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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
Commission file number: 1-10864
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UNITED HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1321939
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
300 OPUS CENTER 55343
9900 BREN ROAD EAST (Zip Code)
MINNETONKA, MINNESOTA
(Address of principal executive offices)
Registrant's telephone number, including area code: (612)936-1300
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Securities registered pursuant to Section 12(b) of the Act:
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<S> <C>
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
(Title of each class) (Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark 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 / /
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 8, 1999, was approximately $8,512,536,866 (based on the
last reported sale price of $51.75 per share on March 8, 1999, on the New York
Stock Exchange).
As of March 8, 1999, 180,782,384 shares of the registrant's Common Stock,
$.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Shareholders of Registrant to be
held on May 12, 1999. Certain information therein is incorporated by reference
into Part III hereof.
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*Only shares of common stock held beneficially by directors and executive
officers of the Company and persons or entities holding more than 10% of the
common stock filing Schedules 13G received by the Company have been excluded in
determining this number.
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PART I
ITEM 1. BUSINESS
UnitedHealth Group is a national leader offering health care coverage and
related services to help people achieve improved health and well-being through
all stages of life. The Company operates in all 50 states, the District of
Columbia, Puerto Rico and internationally. UnitedHealth Group's products and
services reflect a number of core capabilities, including medical information
management, health benefit administration, care coordination, risk assessment
and pricing, health benefit design and provider contracting. With these
capabilities, United is able to provide comprehensive health care management
services through organized health systems and insurance products, including
health maintenance organizations ("HMOs"), point-of-service plans ("POS"),
preferred provider organizations ("PPO") and managed indemnity programs. The
Company also offers specialized health care management services and products
such as behavioral health services, workers compensation and disability
services, utilization review services, specialized provider networks, employee
assistance programs, and knowledge and information services.
UnitedHealth Group is a Minnesota corporation, incorporated in January 1977.
Unless the context otherwise requires, the terms "United," "UnitedHealth Group"
or the "Company" refer to United HealthCare Corporation and its subsidiaries,
which operate under the name of, and is sometimes referred to in this Form 10-K
as, UnitedHealth Group. United's executive offices are located at 300 Opus
Center, 9900 Bren Road East, Minnetonka, Minnesota 55343; telephone (612)
936-1300.
BUSINESS OPERATIONS
The Company operates in the health and well-being marketplace. In late 1997,
the Company announced an internal realignment that established strategic
business units for each of the Company's six key business lines. These
businesses include UnitedHealthcare, Unimerica, Uniprise, Ovations, Specialized
Care Services and Ingenix. While the Company's general management and various
operational aspects, including information systems and certain administrative
functions, remain interrelated, the realignment allows each business to focus
fully on its specific set of customers and markets. The Unimerica business line
provides insurance services to the other businesses of UnitedHealth Group, and
its results are reported in the segment that originates the business. The
results of UnitedHealthcare and Ovations are combined in one segment.
UNITEDHEALTHCARE
UnitedHealthcare operates organized health systems. As of December 31, 1998,
UnitedHealthcare held a majority ownership interest in health plans operating in
approximately 40 markets nationwide and in Puerto Rico. UnitedHealthcare also is
engaged in a joint venture that operates a health plan in the Republic of South
Africa and provides consulting services in Germany, Hong Kong and the
Philippines through this business unit.
For organized health systems it owns, UnitedHealthcare assumes the risk for
health care and administrative costs in return for premium revenue.
UnitedHealthcare's owned health systems usually are licensed as health
maintenance organizations ("HMOs") or insurers. These plans provide
comprehensive health care coverage for a fixed fee or premium that usually does
not vary with the extent of medical services received by the member. Most of
UnitedHealthcare's owned health plans contract with independent providers of
health care services for medical and hospital services. UnitedHealthcare's
health plans that employ health care providers strive for cost-effective
delivery of health care services by emphasizing appropriate use of these
services, promoting preventive health services, and encouraging the use of
clinically proven treatments and best medical practices. UnitedHealthcare also
provides administrative and other management services to a limited number of
health plans in which UnitedHealthcare has no ownership interest.
UnitedHealthcare receives an administrative fee for providing its services to
these plans and generally assumes no responsibility for health care costs.
POINT-OF-SERVICE PRODUCTS. UnitedHealthcare's point-of-service products are
one of its most popular coverage options. Unlike some traditional HMO products,
which only cover non-emergency services
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received from contracted providers, point-of-service products also provide
coverage, usually at a lower level, for services received from non-contracted
providers. Sometimes, this out-of-network coverage is offered directly by the
health plan, but more often it is provided by an insurance policy "wrapped
around" the health plan benefit contract. The insurance policy usually is
provided through one of Unimerica's insurance subsidiaries.
SELF-FUNDED PRODUCTS. UnitedHealthcare has developed self-funded products
for employers who want the cost containment aspects of an organized health
system while self-insuring the health care cost risk. UnitedHealthcare uses the
provider networks it has developed for its health plan or insurance products for
its self-funded products, many of which include a point-of-service feature. The
provider contracts for these products are with individual physicians, groups of
physicians and health care facilities and are generally on a standard
fee-for-service basis. With self-funded products, employers and other sponsoring
groups have access to a provider network and the administrative and care
coordination services associated with an organized health system product, but
the sponsoring company or group generally bears the financial costs associated
with the health care.
MEDICARE+CHOICE PLANS. Several of UnitedHealthcare's owned health plans
contract with the federal Health Care Financing Administration ("HCFA") to
provide coverage for Medicare-eligible individuals. Under these contracts, plans
receive a fixed monthly payment from HCFA for each enrolled individual and must
provide at least the benefits that would be covered under traditional Medicare.
The plans provide a significantly higher level of coverage and may, but often do
not, charge an additional monthly premium to the members for the greater
benefits. The health plans generally use a subset of their commercial product
provider network as the provider network for the Medicare products. Any
Medicare-eligible person in a plan's service area may enroll in the Medicare
product without underwriting or health screening. Features such as United Health
Passport allow members to travel to other UnitedHealthcare Medicare sites and
receive their same benefits.
Some of UnitedHealthcare's health plans also offer these Medicare products
to or through employer groups as a way of providing retiree health care
coverage.
MEDICAID PRODUCTS. Several of UnitedHealthcare's health plans offer
coverage to Medicaid-eligible individuals. These plans typically contract with a
state agency to provide such coverage and receive a fixed monthly payment for
each enrolled individual. The level of benefits generally is set by contract,
and few additional benefits are offered. Enrollment usually must be offered to
all eligible individuals without underwriting or health screening. Generally,
the provider network for commercial products is used, but some providers may
refuse to participate in the Medicaid product and the network may have a
different number or set of providers for other reasons.
OVATIONS
Ovations includes the Company's operations that target the market segment
comprised of people age 50 and older. These operations include Medigap and
Medicare supplement products, the EverCare-Registered Trademark- program and the
Company's relationship with AARP.
AARP. In early 1997, the Company finalized a 10-year agreement with the
American Association of Retired Persons ("AARP") to underwrite Medicare and
hospital supplement insurance products effective January 1, 1998. During 1997,
the Company coordinated the transfer of the operations from AARP's existing
vendor and prepared to implement this contract. As of January 1, 1998, the
Company's insurance subsidiaries assumed the underwriting risk, and Ovations
assumed the claim administration associated with the business.
EVERCARE-REGISTERED TRADEMARK-. The EverCare-Registered Trademark- program
coordinates the provision of a broad spectrum of health care services primarily
to permanent nursing home residents through employed and contracted physicians
and nurse practitioners. EverCare is participating in a demonstration project
with HCFA to offer health care services to the elderly nursing home residents in
several separate locations throughout the country.
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UNIMERICA
Unimerica is UnitedHealth Group's insurance arm, which serves as the legal
insurer for insurance products offered through UnitedHealth Group businesses.
Unimerica's insurance subsidiaries are licensed in all 50 states, the District
of Columbia, Puerto Rico, Guam and the Virgin Islands.
UnitedHealth Group reports the revenues from insurance products in the
segments that originate the business, not in Unimerica. Through these insurance
subsidiaries, Unimerica offers Options PPO, a national preferred provider
organization product. Options PPO combines access to UnitedHealthcare's
commercial health plan networks and certain specialty services with managed
indemnity coverage. Individuals covered under the Options PPO product have lower
out-of-pocket costs when they obtain covered services from contracted providers,
but also have the option to go outside of the network for covered services.
For customers with less than 50 employees, Unimerica typically sells its
products on an insured basis for a fixed premium, with no experience adjustments
made to the premium. This type of business often has been subject to sudden and
unpredictable changes in health care costs and generally has high administrative
and marketing expenses. In addition, these products are subject to extensive
state regulations. For larger customers, Unimerica sells these products on both
an insured and self-funded basis. The insured products often are sold on an
experience-rated basis, and the self-funded products usually are sold on an
administrative fee basis. In some cases, the agreement with the customer
includes penalties or rewards related to administrative service standards and/or
health care costs.
Unimerica's insurance subsidiaries also offer several health insurance
products in conjunction with health plan products. These products help employers
replace multiple health care policies and vendors with a single health care
plan. These subsidiaries also offer reinsurance and other insured products on a
selective basis to most of UnitedHealthcare's health plans and to employers and
other sponsoring groups offering self-funded health care benefit plans. Under an
agreement with Metropolitan Life Insurance Company ("MetLife"), UnitedHealth
Group businesses offers MetLife's life, dental, accidental death and
dismemberment and short-term disability products to customers, and MetLife
offers UnitedHealth Group's health care coverage products to MetLife customers.
This agreement with MetLife also contains certain exclusivity and
non-competition provisions.
UNIPRISE
Uniprise focuses on UnitedHealth Group's business with large employers. Its
core competencies include sales and account management, benefits administration
and customer services, including government-related operations, and care
management.
Uniprise provides sales and account management services to more than 200
customers, approximately 50 percent of which are Fortune 500 companies.
UnitedHealth Group's network-based medical and insurance products and
specialized care services are available to these customers, with various types
of funding arrangements. Uniprise specializes in serving the needs of large
multi-site employers, and offers long-term strategic health care coverage
planning to its customers.
The operations unit of Uniprise provides benefits administration services
and customer services to UnitedHealth Group customers in its other business
lines. Benefits administration services include enrollment, eligibility, claims
processing, and billing. Customer services include telephonic information,
provider directories and identification card production, and oversight of the
government operations and care management centers divisions.
The government operations division provides Medicare Part A services for
hospitals and nursing homes in Connecticut, New York and Michigan and Medicare
Part B services for beneficiaries and providers in Connecticut, Minnesota,
Mississippi and Virginia. This division also provides specialized claims
processing services for durable medical equipment in 10 northeastern states.
This unit serves as the national Medicare Part B carrier for the Railroad
Retirement Board. In addition, at the request of the Office of Personnel
Management and HCFA, the government operations division contracts with all
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insurance carriers involved in the administration of the Federal Employee Health
Benefit Plan ("FEHBP").
The care management centers division offers customers medical management
programs designed to improve patients' clinical outcomes, reduce medical
expenses, and increase consumer satisfaction. These services include utilization
review, review of hospital-based services, and the administration of high-impact
medical programs based upon customer-specific demographic and claims data.
SPECIALIZED CARE SERVICES
Specialized Care Services is a portfolio of businesses that focus on
specific aspects of health and well-being. These businesses sell its products
and services to and through other UnitedHealth Group businesses as well as to
independent entities such as HMOs, PPOs, insurers, Blue Cross/Blue Shield plans,
third-party administrators, employers, labor unions and/or government agencies.
These businesses generally receive fees for the services they provide, which are
primarily administrative in nature. Specialized Care Services assumes no
responsibility for health care costs except for certain behavioral health
products. These businesses assume some responsibility for health care costs
related to providing mental health/substance abuse services.
BEHAVIORAL HEALTH SERVICES. Specialized Care Services provides behavioral
health services through United Behavioral Health ("UBH"), which offers
behavioral health care management services, employer assistance programs, and
psychiatric disability management services through specialized provider networks
and behavioral health care managers. UBH customers include most of
UnitedHealthcare's health plans, private and public sector employers and
government agencies. These services are provided by a national network of
contracted providers. United assumes the responsibility for health care costs
related to some of these services. UBH serves approximately 14 million
individuals.
HEALTH INFORMATION, EDUCATION AND SUPPORT SERVICES. Specialized Care
Services provides health information, education and related services through
Optum-Registered Trademark-. Optum offers a full spectrum of counseling, access
and consumer information services for helping individuals manage their health
and well-being. Its services are available via 24-hour telephone information
lines, publications, audiotapes, face-to-face meetings and the Internet. Optum
services are available to approximately 15 million individuals.
TRANSPLANT SERVICES. Specialized Care Services offers transplant services
through United Resource Networks. United Resource Networks offers clients access
to a network of health care facilities for transplant-related services and
transplant care management services. United Resource Networks negotiates fixed,
competitive rates for high-cost, low-frequency health care services such as
organ and tissue transplants. United Resource Networks serves 450 clients,
representing approximately 37 million individuals.
INGENIX
Ingenix builds upon UnitedHealth Group's heritage of using its large
database and expertise to provide knowledge and information services to
providers, drug and device manufacturers, the government, payers, employers and
other interested organizations. It was formed by combining UnitedHealth Group's
information-related businesses and capabilities and expanded through several
acquisitions, as well as internal growth.
Ingenix provides four broad types of products and services:
CONSULTING. Ingenix provides consulting services to providers, payers,
employers and other health system participants focusing on actuarial and
financial matters, product development, provider contracting, and medical policy
and management.
PHARMACEUTICAL SERVICES. Ingenix performs clinical trials services and
outcomes and pharmacoeconomic research for pharmaceutical and medical device
manufacturers globally. Services
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include helping find and train investigators and recruit patients, developing
research protocols, providing regulatory assistance, data collection and
management, biostatistics, and general project management.
PUBLISHING. Ingenix's publications unit sells print and electronic media
products that provide information regarding coding, reimbursement, billing,
compliance and other general health care issues.
SOFTWARE, DATA AND SERVICES. Ingenix's software, data and services include
databases for benchmarking, software to analyze and report cost and utilization
of services, data management services, HEDIS reporting, fraud and abuse
services, claims editing software, and reimbursement systems audits.
EXPANSION AND DIVESTITURE OF OPERATIONS
United continually evaluates expansion opportunities and often considers
whether to divest or stop offering certain of its businesses or products.
Expansion opportunities may include acquiring specialized care services programs
or insurance and health plan operations. United also devotes significant
attention to developing new products and techniques for managing health care
costs, measuring the outcomes and efficiency of health care delivered, and
coordinating and managing health care delivery systems. As part of its expansion
efforts, in 1998 the Company earmarked $35 million from the Company's corporate
usable cash reserves to invest in and help develop small but promising ventures.
During 1998, the Company completed several acquisitions and also sold or
terminated certain lines of business and ceased offering some products, all as
part of its ongoing emphasis on its strategic focus. If the Company were to make
numerous acquisitions, it may affect its ability to integrate and manage its
overall business effectively. Integration activities relating to acquisitions
may increase costs, affect membership, affect revenue and earnings growth and
adversely affect United's financial results.
GOVERNMENT REGULATION
United's primary business, offering health care coverage and health care
management services, is heavily regulated at both the federal and state level.
United believes it complies in all material respects with the various federal
and state regulations that apply to its current operations. To maintain
compliance, United or a subsidiary may make occasional changes in its services,
products, organizational or capital structure, or marketing methods.
