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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-13253
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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
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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
May 12, 1997 was 186,246,869.
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UNITED HEALTHCARE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-------------
<S> <C>
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at
March 31, 1997 and December 31, 1996.............................................................. 3
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 1997 and 1996....................................................... 4
Condensed Consolidated Statements of Cash Flows for the
three month periods ended March 31, 1997 and 1996................................................. 5
Notes to Condensed Consolidated Financial Statements................................................ 6
Report of Independent Public Accountants............................................................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................... 8
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 14
ITEM 6. EXHIBITS.................................................................................... 14
Signatures.............................................................................................. 15
</TABLE>
2
<PAGE>
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......................................................... $ 903,965 $1,036,716
Short-term investments............................................................. 446,362 610,572
Accounts receivable, net........................................................... 681,545 605,801
Assets under management............................................................ 133,519 155,090
Other.............................................................................. 364,090 331,485
------------ ------------
Total Current Assets............................................................. 2,529,481 2,739,664
Long-term Investments................................................................ 2,081,403 1,804,973
Property and Equipment, net.......................................................... 322,129 312,984
Goodwill and Other Intangible Assets, net............................................ 2,129,595 2,139,009
------------ ------------
TOTAL ASSETS......................................................................... $ 7,062,608 $6,996,630
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical costs payable.............................................................. $ 1,619,151 $1,516,111
Other policy liabilities........................................................... 312,811 334,039
Accounts payable................................................................... 130,011 73,077
Accrued expenses................................................................... 426,220 491,297
Unearned premiums.................................................................. 111,549 228,258
------------ ------------
Total Current Liabilities........................................................ 2,599,742 2,642,782
Long-term Obligations and Minority Interests......................................... 28,825 30,761
Convertible Preferred Stock.......................................................... 500,000 500,000
------------ ------------
Shareholders' Equity
Common stock, $.01 par value--500,000,000 shares authorized; 185,759,000 and
184,865,000 issued and outstanding............................................... 1,858 1,849
Additional paid-in capital......................................................... 1,176,480 1,148,039
Retained earnings.................................................................. 2,776,311 2,680,191
Net unrealized holding losses on investments available for sale, net of income tax
effects.......................................................................... (20,608) (6,992)
------------ ------------
Total Shareholders' Equity....................................................... 3,934,041 3,823,087
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................... $ 7,062,608 $6,996,630
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUES
Premiums......................................................................... $ 2,444,580 $ 1,914,364
Management Services and Fees..................................................... 355,733 357,841
Investment and Other Income...................................................... 50,798 45,905
------------ ------------
Total Revenues................................................................. 2,851,111 2,318,110
------------ ------------
OPERATING EXPENSES
Medical Costs.................................................................... 2,064,020 1,585,369
Selling, General and Administrative Costs........................................ 575,074 508,034
Depreciation and Amortization.................................................... 33,607 31,101
------------ ------------
Total Operating Expenses....................................................... 2,672,701 2,124,504
------------ ------------
EARNINGS FROM OPERATIONS........................................................... 178,410 193,606
Interest Expense................................................................. (123) (251)
------------ ------------
EARNINGS BEFORE INCOME TAXES, AND MINORITY INTERESTS............................... 178,287 193,355
Provision for Income Taxes....................................................... (69,532) (73,475)
Minority Interests in Net Losses (Earnings) of Consolidated Subsidiaries......... 124 (934)
------------ ------------
NET EARNINGS....................................................................... 108,879 118,946
CONVERTIBLE PREFERRED STOCK DIVIDENDS.............................................. (7,188) (7,188)
------------ ------------
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS..................................... $ 101,691 $ 111,758
------------ ------------
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NET EARNINGS PER COMMON SHARE...................................................... $ 0.54 $ 0.62
------------ ------------
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WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............................... 189,330 180,470
------------ ------------
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</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
--------------------------
1997 1996
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings........................................................................ $ 108,879 $ 118,946
Non-cash Items:
Depreciation and amortization..................................................... 33,607 31,101
Other............................................................................. 1,879 (2,974)
Net Change in Other Operating Items:
Accounts receivable and other current assets...................................... (108,349) (61,244)
Accounts payable.................................................................. 56,934 (7,338)
Accrued expenses.................................................................. (59,588) 48,018
Medical costs payable............................................................. 103,855 65,025
Other policy liabilities.......................................................... (472) 40,169
Unearned premiums................................................................. (116,709) (69,702)
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Cash Flows From Operating Activities............................................ 20,036 162,001
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INVESTING ACTIVITIES
Cash Assumed in Acquisition, net of cash paid and other effects..................... -- 34,788
Net Purchases of Property and Equipment............................................. (32,820) (22,015)
Purchases of Investments Available for Sale......................................... (1,009,107) (794,206)
Maturities/Sales of Investments Available for Sale.................................. 867,837 719,978
Purchases of Investments Held to Maturity........................................... (5,416) (2,085)
Maturities of Investments Held to Maturity.......................................... 13,692 1,964
Other............................................................................... 2,825 449
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Cash Flows Used for Investing Activities........................................ (162,989) (61,127)
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FINANCING ACTIVITIES
Net Proceeds from Stock Option Exercises............................................ 17,390 6,696
Dividends Paid on Convertible Preferred Stock....................................... (7,188) (7,188)
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Cash Flows From (Used for)Financing Activities.................................. 10,202 (492)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (132,751) 100,382
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................ 1,036,716 940,110
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CASH AND CASH EQUIVALENTS, END OF PERIOD.............................................. $ 903,965 $ 1,040,492
------------- -----------
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</TABLE>
See notes to condensed consolidated financial statements
5
<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, these unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
2. DIVIDENDS
On February 13, 1997, the Company's Board of Directors approved an annual
dividend for 1997 of $0.03 per share to holders of the Company's common stock.
