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