Government regulation of health care coverage products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Regulatory
agencies generally have broad discretion to issue regulations and interpret and
enforce laws and rules. Changes in applicable laws and regulations are
continually being considered, and the interpretation of existing laws and rules
also may change periodically. These regulatory revisions could affect United's
operations and financial results. Certain proposed changes in Medicare and
Medicaid programs may improve opportunities to enroll people under products
developed for the senior populations. Other proposed changes may limit available
reimbursement and increase competition in those programs, with adverse effects
on United's financial results. Also, it may be more difficult for United to
control medical costs if federal and state bodies continue to consider and enact
significant and sometimes onerous managed care laws and regulations. Examples of
such laws are medical malpractice liability laws for health plans; mandates
requiring health plans to offer point-of-service plans and other benefits such
as direct access and formulary restrictions; limits on contractual terms with
providers, including termination provisions; implementation of a mandatory third
party review process for certain coverage denials and other laws and limits on
utilization management.
HIPPAA. The Health Insurance Portability and Accountability Act of 1996
("HIPAA") may represent the most significant federal reform of employee benefits
law since the enactment of the Employee Retirement Income Security Act ("ERISA")
in 1974. HIPAA's federal standards apply to both the group and individual health
insurance markets, including self-insured employee benefit plans. Some of
HIPAA's significant provisions include guarantees of the availability of health
insurance for certain employees and individuals; limits on the use of
preexisting condition exclusions; prohibitions against discriminating on the
basis of health status; and requirements which make it easier to continue
coverage in cases where an
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employee is terminated or changes employers. While United currently believes
that it is in material compliance with the requirements of HIPAA, the law is far
reaching and complex, and the federal agencies involved in the enforcement of
HIPAA's provisions have been slow to provide guidance regarding HIPAA's
requirements in the form of final rules and regulations. Consequently, United's
efforts to measure, monitor, and adjust its business practices to comply with
HIPAA are ongoing. Further, significant enforcement responsibilities for HIPAA's
provisions have been given to the states. It is likely that United will
encounter different interpretations of HIPAA's provisions in the different
states as well as varying enforcement philosophies which may inhibit United's
ability to standardize its products and services across state lines. Ultimately,
under HIPAA and other state laws, cost control through provider contracting and
coordinating care may become more important, and United believes its experience
in these areas will allow it to compete effectively.
FRAUD AND ABUSE. Health care fraud and abuse have become a top priority for
the nation's law enforcement entities. The funding of such law enforcement
efforts has increased dramatically in the past few years and is expected to
continue. The focus of these efforts has been directed at participants in
federal government health care programs such as Medicare, Medicaid and FEHBP.
United participates extensively in these programs. The regulations and
contractual requirements applicable to participants in these programs are
extremely complex and ever changing. In light of this environment, United has
re-emphasized its regulatory compliance efforts for these programs; however, the
programs are subject to highly technical rules. When combined with law
enforcement intolerance for any level of noncompliance, these rules mean that
compliance efforts in this arena continue to be challenging.
AUDITS AND INVESTIGATIONS. United also is subject to governmental audits,
investigations and enforcement actions. These include possible government
actions relating to ERISA, which regulates insured and self-insured health
coverage plans offered by employers and United's services to such plans and
employers; FEHBP; federal and state fraud and abuse laws; state insurance or
licensing laws; laws relating to utilization management and the delivery of
health care; and laws relating to Medicare, including ACR development, special
payment status, payments for emergency room visits, and various other areas. Any
such government actions could result in assessment of damages, civil or criminal
fines or penalties, or other sanctions, including exclusion from participation
in government programs. United is currently involved in various government
investigations, audits and reviews, some of which are under FEHBP, ERISA, and
the authority of state departments of insurance. United does not believe the
results of current audits, individually or in the aggregate, will have a
material adverse effect on its financial position or results.
HMOS. All of the states in which United's health plans offer HMO products
regulate the activities of those health plans. Most states require periodic
financial reports from entities licensed to operate as HMOs in their states and
impose minimum capital or reserve requirements. Some of United's health plan and
insurance subsidiaries must maintain specified capital levels to support their
operations. In addition, state regulatory agencies require some United health
plans and insurance subsidiaries to maintain restricted cash reserves
represented by interest-bearing instruments, which are held by trustees or state
regulatory agencies to ensure that each subsidiary maintains adequate financial
reserves. Some state regulations allow agencies to review all contracts entered
into by HMOs, including management contracts and agreements between affiliates,
for reasonableness of fees charged and other provisions.
United's health plans that have Medicare risk contracts are regulated by
HCFA. HCFA has the right to audit health plans operating under Medicare risk
contracts to determine each health plan's compliance with HCFA's contracts and
regulations and the quality of care being given to the health plan's members. To
enter into Medicare risk contracts, a health plan must be either federally
qualified or considered a Competitive Medical Plan under HCFA's requirements.
Health plans that offer a Medicare risk product also must comply with
requirements established by peer review organizations ("PROs"), which are
organizations under contract with HCFA to monitor the quality of health care
Medicare beneficiaries receive. PRO requirements relate to quality assurance and
utilization review procedures. United's health plans that have Medicare cost
contracts are subject to similar regulatory requirements. In addition, these
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health plans must file certain cost reimbursement reports with HCFA, which are
subject to audit and revision.
United's health plans that have Medicaid contracts are subject to federal
and state regulation regarding services to be provided to Medicaid enrollees,
payment for those services, and other aspects of the Medicaid program. Both
Medicare and Medicaid have, or have proposed, regulations relating to fraud and
abuse, physician incentive plans, and provider referrals that could affect
United's operations.
Many of United's health plans have contracts with FEHBP. These contracts are
subject to extensive regulation, including complex rules regarding premiums
charged. FEHBP is authorized to audit the rates charged retroactively and seek
premium refunds or institute other sanctions against health plans that
participate in the program, depending on the outcome of such audits.
INSURANCE REGULATION. United's insurance subsidiaries and most of the
Company's health plans are regulated by the department of insurance or
equivalent agency in each state or other jurisdiction in which the entity is
licensed. Regulatory authorities have extensive supervisory power regarding:
licensing; the amount of reserves that must be maintained; the approval of
insurance policy forms; the nature of, and limits on, insurance company
investments; periodic examination of insurance company operations; the form and
content of annual statements and other required reports on the financial
condition of insurance companies; and the capital requirements for insurance
companies. United's insurance company subsidiaries must file periodic statutory
financial statements in each jurisdiction in which they are licensed.
Additionally, these companies are periodically examined by the insurance
departments or equivalent agencies of the jurisdictions in which they are
licensed to do business.
INSURANCE HOLDING COMPANY REGULATIONS. Many of United's health plans and
each of United's insurance subsidiaries are regulated under state insurance
holding company regulations. Insurance holding company laws and regulations
generally require registration with the state department of insurance and the
filing of certain reports that describe capital structure, ownership, financial
condition, certain intercompany transactions and general business operations.
Various notice, reporting and pre-approval requirements generally apply to
transactions between companies within an insurance holding company system,
depending on the size and nature of the transactions. Some state insurance
holding company laws and regulations require prior regulatory approval or, in
certain circumstances, prior notice of acquisitions, and certain material
intercompany transfers of assets, as well as certain transactions between the
regulated companies and their parent holding companies or affiliates.
TPAS. Certain subsidiaries of United also are licensed as third-party
administrators ("TPAs") where required. TPA regulations differ greatly from
state to state, but generally contain certain required administrative
procedures, periodic reporting obligations and minimum financial requirements.
PPOS. Some United subsidiaries or products may be subject to PPO regulation
in a particular state. PPO regulations generally contain network, contracting,
financial and reporting requirements, which vary from state to state.
UTILIZATION REVIEW REGULATIONS. Many states have enacted laws and/or
adopted regulations governing utilization review activities, and these laws may
apply to some United operations. Generally, these laws and regulations set
specific standards for delivery of services, confidentiality, staffing and
policies and procedures of private review entities, including the credentials
required of personnel.
MCOS. Many states have enacted laws that allow self-insured employers
and/or insurance carriers to use a state-certified managed care organization
("MCO") to apply medical management and other managed care techniques to the
medical benefit portion of workers' compensation. United's subsidiaries
generally have sought MCO certification in states where it is available and
where they market managed care workers compensation products. MCO laws differ
significantly from state to state, but generally address network and utilization
review activities.
ERISA. ERISA regulates how goods and services are provided to or through
certain types of employee health benefit plans. ERISA is a complex set of laws
and regulations that is subject to periodic
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interpretation by the United States Department of Labor. ERISA places controls
on how United's business units may do business with employers covered by ERISA,
particularly employers that maintain self-funded plans. The Department of Labor
has an ongoing ERISA enforcement program, which may result in additional
constraints on how ERISA-governed benefit plans conduct their activities. There
recently have been legislative attempts to limit ERISA's preemptive effect on
state laws. Such limitations could increase United's liability exposure under
state law-based suits relating to employee health benefits offered by United's
health plans and specialty businesses and permit greater state regulation of
other aspects of those businesses' operations.
YEAR 2000 ACTIVITIES
Our business depends significantly on effective information systems, and we
have many different information systems for our various businesses. Our
information systems require ongoing enhancements to keep pace with the
continuing changes in information technology, evolving industry standards, and
customer preferences. We have been modifying our computer systems to accommodate
the Year 2000. The Year 2000 problem exists throughout the global marketplace,
as many computer systems and applications were developed to recognize the year
as a two-digit number, with the digits "00" being recognized as the year 1900.
Starting in 1995, our formal Year 2000 Project Office began implementing a
remediation plan to ensure that critical information systems applications,
end-user developed application tools, and critical business interfaces remain
intact, and can function properly through the century change. We are on schedule
to complete, test, and certify our Year 2000 remediation efforts by September
30, 1999. A more detailed description and current status of our Year 2000
activities follows.
TECHNICAL INFRASTRUCTURE
MAINFRAME TECHNOLOGY. In conjunction with our two vendors that provide
support for our data center operations, we have completed, tested and certified
99% of our remediation efforts for the hardware, operating system and supporting
software remediation efforts on our two primary mainframe computer systems. In
addition, we are in the process of reviewing some of our smaller mainframe
systems and making modifications as necessary. We expect to be 100% complete
with all mainframe hardware and software technology Year 2000 modifications by
March 31, 1999. We also have installed separate test environments (both
mainframe and distributed) to test our business applications in a simulated Year
2000 environment.
DESKTOP HARDWARE & SOFTWARE. We have inventoried all of our desktop
hardware and software--over 40,000 computing devices of multiple makes and
models. All non-compliant desktop hardware and software have been identified and
are being modified or replaced with compliant systems by September 30, 1999.
TELECOMMUNICATIONS. We have inventoried all of our telecommunication
systems--more than 28,000 telecommunication devices, including traffic routers
and phone switches. We are using two outside vendors to assist us in modifying
or replacing non-compliant telecommunication systems. As of December 31, 1998,
we were approximately 75% Year 2000 compliant with our data and voice networks.
We expect all our telecommunication networks and devices will be Year 2000
compliant by September 30, 1999.
BUSINESS APPLICATIONS
SOFTWARE APPLICATIONS. We use 500 different software applications that
include over 80 million lines of computer code. We have surveyed our software
applications and have identified systems that will not be used after December
31, 1999, and systems that will be modified for Year 2000 compliance. We have
determined that 36% of our software applications will not be used after December
31, 1999 due to conversions, consolidations and software replacements. Of the
remaining applications, over 90% have been made Year 2000 compliant, tested and
certified or are scheduled to be certified for compliance. The
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balance of the applications are yet to be tested. We expect all critical Year
2000 software modifications to be completed by March 31, 1999, with further
testing and certification during the remainder of 1999.
END-USER DEVELOPED APPLICATIONS. End-user developed applications are
analysis tools that have been internally developed by individual employees or
operating segments primarily running on personal computers or client servers.
The Year 2000 Project Office has continuously communicated with all employees
explaining the risks of non-compliant applications and provided tools and
techniques to make them compliant. We have identified and are tracking and
assessing Year 2000 compliance issues with respect to all potentially critical
end-user applications.
OTHER YEAR 2000 MATTERS
NON-INFORMATION TECHNOLOGY SYSTEMS. We have approximately 300 owned or
leased facilities throughout the world. We have contacted all of our facility
managers regarding Year 2000 compliance issues. In addition, we have contracted
with a real estate management company to assist in our Year 2000 compliance
efforts. All facilities are scheduled to be Year 2000 compliant by September 1,
1999.
DEPENDENCE ON THIRD PARTIES. We have a contractual relationship with
approximately 300,000 different medical providers and more than 92,000 vendors.
Approximately 2,000 vendors have been identified as critical business partners
and suppliers. We are currently in communication with these critical business
partners to analyze their Year 2000 compliance efforts. We expect to complete
our analysis of critical vendor readiness and identify alternative vendors,
where necessary, by July 31, 1999. We will not be individually contacting all of
the 300,000 medical providers we conduct business with regarding Year 2000
compliance issues. However, we will be testing and verifying the electronic
collection of data with these providers through our EDI (electronic data
interface) clearinghouse vendors.
COSTS OF YEAR 2000 COMPLIANCE. The projected costs of our Year 2000
compliance efforts and the date on which we plan to complete the necessary Year
2000 remediation efforts are based on management's best estimates, which were
derived utilizing various assumptions of future events. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
significantly from our current plans. Specific factors that might cause
significant differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct the
relevant computer codes, and the ability of our significant vendors, providers,
customers and others with whom we conduct business to identify and resolve their
own Year 2000 issues.
Costs associated with modifying internal use software for Year 2000
compliance are charged to expense as incurred. Purchases of hardware or software
that replace existing hardware or software that is not Year 2000 compliant are
capitalized and amortized over their useful lives. As of December 31, 1998, our
historical and projected costs to complete our Year 2000 remediation plan are as
follows (in millions):
<TABLE>
<CAPTION>
COST INCURRED TO DATE PROJECTED COSTS
---------------------------- ----------------------------
YEAR RESOURCES AMORTIZATION RESOURCES AMORTIZATION TOTAL
- ---------------------------------- ----------- --------------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C>
1996.............................. $ 1 $ -- $ -- $ -- $ 1
1997.............................. 12 -- -- -- 12
1998.............................. 18 -- 18
1999.............................. -- -- 18 7 25
2000.............................. -- -- 3 9 12
2001.............................. -- -- -- 9 9
2002.............................. -- -- -- 2 2
----- ----- ----- ----- ---------
$ 31 $ -- $ 21 $ 27 $ 79
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
</TABLE>
BUSINESS RISKS OF NON-COMPLIANT SYSTEMS. Although we are committed to
completing and testing our remediation plan well in advance of the Year 2000,
there are risks if we do not meet our objectives by December 31, 1999.
Operationally, the most severe risk is business interruption. Specific examples
of
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situations that could cause business interruption include, but are not limited
to: 1) computer hardware or application software processing errors or failures,
2) facilities or infrastructure failures, or 3) critical outside providers,
suppliers, or customers who may not be Year 2000 compliant. Depending on the
extent and duration of business interruption resulting from non-compliant Year
2000 systems, such interruption may have a material adverse effect on our
results of operations, liquidity, and financial condition.
CONTINGENCY PLANS. Each area of our Year 2000 compliance effort is
currently developing contingency plans to mitigate the risk of failure, and to
provide for a speedy recovery from possible failures associated with the century
change. The contingency plans detail strategies to implement in 1999 to prepare
for the century rollover, and actions to execute if problems arise. The target
date for completion of the initial contingency plans is April 1, 1999.
