________________________________________________________________________________
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, 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
November 8, 1996 was 184,037,423.
________________________________________________________________________________
<PAGE>
UNITED HEALTHCARE CORPORATION
INDEX
Part I. Financial Information. Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the three
and nine month periods ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
nine month periods ended September 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 6. Exhibits 17
Signatures 18
<PAGE>
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 732,025 $ 940,110
Short-term investments 1,055,930 863,815
Accounts receivable, net 648,734 550,313
Assets under management 158,462 309,170
Other 207,922 203,713
Total Current Assets 2,803,073 2,867,121
Goodwill, net 2,015,837 1,727,042
Long-term Investments 1,530,669 1,274,470
Property and Equipment, net 310,269 267,652
Intangible and Other Assets, net 41,431 24,701
TOTAL ASSETS $ 6,701,279 $ 6,160,986
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 62,942 $ 79,796
Accrued expenses 462,379 566,770
Medical costs payable 1,464,184 1,156,421
Other policy liabilities 363,939 457,528
Unearned premiums 97,574 173,481
Total Current Liabilities 2,451,018 2,433,996
Long-term Obligations and Minority Interests 35,595 38,970
Convertible Preferred Stock 500,000 500,000
Shareholders' Equity
Common stock, $.01 par value - 500,000,000 shares
authorized; 184,376,000 and 175,215,000 issued and
outstanding 1,844 1,752
Additional paid-in capital 1,133,408 822,429
Retained earnings 2,592,204 2,358,640
Net unrealized holding gains (losses) on investments
available for sale, net of income tax effects (12,790) 5,199
Total Shareholders' Equity 3,714,666 3,188,020
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,701,279 $ 6,160,986
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES
Premiums $2,199,270 $1,100,013 $6,208,700 $3,153,275
Management Services and Fees 343,893 76,367 1,053,525 210,340
Investment and Other Income 44,195 39,156 135,426 113,701
Total Revenues 2,587,358 1,215,536 7,397,651 3,477,316
OPERATING EXPENSES
Medical Costs 1,856,364 872,358 5,262,682 2,480,020
Selling, General and
Administrative Costs 547,686 173,267 1,597,549 500,364
Depreciation and Amortization 33,909 19,343 96,939 59,392
Total Operating Expenses 2,437,959 1,064,968 6,957,170 3,039,776
EARNINGS FROM OPERATIONS 149,399 150,568 440,481 437,540
Interest Expense (83) (146) (593) (704)
Merger Costs -- -- (14,968) --
EARNINGS BEFORE INCOME TAXES
AND MINORITY INTERESTS 149,316 150,422 424,920 436,836
Provision for Income Taxes (58,234) (55,655) (163,786) (161,629)
Minority Interests in Net
Losses (Earnings) of
Consolidated Subsidiaries 145 (1,097) (640) (2,226)
NET EARNINGS 91,227 93,670 260,494 272,981
CONVERTIBLE PREFERRED STOCK
DIVIDENDS (7,188) -- (21,564) --
NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS $ 84,039 $ 93,670 $ 238,930 $ 272,981
NET EARNINGS PER COMMON SHARE $ 0.45 $ 0.53 $ 1.29 $ 1.55
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 187,130 177,070 185,030 176,615
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 260,494 $ 272,981
Non Cash Items
Depreciation and amortization 96,939 59,392
Provision for future losses 45,000 --
Other (20,951) (5,304)
Net Change in Other Operating Items, net of effects from
acquisitions
Accounts receivable and other current assets (93,549) (48,876)
Accounts payable (20,794) (44,879)
Accrued expenses (98,823) (3,579)
Medical costs payable 305,184 13,796
Other policy liabilities (14,658) --
Unearned premiums (76,997) 23,954
Cash Flows From Operating Activities 381,845 267,485
INVESTING ACTIVITIES
Cash Paid for Acquisitions, net of cash assumed
and other effects (105,379) (546,054)
Cash Assumed in Acquisitions, net of cash paid
and other effects 53,515 --
Net Purchases of Property and Equipment (110,852) (66,046)
Purchases of Investments Available for Sale (3,113,808) (2,121,949)
Maturities/Sales of Investments Available for Sale 2,703,823 2,265,167
Purchases of Investments Held to Maturity (20,306) (8,517)
Maturities of Investments Held to Maturity 12,712 4,942
Other (11,716) (14,661)
Cash Flows Used for Investing Activities (592,011) (487,118)
FINANCING ACTIVITIES
Net Proceeds from Stock Option Exercises 29,523 18,284
Payment of Long-term Obligations (544) (4,977)
Dividends Paid
Convertible Preferred Stock (21,564) --
Common Stock (5,334) (5,192)
Cash Flows From Financing Activities 2,081 8,115
DECREASE IN CASH AND CASH EQUIVALENTS (208,085) (211,518)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 940,110 1,519,049
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 732,025 $1,307,531
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
UNITED HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting solely
of normal recurring adjustments, necessary for a fair presentation of the
financial results for the interim periods presented. These financial
