:
1. Form 8-K Current Report Dated July 11, 1996. The items reported
on this Form 8-K were items 5 and 7; Registrant issued a press
release relating to second quarter earnings expectations.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED HEALTHCARE CORPORATION
Dated: August 14, 1996 By /s/ William W. McGuire, M.D.
William W. McGuire, M.D.
President and Chief Executive Officer
Dated: August 14, 1996 By /s/ David P. Koppe
David P. Koppe
Chief Financial Officer
<PAGE>
UNITED HEALTHCARE CORPORATION
Exhibit Index
Exhibit Number Description Page
11 Statements Re Computation of Per
Share Earnings
15 Letter Re Unaudited Interim Financial
Information
99 Cautionary Statements
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
UNITED HEALTHCARE CORPORATION
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
PRIMARY:
NET EARNINGS $ 50,320 $ 89,879 $ 169,266 $ 179,311
LESS CONVERTIBLE PREFERRED
STOCK DIVIDENDS 7,188 -- 14,376 --
NET EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS $ 43,132 $ 89,879 $ 154,890 $ 179,311
Weighted average number of
common shares outstanding 182,067 173,239 178,772 173,075
Additional equivalent shares
issuable from assumed exercise
of common stock options
and warrants 4,590 3,066 4,961 3,315
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 186,657 176,304 183,733 176,390
NET EARNINGS PER COMMON
SHARE $ 0.23 0.51 $ 0.84 $ 1.02
FULLY DILUTED:
NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS $ 50,320 $ 89,879 $ 169,266 $ 179,311
Weighted average number of
common shares outstanding 182,067 173,237 178,772 173,075
Additional equivalent shares
issuable from assumed exercise
of common stock options
and warrants 4,587 3,210 4,954 3,316
Assumed conversion of convertible
preferred stock 10,106 -- 10,106 --
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 196,760 176,447 193,832 176,391
NET EARNINGS PER COMMON
SHARE $ 0.26<F1> $ 0.51<F2> $ 0.87<F1> $ 1.02<F2>
<FN>
<F1> 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.
<F2> This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not
required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of
less than 3%.
</FN>
</TABLE>
<PAGE>
EXHIBIT 15
LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
August 14, 1996
To United HealthCare Corporation:
We are aware that United HealthCare Corporation and Subsidiaries has
incorporated by reference in its Registration Statements No. 33-3558, 2-95342,
33-22310, 33-27208, 33-36579, 33-50282, 33-67918, 33-68300, 33-75846, 33-
79632, 33-79634, 33-79636, 33-79638, 33-59083, 33-59623, 33-63885, 333-05717,
333-01915, 333-02525, 333-04875, 333-04401, 333-06533 its Form 10-Q for the
quarter ended June 30, 1996, which includes our report dated August 8, 1996,
covering the unaudited interim condensed consolidated financial information
contained therein. Pursuant to Regulation C of the Securities Act of 1933,
that report is not considered a part of the registration statement prepared or
certified by our firm or a report prepared or certified by our firm within the
meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ARTHUR ANDERSEN LLP
<PAGE>
CAUTIONARY STATEMENTS EXHIBIT 99
The following discussion contains certain cautionary statements regarding
United's business and results of operations which should be considered by
investors and others. These statements discuss matters which may in part be
discussed elsewhere in this report and which may have been discussed in other
documents prepared by the Company pursuant to federal or state securities
laws. This discussion is intended to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The
following factors should be considered in conjunction with any discussion of
operations or results by the Company or its representatives, including any
forward-looking discussion, as well as comments contained in press releases,
presentations to securities analysts or investors, or other communications by
the Company.
In making these statements, the Company is not undertaking to address or
update each factor in future filings or communications regarding the Company's
business or results, and is not undertaking to address how any of these
factors may have caused changes to discussions or information contained in
previous filings or communications. In addition, any of the matters discussed
below may have affected United's past results and may affect future results,
so that the Company's actual results for second quarter 1996 and beyond may
differ materially from those expressed in prior communications.