Contingency plans will be final by July 31, 1999.
MARKETING
The Company's marketing strategy is defined and coordinated by each
functional business unit's dedicated marketing staff. Within these business
units, primary marketing responsibility generally resides with a marketing
director and a direct sales force. In addition, several of the business units
rely upon independent insurance agents and brokers to sell some of the Company's
health plan, insurance, self-funded and specialized care products. Marketing
efforts also include public relations efforts and advertising programs that may
use television, radio, newspapers, magazines, billboards, direct mail and
telemarketing.
COMPETITION
The managed health care industry evolved primarily because of health care
buyers' concerns about rising health care costs. The industry has brought
greater cost effectiveness and accountability into the health care system
through managed care products, including health plans, PPOs, and specialized
services such as mental health or pharmacy benefit programs. The industry also
has helped increase the accessibility and quality of health care services.
United operates in a highly competitive environment. Significant
consolidation has occurred within the managed care industry, creating stronger
and more diverse competitors. At the same time, new competitors have entered the
marketplace, which also may increase competitive pressures. In certain areas,
current competition may limit United's ability to price its products at levels
United believes appropriate. These competitive factors could adversely affect
United's financial results.
As managed health care penetration of the health care market and the effects
of health care reforms continue to increase nationwide, the Company expects it
may become increasingly difficult to obtain new contracts for its health plans
with large employer and government groups. The Company also expects competition
for smaller employer groups to intensify. In addition, employers increasingly
may choose to self-insure the health care risk, while seeking benefit
administration and utilization review services from third parties to help them
control and report health care costs.
The Company's business lines compete for group and individual membership
with other health insurance plans, Blue Cross/Blue Shield plans, health plans,
HMOs, PPOs, third party administrators, health care management companies, and
employers or groups that elect to self-insure. The Company also faces
competition from hospitals, health care facilities, and other health care
providers who have formed their own networks to contract directly with employer
groups and other prospective customers for the delivery of health care services.
The number and strength of the Company's competitors varies for each particular
business unit and geographic area. The Company believes that the principal
competitive factors affecting the Company and its products include price, the
level and quality of products and service, provider network capabilities, market
share, the offering of innovative products, product distribution systems,
efficient administration operations, financial strength and marketplace
reputation.
The Company currently believes that its competitive strengths include the
breadth of its product line, its geographic scope and diversity, the strength of
its underwriting and pricing practices and staff, its significant market
position in certain geographic areas, the strength of its distribution network,
its financial
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<PAGE>
strength, its generally large provider networks that provide more member choice,
its point-of-service products and experience, and its generally favorable
marketplace reputation. In some markets, however, the Company may be at a
disadvantage because of competitors with larger market shares, broader networks,
narrower networks (which may allow greater cost control and lower prices) or a
more-established marketplace name and reputation. The Company believes its
recent operational realignment will allow the individual business units to more
effectively compete in their respective markets.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 29,226
individuals. As of December 31, 1998, approximately 239 of the Company's
employees were represented by a union. The Company believes its employee
relations are good.
CAUTIONARY STATEMENTS
The statements contained in this Form 10-K, and the Management's Discussion
and Analysis of Financial Condition and Results of Operation and other sections
of the Company's annual report to shareholders incorporated by reference in this
document, include forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "PSLRA"). When used in this Form
10-K 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
our 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, we are not undertaking to address or update
each factor in future filings or communications regarding our business or
results, and are 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. The Company's actual results in the future may differ
materially from those expressed in prior communications.
HEALTH CARE COSTS. We use a large portion of our revenue to pay the costs
of health care services or supplies delivered to our members. Total health care
costs we incur are affected by the number of individual services rendered and
the cost of each service. Much of our premium revenue is priced before services
are delivered and the related costs are incurred, usually on a prospective
annual basis. Although we try to base the premiums we charge in part on our
estimate of future health care costs over the fixed premium period, competition,
and regulations and other circumstances may limit our ability to fully base
premiums on estimated costs. In addition, many factors may and often do cause
actual health care costs to exceed what was estimated and reflected in premiums.
These factors may include increased use 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 earnings we
report for any particular quarter include estimates of covered services incurred
by our enrollees during that period for claims that have not been received or
processed. Because these are estimates, our earnings may be adjusted later to
reflect the actual costs. Relatively insignificant changes in the medical care
ratio, because of the narrow margins of our health plan business, can create
significant changes in our earnings.
Our medical care ratio has generally increased over the past several fiscal
periods. We are addressing the medical care ratio by altering benefit designs,
recontracting with providers, and aggressively increasing
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both our contemporaneous and retrospective claim management activities. Our
inability to implement these changes successfully could lead to further
increases in our medical care ratio.
In addition, our operating results may be affected by the seasonal changes
in the level of health care use during the calendar year. Although there are no
assurances, per member medical costs generally have been higher in the first
half than in the second half of each year.
INDUSTRY FACTORS. The managed care industry receives significant negative
publicity. This publicity has been accompanied by increased legislative
activity, regulation and review of industry practices. These factors may
adversely affect our ability to market our products or services, may require us
to change our products and services, and may increase the regulatory burdens
under which we operate, further increasing the costs of doing business and
adversely affecting profitability.
COMPETITION. In many of our geographic or product markets, we compete with
a number of other entities, some of which may have certain characteristics or
capabilities that give them a competitive advantage. We believe the barriers to
entry in these markets are not substantial, so the addition of new competitors
can occur relatively easily, and consumers enjoy significant flexibility in
moving to new managed care providers. Certain Company customers may decide to
perform functions or services we provide for themselves, which would decrease
our revenues. Certain Company providers may decide to market products and
services to our customers in competition with us. In addition, significant
merger and acquisition activity has occurred in the industry in which we operate
as well as in industries that act as suppliers to us, such as the hospital,
physician, pharmaceutical and medical device industries. To the extent that
there is strong competition or that competition intensifies in any market, our
ability to retain or increase customers or providers, or maintain or increase
our revenue growth, pricing flexibility, control over medical cost trends and
our marketing expenses may be adversely affected.
AARP CONTRACT. Under our long-term contract with the American Association
of Retired Persons ("AARP"), we provide Medicare supplemental, hospital
indemnity health insurance and other products to AARP members. As a result of
the agreement, the number of members we serve, products we offer, and services
we provide has grown significantly. Our portion of the AARP's insurance program
represents approximately $3.5 billion in annual net premium revenue from
approximately 4 million AARP members. The success of the AARP arrangement will
depend, in part, on our ability to service these new members, develop additional
products and services, price the products and services competitively, and
respond effectively to federal and state regulatory changes. Additionally,
events that adversely affect the AARP could have an adverse effect on the
success of our arrangement with the AARP.
MEDICARE OPERATIONS. In the second quarter of 1998, we experienced a
significant rise in the medical care ratio for our Medicare operations. The
increase in medical costs was primarily due to the business growth in new
markets with higher and more volatile medical cost trends, coupled with lower
reimbursement rates. In response, we announced in October 1998 our decision to
withdraw Medicare product offerings from 86 of the 206 counties we currently
serve. The decision, effective January 1, 1999, will affect approximately
60,000, or 13%, of current Medicare members. As a consequence of this
withdrawal, we are precluded from re-entering these counties with Medicare
product offerings until 5 years after the effective date.
We will continue to offer Medicare products in strong and economically
viable markets. However, our ability to improve the financial results of all of
our Medicare operations will depend on a number of factors, including future
premium increases, growth in markets where we have achieved sufficient size to
operate efficiently, benefit design, provider contracting, and other factors.
There can be no assurance that we will be able to successfully prevent future
losses on our Medicare operations.
REALIGNMENT OF OPERATIONS. We recognized a charge to earnings in the second
quarter of 1998 for our realignment. In January 1998, we initiated a significant
realignment of our operations into six business lines. As part of the
realignment, we began shifting resources and activities to more directly support
the operations of our businesses. Although we do not expect our realignment
efforts to negatively affect our product offerings, provider relations, billing
and collection disciplines, claims processing and payment
13
<PAGE>
activities, or other business functions, there can be no assurance that such
negative effects may not occur. Our second quarter charge to earnings for costs
associated with the realignment was $725 million. Although we believe such
charges are adequate, there can be no assurance that the costs associated with
our realignment efforts will not exceed the charges we have taken for such
costs.
GOVERNMENT PROGRAMS AND REGULATION. Our business is heavily regulated on a
federal, state and local level. The laws and rules governing our business and
interpretations of those laws and rules are subject to frequent change. Broad
latitude is given to the agencies administering those regulations. Existing or
future laws and rules could force us to change how we do business, restrict
revenue and enrollment growth, increase its health care and administrative costs
and capital requirements, and increase our liability for medical malpractice or
other actions. We must obtain and maintain regulatory approvals to market many
of our products. Delays in obtaining or failure to obtain or maintain these
approvals could adversely affect our revenue or the number of our members, or
could increase our costs. A significant portion of our 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, generally are subject to frequent change, including changes
that may reduce the number of persons enrolled or eligible, reduce the amount of
reimbursement or payment levels, or may reduce or increase our administrative or
health care costs under such programs. Such changes have adversely affected our
results and willingness to participate in such programs in the past and may also
do so in the future.
The Company also is subject to various governmental reviews, audits and
investigations. Such oversight 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 damage our reputation in various markets and
make it more difficult for us to sell our products and services. The National
Association of Insurance Commissioners (the "NAIC") is expected to adopt rules
which, if implemented by the states, will require certain capitalization levels
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 generally to
insurance companies. Depending on the nature and extent of the new minimum
capitalization requirements ultimately implemented, there could be an increase
in the capital required for certain of our subsidiaries and there may be some
potential for disparate treatment of competing products. Federal solvency
regulation of companies providing Medicare-related benefit programs may also be
applied.
PROVIDER RELATIONS. One of the significant techniques we use to manage
health care costs and utilization and monitor the quality of care being
delivered is contracting with physicians, hospitals and other providers. Because
our health plans are geographically diverse and most of those health plans
contract with a large number of providers, we currently believe our exposure to
provider relations issues is limited. In any particular market, however,
providers could refuse to contract, demand higher payments, or take other
actions that could result in higher health care costs, less desirable products
for customer 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. If these providers refuse to
contract with us, use their market position to negotiate favorable contracts, or
place us at a competitive disadvantage those activities could adversely affect
our ability to market products or to be profitable in those areas.
LITIGATION AND INSURANCE. We may be a party to a variety of legal actions
that affect any business, such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including securities fraud, and
intellectual property related litigation. In addition, because of the nature of
our business, we are subject to a variety of legal actions relating to our
business operations. These could include: claims relating to the denial of
health care benefits; medical malpractice actions; provider disputes over
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
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calculations; and claims relating to customer audits and contract performance.
Recent court decisions and legislative activity may increase our exposure for
any of these types of claims. In some cases, substantial non-economic or
punitive damages may be sought. We currently have insurance coverage for some of
these potential liabilities. Other potential liabilities may not be covered by
insurance, 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. Our business depends significantly on effective
information systems, and we have many different information systems for its
various businesses. Our information systems require an ongoing commitment of
resources to maintain and enhance existing systems and develop new systems in
order to keep pace with continuing changes in information processing technology,
evolving industry standards, and changing customer preferences. In addition, we
may from time to time obtain significant portions of our systems-related or
other services or facilities from independent third parties, which may make our
operations vulnerable to such third parties' failure to perform adequately. As a
result of our acquisition activities, we have acquired additional systems and
have been taking steps to reduce the number of systems and have upgraded and
expanded our information systems capabilities. Failure to maintain effective and
efficient information systems could cause loss of existing customers, difficulty
in attracting new customers, customer and provider disputes, regulatory
problems, increases in administrative expenses or other adverse consequences.
THE YEAR 2000. We are in the process of modifying our computer systems to
accommodate the Year 2000. We currently expect to complete this modification
enough in advance of the Year 2000 to avoid adverse impacts on our operations.
We are expensing the costs incurred to make these modifications. Our operations
could be adversely affected if we were unable to complete our Year 2000
modifications in a timely manner or if other companies with which we do business
fail to complete their Year 2000 modifications in a timely manner.
ADMINISTRATIVE AND MANAGEMENT. Efficient and cost-effective administration
of our operations is essential to our profitability and competitive positioning.
While we attempt to effectively manage such expenses, staff-related and other
administrative expenses may rise from time to time due to business or product
start-ups or expansions, growth or changes in business, acquisitions, regulatory
requirements or other reasons. These expense increases are not clearly
predictable and may adversely affect results. We believe we currently have an
experienced, capable management and technical staff. The market for management
and technical personnel, including information systems professionals, in the
health care industry is very competitive. Loss of certain managers or a number
of such managers or technical staff could adversely affect our ability to
administer and manage our business.
MARKETING. We market our products and services through both employed sales
people and independent sales agents. Although we have many sales employees and
agents, the departure of certain key sales employees or agents or a large subset
of such individuals could impair our ability to retain existing customers and
members. In addition, certain of our 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 our
health plans or other business units may not have obtained or maintained, or may
not desire or be able to obtain or maintain, such rating accreditation or
certification, which could adversely affect our ability to obtain or retain
business with these customers.
ACQUISITIONS AND DISPOSITIONS. The Company has made several large
acquisitions in recent years and has an active ongoing acquisition and
disposition program under which it may engage in transactions involving the
acquisition or disposition of assets, products or businesses, some or all of
which may be material. These acquisitions may entail certain risks and
uncertainties and may affect ongoing business operations because of unknown
liabilities, unforeseen administrative needs or increased efforts to integrate
the acquired operations. Failure to identify liabilities, anticipate additional
administrative needs or
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effectively integrate acquired operations could result in reduced revenues,
increased administrative and other costs, or customer confusion or
dissatisfaction.
DATA AND PROPRIETARY INFORMATION. Many of the products that are part of our
knowledge and information services business depend significantly on the
integrity of the data on which they are based. If the information contained in
our databases were found or perceived to be inaccurate, or if such information
were generally perceived to be unreliable, commercial acceptance of our
database-related products would be adversely and materially affected.
Furthermore, the use by our knowledge and information-related business of
patient data is regulated at federal, state, and local levels. These laws and
rules are changed frequently by legislation or administrative interpretation.
These restrictions could adversely affect revenues from these products and, more
generally, affect our business, financial condition and results of operations.
The success of our knowledge and information services business also depends
significantly on our ability to maintain proprietary rights to our products. We
rely on our agreements with customers, confidentiality agreements with
employees, and our trade secrets, copyrights and patents to protect our
proprietary rights. We cannot assure that these legal protections and
precautions will prevent misappropriation of our proprietary information. In
addition, substantial litigation regarding intellectual property rights exists
in the software industry, and we expect software products to be increasingly
subject to third-party infringement claims as the number of products and
competitors in this industry segment grows. Such litigation could have an
adverse affect on the ability of our knowledge and information-related business
to market and sell its products and on our business, financial condition and
results of operations.
STOCK MARKET. The market prices of the securities of the Company and
certain of the publicly-held companies in the industry in which we operate 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. We cannot assure the level or stability of our share price
at any time, or the impact of the foregoing or any other factors may have on our
share price.