statements include some amounts that are based on management's best estimates
and judgments. The most significant estimates relate to medical costs payable
and other policy liabilities, intangible asset valuations and integration and
restructuring reserves relating to the Company's recent acquisitions. These
estimates are subject to adjustment as more accurate information becomes
available and any such adjustment could be significant.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, footnote disclosures which would substantially duplicate the
disclosures contained in the audited financial statements of the Company have
been omitted from these interim financial statements. Although the Company
believes that the disclosures presented below are adequate to make the interim
financial statements presented not misleading, 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)
The former owners of MetraHealth were eligible to receive up to an additional
$350.0 million if MetraHealth achieved certain 1995 operating results, as
defined. In the third quarter, the Company paid $105.4 million in cash,
including interest, as full settlement of the 1995 earnout. This earnout
payment has been reflected in the accompanying financial statements as
additional goodwill. With the settlement of the 1995 earnout, the Company
expects to finalize all aspects of the purchase accounting related to the
MetraHealth acquistion in the fourth quarter.
In addition, former owners will be eligible to receive up to an additional
$175.0 in cash for each of 1996 and 1997 if the Company's in total
post-acquisition combined net earnings each of these years reaches certain
specified levels. Based on combined operating results through September 30,
1996, the Company believes that any additional payment related
to the 1996 earnout is not likely. Any additional consideration that might
be paid pursuant to these arrangements will be reflected as additional
goodwill.
If the MetraHealth acquisition had occurred on January 1, 1995, the estimated
combined unaudited pro forma results for the nine month period ended September
30, 1995 would have been: revenues - $6.52 billion; net earnings - $327.8
million and net earnings per common share - $1.74.
3. Provision 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 were 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. In
developing the Plan, the Company expected approximately 800 positions to be
eliminated through December 31, 1996 under the restructuring efforts. As of
September 30, 1996, the elimination of approximately 300 positions have
required severance and outplacement payments of $7.7 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 $38.8 million have been incurred through September 30,
1996.
<PAGE>
UNITED HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 September 30, 1996, the Company paid $11.2 million related
to the closing of 14 office locations.
The Company continues to monitor its integration efforts and has modified its
Plan accordingly. The Company believes the original restructuring reserves
established pursuant to the original Plan are sufficient; however, reallocation
of the reserve estimates among the restructuring captions may be required
in the fourth quarter in response to changes to the original Plan.
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 September 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 $ 732,025 $ -- $ -- $ 732,025
Investments Available for Sale 2,543,322 5,780 (26,638) 2,522,464
Investments Held to Maturity 64,135 318 (176) 64,277
Total Cash and Investments $3,339,482 $ 6,098 $ (26,814) $3,318,766
</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
September 30, 1996, and the related condensed consolidated statements of
operations for the three and nine month periods ended September 30, 1996 and
1995, and the condensed consolidated statements of cash flows for the nine
month periods ended September 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
balance sheet. 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,
November 7, 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 September 30, Nine Months Ended September 30,
Percent Percent
1996 (a) 1995 Increase 1996 (a) 1995 Increase
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $2,587,358 $1,215,536 113 % $7,397,651 $3,477,316 113 %
Earnings from Operations(d)$ 149,399 $ 150,568 (1)% $ 440,481 $ 437,540 1 %
Medical Costs to Premium
Revenues(b) 84.4% 79.3% 84.8% 78.6%
SG&A Expenses to Total
Revenues 21.2% 14.3% 21.6% 14.4%
Total Operating Margin(b) 5.8% 12.4% 6.0% 12.6%
Enrollment (at period end) September 30, 1996 September 30, 1995
Health Plan Products
Commercial 3,914(c)(d)(e) 2,455(c)
Medicaid 524(e) 331
Medicare 203(e) 137
Total 4,641 2,923
Other Network-Based Products 5,703(c) 283(c)
Indemnity Products 3,586(c) --
Total Enrollment 13,930 3,206
(a) Includes post-acquisition date operating results of the MetraHealth Companies, Inc. acquired
on October 2, 1995.