Dividends of $5.6 million were paid on April 15, 1997 to shareholders of record
at the close of business on April 3, 1997.
3. CASH AND INVESTMENTS
As of March 31, 1997, 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
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents.................................... $ 903,965 $ -- $ -- $ 903,965
Investments Available for Sale............................... 2,497,791 2,505 (36,288) 2,464,008
Investments Held to Maturity................................. 63,757 127 (309) 63,575
------------ ----------- ----------- ------------
Total Cash and Investments................................. $ 3,465,513 $ 2,632 $ (36,597) $ 3,431,548
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
4. RECENTLY ISSUED ACCOUNTING STANDARD
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No.128, "Earnings per Share" (SFAS
No. 128), which changes the computation and disclosure of earnings per share.
SFAS No. 128 is effective for both interim and annual periods ending after
December 15, 1997 and earlier application is not permitted. Under the Company's
current capital structure, the adoption of SFAS No. 128 will not have a material
impact on the Company's determination of earnings per share.
6
<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
March 31, 1997, and the related condensed consolidated statements of operations
and cash flows for the three month periods ended March 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of United HealthCare
Corporation and Subsidiaries as of and for the year ended December 31, 1996 (not
presented herein), and, in our report dated February 28, 1997, we expressed an
unqualified opinion on those statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 1996, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota
May 7, 1997
7
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has completed certain transactions which affect the year-to-year
comparability of the Company's consolidated financial position and results of
operations. 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. 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 HealthWise acquisition was accounted for as a pooling of interests;
however, the historical financial results of the Company were not restated
because the effects of this acquisition on the Company's financial statements
were not material. The PHP acquisition was accounted for using the purchase
method of accounting. Accordingly, only the post-acquisition results of
HealthWise and PHP are included in the Company's consolidated financial
statements.
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 Month Period Ended
------------------------------------------------
March 31, 1997 March 31,
-------------------------------- 1996
Percent -------------
AMOUNT OR Increase Amount or
PERCENT(a) (Decrease) Percent
--------------- -------------- -------------
<S> <C> <C> <C>
Total Revenues.......................... $ 2,851,111 23% $2,318,110
Earnings From Operations................ $ 178,410 (8)% $ 193,606
--------------- ----- -------------
Medical Costs to Premium Revenue........ 84.4% 82.8%
SG&A Expenses to Total Revenues......... 20.2% 21.9%
--------------- ----- -------------
Enrollment (at period end)
Health Plan Products
Commercial.......................... 4,282(b) 25% 3,424(b)
Medicaid............................ 475 30% 365
Medicare............................ 257 57% 164
--------------- ----- -------------
Total............................. 5,014 27% 3,953
Other Network-Based Products.......... 5,533(b) (3)% 5,675(b)
Indemnity Products.................... 2,993(b) (24)% 3,950(b)
--------------- ----- -------------
Total Enrollment........................ 13,540 0% 13,578
--------------- ----- -------------
--------------- ----- -------------
</TABLE>
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(a) Amounts include post-acquisition operating results of PHP, Inc. acquired on
March 29, 1996 and HealthWise of America, Inc. acquired on April 12, 1996.
(b) Amounts include both fully insured and self-funded enrollment. As of March
31, 1997 and 1996, self-funded enrollment was as follows: Commercial Health
Plan Products--316,000 in 1997 and 294,000 in
8
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
1996; Other Network-Based Products--4,837,000 in 1997 and 4,936,000 in 1996;
Indemnity Products--2,464,000 in 1997 and 3,091,000 in 1996.
PREMIUM REVENUES
Premium revenues of $2.44 billion in the first quarter of 1997 increased
$530 million, or 28%, compared to the first quarter of 1996. Excluding the
effects of the Company's 1996 acquisitions of HealthWise and PHP, the increase
in first quarter 1997 premium revenues over the first quarter of 1996 was 21%.
The increase in premium revenues is primarily attributable to year-over-year
same store health plan premium revenue growth of $412 million, or 29%. The
health plan premium revenue increase reflects same store enrollment growth of
23% and an average year-over-year premium rate increase on renewing commercial
groups of approximately 5%. Growth in the Company's Medicare programs also
contributed to the increase in premium revenues. Included in the total health
plan same-store enrollment growth of 23% is year-over-year same-store increases
of 48% 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 level of
medical care services utilized by this population.
The year-over-year increase in premium revenues from health plan operations
was partially offset by an expected decrease in premium revenues from fully
insured non-network-based indemnity products of $13 million. In response to
increased medical costs associated with these products, the Company instituted
rate increases averaging from 10% to 20% during 1996 and into 1997. 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 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.
MEDICAL COSTS
The combination of the Company's pricing strategy and its medical management
efforts are reflected in its medical care ratio (the percent of premium revenues
expensed as medical costs). The Company's commercial health plan business is
most sensitive to this strategy.
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 had been able to effectively manage health care costs
and maintain the rate at which its health care costs had grown within the
commercial health plan line of business to low single-digit percentage
increases. Commercial premium rates were set accordingly.
When establishing premium rates for late 1995 and January 1996 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. The
9
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
January renewal period is significant for the Company as approximately 45% of
its existing commercial health plan enrollment renews in that month.
As 1996 progressed, the Company determined year-over-year commercial health
care cost trend had risen to the 3% to 4% range. The increasing health care cost
trend was attributed to certain cost components 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. Consequently, the commercial health plan premium
rates achieved by the Company during late 1995 and January 1996 were less than
the corresponding increase in health care costs, causing the Company's
consolidated medical care ratio to increase from 82.8% during the first quarter
of 1996 to 84.4% during the first quarter of 1997.