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EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
FIRST ELECTED AS
NAME AGE POSITION AT 12/31/98 EXECUTIVE OFFICER
- -------------------------------- --- -------------------------------------------------------- -----------------
<S> <C> <C> <C>
President, Chairman, Chief Executive Officer and
William W. McGuire, M.D......... 50 Director 1988
Stephen J. Hemsley.............. 46 Chief Operating Officer 1997
Arnold H. Kaplan................ 59 Chief Financial Officer 1998
David J. Lubben................. 47 General Counsel and Secretary 1996
Lois E. Quam.................... 37 CEO, Ovations 1998
Jeannine R. Rivet............... 50 CEO, UnitedHealthcare 1998
R. Channing Wheeler............. 47 CEO, Uniprise 1998
</TABLE>
The Company's Board of Directors elects executive officers annually. The
Company's executive officers serve until their successors are duly elected and
qualified.
Dr. McGuire became a director of UnitedHealth Group in February 1989 and the
Chairman of the Board in May 1991. Dr. McGuire became an Executive Vice
President of the Company in November 1988, was appointed the Company's Chief
Operating Officer in May 1989, the Company's President in November 1989, and the
Company's Chief Executive Officer in February 1991.
Mr. Hemsley joined UnitedHealth Group in May 1997 and became Chief Operating
Officer in September 1998. Prior to that time, he served as Senior Executive
Vice President of the Company. Prior to joining the Company, Mr. Hemsley was
with Arthur Andersen LLP where he served since 1974 in various capacities,
including Chief Financial Officer and Managing Partner, Strategy and Planning.
Mr. Kaplan joined UnitedHealth Group in July 1998 as Chief Financial
Officer. Prior to joining the Company, Mr. Kaplan was associated with Air
Products & Chemical where he served since 1976 in various capacities, including
Senior Vice President, Chief Financial Officer, Vice President Purchasing and
Controller.
Mr. Lubben became UnitedHealth Group's General Counsel and Secretary in
October 1996. Prior to joining the Company, he was a partner in the law firm of
Dorsey & Whitney LLP. Mr. Lubben first became associated with Dorsey & Whitney
in 1977.
Ms. Quam joined UnitedHealth Group in 1989 and became the CEO, Ovations in
April 1998. Prior to April 1998, Ms. Quam served in various capacities including
CEO, AARP Division, Vice President, Public Sector Services and Director,
Research. Prior to joining the Company, Ms. Quam served as Research Director
from 1987-1989 for Partners National Health Plan.
Ms. Rivet joined UnitedHealth Group in June 1990. Ms. Rivet was named CEO,
UnitedHealthcare in April 1998 and has served as Executive Vice President of
UnitedHealthcare since October 1994. She served as the Company's Senior Vice
President, Health Plan Operations from September 1993 to September 1994 and the
Company's Vice President of Health Service Operations from June 1990 to
September 1993.
Mr. Wheeler joined UnitedHealth Group in March 1995 and became CEO, Uniprise
in May 1998. Prior to May 1998, he served in various capacities of the Company,
including CEO, Northeast HealthPlans.
ITEM 2. PROPERTIES
As of December 31, 1998, the Company leased approximately 1.72 million
aggregate square feet of space for its principal administrative offices in the
greater Minneapolis/St. Paul, Minnesota area and in Hartford, Connecticut.
Excluding these areas, as of December 31, 1998, the Company leased approximately
6.38 million aggregate square feet in the United States, and approximately
97,100 aggregate square
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feet outside of the United States (including Puerto Rico). Such space
accommodates health plans, managed care services, specialty programs or
satellite administrative offices. The Company's leases expire at various dates
through May 31, 2026. As of December 31, 1998, the Company owned approximately
310,700 aggregate square feet of space for administrative offices in various
states and its staff model clinic operations in Florida.
ITEM 3. LEGAL PROCEEDINGS
Because of the nature of its business, United is subject to suits relating
to the failure to provide or pay for health care or other benefits, poor
outcomes for care delivered or arranged under United's programs, nonacceptance
or termination of providers, failure to return withheld amounts from provider
compensation, failure of a self-funded plan serviced by United to pay benefits,
improper copayment calculations and other forms of legal actions. Some of these
suits may include claims for substantial non-economic or punitive damages.
United does not believe that any such actions, or any other types of actions,
currently threatened or pending will, individually or in the aggregate, have a
material adverse effect on United's financial position or results of operations.
However, the likelihood or outcome of current or future suits cannot be
accurately predicted, and they could adversely affect United's financial
results.
Six suits assert claims under the United States securities laws against
United and certain of its current and former officers and directors. The
plaintiffs are stockholders of United who purport to sue on behalf of a class of
purchasers of common shares of United during the period February 12, 1998
through August 5, 1998 (the "Class Period"). Each complaint was filed in the
United States District Court for the District of Minnesota. Each of the six
actions claims violations of Sections 10(b) and 20(a) of the Securities Exchange
Act and SEC Rule 10b-5. In substance, the complaints allege that United made
materially false or misleading statements about the profitability and
performance of the Company's Medicare business during the Class Period. Two of
the complaints also allege that the Company made materially false statements
about its medical costs and the expenses related to the Company's realignment.
The complaints also allege that the statements were made with the intention of
deceiving members of the investing public and with the intention that the price
of United shares would rise, making it possible for insiders at the Company to
profit by selling shares at a time when they knew the Company's true financial
condition, but the investing public did not. The complaints allege that once the
Company's true financial condition was revealed on August 6, 1998, the price of
United common shares fell from a closing price of $52 7/8 on August 5, 1998, to
a closing price of $37 7/8 on August 6, 1998. The complaints seek compensatory
damages in unspecified amounts.
On January 19, 1999, we received a consolidated amended complaint (IN RE
UNITED HEALTHCARE CORPORATION SECURITIES LITIGATION, No. 98-1888 in the United
States District Court for the District of Minnesota) for the six suits which
essentially restates the allegations made in the earlier complaints.
On March 22, 1999, two actions were filed in the United States District
Court for the District of Minnesota by two pension funds against United, certain
current and former officers and directors, and other individuals yet to be
identified. The pension funds wish to "opt-out" of the aforementioned purported
class action suits. These individual actions essentially restate the allegations
made in the purported class actions and claim violations of Sections 10(b),
18(a) and 20 of the Securities Exchange Act. In addition, both actions assert a
claim of negligent misrepresentation and securities claims under state law. In
the aggregate, the plaintiff pension funds seek compensatory damages totaling
approximately $12.1 million.
The defendants intend to defend these actions vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK LISTING
The Company's common stock is traded on the New York Stock Exchange under the
symbol UNH.
The following table shows the range of high and low sales prices for the
Company stock as reported on the New York Stock Exchange Composite Tape for
the calendar periods indicated through February 26, 1999. These prices do not
include commissions or fees associated with the purchase or sale of this
security:
<TABLE>
<CAPTION>
HIGH LOW
- ------------------------------------------------------------------------------
<S> <C> <C>
1999
First Quarter 1999
Through February 26, 1999 $ 49.50 $39.4375
- ------------------------------------------------------------------------------
1988
First Quarter $66.8125 $46.5625
Second Quarter $73.9375 $ 61.25
Third Quarter $ 66.50 $29.5625
Fourth Quarter $ 50.625 $ 33.375
- ------------------------------------------------------------------------------
1997
First Quarter $ 55.25 $ 42.625
Second Quarter $ 56.75 $ 43.75
Third Quarter $ 60.125 $ 47.875
Fourth Quarter $ 54.75 $42.4375
- ------------------------------------------------------------------------------
</TABLE>
AS OF FEBRUARY 26, 1999, THE COMPANY HAD 13,111 SHAREHOLDERS OF RECORD.
DIVIDEND POLICY
The Company's dividend policy, established by its board of directors in
August 1990, requires the board to review the Company's audited consolidated
financial statements following the end of each fiscal year and decide
whether it is advisable to declare a dividend on the outstanding shares of
common stock.
Shareholders of record on April 3, 1997, received an annual dividend for 1997
of $0.03 per share, and shareholders of record on April 1, 1998, received an
annual dividend for 1998 of $0.03 per share. On February 16, 1999, the
Company's board of directors approved an annual dividend for 1999 of $0.03
per share to holders of the Company's common stock. The dividend will be paid
on April 15, 1999, to shareholders of record at the close of business on
April 1, 1999.
II-1
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS UNITEDHEALTH GROUP
<TABLE>
<CAPTION>
For the Year Ended December 31,
(in millions, except per share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING RESULTS
Revenues $17,355 $11,794 $10,074 $5,671 $3,769
Earnings (Loss) From Operations $ (42)(1) $ 742 $ 581(2) $ 461(3) $ 506
- ------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) Before
Extraordinary Gain $ (166) $ 460 $ 356 $ 286 $ 288(4)
Extraordinary Gain on Sale of
Subsidiary, net of income tax effects -- -- -- -- 1,377(5)
- ------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) $ (166)(1) $ 460 $ 356(2) $ 286(3) $1,665
Convertible Preferred Stock Dividends (28) (29) (29) (7) --
Preferred Stock Redemption Premium (20) -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) Applicable to
Common Shareholders $ (214)(1) $ 431 $ 327 $ 279 $1,665
- ------------------------------------------------------------------------------------------------------------
Basic Net Earnings (Loss) per
Common Share
Basic Net Earnings (Loss) per Common
Share Before Extraordinary Gain $ (1.12) $ 2.30 $ 1.80 $ 1.61 $ 1.69
Extraordinary Gain -- -- -- -- 8.06
- ------------------------------------------------------------------------------------------------------------
Basic Net Earnings (Loss) per
Common Share $ (1.12) $ 2.30 $ 1.80 $ 1.61 $ 9.75
- ------------------------------------------------------------------------------------------------------------
Diluted Net Earnings (Loss) per
Common Share
Diluted Net Earnings (Loss) per Common
Share Before Extraordinary Gain $ (1.12)(1) $ 2.26 $ 1.76(2) $ 1.57(3) $ 1.64(4)
Extraordinary Gain -- -- -- -- 7.86(5)
- ------------------------------------------------------------------------------------------------------------
Diluted Net Earnings (Loss) per
Common Share $ (1.12)(1) $ 2.26 $ 1.76(2) $ 1.57(3) $ 9.50
- ------------------------------------------------------------------------------------------------------------
Basic Weighted-Average Number of
Common Shares Outstanding 191 187 182 174 171
Weighted-Average Number of Common
Shares Outstanding, Assuming Dilution 191 191 186 177 175
- ------------------------------------------------------------------------------------------------------------
Dividends Per Share
Common Stock $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.03
Convertible Preferred Stock $ 56.03 $ 57.50 $ 57.50 $14.38 $ --
- ------------------------------------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL CONDITION
(As of December 31)
Cash and Investments $ 4,424 $ 4,041 $ 3,453 $3,078 $2,769
Total Assets $ 9,701 $ 7,623 $ 6,997 $6,161 $3,489
Debt $ 708(6) $ -- $ -- $ -- $ --
Convertible Preferred Stock $ -- $ 500 $ 500 $ 500 $ --
Shareholders' Equity $ 4,038 $ 4,534 $ 3,823 $3,188 $2,795
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Financial Highlights should be read together with the accompanying Financial
Review and Consolidated Financial Statements and Notes.
(1) Excluding the operational realignment and other charges of $725 million,
$175 million of charges related to contract losses associated with certain
Medicare markets and other increases to commercial and Medicare medical costs
payable estimates and the $20 million convertible preferred stock redemption
premium from 1998 results, earnings from operations and net earnings applicable
to common shareholders would have been $858 million and $509 million, or $2.62
diluted net earnings per common share.
(2) Excluding the merger costs associated with the acquisition of HealthWise of
America, Inc. of $15 million ($9 million after tax, or $0.05 diluted net
earnings per common share) and the provision for future losses on two large 28
contracts of $45 million ($27 million after tax, or $0.15 diluted net earnings
per common share), 1996 earnings from operations and net earnings would have
been $641 million and $392 million, or $1.96 diluted net earnings per common
share.
(3) Excluding restructuring charges associated with the acquisition of The
MetraHealth Companies, Inc., of $154 million ($97 million after tax, or $0.55
diluted net earnings per common share), 1995 earnings from operations and net
earnings would have been $615 million and $383 million, or $2.12 diluted net
earnings per common share.
(4) Excluding the nonoperating merger costs associated with the acquisitions of
Complete Health Services, Inc. and Ramsay-HMO, Inc., of $36 million ($22
million after tax, or $0.13 diluted net earnings per common share), 1994
earnings before extraordinary gain would have been $310 million or $1.77
diluted net earnings per common share.
(5) In May 1994, the Company sold Diversified Pharmaceutical Services, Inc. for
$2.3 billion in cash and recognized an extraordinary gain after transaction
costs and income tax effects of $1.4 billion, or $7.86 diluted net earnings per
common share.
(6) During 1998, we issued notes and commercial paper aggregating $708 million,
which remained outstanding at December 31, 1998.
II-2
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATIONS
1998 FINANCIAL PERFORMANCE HIGHLIGHTS
1998 was an important year of both challenges and successes for UnitedHealth
Group.
- - Excluding the effects of the unusual or nonrecurring events and transactions
described below, we achieved record profits. Underlying earnings from
operations, net earnings applicable to common shareholders, and diluted net
earnings per common share were $858 million, $509 million and $2.62 per share,
respectively, representing increases over 1997 of 16%, 18%, and 16%,
respectively.
- - We achieved record revenues of $17.4 billion, a 47% increase over 1997. This
growth was driven primarily by same-store enrollment growth in our
UnitedHealthcare business and from successful implementation of our $3.5
billion Medicare supplement insurance program with the AARP.
- - Record cash flows of more than $1.0 billion were generated from operating
activities, a 57% increase over 1997.
- - We completed several financing initiatives to achieve a more efficient
capital structure, including the redemption of our $500 million convertible
preferred stock and the repurchase of 11.3 million shares of our common stock.
- - We embarked on a major realignment of our operations into independent but
strategically linked businesses, each focused on performance, growth and
shareholder value. As a result of our evaluation of each business's strategic
fit and contributions, analysis of our profitability in certain markets, and
the adequacy of our medical costs payable estimates, we took actions that
resulted in special operating charges of $900 million.
1998 OPERATING RESULTS OVERVIEW
The following table summarizes our results for each of the last three years
ended December 31 (in millions, except per share amounts).
<TABLE>
<CAPTION>
1998(1) 1997 1996(2)
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Earnings (Loss) From Operations $ (42) $ 742 $ 581
Net Earnings (Loss) Applicable to
Common Shareholders $ (214) $ 431 $ 327
Diluted Net Earnings (Loss) per
Common Share $(1.12) $2.26 $1.76
Medical Costs to Premium Revenues 87.2%(3) 84.3% 84.6%
SG&A Expenses to Total Revenues 17.1% 20.0% 21.5%
- -----------------------------------------------------------------------
</TABLE>
(1) Excluding the effects of $725 million of operational realignment and other
charges, $175 million of charges related to contract losses associated with
certain Medicare markets and other increases to commercial and Medicare medical
costs payable estimates, and the $20 million convertible preferred stock
redemption premium, earnings from operations, net earnings applicable to common
shareholders, and diluted net earnings per common share would have been $858
million, $509 million, and $2.62 per share, respectively.
(2) Excluding the effects of a $45 million provision for future losses on two
large multi-year contracts and $15 million of merger costs associated with the
acquisition of HealthWise of America, Inc., earnings from operations, net
earnings applicable to common shareholders, and diluted net earnings per common
share would have been $641 million, $392 million, and $1.96 per share,
respectively.
(3)Includes $175 million of contract losses associated with certain Medicare
markets and other increases to commercial and Medicare medical costs payable
estimates. The company's ratio of medical costs to premium revenues for the
year ended December 31, 1998, would have been 86.0% without these charges.