(b) Excluding the provision for future losses on two multi-year contracts of $45.0 million,
earnings from operations for the nine month period ended September 30, 1996 would have been
$485.4 million; medical costs to premium revenues and total operating margin would have been
84.0% and 6.6%, respectively.
(c) Amounts include both fully insured and self-funded enrollment. As of September 30, 1996 and
1995, self-funded enrollment was as follows: Commercial Health Plan Products - 314,000 in 1996
and 192,000 in 1995; Other Network-Based Products - 4,961,000 in 1996 and 283,300 in 1995;
Indemnity Products - 2,889,400 in 1996.
(d) Includes PHP, Inc. (North Carolina) acquired on March 29, 1996. PHP, Inc. had 142,000
members as of September 1996. Consistent with purchase accounting, no prior period restatement
was made.
(e) Includes HealthWise of America, Inc. acquired on April 12, 1996. HealthWise's health plan
operations had 137,200 commercial members, 7,100 Medicare members, and 17,500 Medicaid members as
of September 1996. The acquisition was accounted for as a pooling of interests, but prior period
financial and enrollment information was not restated due to the immaterial effects of the
acquisition.
</TABLE>
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Net earnings for the third quarter of 1996 were $91.2 million, down slightly
from comparable 1995 net earnings of $93.7 million. For the nine months ended
September 30, 1996, net earnings excluding nonrecurring charges were $297.1
million, a 9% increase over comparable 1995 net earnings of $273.0 million.
Net earnings for the nine months ended September 30, 1996, include two large
nonrecurring charges recorded in the second quarter of 1996. 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. Including these charges,
net earnings for the nine months ended September 30, 1996, were $260.5
million.
Revenues
Premium revenues for the three and nine months ended September 30, 1996 of
$2.20 billion and $6.21 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 nine months ended September 30, 1996 over the same periods in 1995
was 34% and 30%, respectively, primarily reflecting year-over-year total
health plan enrollment growth of 29% and an average year-over-year premium rate
increase on renewing commercial groups of approximately 1% to 2%. The balance
of the increase in premium revenues is primarily attributable to growth in the
Company's Medicare programs. Included in the total health plan enrollment
growth of 29% 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. The Medicare product
generally realizes per member premium rates three to four times higher than
the average commercial premium rates because of the higher medical care required
to serve this population.
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
related to calendar 1995 and January 1996 renewal businesss. 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 it experienced in 1995. However, the
Company now believes the current year-over-year 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 plan products had not been realized in time to match the
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
pricing decisions made for these products in late 1995 and into 1996. These
products comprised approximately 15% of MetraHealth's total revenues in 1995.
As a result of all of these factors, the health plan premium rates achieved
during 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 September 1996, and new group pricing has been similarly increased to
reflect the new higher health care cost trends the Company has recently
experienced in its commercial health plan products. Depending on the level of
future competition, customer acceptance of the Company's premium increases, or
other factors, there can be no assurance that the Company's recent enrollment
growth trends will continue or that the Company will be able to price consistent
with health care cost trends.
As a result of its acquisition of MetraHealth, the Company had approximately
697,000 enrollees at September 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 all of 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 and into 1997. To the extent
practicable, the Company will attempt to convert these enrollees to its
network-based managed care products. While these recent rate increases were
based on the Company's estimate of health care cost trends within the
non-network-based products, there can be no assurance that these rate
increases will be consistent with the related future health care cost
experience.
Management services and fees revenue for the three and nine months ended
September 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. Excluding the effect of the Company's acquistions of
MetraHealth, Healthwise and PHP, the Company recorded management services and
fees revenue for the three and nine months ended September 30, 1996, of $106.5
million and $286.3 million, representing a 39% and 36% increase over the same
periods in 1995. These increases can be primarily attributed to enrollment
growth within the managed health plans and an increase in lives served
by the specialty managed care services operations, most notably in behavioral
health and demand management divisions.
At September 30, 1996, the Company had approximately 8,164,400 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
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
three and nine months ended September 30, 1996, the Company recorded management
services and fees revenue related to the former MetraHealth self-funded products
of $198.9 million and $603.5 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 third
quarter of 1996 was 84.4% compared to 79.3% for the same period in 1995.