The Company believes that the competitive premium environment has improved
since January 1996. The Company has been able to realize rate increases in
excess of 5% in its commercial health plan business during the remainder of 1996
and into 1997. These rate increases combined with stable medical cost trends
during the first quarter of 1997 enabled the Company to maintain its
consolidated medical care ratio at 84.4%, a level relatively consistent with the
consolidated medical care ratio of 84.0% during the fourth quarter of 1996. The
modest increase in the first quarter 1997 medical care ratio is the result of
expected seasonally higher first quarter utilization, as well as changes in the
Company's product mix. The rapid growth associated with recently introduced
Medicare products in several new markets (with the proportionately higher
medical care ratios expected at this early stage of product introduction) and
the absence of Medicaid premium increases contributed to the increased medical
care ratio. The medical care ratio for the commercial health plan business
declined slightly from the fourth quarter of 1996 to the first quarter of 1997,
partially offsetting the impact of the Company's Medicare and Medicaid business.
The Company will continue to strive to establish its commercial premium
rates based on anticipated health care costs. Depending on the level of future
competition, customer acceptance of the Company's premium increases, future
health care cost trends 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 its products consistent with health care cost trends.
MANAGEMENT SERVICES AND FEE REVENUES
Management services and fee revenues were $356 million in the first quarter
of 1997, comparable to revenues of $358 million reported in the first quarter of
1996. These revenues are primarily generated from self-funded indemnity products
wherein the Company receives a fee for the provision of administrative services
and generally assumes no financial responsibility for health care costs
associated with these products. Additionally, the Company generates fee revenues
from administrative services performed on behalf of managed health plans and for
services provided by the Company's specialty managed care services.
Management services and fee revenues from self-funded indemnity products has
decreased $14 million from the first quarter of 1996 as a result of declining
enrollment in this product. This decrease is fully offset by an increase in
revenues generated from the Company's other sources of management services and
fee revenues, attributable to enrollment growth within the managed health plans
and an increase in lives served by the specialty managed care services
operations, most notably in the behavioral health and demand management
businesses.
10
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs as a percent of total revenues
(the SG&A ratio) decreased from 21.9% in the first quarter of 1996 to 21.1% in
the fourth quarter of 1996, and again to 20.2% in the first quarter of 1997. The
decrease in the SG&A ratio reflects increased operating efficiencies as well as
the Company's diligence in managing these expenses. On an absolute dollar basis,
selling, general and administrative costs in the first quarter of 1997 increased
$67 million, or 13%, over the first quarter of 1996, reflecting the additional
infrastructure necessary to support the corresponding $530 million increase in
premium based business, as well as additional investment in new Medicare markets
and increased support for its growing specialty managed care service operations.
INFLATION
Although the general rate of inflation has remained relatively stable and
health care cost inflation has declined in recent years, the total national
health care cost inflation rate still exceeds the general inflation rate. The
Company uses various strategies to mitigate the negative effects of health care
cost inflation, including setting commercial premiums based on its anticipated
health care costs, risk-sharing arrangements with the Company's various health
care providers, and other health care cost containment measures. Specifically,
the Company's health plans attempt to control medical and hospital costs through
contractual arrangements primarily with independent providers of health care
services. Cost-effective delivery of health care services by such health care
providers is achieved by emphasizing preventive health services, appropriate use
of specialty referral services, and the reduction of unnecessary
hospitalizations. While the Company currently believes its strategies to
mitigate health care cost inflation will continue to be successful, competitive
pressures, new health care product introductions, demands from providers and
customers, applicable regulations or other factors may adversely affect the
Company's ability to control the impact of health care cost increases. In
addition, certain non-network-based products do not have 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.
GOVERNMENT REGULATION
The Company's primary business, offering health care coverage and health
care management services, is heavily regulated at both the federal and state
levels. The Company believes that it is in compliance in all material respects
with the various federal and state regulations applicable to its current
operations. To maintain such compliance, it may be necessary for the Company or
one of its subsidiaries to make changes from time to time in its services,
products, marketing methods, or organizational or capital structure.
Government regulation of health care coverage products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Changes in
applicable laws and regulations are continually being considered and the
interpretation of existing laws and rules also may change from time to time.
Regulatory agencies generally have broad discretion in promulgating regulations
and in interpreting and enforcing laws and rules.
While the Company is unable to predict what regulatory changes may occur or
the impact on the Company of any particular change, the Company's operations and
financial results could be negatively affected by regulatory revisions. Certain
proposed changes in Medicare and Medicaid programs may increase the
opportunities for the Company to enroll people under products developed for the
Medicare-
11
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
and Medicaid-eligible populations. Other proposed changes also may limit the
reimbursement available to the Company and increase competition in those
programs, which could adversely affect the Company's financial results. The
continued consideration and enactment of "anti-managed care" laws and
regulations, such as "any willing provider" laws and limits on utilization
management, by federal and state bodies may make it more difficult for the
Company to control medical costs and may adversely affect financial results.
A number of jurisdictions have enacted small group insurance and rating
reforms, which generally limit the ability of insurers and health plans to use
risk selection as a method of controlling medical costs for small group
business. These laws generally may limit or eliminate use of preexisting
conditions exclusions, experience rating and industry class rating, and may
limit the amount of rate increases from year to year. Under these laws, medical
cost control through provider contracting and managing care may become more
important, and the Company currently believes its experience in these areas will
allow it to compete effectively.
In addition to changes in applicable laws and rules, the Company is
potentially subject to governmental investigations and enforcement actions.
These include possible government actions relating to the federal Employee
Retirement Income Security Act (ERISA), which regulates insured and self-insured
health coverage plans offered by employers, the Federal Employees Health Benefit
Plan (FEHBP), federal and state fraud and abuse laws, and laws relating to
utilization management and the delivery of health care. Any such government
action could result in assessment of damages, civil or criminal fines or
penalties, or other sanctions, including exclusion from participation in
government programs. Although the Company is currently involved in various
government audits, such as under the FEHBP or relating to services for ERISA
plans, the Company currently does not believe the results of such audits will
have a material adverse effect on the Company's financial position or results of
operations.