Health Care Costs. A large portion of the revenue received by United is
expended to pay the costs of health care services or supplies delivered to its
members. The total health care costs incurred by United are affected by the
number of individual services rendered and the cost of each service. Much of
the Company's premium revenue is set in advance of the actual delivery of
services and the related incurring of the cost, usually on a prospective
annual basis. While United attempts to base the premiums it charges at least
in part on its estimate of expected health care costs over the fixed premium
period, competition, regulations and other circumstances may limit United's
ability to fully base premiums on estimated costs. In addition, many factors
may and often do cause actual health care costs to exceed that estimated and
reflected in premiums. These factors may include increased utilization of
services, increased cost of individual services, catastrophes, epidemics,
seasonality, general inflation, new mandated benefits or other regulatory
changes and insured population characteristics.
Marketing. The Company markets its products and services through both
employed sales people and independent sales agents. Although the Company has
a number of such sales employees and agents, if certain key sales employees or
agents or a large subset of such individuals were to leave the Company, its
ability to retain existing customers and members could be impaired. In
addition, certain of the Company's customers or potential customers consider
rating, accreditation or certification of the Company by various private or
governmental bodies or rating agencies necessary or important. Certain of the
Company's health plans or other business units may not have obtained or may
not desire or be able to obtain or maintain such accreditation or
certification which could adversely affect the Company's ability to obtain or
retain business with such customers.
The managed care industry has recently received significant amounts of
negative publicity. Such general publicity, or any negative publicity
regarding United in particular, could adversely affect the Company's ability
to sell its products or services or could create regulatory problems for the
Company.
<PAGE>
Competition. In any of its geographic or product markets the Company competes
with a number of other entities, some of which may have certain
characteristics or capabilities which give them an advantage in competing with
the Company. The Company believes there are few barriers to entry in these
markets, so that the addition of new competitors can occur relatively easily.
Certain of the Company's customers may decide to perform for themselves
functions or services formerly provided by the Company, which would result in
a decrease in the Company's revenues. Certain of the Company's providers may
decide to market products and services to Company customers in competition
with the Company. In addition, significant merger and acquisition activity has
occurred in the industry in which the Company operates as well as in
industries which act as suppliers to the Company, such as the hospital,
physician, pharmaceutical and medical device industries. This activity may
create stronger competitors and/or result in higher health care costs. To the
extent that there is strong competition or that competition intensifies in any
market, the Company's ability to retain or increase customers, its revenue
growth, its pricing flexibility, its control over medical cost trends and its
marketing expenses may all be adversely affected.
Provider Relations. One of the significant techniques United uses to manage
health care costs and utilization and monitor the quality of care being
delivered is contracting with physicians, hospitals and other providers.
Because of the geographic diversity of its health plans and the large number
of providers with which most of those health plans contract, United currently
believes it has a limited exposure to provider relations issues. In any
particular market, however, providers could refuse to contract with United,
demand higher payments or take other actions which could result in higher
health care costs, less desirable products for customers and members or
difficulty meeting regulatory or accreditation requirements.
In some markets, certain providers, particularly hospitals, physician/hospital
organizations or multi-specialty physician groups, may have significant market
positions or even monopolies. Many of these providers may compete directly
with the Company. If such providers refuse to contract with United or utilize
their market position to negotiate favorable contracts or place United at a
competitive disadvantage, United's ability to market products or to be
profitable in those areas could be adversely affected.
Administration and Management. The level of administrative expense is a
partial determinant of United's profitability. While United attempts to
effectively manage such expenses, increases in staff-related and other
administrative expenses may occur from time-to-time due to business or product
start-ups or expansions, growth or changes in business, acquisitions,
regulatory requirements or other reasons. Such expense increases are not
clearly predictable and increases in administrative expenses may adversely
affect results.