Through the first nine months of 1996, this ratio increased to 84.8% from
78.6% for the comparable 1995 period. A portion of the year-over-year
increase in the ratio is generally attributable to the former MetraHealth
products (included in 1996 results, but not in 1995) which historically have
had a higher medical expense ratio as compared to the Company's previous
products. Also contributing to the year-over-year increases is the provision
for future losses on two multi-year St. Louis contracts of $45.0 million. The
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 health care services. The 1996 medical
expense ratio through the first nine months, excluding the contract loss
provision, was 84.0%.
The SG&A ratio (selling, general and administrative expenses as a percent of
total revenues) increased from 14.3% in the third quarter of 1995 to 21.2% in
the third quarter of 1996. Through the first nine months of 1996, the ratio
increased to 21.6% from 14.4% for the comparable 1995 period. As expected,
the MetraHealth acquisition had a significant impact on the Company's 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 successfully 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 21.6% in the first
nine 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 national health
care cost inflation rate still exceeds the general inflation rate. As
mentioned previously, the Company believes the current year-over-year health
care cost trend experienced by its commerical health plan business is 3% to
4%. 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,
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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, 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
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.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash and investments increased from $3.08 billion at December
31, 1995, to $3.32 billion at September 30, 1996. The increase of $240.2
million during the first nine months of 1996 primarily reflects cash generated
from operations of $381.8 million, less a cash payment of $105.4 million,
including interest, related to the 1995 MetraHealth earnout discussed below.
The Company generally invests a large portion of its cash resources in high
quality, long-term investments. At September 30, 1996, the Company had working
capital of $352.1 million, a current ratio of 1.14, 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 1.18. 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 $743.3 million in cash and investments available
for general corporate use at September 30, 1996.
In connection with the Company's acquisition of MetraHealth, the former owners
of MetraHealth were eligible to receive up to an additional $350.0 million if
MetraHealth achieved certain 1995 operating results, as defined. In the third
quarter, the Company paid $105.4 million in cash, including interest, as full
settlement of the 1995 earnout. In addition, 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 continues to focus on expanding its health care programs to the
Medicare population. In the past twelve months, the number of sites offering
a Medicare health plan product increased from 8 to 17 sites. Over the same
period, health plan Medicare enrollment grew 43%. The Company continues to
invest in new markets and expects to have over 30 sites offering Medicare
programs by mid-1997. Significant expenditures must be incurred in connection
with the introduction of a Medicare health plan product in a particular site.
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
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
advance of product sales. The Company expects to incur operating losses from
its Medicare products in these start-up markets usually for the first twelve to
eighteen months until Medicare enrollment is sufficient to cover the
corresponding administrative cost structure in each site.
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 6. Exhibits
Exhibits.
The following exhibits are filed in response to Item 601 of Regulation
S-K.
Exhibit No. Exhibit
Exhibit 10 - Employment Agreement effective as of June 25, 1995,
between United HealthCare Corporation and David A.George
Exhibit 11 - Statements Re Computation of Per Share Earnings
Exhibit 15 - Letter Re Unaudited Interim Financial Information
Exhibit 99 - Cautionary Statements
<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: November 14, 1996 By /s/ William W. McGuire, M.D.
William W. McGuire, M.D.
President and Chief Executive Officer
Dated: November 14, 1996 By /s/ David P. Koppe
David P. Koppe
Chief Financial Officer
<PAGE>
UNITED HEALTHCARE CORPORATION
Exhibit Index
Exhibit Number Description Page
10 Employment Agreement effective as of 20
June 25, 1995, between United HealthCare
Corporation and David A. George
11 Statements Re Computation of Per 28
Share Earnings
15 Letter Re Unaudited Interim Financial 29
Information
99 Cautionary Statements 30
<PAGE>
Exhibit 10
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made as of the Effective
Date between UHC Management Company, Inc. (the "Company") and David A. George
("Executive").
RECITALS:
The Board of Directors of the Company (the "Board of Directors")
recognizes that outstanding management of the Company is essential to
advancing the best interests of the Company, its shareholders and its
subsidiaries. The Company desires to employ Executive and Executive has
agreed to be employed by the Company under the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the mutual
undertakings contained in this Agreement, the parties agree as follows:
1. Employment. The Company will employ Executive, and Executive
accepts employment by the Company, for the period beginning on the date the
proposed merger transaction between United HealthCare Corporation and The
MetraHealth Companies ("Metra") closes ("Effective Date") and ending on
December 31, 1998 (the "Employment Period"), according to the terms of this
Agreement. This Agreement shall never be of any effect in the event the
proposed merger transaction does not close.