FINANCIAL CONDITION AND LIQUIDITY
The Company has continued strong financial condition and liquidity with cash
and investments of $3.43 billion at March 31, 1997, relatively unchanged from
December 31, 1996. Cash flows from operations in the first quarter of 1997 of
$20 million reflects net earnings for the quarter of $109 million, offset by
normal timing issues in operating cash payments and receipts. The Company
expects operating cash flows in the subsequent quarters of 1997 to reflect the
positive impact of the reversal of these timing items.
Under applicable state regulations, several of the Company's subsidiaries
are required to maintain specified capital levels to support their operations.
After giving effect to these regulations and certain business considerations,
the Company had approximately $864 million in cash and investments available for
general corporate use at March 31, 1997.
The Company continues to focus on expanding its health care programs to the
Medicare population. In connection with the introduction of a Medicare health
plan product in a particular site, significant expenditures must be incurred.
These start-up expenditures include a lengthy and detailed regulatory approval
process, product-specific provider contracting and network configuration, high
up-front sales and marketing costs, and staffing of service areas in advance of
product sales. In addition, start-up markets generally experience a higher
medical care ratio due to the low enrollment base. The Company expects to incur
operating losses from its Medicare products in these start-up markets usually
for the first 12 to 18 months until Medicare enrollment is sufficient to cover
the corresponding administrative cost structure in each site and to absorb the
medical risk attributable to these products.
12
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
In February 1997, the Company completed a contract to deliver Medicare
supplement insurance and develop an array of new products for the American
Association of Retired Persons (AARP) beginning in January 1998. Under the terms
of the 10 year contract, the Company's portion of the AARP insurance offerings
is expected to represent approximately $3.8 billion in annual premium revenue
from over 5 million policyholders (based on year-end 1996 figures).
The Company currently believes its available cash resources will be
sufficient to meet its current operating requirements and internal development
and integration initiatives. In addition, the Company believes that, based on
its current financial condition and results of operations, it would be able to
finance additional cash requirements in the public or private markets, if
necessary.
There currently are no other material definitive commitments for future use
of the Company's available cash resources; however, management continually
evaluates opportunities to expand its operations, which includes internal
development of new products and programs and may include additional
acquisitions.
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.
13
<PAGE>
UNITED HEALTHCARE CORPORATION
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders held on May 14, 1997, the
Company's shareholders elected three directors and ratified the appointment of
Arthur Andersen LLP as independent public accountants.
Three directors whose terms expire in 2000 (Class II) were elected: James A.
Johnson with 149,669,494.12 votes cast for his election and 2,068,143.58 votes
withheld; Douglas W. Leatherdale with 149,677,404.12 votes cast for his election
and 2,060,233.58 votes withheld; Walter F. Mondale, with 149,743,551.135 votes
cast for his election and 1,994,086.565 votes withheld.
The appointment of Arthur Andersen LLP as independent public accountants for
the Company for the year ending December 31, 1997 was ratified with
151,284,351.51 votes cast for ratification, 110,618.830 votes cast against
ratification and 342,667.360 abstaining votes cast. There were 0 broker nonvotes
on this matter.
ITEM 6. EXHIBITS
The following exhibits are filed in response to Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------ ---------------------------------------------------------------------------
<S> <C> <C>
Exhibit 10 -- 1997 Management Incentive Plan
Exhibit 11 -- Statements Re Computation of Per Share Earnings
Exhibit 15 -- Letter Re Unaudited Interim Financial Information
Exhibit 99 -- Cautionary Statements
</TABLE>
14
<PAGE>
UNITED HEALTHCARE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
UNITED HEALTHCARE CORPORATION
Dated: May 14, 1997
By /s/ WILLIAM W. MCGUIRE, M.D.
--------------------------------------
William W. McGuire, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: May 14, 1997
By /s/ DAVID P. KOPPE
--------------------------------------
David P. Koppe
CHIEF FINANCIAL OFFICER
</TABLE>
15
<PAGE>
UNITED HEALTHCARE CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------------- -----
<S> <C> <C>
10 1997 Management Incentive Plan....................................................................
11 Statements Re Computation of Per Share Earnings...................................................
15 Letter Re Unaudited Interim Financial Information.................................................
99 Cautionary Statements.............................................................................
</TABLE>
<PAGE>
1997
MANAGEMENT INCENTIVE PLAN
- --------------------------------------------------------------------------------
UNITED HEALTHCARE CORPORATION-Signature Mark-
<PAGE>
1997
MANAGEMENT INCENTIVE PLAN
- --------------------------------------------------------------------------------
As a national leader in health care management, United HealthCare is
committed to rewarding - and keeping - the professionals who have helped us
accomplish our successes. In 1997 we again will be challenged to attain even
higher levels of performance to maintain our leadership position. Overall, we
believe our company will continue to provide tremendous opportunities for all of
us who work to make United HealthCare successful.
In our endeavors in this year and beyond, we will stress tightly managed
operational execution and excellence in service. Specific goals include
excellent growth and strong financial performance; enhanced responsiveness
through better organizational structures and processes; continued leadership
gains in each of our business units; improved products and services for all of
our customers; and successful integration of business through merger and
acquisition activity. As always, we must remain focused on continued
improvements in appropriate health care delivery, SG&A, and medical cost trends.
The information presented in this brochure describes United HealthCare's
Management Incentive Plan. Incentive programs and performance management are
inherent to our corporate culture, a culture that rewards leaders who strive for
excellence and continuous improvement. This plan also represents a significant
step toward unifying all United HealthCare leaders under a single system to
recognize our accomplishments as we work toward common goals.
As leaders at United HealthCare, we all are responsible and accountable for
maintaining the standards of excellence that will move our company forward
successfully as we work to improve the health and well-being of the people we
serve.