In 1998, we reported a net loss applicable to common shareholders of $214
million, or $1.12 diluted net loss per common share. However, these results
include certain large or unusual events and transactions as described below:
- - In conjunction with our realignment and other initiatives, we recorded $725
million of charges to operations during the second quarter of 1998. The charges
included $451 million of asset impairments and $274 million of estimated future
costs associated with our initiatives, such as employee terminations; disposing
of or discontinuing business units, product lines and contracts; and
consolidating certain processing operations and associated real estate
obligations. Although our realignment initiatives and the associated
nonrecurring charges caused us to report a net loss for 1998, these actions
position us to make long-term fundamental process and performance improvements.
- - Our second quarter 1998 medical costs include $120 million related to
contract losses and other increases to medical costs payable estimates in
UnitedHealthcare's Medicare markets and $55 million related to increases to
medical costs payable estimates associated with increased commercial medical
costs in certain health plans.
- - In conjunction with the redemption of our $500 million convertible preferred
stock, we paid a $20 million redemption premium. This premium is added to
1998's net loss to arrive at net loss applicable to common shareholders.
Excluding the effects of the events and transactions described above,
1998 underlying earnings from operations and diluted net earnings per common
share were $858 million and $2.62 per share, respectively, representing
increases of 16% over earnings from operations of $742 million and diluted net
earnings per common share of $2.26 in 1997. These increases were primarily
driven by improved margins in the commercial product offerings of our
UnitedHealthcare business and successful integration and management of our
services provided to the AARP, which began on January 1, 1998.
The discussion that follows provides a more detailed analysis of our
1998, 1997 and 1996 operating results.
II-3
<PAGE>
1998 RESULTS COMPARED TO 1997 RESULTS
REVENUES AND ENROLLMENT
1998 was a record year for UnitedHealth Group, with consolidated revenues of
$17.4 billion, an increase of $5.6 billion, or 47%, over 1997. Our revenue
growth was primarily derived from successful implementation of our $3.5
billion Medicare supplement insurance program with the AARP and same-store
enrollment growth in our UnitedHealthcare business. On a year-over-year
same-store basis, UnitedHealthcare's total revenues increased by $1.7
billion, or 16%, over 1997.
The following table summarizes enrollment in all of our product
offerings as of December 31:
ENROLLMENT SUMMARY(1)
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- -------
Amount Increase (Decrease) Amount Increase (Decrease) Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Enrollment, excluding Ovations
(as of December 31, in thousands)
UnitedHealthcare
Risk-Based:
Health Plans 5,231 17% 4,475 13% 3,945
Other Network-Based and Indemnity 530 (14%) 613 (29%) 858
- ----------------------------------------------------------------------------------------------------------------
Total Commercial 5,761 13% 5,088 6% 4,803
Medicare 483 40% 345 54% 224
Medicaid 638 21% 526 0% 525
- ----------------------------------------------------------------------------------------------------------------
Total Risk-Based 6,882 15% 5,959 7% 5,552
Fee-Based:
Commercial 1,725 7% 1,609 (29%) 2,279
- ----------------------------------------------------------------------------------------------------------------
Total UnitedHealthcare 8,607 14% 7,568 (3%) 7,831
- ----------------------------------------------------------------------------------------------------------------
Uniprise
Risk-Based 261 (1%) 263 (9%) 288
Fee-Based 5,139 (2%) 5,226 (8%) 5,653
- ----------------------------------------------------------------------------------------------------------------
Total Uniprise 5,400 (2%) 5,489 (8%) 5,941
- ----------------------------------------------------------------------------------------------------------------
Total Enrollment, excluding
Ovations 14,007 7% 13,057 (5%) 13,772
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Enrollment information includes growth resulting from our 1998
acquisition of HealthPartners of Arizona, Inc. (509,000 members).
Additionally, the fee-based lives served by United HealthCare Administrators,
Inc. are included in 1996 (666,000 members). We sold United HealthCare
Administrators, Inc. on June 30, 1997.
Our revenues are comprised of: 1) premium revenues associated with our
risk-based products (those where we assume financial responsibility for
health care costs); 2) management services and fees associated with
administrative services only customers, managed health plans, and our
Specialized Care Services and Ingenix businesses; and 3) investment and other
income.
The discussion that follows provides an analysis of our 1998 revenue
trends for each of our three revenue components.
PREMIUM REVENUES
The following table summarizes premium revenues by business unit for the
years ended December 31 (in millions):
<TABLE>
<CAPTION>
Percent
Increase
1998 1997 (Decrease)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
UnitedHealthcare $11,397 $ 9,507 20%
Ovations 3,584 87 NM
Uniprise 447 418 7%
Specialized Care Services 337 291 16%
Elimination of Inter-Unit
Transactions (249) (168) NM
- -----------------------------------------------------------------------------
$15,516 $10,135 53%
- -----------------------------------------------------------------------------
</TABLE>
NM - Not Meaningful
Consolidated premium revenues in 1998 totaled $15.5 billion, an increase
of $5.4 billion, or 53%, compared to 1997. On January 1, 1998, our Ovations
business began delivering Medicare supplement insurance and other medical
insurance coverage to approximately 4 million AARP members. Premium revenues
from our portion of the AARP insurance offerings during 1998 were $3.5
billion.
Excluding the AARP business, 1998 consolidated premium revenues totaled
$12.0 billion, an increase of 19% over 1997. This increase is primarily the
result of growth in our UnitedHealthcare business. On a year-over-year
same-store basis, UnitedHealthcare's premium revenues increased $1.7 billion,
or 18%, during 1998. The increase reflects same-store commercial health plan
enrollment growth of 10% and average year-over-year premium yield increases
on renewing commercial health plan groups of approximately 5% to 6%.
Growth in UnitedHealthcare's Medicare programs also contributed to the
increase in premium revenues, with same-store growth of 33% in Medicare
enrollment. Significant growth in Medicare enrollment affects year-over-year
comparability. The Medicare product generally has per member premium rates
three times to four times higher than average commercial premium rates
because Medicare members typically use proportionately more medical care
services. On a year-over-year same-
II-4
<PAGE>
store basis, UnitedHealthcare's commercial health plan and Medicare products
accounted for $1.8 billion of premium revenue growth during 1998.
The increase in UnitedHealthcare's commercial health plan and Medicare
product premium revenues was partially offset by a $240 million decrease from
other network-based and indemnity products. We expect enrollment in
UnitedHealthcare's other network-based and indemnity products will continue
to decline through 1999. To the extent possible, we will convert these
enrollees to UnitedHealthcare's commercial health plan products.
MANAGEMENT SERVICES AND FEE REVENUES
Management services and fee revenues during 1998 totaled $1.6 billion,
representing an increase of approximately $160 million over 1997. The
increase is primarily the result of acquisitions by Ingenix during 1997 and
1998. Additionally, our Specialized Care Services business -- most notably
United Behavioral Health and Optum,-Registered Trademark- our telephone- and
Internet-based health information and services business -- continues to
increase the number of individuals it serves.
INVESTMENT AND OTHER INCOME
Investment and other income increased to $249 million in 1998 from $231 million
in 1997. The increase of $18 million is primarily attributable to an increase in
average cash and investments from $3.6 billion in 1997 to $4.1 billion in 1998.
Net capital gains were $26 million in both 1998 and 1997.
MEDICAL COSTS
The combination of our pricing strategy and medical management efforts is
reflected in the medical care ratio (medical costs as a percentage of premium
revenues). The following table summarizes our medical care ratio by product line
for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
UnitedHealthcare:
Commercial(1) 85.3% 85.7%
Medicare 92.0% 83.3%
Medicaid 85.2% 82.8%
- ----------------------------------------------------------------------------
Total UnitedHealthcare 86.7% 85.1%
- ----------------------------------------------------------------------------
Consolidated UnitedHealth Group 87.2% 84.3%
- ----------------------------------------------------------------------------
Consolidated (excluding AARP) 85.8% 84.3%
- ----------------------------------------------------------------------------
</TABLE>
(1) Includes commercial health plan, other network-based and indemnity products.
Our consolidated medical care ratio increased to 87.2% in 1998 from
84.3% in 1997. The year-over-year increase includes the effects of the AARP
business on our medical care ratio. We experience a medical care ratio of
approximately 92% related to our portion of the AARP insurance offerings,
which we began delivering on January 1, 1998. Excluding the AARP business, on
a year-over-year basis, the medical care ratio increased to 85.8%.
The increase in the 1998 medical care ratio is primarily attributable to
average Medicare premium rate increases of 2.5% that were more than offset by
increased medical utilization, reflected mostly in hospital costs. In 13 of
our 24 Medicare markets, representing half of our annual Medicare premiums of
$2.4 billion, we incurred contract losses of $111 million. Six of these 13
markets are generally newer markets where we have been unable to achieve the
scale of operations necessary to achieve profitability. In numerous counties
in the other seven markets, we experienced high medical costs which exceeded
the fixed Medicare premiums that increased only 2.5% on average.
We are addressing our Medicare medical care ratio by altering benefit
designs, recontracting with providers, and aggressively increasing both
contemporaneous and retrospective claim management activities. We also are
continuing to evaluate the markets we serve and products we offer. In
addition, we will curtail activities or exit markets where we believe near
term prospects are unacceptable.
To that end, in October 1998, we announced our decision to withdraw
Medicare product offerings from 86 of the 206 counties we then served. The
decision, effective January 1, 1999, affected approximately 60,000, or 13%,
of our Medicare members. We will continue to offer Medicare products in
strong and economically viable markets. Annual revenues for 1998 from
Medicare counties we exited were approximately $225 million.
Despite increasing commercial medical cost trends in certain health plan
markets, UnitedHealthcare's overall commercial medical care ratio improved
slightly to 85.3% in 1998 from 85.7% in 1997.
Commercial health plan premium rates are established based on
anticipated health care costs. During 1998, commercial premium yield
increases averaging 5% to 6% minimally exceeded medical cost trends of 4% to
5%. Looking to 1999, we expect average medical cost increases to remain
stable in the 4% to 5% range, and we also expect that our medical care ratio
will improve as a result of premium yield increases on new and renewal
commercial business averaging 7% to 8%.
OPERATING EXPENSES
Selling, general and administrative expenses as a percent of total revenues
(the SG&A ratio) decreased from 20.0% in 1997 to 17.1% in 1998. The
improvement in the year-over-year SG&A ratio principally reflects the
operating leverage we gained with the addition of the AARP business and
planned cost reductions we have achieved to date from our realignment
initiatives. On an absolute dollar basis, selling, general and administrative
costs increased by $600 million, or 25%, over 1997. This increase primarily
reflects the additional infrastructure needed to support the $5.4 billion, or
53%, increase in premium-based business.
Depreciation and amortization was $185 million in 1998, and $146
million in 1997. This increase resulted from a combination of higher levels of
capital expenditures to support business growth and amortization of goodwill and
other intangible assets related to recent acquisitions.
The $451 million of asset impairments recorded in the second quarter of
1998 will reduce depreciation and amortization by approximately $15 million
annually. This decrease will be more than offset in 1999 by increased
depreciation and amortization related to capital expenditures and intangible
assets acquired in acquisitions during 1998.
II-5
<PAGE>
OPERATIONAL REALIGNMENT AND OTHER CHARGES
In conjunction with our operational realignment, we developed and, in the second
quarter of 1998, approved a comprehensive plan (the Plan) to implement our
operational realignment. We recognized corresponding charges to operations of
$725 million, which reflect the estimated costs we will incur under the Plan.
The charges included costs associated with asset impairments; employee
terminations; disposing of or discontinuing business units, product lines and
contracts; and consolidating and eliminating certain processing operations and
associated real estate obligations. These activities will result in a net
reduction of more than 4,000 positions, affecting 6,000 people in various
locations. Through December 31, 1998, we have eliminated approximately 2,000
positions pursuant to the Plan.
Businesses we intend to dispose of include our managed workers'
compensation business, and medical and behavioral health provider clinics.
Markets where we plan to curtail or make changes to our operating presence
include our small group health insurance business and three health plan markets
that are in non-strategic locations.
Our original provision for operational realignment and other charges
was developed based on management's best judgment and estimates at that time.
As we began to execute the Plan, we adjusted certain estimates based on more
current information related to the amounts to be paid for severance and lease
cancellation fees. In addition, based on continuing negotiations related to
business dispositions, our original estimates for asset impairments and
business disposition costs were revised. In total, our Operational
Realignment and Other Charges did not change.
The table below summarizes realignment activities for the year ended
December 31, 1998 (in millions):
<TABLE>
<CAPTION>
Additional Charges Incurred
Recorded Charges ----------------- Accrual at
Provision (Credits) Cash Noncash Year-End
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for operational realignment and other charges:
Asset Impairments $ 430 21 $ -- $(451) $ --
Severance and outplacement costs 142 (20) (19) -- 103
Noncancelable lease obligations 82 (9) (6) -- 67
Dispositions of business and other costs 71 8 (13) -- 66
- -----------------------------------------------------------------------------------------------------------------
Total provision $ 725 - $(38) $(451) $236
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
We have included in asset impairments the write off of $68 million
of purchased in-process research and development associated with the
acquisition of Medicode, Inc. The in-process projects were focused on the
continued development and evolution of next generation medical databases and
software solutions including clinical editing software, benchmarking databases
and technologies. These technologies upon completion will enable both
healthcare payers and providers to use the same data generated in the
treatment documentation process to then be used in the financial transaction
process, which involves provider compensation, care utilization review, trend
analysis and management reporting. As of the date of acquisition, Medicode
had invested $8.5 million in the in-process projects identified above. We
estimate that it will be necessary to dedicate approximately $2.2 million
over the next sixteen months in order to successfully complete these projects.
Details of the asset impairments are as follows (in millions):
<TABLE>
<CAPTION>
Triggering Event Expected Disposal Disposal Date
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
UnitedHealthcare intangible and operating A decision to exit or Operating assets will be The carrying value
assets of certain health plan and small reconfigure these abandoned or disposed of the assets will
group insurance markets $291 businesses, markets of upon exit or be depreciated
and products. reconfiguration of the over the estimated
Specialized Care Services intangible market, business, or remaining life,
and operating assets $ 39 products. with physical
disposal during
either the fourth
quarter of 1998
or the first six
months of 1999.
- -------------------------------------------------------------------------------------------------------------------------------
Ingenix purchased in-process research The acquisition of Not applicable. Written down
and development $ 68 Medicode, Inc. occurred during second
in December 1997. quarter of 1998.
The final allocation of
purchase price and
valuation of acquired
intangibles was completed
in June 1998.
- ------------------------------------------------------------------------------------------------------------------------------
Corporate operating assets $ 53 Realignment initiatives Operating assets have The carrying
resulted in operating been or will be written value of the
assets to be abandoned or off, abandoned or assets will be
disposed. disposed of upon exit of depreciated over
certain businesses or as a the estimated
result of other remaining life
realignment initiatives. with physical
disposal during
either the fourth
quarter of 1998
or the first six
months of 1999.
- ------------------------------------------------------------------------------------------------------------------------------
Total $451
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
We believe the aggregate reduction in our overall cost structure from
our realignment and other cost reduction activities will approximate $300
million annually by the end of the year 2000. We expect to realize approximately
$75 million of these reductions in 1999.
The operational realignment charges do not cover certain aspects of
the Plan, including new information systems, data conversions, process
re-engineering and employee relocation and training. These costs will be
charged to expense as incurred or capitalized, as appropriate.