2. Duties.
(a) The Company and Executive agree that during the Employment
Period Executive will have such authority and perform such executive duties as
are commensurate with his position. Executive will support the Chief
Executive Officer of the Company in carrying out his responsibilities as Chief
Executive Officer.
(b) Executive (i) will devote his knowledge, skill and best
efforts on a full-time basis to performing his duties and obligations to the
Company (with the exception of absences on account of illness or vacation in
accordance with the Company's policies and civic and charitable commitments
not involving a conflict with the Company's business), and (ii) will comply
with the directions and orders of the Board of Directors and Chief Executive
Officer of the Company with respect to the performance of his duties.
3. Compensation and Benefits.
(a) During the Employment Period, the Company will pay to
Executive the following salary and incentive awards for services rendered to
the Company:
(i) An annualized base salary of not less than $300,000.
Executive's performance will be evaluated at least annually and
annual increases in Executive's base salary will be considered
based on Executive's performance.
<PAGE>
(ii) Executive shall be eligible to participate in the
Company's management incentive compensation plan in accordance
with the terms and conditions of that plan. Executive's
management incentive plan target will be 100% of his base salary.
For calendar year 1995 Executive shall be paid whatever incentive
compensation he would have received under his employment agreement
with Metra, which for 1995 will not be less than $181,000.
(b) During the Employment Period, Executive will be eligible to
participate in a similar manner as other senior executives of the Company in
such employee benefit plans and programs as may be established and maintained
by the Company for its senior management employees.
(c) Executive shall be eligible to participate in the Company's
stock option and stock grant plans in accordance with the terms and conditions
of those plans.
4. Termination of Employment.
(a) By the Company without Cause. If the Company terminates
Executive's employment without Cause (as defined in paragraph (c) below)
during the Employment Period, the Company will pay Executive severance pay as
follows:
(i) (A) If the Company terminates Executive's employment
without Cause on or before November 14, 1995, Executive will
receive severance pay equal to two years of both base salary
and management incentive plan payments, plus a prorated
management incentive plan payment for the fraction of the
management incentive plan payment period ending on
Executive's termination of employment and any management
incentive plan payments remaining unpaid from the preceding
year under the terms of the management incentive plan. The
severance pay will be paid over a two year period in equal
biweekly installments.
(B) If the Company terminates Executive's employment
without Cause after November 14, 1995, Executive will
receive severance pay equal to one year of both base salary
and management incentive plan payments, plus a prorated
management incentive plan payment for the fraction of the
management incentive plan payment period ending on
Executive's termination of employment and any management
incentive plan payments remaining unpaid from the proceeding
year under the terms of the management incentive plan. The
severance pay will be paid over a one year period in equal
biweekly installments.
(ii) The Company will continue coverage under the Company's
group health plan for Executive and his eligible dependents for
the period during which Executive is entitled to receive severance
benefits pursuant to (i). Notwithstanding the foregoing, if the
Company determines that giving such continued coverage could
<PAGE>
adversely affect the tax qualification or tax treatment of a
benefit plan, or otherwise have adverse legal ramifications to the
Company, the Company may reimburse Executive for the cost of COBRA
coverage for himself and his eligible dependents, and if
Executive's severance payments extend beyond the period of his
COBRA coverage, pay Executive a lump sum cash amount that
reasonably approximates the after-tax value to Executive of the
balance of his continued coverage through the severance payment
period, in lieu of giving credit and continued coverage.
(iii) Any unvested stock options or grants awarded Executive
shall continue to vest for a period of two years from the last day
of Executive's employment, in accordance with those grants' or
options' pre-established vesting schedule.
(iv) For purposes of subparagraphs (i) and (ii),
Executive's annual base salary will be calculated at the highest
rate in effect for Executive at any time during the twelve month
period preceding the time of his termination of employment, and
Executive's management incentive payment will be calculated at a
rate equal to the management incentive payment paid or payable to
Executive for the fiscal year preceding his termination of
employment.