/s/ William W. McGuire, M.D.
----------------------------
William W. McGuire, M.D.
Chief Executive Officer,
President and Chairman
1
<PAGE>
1997
MANAGEMENT INCENTIVE PLAN
- --------------------------------------------------------------------------------
OVERVIEW
Annual management incentive plan funding and payout amounts are determined by
the following performance factors:
1) The OVERALL PERFORMANCE OF UNITED HEALTHCARE, measured by accomplishment of
strategic initiatives, deployment of capital and resources, market
valuation, merger and acquisition activity, public image and recognition,
as well as financial goals in the following categories: earnings, revenue,
SG&A, medical cost ratio, growth and membership. United HealthCare's
performance, by design, affects every manager's incentive to some degree.
2) The OVERALL PERFORMANCE OF YOUR BUSINESS UNIT, SUPPORT UNIT OR CORPORATE
DIVISION. If you're part of a United HealthCare business unit, your goals
will be developed jointly by your Senior Executive, CEO or Senior Manager
and the person to whom he or she reports. If you're part of a United
HealthCare business support or corporate division, your goals will be
established by the appropriate Senior Executive and the person to whom he
or she reports.
3) YOUR INDIVIDUAL PERFORMANCE, based on your overall performance in your
position and accomplishment of established goals and objectives.
All three performance measures are used to determine the incentive pool and
incentive awards. We believe that our collective success must grow out of a
synergy of effort. This blend of performance measurement helps ensure all
of United HealthCare works together toward common goals - and therefore
allows us the greatest opportunities for success, both professionally and
personally.
INCENTIVE TARGETS
Incentive targets are defined as a percent of eligible base earnings paid
during the current fiscal year. The incentive target percents are based on
grade level and overall position responsibility.
Your senior executive will communicate this year's corporate and business
unit or corporate division goals.
2
<PAGE>
- --------------------------------------------------------------------------------
PAYMENT DETERMINATION
STEP 1 - ESTABLISHMENT OF TOTAL INCENTIVE POOL
At the end of United HealthCare's fiscal year, the Compensation and Stock
Option Committee of the Board of Directors will determine overall United
HealthCare company performance and the total amount available in the company
incentive pool. The total company incentive pool reflects United HealthCare's
total performance on its strategic initiatives, merger and acquisition activity,
and the collective results of all United HealthCare operations. It is NOT the
average result of United HealthCare operations but the overarching performance
of the entire company.
The Compensation and Stock Option Committee will approve an incentive pool
amount based on an assessment ranging from 50% of total incentive targets to
200% of total incentive targets. Generally, no pool amount of less than 50%
will be established.
STEP 2 - ESTABLISHMENT OF BUSINESS UNIT, SUPPORT UNIT AND CORPORATE DIVISION
POOLS
Following a determination of the total amount available in the United
HealthCare incentive pool, United HealthCare Senior Management determines the
performance and incentive pools specific to the business units, business unit
support areas and United HealthCare corporate divisions. Business support areas
will be evaluated based on the primary business areas they support and their
specific unit performance. The business unit, business support division or
corporate division pool is established by creating a pool of available dollars
from 50% of target to 200% of targets. Generally, no pool amount of less than
50% will be established for any business unit, support area, or corporate
division.
STEP 3 - ESTABLISHMENT OF INDIVIDUAL INCENTIVE PAYMENTS
After business unit, support division and United HealthCare corporate
division incentive pools are established, the respective Health Plan CEOs,
Subsidiary Business Presidents and Corporate Senior Managers determine
individual incentive payments for their eligible managers. Health Plan CEOs,
Corporate Executives or Specialty Business Presidents' incentives are determined
by their management.
For those receiving an award, payments generally range from 50% of
incentive target to 200% of incentive target.
3
<PAGE>
1997
MANAGEMENT INCENTIVE PLAN
- --------------------------------------------------------------------------------
ELIGIBILITY
Generally, full-time regular employees grade 28 and above are eligible for
MIP awards. It is at this level that positions are directly accountable for
meeting key division or business unit objectives and generally also manage
staff, and determine and manage financial resources and budgets. Certain
positions are not eligible for MIP due to participation in other incentive
plans, even if they meet the eligibility criteria.
- - If you were hired or promoted during the year to an MIP-eligible position,
your participation will be prorated for the time you serve as an eligible
employee. New hires or promotions in the fourth quarter of 1997 are not
eligible to participate in the 1997 plan. Employees who were eligible for
the performance incentive plan or business incentive plan prior to
promotion in the fourth quarter may still be eligible for a year-end PIP or
BIP award in lieu of an MIP award for that year.
- - If you are promoted to a position that carries a higher management
incentive potential, any incentive paid to you would be based on a
combination of your existing and new incentive targets. The targets would
be weighted according to the time you held each position.
- - If you are on leave for part of the year, pay that you receive while on
leave (except vacation and sick leave) will not be included as base
earnings in the calculation of the management incentive payment.
- - TO BE ELIGIBLE FOR A MANAGEMENT INCENTIVE PAYMENT, YOU MUST BE AN ACTIVE
EMPLOYEE AT THE TIME SUCH PAYMENTS ARE MADE. EMPLOYEES WHO TERMINATE
EMPLOYMENT PRIOR TO THE DATE INCENTIVE AWARDS ARE MADE ARE NOT ELIGIBLE FOR
ANY INCENTIVE AWARDS. IF YOU ARE ON A LEAVE OF ABSENCE AT THE TIME OF
PAYMENT, YOU WILL BECOME ELIGIBLE FOR AN INCENTIVE PAYMENT AT THE TIME OF
YOUR RETURN TO WORK. EMPLOYEES WHO DO NOT RETURN TO WORK FROM LEAVE ARE NOT
ELIGIBLE FOR AN INCENTIVE AWARD.