United's business is significantly dependent on effective information systems.
United has many different information systems for its various businesses.
United is in the process of attempting to reduce the number of systems and
also upgrade and expand its information systems capabilities. Failure to
maintain an effective and efficient information system could result in loss of
existing customers and difficulty in attracting new customers, customer and
provider disputes, regulatory problems, increases in administrative expenses
or other adverse consequences. In addition, the Company may, from time-
to-time, obtain significant portions of its systems-related or other services
or facilities from independent third parties which may make the Company's
operations vulnerable to such third party's failure to perform adequately.
United currently believes it has a relatively experienced, capable management
staff. Loss of certain managers or a number of such managers could adversely
<PAGE>
affect United's ability to administer and manage its business. The Company has
made several large acquisitions in recent years, and has an active ongoing
acquisition program. Failure to effectively integrate acquired operations
could result in increased administrative costs or customer confusion or
dissatisfaction.
Government Programs and Regulation. The Company's business is heavily
regulated. The laws and rules governing the Company's business and
interpretations of those laws and rules are subject to frequent change.
Existing or future laws and rules could force United to change how it does
business and may restrict United's revenue and/or enrollment growth and/or
increase its health care and administrative costs. Regulatory approvals must
be obtained and maintained to market many of United's products and services.
Delays in obtaining or failure to obtain or maintain such approvals could
adversely affect United's revenue or the number of its members, or could
increase costs.
A significant portion of United's revenues relate to federal, state and local
government health care coverage programs. These types of programs, such as
the federal Medicare program and the federal and state Medicaid program, are
generally subject to frequent change including changes which may reduce the
number of persons enrolled or eligible, reduce the revenue received by United
or increase the Company's administrative or health care costs under such
programs. Such changes have in the past and may in the future adversely affect
United's results and its willingness to participate in such programs.
The Company is also subject to various governmental audits and investigations.
Such activities could result in the loss of licensure or the right to
participate in certain programs, or the imposition of fines, penalties and
other sanctions. In addition, disclosure of any adverse investigation or
audit results or sanctions could negatively affect the Company's reputation in
various markets and make it more difficult for the Company to sell its
products and services.
Litigation and Insurance. United is subject to a variety of legal actions to
which any corporation may be subject, including employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including for securities fraud, and
intellectual property related litigation. In addition, because of the nature
of its business, United incurs and likely will continue to incur potential
liability for claims related to its business, such as failure to pay for or
provide health care, poor outcomes for care delivered or arranged, provider
disputes, including disputes over withheld compensation, claims related to
self-funded business and improper copayment calculations. In some cases,
substantial non-economic or punitive damages may be sought. While United
currently has insurance coverage for some of these potential liabilities,
others may not be covered by insurance, the insurers may dispute coverage or
the amount of insurance may not be enough to cover the damages awarded. In
addition, certain types of damages, such as punitive damages, may not be
covered by insurance and insurance coverage for all or certain forms of
liability may become unavailable or prohibitively expensive in the future.
Stock Market. Recently, the market prices of the securities of certain of the
publicly-held companies in the industry in which United operates have shown
volatility and sensitivity in response to many factors, including public
communications regarding managed care, legislative or regulatory actions,
health care cost trends, pricing trends, competition, earnings or membership
reports of particular industry participants, and acquisition activity. There
can be no assurances regarding the level or stability of United's share price
at any time or of the impact of these or any other factors on the share price.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000731766
<NAME> UNITED HEALTHCARE CORPORATION
<MULTIPLIER> 1000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 995,679
<SECURITIES> 2,136,585
<RECEIVABLES> 649,542
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<CURRENT-ASSETS> 2,860,470
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500,000
0
<COMMON> 1,836
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<SALES> 4,719,062
<TOTAL-REVENUES> 4,810,293
<CGS> 4,456,182
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</TABLE>