(b) By Executive for Good Reason. If Executive voluntarily
terminates employment with the Company during the Employment Period for Good
Reason (as defined in this subsection (b)), Executive will be entitled to
receive the benefits described in subsection (a) for termination by the
Company without Cause. Subject to the provisions of this subsection (b),
these benefits will be provided if Executive voluntarily terminates employment
after (i) the Company reduces Executive's base salary from the level in effect
during the preceding fiscal year, (ii) Executive is not in good faith
considered for management incentive payments as described in Section 3
(a)(ii), (iii) the Company fails to provide benefits as required by Section 3
(b), (iv) the Company demotes Executive to a position that is not a senior
management position of comparable scope and responsibility (other than on
account of Executive's disability, as defined in Section 5 below) or (v) the
Company relocates Executive's place of employment to a location more than 100
miles from Reston, Virginia. In order for this subsection (b) to be
effective: (1) Executive must give written notice to the Company indicating
that Executive intends to terminate employment under this section (b), (2)
Executive's voluntary termination under this subsection must occur within 60
days after he has actual knowledge of an event described in clause (i), (ii),
(iii), (iv) or (v) above, or within 60 days after the last in a series of such
events, and (3) the Company must have failed to remedy the event describe in
clause (i), (ii), (iii), (iv) or (v), as the case may be, within 30 days after
receiving Executive's written notice. If the Company remedies the event
described in clause (i), (ii), (iii), (iv) or (v), as the case may be, within
30 days after receiving Executive's written notice, Executive may not
terminate employment under this subsection (b) on account of the event
specified in Executive's notice.
<PAGE>
(c) By the Company for Cause or the Executive Without Good
Reason. If Executive's employment is terminated by the Company for Cause or
if Executive voluntarily terminates employment without Good Reason, as
described in subsection (b) above, this Agreement will immediately terminate.
For purposes of this Agreement, the term "Cause" means (i) the repeated
material failure or refusal of Executive to follow the reasonable directions
of Company's Board of Directors or Executive's supervisor or to adequately
perform any duties reasonably required by Company, (ii) material violations of
Company's Code of Conduct or (iii) the commission of any criminal act or act
of fraud or dishonesty by Executive in connection with Executive's employment
by Company. In the event that Company terminates Executive's employment under
subsection (i) of this Cause definition, Company shall specify in the notice
of termination the basis for Cause. If the Cause described in the notice is
cured to Company's reasonable satisfaction prior to the end of the 30 day
notice period, the notice of termination of employment shall be withdrawn.
(d) Notwithstanding the foregoing, the amount of severance
benefits under this Agreement will be reduced by 80% of any compensation
earned by Executive from another employer (including self-employment) if
Executive is employed by another employer (including self-employment) during
the period which Executive receives severance benefits.
(e) The amounts under this Agreement will be paid in lieu of
severance benefits under any severance plan or program maintained by the
Company.
5. Disability or Death.
(a) If Executive becomes disabled (as defined below) during the
Employment Period while he is employed by the Company, Executive shall be
entitled to receive continued base salary at the annual rate in effect on the
date of his disability during the remaining Employment Period while he remains
disabled, including a prorated management incentive payment for the fraction
of the management incentive payment measuring period ending on the date of
Executive's disability, plus any management incentive payment remaining unpaid
from the preceding year under the terms of the management incentive plan.
These payments shall be reduced by any amounts that Executive receives from
Company paid for disability insurance, his compensation from other employment,
or from worker's compensation, Social Security or governmental programs
relating to disability. Except as provided in this Section 5, all of the
rights and benefits of Executive under this Agreement shall cease immediately
upon the date of Executive's disability, except that Executive shall receive
any management incentive payment remaining unpaid from the preceding year
under the terms of the management incentive plan. The term "disability" means
a condition, resulting from mental or physical incapacity, bodily injury or
disease, that renders, and for a six consecutive month period has rendered,
Executive unable to perform any and every duty pertaining to his employment
with the Company. A return to work of less than 14 consecutive days will not
be considered an interruption in Executive's six consecutive months of
disability. Disability will be determined by the Company on the basis of
medical evidence satisfactory to the Company.
<PAGE>
(b) If Executive dies during the Employment Period while he is
employed by the Company, the Company will pay to the personal representative
of Executive's estate Executive's base salary for the month in which his death
occurs, plus a prorated management incentive payment for the fraction of the
management incentive payment measuring period ending on the date of
Executive's death, plus any management incentive payment remaining unpaid from
any preceding year under the terms of the management incentive plan. Insofar
as practicable, the prorated management incentive payment will be paid within
90 days after the end of the management incentive payment measuring period.
Except for the foregoing payments, this Agreement terminates on the date of
Executive's death.
(c) Except as provided in (a) above, the foregoing benefits will
be provided in addition to any death and other benefits provided under any
Company benefit plan in which Executive participates.