- - EMPLOYEES ON FORMAL DISCIPLINARY ACTION ARE NOT ELIGIBLE FOR AN INCENTIVE
PAYMENT.
The senior vice president of Human Resources will determine any exceptions
to eligibility guidelines.
401(k) PLAN AND ESOP CONTRIBUTIONS
Management Incentive Plan payments are considered compensation under the
401(k) and Employee Stock Ownership (ESOP) Plans. Management incentive payments
are not eligible for the Employee Stock Purchase Plan (ESPP).
PAYMENTS
Management Incentive Plan payments generally are made following the close
of the corporate and operating unit books for the 1997 operating year, generally
occurring during the first quarter of the following year.
If you have any questions about the Management Incentive Plan, contact your
supervisor or the head of your operating unit.
4
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLES
EXAMPLE 1 - BUSINESS UNIT (E.G., HEALTH PLAN)
STEP 1: United HealthCare Compensation & Stock Option Committee
determines overall MIP pool.
STEP 2: Senior Management determines each unit's pool.
As an example, assume this unit is:
Business Unit Pool = 130% of target for that business
6 ELIGIBLE EMPLOYEES INCENTIVE TARGETS
2 at 15% at $60,000 Eligible Base Earnings $18,000
2 at 10% at $50,000 Eligible Base Earnings $10,000
2 at 10% at $40,000 Eligible Base Earnings $ 8,000
--------
TOTAL INCENTIVE TARGET EQUALS $36,000
POOL IS
CALCULATED: 130% (Unit Pool) x $36,000 (Incentive Target) = Incentive Pool
of $46,800
STEP 3: Business Unit Senior Manager evaluates individual performance of
each eligible employee and determines incentive payments.
Management incentive payments are either 0% or from 50% to 200%
of targets. The amount of the pool for this Senior Manager to
distribute is $46,800; total payments cannot exceed the pool
total.
EXAMPLE 2 - CORPORATE DIVISION (E.G., CORPORATE FINANCE DEPARTMENT)
STEP 1: United HealthCare Compensation & Stock Option Committee
determines overall MIP pool.
STEP 2: Senior Management determines each unit's pool.
As an example, assume this unit is:
Corporate Division Rating = 90% of target
5 ELIGIBLE EMPLOYEES INCENTIVE TARGETS
1 at 20% at $70,000 Eligible Base Earnings $14,000
2 at 15% at $50,000 Eligible Base Earnings $15,000
2 at 10% at $45,000 Eligible Base Earnings $ 9,000
-------
TOTAL INCENTIVE TARGET EQUALS $38,000
POOL IS
CALCULATED: 90% (Overall Rating) x $38,000 (Incentive Target) = Incentive
Pool of $34,200
STEP 3: Corporate Division Head evaluates individual performance of each
eligible employee and determines incentive payments. Management
incentive payments are either 0% or can range from 50% to 200% of
targets. The amount of the pool for this Division Head is
$34,200; total payments cannot exceed the pool total.
5
<PAGE>
1997
MANAGEMENT INCENTIVE PLAN
- --------------------------------------------------------------------------------
EXAMPLE 3 - BUSINESS SUPPORT UNIT (E.G., SPECIALTY BUSINESS AREA)
STEP 1: United HealthCare Compensation & Stock Option Committee
determines over all MIP pool.
STEP 2: Senior Management determines each unit's pool.
As an example, assume this unit is:
Support Unit Pool = 100%
4 ELIGIBLE EMPLOYEES INCENTIVE TARGETS
1 at 15% at $60,000 Eligible Base Earnings $ 9,000
2 at 10% at $45,000 Eligible Base Earnings $ 9,000
1 at 10% at $40,000 Eligible Base Earnings $ 4,000
-------
TOTAL INCENTIVE TARGET EQUALS $22,000
POOL IS
CALCULATED: 100% (Overall Rating) x $22,000 (Incentive Target) = Incentive
Pool of $22,000
STEP 3: Business Support Unit Senior Manager evaluates individual
performance of each eligible employee and determines incentive
payments. Management incentive payments are either 0% or can
range from 50% to 200% of targets. The amount of the pool for
this Senior Manager to distribute is $22,000; total payments
cannot exceed the pool total.
THERE IS NO GUARANTEE THAT ANY MANAGEMENT INCENTIVE PLAN PAYOUTS WILL BE
MADE. UNITED HEALTHCARE HAS THE EXCLUSIVE AND BINDING DISCRETION TO AMEND,
TERMINATE OR INTERPRET THE TERMS OR CONDITIONS OF THIS MANAGEMENT INCENTIVE PLAN
AT ANY TIME AND WITHOUT NOTICE. CHANGES TO THIS PLAN MUST BE IN WRITING MADE BY
THE SENIOR VICE PRESIDENT OF HUMAN RESOURCES OR THE CHIEF EXECUTIVE OFFICER OF
THE COMPANY. UNITED HEALTHCARE ALSO HAS DISCRETION TO UNILATERALLY MAKE LEGAL
AND FACTUAL DETERMINATIONS REGARDING THE PLAN. THIS MANAGEMENT INCENTIVE PLAN IS
NOT AND SHALL NOT BE DEEMED TO BE AN ENFORCEABLE CONTRACT OR AN EMPLOYEE BENEFIT
PLAN WITHIN THE MEANING OF ERISA.