1997 RESULTS COMPARED TO 1996 RESULTS
PREMIUM REVENUES
During 1997, consolidated premium revenues totaled $10.1 billion, representing
an increase of $1.6 billion, or 19%, compared to 1996. Excluding the effects of
acquisitions, premium revenues in 1997 increased by 17% over 1996.
The increase in premium revenues in 1997 was primarily due to growth in
year-over-year same-store commercial health plan revenues of $1.5 billion, or
25%. The increase reflected same-store commercial health plan enrollment growth
of 13% and
II-6
<PAGE>
average year-over-year premium rate increases on renewing commercial groups
of approximately 5%. Growth in our Medicare programs also contributed to the
increase in premium revenues, with a year-over-year same-store increase of
53% in Medicare enrollment.
The 1997 year-over-year increase in premium revenues from commercial
and Medicare products was partially offset by a $220 million decrease from
non-network-based indemnity products. Nearly $60 million of this decrease
resulted because we discontinued our relationship with a broker who sold and
administered small group indemnity business on our behalf, which led to the loss
of 30,000 indemnity members effective July 1, 1997. The remaining decrease was
from declining enrollment in these products, which is attributed to average rate
increases of 10% to 20% that started in 1996 and continued into 1997, as well as
other business factors.
MANAGEMENT SERVICES AND FEE REVENUES
Management services and fee revenues in 1997 totaled $1.4 billion, representing
an increase of $30 million, or 2%, over 1996. The increase resulted from
enrollment growth within managed health plans and an increase in individuals
served by our Specialized Care Services business. Offsetting these increases,
fee revenues from self-funded products decreased $15 million because of
declining enrollment in these products. In addition, the June 30, 1997, sale of
our subsidiary, United HealthCare Administrators, Inc., resulted in a $24
million decrease in these revenues in 1997 compared to 1996.
INVESTMENT AND OTHER INCOME
Investment and other income increased to $231 million in 1997 from $185 million
in 1996. The increase of $46 million is primarily attributable to an increase in
average cash and investments from $3.2 billion in 1996 to $3.6 billion in 1997.
Additionally, 1997 investment and other income included net capital gains of $26
million compared with $4 million in 1996.
MEDICAL COSTS
During 1997, the medical care ratio increased slightly from 84.0% in 1996
(before nonrecurring charges) to 84.3%. The 1997 increase in the medical care
ratio was the result of several factors:
- - A few specific health plan markets had medical care ratios substantially
higher than our other health plans in the aggregate. The reasons varied from
plan to plan, but generally, medical cost controls and provider contracting
initiatives were not being fully implemented and commercial premium yields
were insufficient compared to corresponding medical costs.
- - Several markets had recently introduced Medicare products, which had been
well received and were growing rapidly. We generally experience higher
medical care ratios during the early stage of Medicare product introductions.
- - Medicaid premiums did not increase and, in fact, decreased in several
markets.
OPERATING EXPENSES
During 1997, our SG&A ratio improved from 21.5% in 1996 to 20.0%. The
improvement in the 1997 SG&A ratio reflected ongoing operating efficiencies as
well as our diligence in managing operating expenses. On an absolute dollar
basis, selling, general and administrative costs increased $199 million in 1997,
or 9%, over 1996. This increase reflects the additional infrastructure needed to
support the $1.6 billion increase in premium-based business, as well as the
additional investment in new Medicare markets and increased support for our
growing Specialized Care Services businesses.
FINANCIAL CONDITION AND LIQUIDITY AS OF DECEMBER 31, 1998
During 1998, we generated more than $1.0 billion in cash from operating
activities. We continued to maintain a strong financial condition and liquidity
position, with cash and investments of $4.4 billion at December 31, 1998, an
increase of $400 million over December 31, 1997. Our long-term investments, $2.6
billion as of December 31, 1998, are classified as available for sale and are
periodically sold prior to their maturity date to fund working capital or for
other purposes.
During 1998, we also took several actions to improve our capital
structure:
- - We redeemed $500 million of convertible preferred stock with a cumulative
dividend rate of 5.75% (a pre-tax effective rate of approximately 9.0%). The
redemption of the preferred shares was financed with $650 million of unsecured
notes payable at a weighted-average pre-tax effective interest rate of 6.0%,
thereby decreasing our financing cost for this $500 million by 34% in the first
year. The debt placement consisted of $400 million in unsecured notes due
December 1999, with an interest rate of 5.65%, and $250 million in unsecured
notes due December 2003, with an interest rate of 6.65%.
- - We repurchased 11.3 million shares of our common stock for an aggregate
cost of $436 million, an average cost of approximately $40 per share. Under
our stock repurchase program, we may purchase up to 18.7 million shares of
our outstanding common stock. Purchases may be made from time to time at
prevailing prices, subject to certain restrictions relating to volume,
pricing and timing.
- - We established a $600 million commercial paper program, which provides
increased flexibility in managing our capital structure. At December 31,
1998, there were $59 million in commercial paper borrowings outstanding at an
average interest rate of 5.3%.
In support of our commercial paper program, we entered into a $600
million credit arrangement with a group of banks. The agreement is comprised of
a $300 million five-year revolving credit facility and a $300 million 364-day
credit facility. No borrowings were outstanding under the credit facilities as
of December 31, 1998.
II-7
<PAGE>
- - In January 1998, we filed a shelf registration statement with the Securities
and Exchange Commission (SEC) to sell up to $200 million of debt securities and
preferred or common shares. The shelf filing registered the securities and
allows us to sell them from time to time in the event we need financing.
Proceeds from sales of these securities may be used for a variety of general
corporate purposes, including working capital, securities repurchases and
acquisitions. In October 1998, we filed another shelf registration statement to
sell up to $1.05 billion of debt securities, preferred stock, common stock,
depository shares, warrants and trust preferred securities. These securities may
not be sold until the SEC declares the registration statement effective.
Cash generated from operating activities and proceeds received from our
1998 financing activities were used to redeem outstanding preferred stock,
repurchase common stock, and for other general corporate purposes, including
acquisitions. We expect our available cash and investment resources, operating
cash flows, and financing capability to be sufficient to meet our current
operating requirements and other corporate development initiatives.
As further described under "Regulatory Capital and Dividend
Restrictions," many of our subsidiaries are subject to various government
regulations. After taking into account these regulations, approximately $500
million of our $4.4 billion of cash and investments at December 31, 1998, was
available for general corporate use, including working capital needs.
The Company's debt arrangements and credit facilities contain various
covenants, the most restrictive of which place limitations on secured and
unsecured borrowings and require the Company to exceed minimum interest coverage
levels. At December 31, 1998, we were well within the requirements of all debt
covenants.
In the second quarter of 1998, we recognized special charges to
operations of $725 million associated with the implementation of our operational
realignment plan. We believe our after-tax cash outlay associated with these
charges will be in the range of $75 million to $100 million over the next 12
months.
Currently, we do not have any other material definitive commitments
that require cash resources; however, we continually evaluate opportunities to
expand our operations. This includes internal development of new products and
programs and may include acquisitions.
GOVERNMENT REGULATION
Our primary business, offering health care coverage and health care management
services, is heavily regulated at the federal and state levels. We strive to
comply in all respects with applicable regulations and may be required to make
changes from time to time in our services, products, marketing methods or
organizational or capital structure.
Regulatory agencies generally have broad discretion to issue
regulations and interpret and enforce laws and rules. 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. These changes could
affect our operations and financial results.
Certain proposed changes in Medicare and Medicaid programs may improve
opportunities to enroll people under products developed for these populations.
Other proposed changes could limit available reimbursement and increase
competition in those programs, with adverse effects on our financial results.
Also, it could be more difficult for us to control costs if federal and state
bodies continue to consider and enact significant and onerous managed care laws
and regulations. Among the legislative proposals are proposals that could expand
health plan liability or increase medical expenses.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA)
may represent the most significant federal reform of employee benefit law since
the enactment of the Employee Retirement Income Security Act (ERISA) in 1974.
Significant provisions of HIPAA include guaranteeing the availability of health
insurance for certain employees, limiting the use of preexisting condition
exclusions, prohibiting discrimination on the basis of health status, and making
it easier to continue coverage in cases where a person is terminated or changes
employers. Under HIPAA and other similar state laws, medical cost control
through amended provider contracts and improved preventive and chronic care
management may become more important. We believe our experience in these areas
will allow us to compete effectively.
A comprehensive set of claims regulations has been proposed by the
United States Department of Labor (DOL) that could have a significant impact on
the Company. These regulations are applicable to employee benefit plans subject
to ERISA. In addition to various other requirements, the regulations would
create new time frames for processing claims and giving notification of
incomplete claims, would impose certain notification requirements following a
claim determination, and would impose certain post-appeal disclosure obligations
on the Company's insured and self-funded business. The DOL has solicited public
comment on the proposals, and the regulations, if adopted, could vary
significantly from the proposals.
Health care fraud and abuse has become a top priority for the nation's
law enforcement entities, which have focused on participants in federal
government health care programs such as Medicare, Medicaid and the Federal
Employees Health Benefits Program (FEHBP). We participate extensively in these
programs.
We also are subject to governmental investigations and enforcement
actions. Included are actions relating to ERISA, which regulates insured and
self-insured health coverage plans offered by employers; the FEHBP; Medicare and
Medicaid; federal and state fraud and abuse laws; and laws relating to care
management and health care delivery. Government actions could result in
assessment of damages, civil or criminal fines or penalties, or other sanctions,
including exclusion from participation in government programs. We currently are
involved in various government investigations and audits, but we do not believe
the results will have a material adverse effect on our financial position or
results of operations.
II-8
<PAGE>
REGULATORY CAPITAL AND
DIVIDEND RESTRICTIONS
The Company's operations are conducted through United HealthCare Corporation,
its wholly-owned subsidiary United HealthCare Services, Inc. and their
respective subsidiaries, which consist principally of Health Maintenance
Organizations (HMOs) and insurance companies. HMOs and insurance companies are
subject to state regulations that, among other things, may require the
maintenance of minimum levels of statutory capital, as defined by each state,
and restrict the timing and amount of dividends and other distributions that may
be paid to their respective parent companies. Generally, the amount of dividend
distributions that may be paid by regulated insurance and HMO companies, without
prior approval by state regulatory authorities, is limited based on the entity's
level of statutory net income and statutory capital and surplus.
As of December 31, 1998, the Company's regulated subsidiaries had
aggregate statutory capital and surplus of approximately $1.4 billion, compared
with their aggregate minimum statutory capital and surplus requirements of $390
million. The amount of dividends that may be paid to the Company or United
HealthCare Services, Inc., by their insurance and HMO subsidiaries at December
31, 1998, without prior approval by state regulatory authorities, is limited to
approximately $120 million. There are no such restrictions on distributions from
United HealthCare Services, Inc. to the Company or on distributions from the
Company to its shareholders.
The National Association of Insurance Commissioners has adopted rules
which, to the extent that they are implemented by the states, will set new
minimum capitalization requirements for insurance companies, HMOs and other
entities bearing risk for health care coverage. The requirements take the form
of risk-based capital rules. The change in rules for insurance companies was
effective December 31, 1998. The new HMO rules are subject to state-by-state
adoption, but few states had adopted the rules as of December 31, 1998. The HMO
rules, if adopted by the states in their proposed form, would significantly
increase the capital required for certain of our subsidiaries. However, we
believe we can redeploy capital among our regulated entities to minimize the
need for incremental capital investment of general corporate financial resources
into regulated subsidiaries. As such, we do not anticipate a significant impact
on our aggregate capital or investments in regulated subsidiaries.
CONCENTRATIONS OF CREDIT RISK
Investments in financial instruments such as marketable securities and
commercial premiums receivable may subject UnitedHealth Group to concentrations
of credit risk. Our investments in marketable securities are managed by
professional investment managers within an investment policy authorized by the
board of directors. This policy limits the amounts that may be invested in any
one issuer. Concentrations of credit risk with respect to commercial premiums
receivable are limited to the large number of employer groups that comprise our
customer base. As of December 31, 1998, there were no significant concentrations
of credit risk.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the date of the Company's quarterly report filed on Form 10-Q for the
quarter ended September 30, 1998, no material changes have occurred in the
Company's exposure to market risk associated with our investments in market
risk-sensitive financial instruments. We do not believe that our risk of a loss
in future earnings or a decline in fair values or cash flow attributable to such
investments is material.
INFLATION
Although the general rate of inflation has remained relatively stable and health
care cost inflation has stabilized in recent years, the national health care
cost inflation rate still exceeds the general inflation rate. We use various
strategies to mitigate the negative effects of health care cost inflation,
including setting commercial premiums based on anticipated health care costs,
risk-sharing arrangements with various health care providers, and other health
care cost containment measures. Specifically, health plans try to control
medical and hospital costs through contracts with independent providers of
health care services. Through these contracted care providers, our health plans
emphasize preventive health care and appropriate use of specialty and hospital
services.
While we currently believe our strategies to mitigate health care cost
inflation will continue to be successful, competitive pressures, new health care
product introductions, demands from health care providers and customers,
applicable regulations, or other factors may affect our 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 in
place for network-based products. As a result, there is added health care cost
inflation risk with these products.
YEAR 2000 ACTIVITIES
Our business depends significantly on effective information systems, and we have
many different information systems for our various businesses. Our information
systems require ongoing enhancements to keep pace with the continuing changes in
information technology, evolving industry standards, and customer preferences.
We have been modifying our computer systems to accommodate the Year 2000. The
Year 2000 problem exists throughout the global marketplace, as many computer
systems and applications were developed to recognize the year as a two-digit
number, with the digits "00" being recognized as the year 1900.
Starting in 1995, our formal Year 2000 Project Office began
implementing a remediation plan so that critical information systems
applications, end-user developed application tools, and business interfaces
remain intact and can function properly through the century change. We are on
schedule to complete, test and certify our Year 2000 remediation efforts by
September 30, 1999. A more detailed description and current status of our Year
2000 activities follows.
II-9
<PAGE>
TECHNICAL INFRASTRUCTURE
MAINFRAME TECHNOLOGY In conjunction with our two vendors that provide support
for our data center operations, we have completed, tested and certified 99% of
our remediation efforts for the hardware, operating system and supporting
software remediation efforts on our two primary mainframe computer systems. In
addition, we are in the process of reviewing some of our smaller mainframe
systems and making modifications as necessary. We expect to be 100% complete
with all mainframe hardware and software technology Year 2000 modifications by
March 31, 1999. We also have installed separate test environments (both
mainframe and distributed) to test our business applications in a simulated Year
2000 environment.
DESKTOP HARDWARE AND SOFTWARE We have inventoried all of our desktop hardware
and software-- more than 40,000 computing devices of multiple makes and models.
All noncompliant desktop hardware and software have been identified and are
being modified or replaced with compliant systems by September 30, 1999.
TELECOMMUNICATIONS We have inventoried all of our telecommunication systems--
more than 28,000 telecommunication devices, including traffic routers and phone
switches. We are using two outside vendors to assist us in modifying or
replacing noncompliant telecommunication systems. As of December 31, 1998, we
were approximately 75% Year 2000 compliant with our data and voice networks. We
expect all of our telecommunication networks and devices will be Year 2000
compliant by September 30, 1999.
BUSINESS APPLICATIONS
CRITICAL SOFTWARE APPLICATIONS We use 500 different software applications that
include more than 80 million lines of computer code. We have surveyed our
software applications and have identified systems that will not be used after
December 31, 1999, and systems that will be modified for Year 2000 compliance.