6. Confidential Information. Executive agrees that during and after
the term of this Agreement Executive shall keep confidential all confidential
information and trade secrets of the Company, or any subsidiaries or
affiliates of the Company and shall not disclose such information to any
person without the prior approval of the Company, or use such information for
any purpose other than in the course of fulfilling his duties pursuant to this
Agreement. Upon termination of this Agreement, Executive shall return any
documents, records, data, books or materials of or pertaining to the Company
or its subsidiaries or affiliates in his possession or control and any of his
work papers in his possession or control containing confidential information
or trade secrets. The Company acknowledges that Executive already has
substantial experience and expertise in the health insurance and managed
health care business, and use of that experience and expertise in other
employment will not be deemed a violation of this Agreement.
7. Non-Competition.
(a) Executive agrees that (i) until the expiration of the
Employment Period under Section 1, and (ii) for a period of two years after
the last day of Executive's employment if Executive's employment is terminated
by the Company without Cause (as provided in Section 4(a)) or Executive
voluntarily terminates his employment for Good Reason (as provided in Section
4(b)), in either case on or before November 14, 1995, or for a period of one
year if the termination occurs after November 14, 1995, Executive agrees not
to engage, directly or indirectly (whether as officer, director, employee,
consultant or by ownership or otherwise) in a competitive business in the
Company's market area.
(b) Executive agrees that if (i) Executive's employment is
terminated by Company for Cause, (ii) Executive terminates his employment
without Good Reason, or (iii) upon termination of this agreement at the end of
the term, Company shall have the option of electing to pay Executive the
periodic payments set forth in Section 4 (a) (i) for up to one year and that
if Company so elects, Executive agrees not to engage, directly or indirectly
(whether as officer, director, employee, consultant or by ownership or
otherwise) in a competitive business in the Company's market area for so long
as Company is making those periodic payments to Executive.
<PAGE>
(c) Notwithstanding the foregoing, nothing in this Agreement
shall prohibit or penalize the ownership by Executive of investments in shares
of a competitive business that are registered under Section 12 of the
Securities Exchange Act of 1934 and constitute, together with all such
investments owned by any immediate family member of affiliate of, or person
acting in concert with, Executive, less than 5% of the outstanding registered
investments in such business. As used herein, the term "competitive business"
means a business entity that markets health insurance, managed health care,
health maintenance organizations, or the administration of health insurance
programs, and the term "market area" means any state or possession in which
the Company is engaged in business on the date of the Executive's termination
of employment.
8. Nonsolicitation. Executive agrees that (i) during the Employment
Period, and (ii) for the longer of a one-year period after Executive's
termination of employment for any reason, and any period with respect to which
the Company is required to make payments pursuant to Section 4(a) or 4(b) or
elects to make payments pursuant to Section 7(b), Executive will not (a)
induce or attempt to induce, directly or indirectly, any of the Company's
employees to terminate their employment with the Company nor (b) solicit the
sale of any product or service that constitutes a competitive business to any
entity which on the date of Executive's termination of employment was
purchasing (or with which substantial negotiations were then in progress for
the purchase of) the Company's services or products.
9. Indemnification. The Company will pay all reasonable fees and
expenses, if any, (including, without limitation, legal fees and expenses)
that are incurred by Executive to enforce this Agreement and that result from
an actual or threatened breach of this Agreement by the Company.
10. Payment of Compensation and Taxes. All amounts payable under this
Agreement (other than stock-related compensation, which will be paid according
to the terms of the Company's stock incentive plan) will be paid in cash,
subject to required income and payroll tax withholdings.
11. Assignment. The rights and obligations of the Company under this
Agreement will inure to the benefit of and will be binding upon the successors
and assigns of the Company. If the Company is consolidated or merged with or
into another corporation, or if another entity purchases all or substantially
all of the Company's assets, the surviving or acquiring corporation will
succeed to the Company's rights and obligations under this Agreement.
Executive's rights under this Agreement may not be assigned or transferred in
whole or in part, except that the personal representative of Executive's
estate will receive any amounts payable under this Agreement after the death
of Executive. The Company may arrange for one or more of its affiliates to
act as the Company for purposes of administering and providing Executive's
compensation and benefits under this Agreement.
12. Rights Under the Agreement. The right to receive benefits under
this Agreement will not give Executive any proprietary interest in the Company
or any of its assets. Benefits under the Agreement will be payable from the
general assets of the Company, and there will be no required funding of
amounts that may become payable under the Agreement. Executive will for all
<PAGE>
purposes be a general creditor of the Company. The interest of Executive
under the Agreement cannot be assigned, anticipated, sold, encumbered or
pledged and will not be subject to the claims of Executive's creditors. The
foregoing provisions of this Section 12 shall not apply to the extent (if any)
that they conflict with the rights of the Executive under the stock option
plans referred to in Section 3(c).