- --------------------------------------------------------------------------------
6
<PAGE>
EXHIBIT 11
UNITED HEALTHCARE CORPORATION
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
PRIMARY:
NET EARNINGS.............................................................................. $ 108,879 $ 118,946
LESS CONVERTIBLE PREFERRED STOCK DIVIDENDS................................................ 7,188 7,188
---------- ----------
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS............................................ $ 101,691 $ 111,758
---------- ----------
---------- ----------
Weighted-average number of common shares outstanding...................................... 184,862 175,540
Additional equivalent shares issuable from assumed exercise of common stock options and
warrants................................................................................ 4,468 4,930
---------- ----------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING...................................... 189,330 180,470
---------- ----------
---------- ----------
NET EARNINGS PER COMMON SHARE............................................................. $ 0.54 $ 0.62
---------- ----------
---------- ----------
FULLY DILUTED(1):
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS............................................ $ 108,879 $ 118,946
---------- ----------
---------- ----------
Weighted-average number of common shares outstanding...................................... 184,862 175,540
Additional equivalent shares issuable from assumed exercise of common stock options and
warrants................................................................................ 4,476 4,930
Assumed conversion of convertible preferred stock......................................... 10,106 10,106
---------- ----------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING...................................... 199,444 190,576
---------- ----------
---------- ----------
NET EARNINGS PER COMMON SHARE............................................................. $ 0.55 $ 0.62
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(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) As discussed more fully in Footnote 4 to the condensed consolidated
financial statements, the Company is required to implement a new methodology
for determining earnings per share in the fourth quarter of 1997. The impact
of this new methodology is not expected to be material.
<PAGE>
EXHIBIT 15
LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
May 7, 1997
To United HealthCare Corporation:
We are aware that United HealthCare Corporation and Subsidiaries has
incorporated by reference in its Registration Statements No. 33-3558, 2-95342,
33-22310, 33-27208, 33-36579, 33-50282, 33-67918, 33-68300, 33-75846, 33-79632,
33-79634, 33-79636, 33-59083, 33-59623, 33-63885, 333-05717, 333-02525,
333-04875, 333-04401, 333-06533, 333-01517, 333-01915, 333-25923 and 333-05291
its Form 10-Q for the quarter ended March 31, 1997, which includes our report
dated May 7, 1997, covering the unaudited interim condensed consolidated
financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, that report is not considered a part of the registration
statement prepared or certified by our firm or a report prepared or certified by
our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNITED
HEALTHCARE CORPORATION FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 903,965
<SECURITIES> 2,527,765
<RECEIVABLES> 730,241
<ALLOWANCES> 48,696
<INVENTORY> 0
<CURRENT-ASSETS> 2,529,481
<PP&E> 599,553
<DEPRECIATION> 277,424
<TOTAL-ASSETS> 7,062,608
<CURRENT-LIABILITIES> 2,599,742
<BONDS> 0
500,000
0
<COMMON> 1,858
<OTHER-SE> 3,932,183
<TOTAL-LIABILITY-AND-EQUITY> 7,062,608
<SALES> 2,800,313
<TOTAL-REVENUES> 2,851,111
<CGS> 2,639,094
<TOTAL-COSTS> 2,672,701
<OTHER-EXPENSES> 33,607
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123
<INCOME-PRETAX> 178,287
<INCOME-TAX> 69,532
<INCOME-CONTINUING> 108,879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,879
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
</TABLE>
<PAGE>
EXHIBIT 99
CAUTIONARY STATEMENTS
The statements contained in this Form 10-Q include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "PSLRA"). When used in this Form 10-Q and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases, presentations to securities analysts or investors, and in oral
statements made by or with the approval of an authorized executive officer of
the Company, the words or phrases "believes," "anticipates," "intends," "will
likely result," "estimates," "projects" or similar expressions are intended to
identify such forward-looking statements. Any of these forward-looking
statements involve risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in the forward-looking
statements.
The following discussion contains certain cautionary statements regarding
United's business that investors and others should consider. This discussion is
intended to take advantage of the "safe harbor" provisions of the PSLRA. In
making these cautionary statements, the Company is not undertaking to address or
update each factor in future filings or communications regarding the Company's
business or results, and is not undertaking to address how any of these factors
may have caused results to differ from discussions or information contained in
previous filings or communications. In addition, any of the matters discussed
below may have affected United's past, as well as current, foward-looking
statements about future results, so that the Company's actual results in the
future may differ materially from those expressed in prior communications.
HEALTH CARE COSTS. A large portion of the revenue received by United is
used 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 incurrence of the related costs, usually on a prospective annual basis.
While United attempts to base the premiums it charges at least in part on its
estimate of future health care costs over the fixed premium period, competition,
regulations and other circumstances may limit 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, the introduction of new or costly
treatments, general inflation, new mandated benefits or other regulatory
changes, and insured population characteristics. In addition, the Company's
earnings reported for any particular quarter include estimates of covered
services incurred by the Company's enrollees during that period but for which a
claim has not been received or processed. These are estimates and therefore the
Company's earnings may be subject to later adjustment based on the actual costs.
INDUSTRY FACTORS. The managed care industry has recently received
significant amounts of negative publicity. This publicity, in turn, has
contributed to increased legislative activity, regulation and review of industry
practices. These factors may adversely affect the Company's ability to market
its products or services, could necessitate changes in the Company's products
and services, and may increase regulatory burdens under which the Company
operates, further increasing the costs of doing business and adversely affecting
profitability.
COMPETITION. In many of its geographic or product markets, the Company
competes with a number of other entities, some of which may have certain
characteristics or capabilities that give them an advantage in competing with
the Company. The Company believes the barriers to entry in these markets are not
substantial, so that the addition of new competitors can occur relatively
easily. Certain of the Company's customers may decide to perform for themselves
functions or services formerly provided by the Company, which would result in a
decrease in the Company's revenues. Certain of the Company's
1
<PAGE>
providers may decide to market products and services to Company customers in
competition with the Company. In addition, significant merger and acquisition
activity has occurred in the industry in which the Company operates as well as
in industries that act as suppliers to the Company, such as the hospital,
physician, pharmaceutical and medical device industries. This activity may
create stronger competitors or result in higher health care costs. To the extent
that there is strong competition or that competition intensifies in any market,
the Company's ability to retain or increase customers or providers, its revenue
growth, its pricing flexibility, its control over medical cost trends and its
marketing expenses may all be adversely affected.