We have determined that 36% of our software applications will not be used after
December 31, 1999, due to conversions, consolidations and software replacements.
Of the remaining applications, over 90% have been made Year 2000 compliant,
tested and certified or are scheduled to be certified for compliance. The
balance of the applications are yet to be tested. We expect all critical Year
2000 software modifications to be completed by March 31, 1999, with further
testing and certification during the remainder of 1999.
END-USER DEVELOPED APPLICATIONS End-user developed applications are analysis
tools that have been internally developed by individual employees or
operating segments primarily running on personal computers or client servers.
The Year 2000 Project Office has continuously communicated with all employees
explaining the risks of noncompliant applications and provided tools and
techniques to make them compliant. We have identified and are tracking and
assessing Year 2000 compliance issues with respect to all potentially
critical end-user applications.
OTHER YEAR 2000 MATTERS
NON-INFORMATION TECHNOLOGY SYSTEMS
We have approximately 300 owned or leased facilities throughout the world. We
have contacted all of our facility managers regarding Year 2000 compliance
issues. In addition, we have contracted with a real estate management company to
assist in our Year 2000 compliance efforts. All facilities are scheduled to be
Year 2000 compliant by September 1, 1999.
DEPENDENCE ON THIRD PARTIES
We use approximately 300,000 different medical providers and more than 92,000
vendors. Approximately 2,000 vendors have been identified as critical business
partners and suppliers. We are currently in communication with these critical
business partners to analyze their Year 2000 compliance efforts. We expect to
complete our analysis of critical vendor readiness and identify alternative
vendors, where necessary, by July 31, 1999. We will not be individually
contacting all of the 300,000 medical providers with whom we conduct business
regarding Year 2000 compliance issues. However, we will be testing and verifying
the electronic collection of data with our providers through our EDI (electronic
data interface) clearinghouse vendors.
COSTS OF YEAR 2000 COMPLIANCE
The projected costs of our Year 2000 compliance efforts and the date on which we
plan to complete the necessary Year 2000 remediation efforts are based on
management's best estimates, which were derived using various assumptions of
future events. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ significantly from our current plans.
Specific factors that might cause significant differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct the relevant computer codes, and the ability of
our significant vendors, providers, customers, and others with whom we conduct
business to identify and resolve their own Year 2000 issues.
Costs associated with modifying internal use software for Year 2000
compliance are charged to expense as incurred. Purchases of hardware or software
that replace existing hardware or software that is not Year 2000 compliant are
capitalized and amortized over their useful lives. As of December 31, 1998, our
historical and projected costs to complete our Year 2000 remediation plan were
as follows (in millions):
<TABLE>
Expenses Incurred to Date Projected Expenses
------------------------------ ------------------------------
Resources Depreciation Resources Depreciation Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 $ 1 $ - $ - $ - $ 1
1997 12 - - - 12
1998 18 - - - 18
1999 - - 18 7 25
2000 - - 3 9 12
2001 - - - 9 9
2002 - - - 2 2
- ------------------------------------------------------------------------------------------
$ 31 $ - $ 21 $ 27 $ 79
- ------------------------------------------------------------------------------------------
</TABLE>
II-10
<PAGE>
BUSINESS RISKS OF NONCOMPLIANT SYSTEMS
Although we are committed to completing and testing our remediation plan well in
advance of the Year 2000, there are risks if we do not meet our objectives by
December 31, 1999. Operationally, the most severe risk is business interruption.
Specific examples of situations that could cause business interruption include,
but are not limited to: computer hardware or application software processing
errors or failures, facilities or infrastructure failures, or critical outside
providers, suppliers, or customers who may not be Year 2000 compliant. Depending
on the extent and duration of business interruption resulting from noncompliant
Year 2000 systems, such interruption may have a material adverse effect on our
results of operations, liquidity and financial condition.
CONTINGENCY PLANS
Each area of our Year 2000 compliance effort is currently developing
contingency plans to mitigate the risk of failure, and to provide for a
speedy recovery from possible failures associated with the century change.
The contingency plans detail strategies to implement in 1999 to prepare for
the century rollover, and actions to execute if problems emerge. The target
date for completion of the initial contingency plans is April 1, 1999.
Contingency plans will be final by July 31, 1999.
LEGAL MATTERS
Six suits assert claims under the U.S. securities laws against UnitedHealth
Group and certain of its current and former officers and directors. The
plaintiffs are shareholders of the Company who purport to sue on behalf of a
class of purchasers of the Company's common shares during the period February
12, 1998, through August 5, 1998 (the "Class Period"). Each complaint was filed
in the United States District Court for the District of Minnesota. Each of the
six actions claims violations of Sections 10(b) and 20(a) of the Securities
Exchange Act and SEC Rule 10b-5. In substance, the complaints allege that the
Company made materially false or misleading statements about the profitability
and performance of the Company's Medicare business during the Class Period. Two
of the complaints also allege that the Company made materially false statements
about its medical costs and the expenses related to its realignment. The
complaints also allege that the statements were made with the intention of
deceiving members of the investing public and with the intention that the price
of the Company's shares would rise, making it possible for insiders at the
Company to profit by selling shares at a time when they knew the Company's true
financial condition, but the investing public did not. The complaints allege
that once the Company's true financial condition was revealed on August 6, 1998,
the price of its common shares fell from a closing price of $52 7/8 per share on
August 5, 1998, to a closing price of $37 7/8 per share on August 6, 1998.
The complaints seek compensatory damages in unspecified amounts.
On January 19, 1999, we received a consolidated amended complaint (In
re United HealthCare Corporation Securities Litigation, No. 98-1888 in the
United States District Court for the District of Minnesota) for the six suits,
which essentially restates the allegations made in the earlier complaints.
On March 22, 1999, two actions were filed in the United States
District Court for the District of Minnesota by two pension funds against
United, certain current and former officers and directors, and other
individuals yet to be identified. The pension funds wish to "opt-out" of
the aforementioned purported class action suits. These individual actions
essentially restate the allegations made in the purported class actions and
claim violations of Sections 10(b), 18(a) and 20 of the Securities Exchange
Act. In addition, both actions assert a claim of negligent misrepresentation
and securities claims under state law. In the aggregate, the plaintiff
pension funds seek compensatory damages totaling approximately $12.1 million.
We intend to defend these actions vigorously.
We are also involved in other legal actions that arise in the ordinary
course of business. Although we cannot predict the outcomes of legal actions, it
is our opinion that the resolution of all currently pending or threatened
actions, including the class action lawsuit described above, will not have an
adverse effect on our consolidated financial position or results of operations.
CAUTIONARY STATEMENT REGARDING
"FORWARD-LOOKING" STATEMENTS
The statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operation, and other sections of this annual
report to shareholders, include forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). When used
herein, the words or phrases "believes," "expects," "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. Statements that are not strictly historical are
"forward-looking" statements under the safe harbor provisions of the PSLRA.
Forward-looking statements involve known and unknown risks, which may cause
actual results and corporate developments to differ materially from those
expected. Factors that could cause results and developments to differ materially
from expectations include, without limitation, the effects of state and federal
regulations, the effects of acquisitions and divestitures, and other risks
described from time to time in each of UnitedHealth Group's SEC reports,
including quarterly reports on Form 10-Q, annual reports on Form 10-K, and
reports on Form 8-K.
II-11
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the date of the Company's Quarterly Report filed on Form 10-Q for the
quarter ended September 30, 1998, no material changes have occurred in the
Company's exposure to market risk associated with the Company's investments in
market risk sensitive financial instruments. We do not believe that our risk of
a loss in future earnings or a decline in fair values or cash flow attributable
to such investments is material.
II-12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS UNITEDHEALTH GROUP
<TABLE>
For the Year Ended December 31,
(in millions, except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $ 15,516 $ 10,135 $ 8,491
Management Services and Fees 1,590 1,428 1,398
Investment and Other Income 249 231 185
- ----------------------------------------------------------------------------------------
Total Revenues 17,355 11,794 10,074
- ----------------------------------------------------------------------------------------
OPERATING EXPENSES
Medical Costs 13,523 8,542 7,180
Selling, General and Administrative Expenses 2,964 2,364 2,165
Depreciation and Amortization 185 146 133
Merger Costs -- -- 15
Operational Realignment and Other Charges 725 --
- ----------------------------------------------------------------------------------------
Total Operating Expenses 17,397 11,052 9,493
- ----------------------------------------------------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS (42) 742 581
Interest Expense (4) -- --
- ----------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (46) 742 581
Provision for Income Taxes (120) (282) (225)
- ----------------------------------------------------------------------------------------
NET EARNINGS (LOSS) (166) 460 356
CONVERTIBLE PREFERRED STOCK DIVIDENDS (28) (29) (29)
CONVERTIBLE PREFERRED STOCK REDEMPTION PREMIUM (20) -- --
- ----------------------------------------------------------------------------------------
NET EARNINGS (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ (214) $ 431 $ 327
- ----------------------------------------------------------------------------------------
BASIC NET EARNINGS (LOSS) PER COMMON SHARE $ (1.12) $ 2.30 $ 1.80
- ----------------------------------------------------------------------------------------
DILUTED NET EARNINGS (LOSS) PER COMMON SHARE $ (1.12) $ 2.26 $ 1.76
- ----------------------------------------------------------------------------------------
BASIC WEIGHTED-AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 191 187 182
DILUTIVE EFFECT OF OUTSTANDING STOCK OPTIONS -- 4 4
- ----------------------------------------------------------------------------------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, ASSUMING DILUTION 191 191 186
- ----------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
II-13
<PAGE>
CONSOLIDATED BALANCE SHEETS UNITEDHEALTH GROUP
<TABLE>
<CAPTION>
As of December 31,
(in millions, except share and per share data) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $1,644 $ 750
Short-Term Investments 170 506
Accounts Receivable, net of allowances of $64 and $45 991 768
Assets Under Management 1,155 28
Other Current Assets 320 141
- --------------------------------------------------------------------------------------
Total Current Assets 4,280 2,193
Long-Term Investments 2,610 2,785
Property and Equipment, net of accumulated depreciation of
$463 and $350 294 364
Goodwill and Other Intangible Assets, net of accumulated
amortization of $258 and $205 2,517 2,281
- --------------------------------------------------------------------------------------
Total Assets $9,701 $ 7,623
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical Costs Payable $2,780 1,565
Other Policy Liabilities 714 235
Accounts Payable and Accrued Liabilities 739 495
Short-Term Debt 459 --
Accrued Operational Realignment and Other Charges 236 --
Unearned Premiums 414 275
- --------------------------------------------------------------------------------------
Total Current Liabilities 5,342 2,570
Long-Term Debt 249 --
Other Long-Term Liabilities 72 19
Convertible Preferred Stock -- 500
Commitments and Contingencies (Note 14)
- --------------------------------------------------------------------------------------
Shareholders' Equity
Common Stock, $0.01 par value - 500,000,000
shares authorized; 183,930,000 and
191,111,000 issued and outstanding 2 2
Additional Paid-in Capital 1,107 1,398
Retained Earnings 2,885 3,105
Net Unrealized Holding Gains on Investments
Available for Sale, net of income tax effects 44 29
- --------------------------------------------------------------------------------------
Total Shareholders' Equity 4,038 4,534
- --------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $9,701 $ 7,623
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
II-14
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY UNITEDHEALTH GROUP
<TABLE>
<CAPTION>
Net
Unrealized
Holding Gains
(Losses) on
Common Stock Additional Investments Total
------------ Paid-in Retained Available Shareholders' Comprehensive
(in millions, except per share data) Shares Amount Capital Earnings for Sale Equity Income (Loss)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 175 $ 2 $ 822 $ 2,359 $ 5 $ 3,188
Issuance of Common Stock
Stock Plans and Related Tax Benefits 2 -- 56 -- -- 56
Acquisitions 8 -- 270 -- -- 270
Comprehensive Income
Net Earnings -- -- -- 356 -- 356 $ 356
Other Comprehensive Income Adjustments
Change in Net Unrealized Holding
Losses on Investments Available
for Sale, net of income tax effects -- -- -- -- (12) (12) (12)
-------
Comprehensive Income -- -- -- -- -- -- $ 344
-------
Cash Dividends
Common Stock ($0.03 per share) -- -- -- (6) -- (6)
Convertible Preferred Stock ($57.50 per share) -- -- -- (29) -- (29)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 185 2 1,148 2,680 (7) 3,823
Issuance of Common Stock
Stock Plans and Related Tax Benefits 3 -- 116 -- -- 116
Acquisitions 3 -- 144 -- -- 144
Stock Repurchases -- -- (10) -- -- (10)
Comprehensive Income
Net Earnings -- -- -- 460 -- 460 $ 460
Other Comprehensive Income Adjustments
Change in Net Unrealized Holding
Gains on Investments Available
for Sale, net of income tax effects -- -- -- -- 36 36 36
------
Comprehensive Income -- -- -- -- -- -- $ 496
------
Cash Dividends
Common Stock ($0.03 per share) -- -- -- (6) -- (6)
Convertible Preferred Stock ($57.50 per share) -- -- -- (29) -- (29)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 191 2 1,398 3,105 29 4,534
Issuance of Common Stock
Stock Plans and Related Tax Benefits 4 -- 131 -- -- 131
Acquisitions -- -- 14 -- -- 14
Stock Repurchases (11) -- (436) -- -- (436)
Comprehensive Income (Loss)
Net Loss -- -- -- (166) -- (166) $ (166)
Other Comprehensive Income Adjustments
Change in Net Unrealized Holding
Gains on Investments Available
for Sale, net of income tax effects -- -- -- -- 15 15 15
------
Comprehensive Loss -- -- -- -- -- -- $ (151)
------
Cash Dividends
Common Stock ($0.03 per share) -- -- -- (6) -- (6)
Convertible Preferred Stock ($56.03 per share) -- -- -- (28) -- (28)
Convertible Preferred Stock Redemption Premium -- -- -- (20) -- (20)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 184 $ 2 $ 1,107 $ 2,885 $ 44 $4,038
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
II-15
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS UNITEDHEALTH GROUP
<TABLE>
<CAPTION>
For the Year Ended December 31,
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Earnings (Loss) $ (166) $ 460 $ 356
Noncash Items
Depreciation and Amortization 185 146 133
Deferred Income Taxes (184) 91 48
Asset Impairments 451 -- --
Provision for Future Losses -- -- 45
Other -- -- (8)
Net Change in Other Operating Items, net of effects from
acquisitions, sales of subsidiaries and changes in AARP
balances
Accounts Receivable and Other Current Assets 41 (84) (185)
Medical Costs Payable 269 53 321
Accounts Payable and Other Current Liabilities 137 (30) (202)
Accrued Operational Realignment and Other Charges 236 --- --
Unearned Premiums 102 47 54
- --------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities 1,071 683 562
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash Paid for Acquisitions, net of cash assumed
and other effects (464) -- (52)
Purchases of Property and Equipment and
Capitalized Software (210) (187) (165)
Proceeds from Sales of Property and Equipment 59 -- --
Purchases of Investments (2,799) (6,706) (5,010)
Maturities/Sales of Investments 3,435 5,889 4,755
- --------------------------------------------------------------------------------------------------
Cash Flows From(Used For) Investing Activities 21 (1,004) (472)
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from Issuance of Debt 708 -- --
Proceeds from Stock Option Exercises 84 79 42
Redemption of Convertible Preferred Stock (520) -- --
Stock Repurchases (436) (10) --
Dividends Paid
Convertible Preferred Stock (28) (29) (29)
Common Stock (6) (6) (6)
- --------------------------------------------------------------------------------------------------
Cash Flows (Used For) From Financing Activities (198) 34 7
- --------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 894 (287) 97
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 750 1,037 940
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,644 $ 750 $ 1,037
- --------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
II-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNITEDHEALTH GROUP
(1) DESCRIPTION OF BUSINESS
UnitedHealth Group ("the Company," "we," "us," "our") is a national leader in
offering health care coverage and related services to help people achieve
improved health and well-being through all stages of life. We provide a broad
spectrum of products and services and operate in all 50 states, the District of
Columbia and Puerto Rico, as well as internationally.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
We have prepared the consolidated financial statements in accordance with
generally accepted accounting principles and have included the accounts of
UnitedHealth Group and its subsidiaries. We have eliminated all significant
intersegment and intercompany accounts and transactions.