13. Entire Agreement. This Agreement constitutes the entire agreement
and understanding between the Company and Executive with respect to the
matters referred to herein and supersedes all prior agreements and
understandings between Executive and the Company or any affiliate of the
Company, including Metra, except as specifically noted herein, with respect to
the employment of Executive after the Effective Date and any other matters
referred to herein.
14. Notice. Any written notice required to be given by one party to
the other party hereunder shall be deemed effective if mailed by registered
mail:
To the Company c/o:
UHC Management Company, Inc.
9900 Bren Rd E
Minnetonka, MN 55343
Attention: Vice President Human Resources
with a copy to: General Counsel
To Executive at:
12522 Knollbrook Dr.
Clifton, VA 22024
or such other address as may be stated in notice given under this Section 14.
15. Dispute Resolution and Remedies. Any dispute arising between the
parties relating to this Agreement or to Executive's employment by Company
shall be resolved by binding arbitration pursuant to the Rules of the American
Arbitration Association. In no event may the arbitration be initiated more
than one year after the date one party first gave written notice of the
dispute to the other party. The arbitrators shall interpret and construe this
Agreement pursuant to controlling law but may not in any case award any
punitive or exemplary damages. The parties acknowledge that Executive's
failure to comply with the Confidentiality, Nonsolicitation and Non-
Competition provisions of this Agreement will cause immediate and irreparable
injury to Company and that therefore the arbitrators, or a court of competent
jurisdiction if an arbitration panel cannot be immediately convened, will be
empowered to provide injunctive relief, including temporary or preliminary
relief, to restrain any such failure to comply.
16. Miscellaneous. To the extent not governed by federal law, this
Agreement will be construed in accordance with the laws of the State of
Minnesota, without reference to its conflict of law rules. No provisions of
<PAGE>
this Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and the writing is signed by
Executive and the Company. A waiver of any breach of or compliance with any
provision or condition of this Agreement is not a waiver of similar or
dissimilar provisions or conditions. The invalidity or unenforceability of
any provision of this Agreement will not affect the validity or enforceability
of any other provision of this Agreement, which will remain in full force and
effect. This Agreement may be executed in one or more counterparts, all of
which will be considered one and the same agreement.
WITNESS the following signatures.
UHC Management Company, Inc.
Dated: 6-25-96 By: /s/ Kevin H. Roche
Executive
Dated 6-25-96 /s/ David A. George
<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 September 30, Nine Months Ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
PRIMARY:
NET EARNINGS $ 91,227 $ 93,670 $ 260,494 $ 272,981
LESS CONVERTIBLE PREFERRED
STOCK DIVIDENDS (7,188) -- (21,564) --
NET EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS $ 84,039 $ 93,670 $ 238,930 $ 272,981
Weighted average number of
common shares outstanding 184,082 173,606 180,560 173,255
Additional equivalent shares
issuable from assumed exercise
of common stock options
and warrants 3,048 3,464 4,470 3,360
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 187,130 177,070 185,030 176,615
NET EARNINGS PER COMMON
SHARE $ 0.45 0.53 $ 1.29 $ 1.55
FULLY DILUTED:
NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS $ 91,227 $ 93,670 $ 260,494 $ 272,981
Weighted average number of
common shares outstanding 184,082 173,606 180,560 173,255
Additional equivalent shares
issuable from assumed exercise
of common stock options
and warrants 3,387 3,464 4,457 3,360
Assumed conversion of convertible
preferred stock 10,106 -- 10,106 --
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 197,575 177,070 195,123 176,615
NET EARNINGS PER COMMON
SHARE $ 0.46(1) $ 0.53(2) $ 1.34(1) $ 1.55(2)
(1) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph
40 of APB Opinion No. 15 because it produces an anti-dilutive result.
(2) 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%.
</TABLE>
<PAGE>
EXHIBIT 15
LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
November 7, 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, 33-59083, 33-59623, 33-63885, 333-05717, 333-02525,
333-04875, 333-04401, 333-06533, 333-01517, 333-01915, 333-05291 its Form 10-Q
for the quarter ended September 30, 1996, which includes our report dated
November 7, 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 third 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.
<PAGE>
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.
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.
<PAGE>
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
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 securities fraud, and
<PAGE>
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.
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