AARP CONTRACT. In early 1997, the Company finalized its contract
arrangements with the American Association of Retired Persons ("AARP") under
which the Company will provide Medicare supplement health insurance products to
AARP members, effective January 1, 1998. As a result of this agreement, the
Company will significantly expand the number of members served, the products
offered and the services it must provide. The success of the AARP arrangement
will depend, in part, on the Company's ability to service these new members,
develop additional products and services, and price the products and services
competitively.
GOVERNMENT PROGRAMS AND REGULATION. The Company's business is heavily
regulated on a federal, state and local level. The laws and rules governing the
Company's business and interpretations of those laws and rules are subject to
frequent change and broad latitude is given to the agencies administering those
regulations. Existing or future laws and rules could force United to change how
it does business, may restrict United's revenue and/or enrollment growth,
increase its health care and administrative costs, and/ or increase the
Company's liability for medical malpractice or other actions. 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 programs, are generally subject to frequent change including changes
that 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.
The National Association of Insurance Commissioners (the "NAIC") has an
effort underway that would require new minimum capitalization limits for health
care coverages provided by insurance companies, HMOs and other risk bearing
health care entities. The requirements would take the form of risk-based capital
rules similar to those which currently apply only to insurance companies.
Depending on the nature and extent of the new minimum capitalization
requirements ultimately adopted, there could be an increase in the capital
required for certain of United's subsidiaries and there may be some potential
for disparate treatment relative to competing products. Failure of the NAIC to
act may result in some form of federal solvency regulation of companies
providing Medicare-related benefit programs.
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
2
<PAGE>
United, demand higher payments or take other actions that could result in higher
health care costs, less desirable products for customers and members, or
difficulty meeting regulatory or accreditation requirements.
In some markets, certain providers, particularly hospitals,
physician/hospital organizations or multi-specialty physician groups, may have
significant market positions or near monopolies. In addition, physician or
practice management companies, which aggregate physician practices for purposes
of administrative efficiency and marketing leverage, continue to expand. These
providers may compete directly with the Company. If such providers refuse to
contract with United, use 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.
LITIGATION AND INSURANCE. United may be a party to a variety of legal
actions to which any corporation may be subject, including employment and
employment discrimination-related suits, employee benefit claims, breach of
contract actions, tort claims, shareholder suits, including for securities
fraud, and intellectual property related litigation. In addition, because of the
nature of its business, United is subject to a variety of legal actions relating
to its business operations, such as claims relating to the denial of health care
benefits, medical malpractice actions, provider disputes including disputes over
withheld compensation and termination of provider contracts, disputes related to
self-funded business including actions alleging claim administration errors and
the failure to disclose network rate discounts and other fee and rebate
arrangements, disputes over copayment calculations, and claims relating to
customer audits and contract performance. Recent court decisions and legislative
activity may have the effect of increasing the Company's exposure for any of
these types of claims. In some cases, substantial non-economic or punitive
damages may be sought. While 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.
INFORMATION SYSTEMS. United's business is significantly dependent on
effective information systems. United has many different information systems for
its various businesses. The Company's information systems require an ongoing
commitment of resources to maintain and enhance existing systems and develop new
systems. As a result of United's acquisition activities, 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 effective and
efficient information systems could result in loss of existing customers,
difficulty in attracting new customers, customer and provider disputes,
regulatory problems, increases in administrative expenses or other adverse
consequences. In addition, the Company may, from time-to-time, obtain
significant portions of its systems-related or other services or facilities from
independent third parties, which may make the Company's operations vulnerable to
such third parties' failure to perform adequately.
THE YEAR 2000. The Company is in the process of modifying its computer
systems to accommodate the year 2000 and currently expects to complete this
modification sufficiently in advance of the year 2000 so as not adversely to
affect its operations. The Company is expensing the costs incurred to make these
modifications. The inability of the Company to complete timely its year 2000
modifications or the inability of other companies with which United does
business to complete timely their year 2000 modifications could adversely affect
the Company's operations.
ADMINISTRATION AND MANAGEMENT. Efficient and cost-effective administration
of the Company's operations is integral to United's profitability and
competitive positioning. 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.
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United believes it currently 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.
MARKETING. The Company markets its products and services through both
employed sales people and independent sales agents. Although the Company has a
number of such sales employees and agents, if certain key sales employees or
agents or a large subset of such individuals were to leave the Company, its
ability to retain existing customers and members could be impaired. In addition,
certain of the Company's customers or potential customers consider rating,
accreditation or certification of the Company by various private or governmental
bodies or rating agencies necessary or important. Certain of the Company's
health plans or other business units may not have obtained or may not desire or
be able to obtain or maintain such accreditation or certification, which could
adversely affect the Company's ability to obtain or retain business with such
customers.
ACQUISITIONS. The Company has made several large acquisitions in recent
years and has an active ongoing acquisition program. These acquisitions may
entail certain risks and uncertainties in addition to those present in its
ongoing business operations, unknown liabilities, unforeseen administrative
needs or increased efforts to integrate the acquired operations. Failure to
identify liabilities, anticipate additional administrative needs or effectively
integrate acquired operations could result in reduced revenues, increased
administrative and other costs, or customer confusion or dissatisfaction.
STOCK MARKET. The market prices of the securities of certain of the
publicly-held companies in the industry in which United operates have shown
volatility and sensitivity in response to many factors, including general market
trends, public communications regarding managed care, legislative or regulatory
actions, health care cost trends, pricing trends, competition, earnings or
membership reports of particular industry participants, and acquisition
activity. During 1996, the market price for United's securities experienced
similar volatility. There can be no assurance 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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