USE OF ESTIMATES
These financial statements include some amounts that are based on our best
estimates and judgments. The most significant estimates relate to medical costs
payable and other policy liabilities, intangible asset valuations and useful
lives, integration reserves relating to acquisitions, and liabilities and asset
impairments relating to our operational realignment activities. These estimates
may be adjusted as more current information becomes available, and any
adjustment could be significant.
REVENUE RECOGNITION
Premium revenues are recognized in the period enrolled members are entitled to
receive health care services. Premium payments received from our customers prior
to such period are recorded as unearned premiums. Management services and fee
revenues are recognized in the period the related services are performed.
Premium revenues related to Medicare and Medicaid programs as a percentage of
total premium revenues were 20% in 1998, 22% in 1997, and 19% in 1996.
MEDICAL COSTS AND MEDICAL COSTS PAYABLE
Medical costs include claims paid, claims adjudicated but not yet paid,
estimates for claims received but not yet adjudicated, and estimates for claims
incurred but not yet received.
The estimates of medical costs and medical costs payable are
developed using actuarial methods based upon historical data for payment
patterns, cost trends, product mix, seasonality, utilization of health care
services and other relevant factors including product changes. The estimates
are subject to change as actuarial methods change or as underlying facts,
upon which estimates are based, change. We did not change our actuarial
methods during 1998, 1997 or 1996. The impact of any changes in estimates is
included in the determination of earnings in the period of change. Management
believes that the amount of medical costs payable is adequate to cover the
Company's liability for unpaid claims as of December 31, 1998.
CASH, CASH EQUIVALENTS, AND INVESTMENTS
Cash and cash equivalents are highly liquid investments with an original
maturity of three months or less. The fair value of cash and cash equivalents
approximates their carrying value because of the short maturity of the
instruments. Investments with a maturity of less than one year are classified as
short-term.
Investments held by trustees or agencies according to state regulatory
requirements are classified as held-to-maturity based on our ability and intent
to hold these investments to maturity. Such investments are reported at
amortized cost and are included in long-term investments. All other investments
are classified as available for sale and reported at fair value based on quoted
market prices and are classified as short-term or long-term depending on their
maturity term. Periodically, we sell investments classified as long-term prior
to their maturity to fund working capital or for other purposes.
Unrealized gains and losses on investments available for sale are
excluded from earnings and reported as a separate component of shareholders'
equity, net of income tax effects. To calculate realized gains and losses on the
sale of investments available for sale, we use the specific cost of each
investment sold. We have no investments classified as trading securities.
ASSETS UNDER MANAGEMENT
Under our 10-year agreement with the AARP, we are administering certain aspects
of the AARP's insurance program that were transferred from the program's
previous carrier (see Note 7). Pursuant to our agreement with the AARP, the
associated assets are managed separately from our general investment portfolio
and are used to fund expenditures associated with the AARP program. The assets
are invested at our discretion, within certain investment guidelines approved by
the AARP. At December 31, 1998, the assets were invested in marketable debt
securities. Interest earnings and realized investment gains and losses on these
assets accrue to the AARP policyholders and, as such, are not included in our
determination of earnings. Assets under management are reported at their
amortized cost. Unrealized gains and losses are included in the reserve
stabilization fund associated with the AARP program (see Note 7). At December
31, 1998, the AARP investment portfolio included unrealized gains of $12
million.
II-17
<PAGE>
OTHER POLICY LIABILITIES
Other policy liabilities principally relate to experience-rated indemnity
products and primarily include retrospective rate credit reserves and customer
balances.
Retrospective rate credit reserves represent premiums we received in
excess of claims and expenses charged under eligible contracts. Reserves
established for closed policy years are based on actual experience, while
reserves for open years are based on estimates of premiums, claims and expenses
incurred.
Customer balances consist principally of deposit accounts and reserves
that have accumulated under certain experience-rated contracts. At the
customer's option, these balances may be returned to the customer or may be used
to pay future premiums or claims under eligible contracts.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful life of the respective assets,
ranging from three years to 30 years. The weighted-average useful life of
property and equipment at December 31, 1998, was approximately six years.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the purchase price and transaction costs associated with
businesses we acquired in excess of the estimated fair value of the net assets
of these businesses. To the extent possible, a portion of the excess purchase
price and transaction costs is assigned to certain identifiable intangible
assets. Goodwill and other intangible assets are being amortized on a
straight-line basis over useful lives ranging from three years to 40 years, with
a weighted-average useful life of 34 years.
The useful lives of goodwill and other intangible assets have been
assigned based on our best judgment. We periodically evaluate whether certain
circumstances may affect the estimated useful lives or the recoverability of the
unamortized balance of goodwill or other intangible assets.
The most significant components of goodwill and other intangible
assets are comprised of goodwill of $1.6 billion in 1998 and $1.2 billion in
1997, and employer group contracts and supporting infrastructure,
distribution networks, and institutional knowledge of $800 million in 1998
and $900 million in 1997, net of accumulated amortization.
LONG-LIVED ASSETS
We review long-lived assets for events or changes in circumstances that would
indicate we may not recover their carrying value. We consider a number of
factors, including estimated future undiscounted cash flows associated with the
long-lived asset, to make this decision. We record assets held for sale at the
lower of their carrying amount or fair value, less any costs associated with the
final settlement.
INCOME TAXES
Deferred income tax assets and liabilities are recognized for the differences
between the financial and income tax reporting bases of assets and liabilities
based on enacted tax rates and laws. The deferred income tax provision or
benefit generally reflects the net change in deferred income tax assets and
liabilities during the year. The current income tax provision reflects the tax
consequences of revenues and expenses currently taxable or deductible on various
income tax returns for the year reported.
STOCK-BASED COMPENSATION
We use the intrinsic value method for determining stock-based compensation
expenses. Under the intrinsic value method, we do not recognize compensation
expense when the exercise price of an employee stock option equals or exceeds
the fair market value of the stock on the date the option is granted.
Information on what our stock-based compensation expenses would have been had we
calculated those expenses using the fair market values of granted stock options
is included in Note 12.
NET EARNINGS (LOSS) PER COMMON SHARE
Basic net earnings (loss) per common share is computed by dividing net earnings
(loss) applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted net earnings (loss) per
common share is determined using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of common stock
equivalents, consisting of shares which might be issued upon exercise of common
stock options. In periods where losses are reported, the weighted-average number
of common shares outstanding excludes common stock equivalents, since their
inclusion would be anti-dilutive.
COMPREHENSIVE INCOME
Comprehensive income and its components is reported in the Consolidated
Statements of Changes in Shareholders' equity. Comprehensive income is defined
as changes in the equity of our business excluding changes resulting from
investments by and distributions to our shareholders.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, a new standard on accounting for derivative financial instruments
and hedging activities was issued. This new standard will not materially affect
our financial results or disclosures based upon our current investment
portfolio.
II-18
<PAGE>
(3) ACQUISITIONS
In October 1998, our UnitedHealthcare business acquired HealthPartners of
Arizona, Inc. (HPA), with 509,000 members as of the acquisition date. We paid
$235 million in cash in exchange for all outstanding shares of HPA. We
accounted for the acquisition using the purchase method of accounting, which
means the purchase price was allocated to assets and liabilities acquired
based on their estimated fair values at the date of acquisition and only the
post-acquisition results of HPA are included in our consolidated financial
statements. The purchase price and costs associated with the acquisition
exceeded the preliminary estimated fair value of net assets acquired by $223
million, which has been assigned to goodwill. The pro forma effects of the
HPA acquisition on our consolidated financial statements were not material.
During 1998, our Ingenix business segment acquired Kern-McNeill
International (KMI), a New Jersey-based contract research organization, and
St. Anthony Publishing, Inc. (St. Anthony), a leader in the health care
coding and reimbursement publications market. In the aggregate, we paid $188
million in cash and assumed liabilities of $17 million in exchange for all of
the common stock of KMI and St. Anthony. We accounted for these acquisitions
using the purchase method of accounting. The purchase price and costs
associated with these acquisitions exceeded the preliminary estimated fair
value of net assets acquired by $205 million, which has preliminarily been
assigned to identifiable intangible assets and goodwill. The pro forma
effects of these acquisitions on our consolidated financial statements were
not material.
In December 1997, Ingenix acquired Medicode, Inc. (Medicode), a
leading provider of health care information products. We issued 2.4 million
shares of common stock and 507,000 common stock options with a total fair
value of $127 million in exchange for all outstanding shares of Medicode. We
accounted for the acquisition using the purchase method of accounting. The
purchase price and costs associated with the acquisition exceeded the
preliminary estimated fair value of net assets acquired by $123 million,
which was preliminarily assigned to goodwill. During the second quarter of
1998, the Company completed the valuation of the intangible assets acquired
in the Medicode transaction. Pursuant to the valuation, we expensed $68
million of the excess purchase price representing purchased in-process
technology that previously had been assigned to goodwill. In management's
judgment, this amount reflects the amount we would reasonably expect to pay
an unrelated party for each project included in the technology. The value of
in-process research and development of $68 million represented approximately
48% of the purchase price and was determined by estimating the costs to
develop the purchased technology into commercially viable products, then
estimating the resulting net cash flows from each project that was incomplete
at the acquisition date, and discounting the resulting net cash flows to their
present value. The amount of research and development expended by Medicode on
these projects prior to the acquisition date totaled $8.5 million, with
another $2.2 million expected to be spent to complete these research and
development projects. The in-process technology has not yet reached
technological feasibility and has no alternative future use. The in-process
projects were focused on the continued development and evolution of
next-generation medical databases and software solutions. The $68 million
charge is included as a component of Operational Realignment and Other
Charges in the accompanying Consolidated Statements of Operations for the
year ended December 31, 1998. Based on the final valuation, the remaining
excess purchase price of $55 million was assigned to existing technologies,
trade names and goodwill. The pro forma effects of the Medicode acquisition
on our consolidated financial statements were not material.
In April 1996, we completed the acquisition of HealthWise of
America, Inc. (HealthWise). HealthWise owned or operated health plans in
Maryland, Kentucky, Tennessee and Arkansas that served 154,000 members at the
time of acquisition. We issued 4.3 million shares of common stock in exchange
for all outstanding shares of HealthWise. We accounted for the acquisition as
a pooling of interests; however, we did not restate our historical financial
results because the effects of this acquisition on our consolidated financial
statements were not material. In connection with the HealthWise acquisition,
we incurred merger costs of $15 million.
In March 1996, we completed the acquisition of PHP, Inc. (PHP), a
North Carolina-based health plan that served 132,000 members at the time of
acquisition. We issued 2.3 million shares of common stock, with a fair value
of $140 million, in exchange for all outstanding shares of PHP. We accounted
for the acquisition using the purchase method of accounting. The purchase
price and costs associated with the acquisition exceeded the estimated fair
value of net assets acquired by $115 million, which has been assigned to
goodwill. The pro forma effects of the PHP acquisition on our consolidated
financial statements were not material.
We acquired MetraHealth in October 1995. MetraHealth was formed in
January 1995 by combining the group health care insurance operations of
Metropolitan Life Insurance Company and The Travelers Insurance Group. We
accounted for the acquisition using the purchase method of accounting. The
excess purchase price over the fair value of net assets acquired of $1.2
billion was assigned to identifiable intangibles of $635 million in the
Indemnity, Administrative Services Only and Specialty businesses consisting
of employer group contracts and the supporting infrastructure, distribution
networks and institutional knowledge being amortized over periods ranging
from 10 to 40 years, with the remaining $560 million assigned to goodwill
being amortized over 40 years.
(4) SPECIAL OPERATING CHARGES
OPERATIONAL REALIGNMENT AND OTHER CHARGES
In conjunction with our operational realignment initiatives, we developed and,
in the second quarter of 1998, approved a comprehensive plan (the Plan) to
implement our operational realignment. We recognized corresponding charges to
operations of $725 million in the quarter, which reflect the estimated costs we
will incur under the Plan. The charges included costs associated with asset
impairments; employee terminations; disposing of or discontinuing business
units, product lines and contracts; and consolidating and eliminating certain
processing operations and associated real estate obligations. These activities
will result in a net reduction of more than 4,000 positions affecting 6,000
people in various locations. Through December 31, 1998, we have eliminated
approximately 2,000 positions pursuant to the Plan.
II-19
<PAGE>
Our original provision for operational realignment and other charges was
developed based on management's best judgment and estimates at that time. As
we began to execute the Plan, we adjusted certain estimates based on more
current information related to the amounts to be paid for severance and lease
cancellation fees. In addition, based on continuing negotiations related to
business dispositions, our original estimates for asset impairments and
business disposition costs were revised. In total, our Operational
Realignment and Other Charges did not change.
The following table summarizes the components of the operational
realignment and other charges for the year ended December 31, 1998 (in
millions):
<TABLE>
<CAPTION>
Additional Charges Incurred
Recorded Charges ------------------ Accrual at
Provision (Credits) Cash Noncash Year-End
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for operational
realignment and other
charges:
Asset Impairments $ 430 21 $ - $ (451) $ -
Severance and
outplacement costs 142 (20) (19) - 103
Noncancelable lease
obligations 82 (9) (6) - 67
Dispositions of business
and other costs 71 8 (13) - 66
- ---------------------------------------------------------------------------------------
Total provision $ 725 - $ (38) $ (451) $ 236
- ---------------------------------------------------------------------------------------
</TABLE>
The asset impairments consist principally of goodwill and other
long-lived assets, including fixed assets, computer hardware and software and
leasehold improvements, from: 1) businesses we intend to dispose of or
discontinue, 2) markets where we plan to curtail our operations or change the
nature of our operating presence, or 3) the allocation of the purchase price
for the acquisition of Medicode.
Businesses we intend to dispose of include our managed workers'
compensation business, and medical and behavioral health provider clinics.
Markets where we plan to curtail or make changes to our operating presence
include our small group health insurance business and three health plan
markets that are in non-strategic locations. We prepared a forecast of
expected undiscounted cash flows, where appropriate, to determine whether
asset impairments existed. We used discounted cash flows to determine the
fair value and measure the write-downs for two of the three health plans. We
estimated proceeds on the sale of the managed workers' compensation, small
group health insurance, clinical and other health plan businesses in order to
determine the fair value and amount of asset write-down for these businesses.
The final allocation of the purchase price for the acquisition of Medicode
was based on an independent valuation. The asset impairments also consist of
other operating assets written down to their net realizable value as a result
of operational realignment activities. The carrying value of the net assets
held for sale or disposal is approximately $20 million as of December 31,
1998.
Our accompanying financial statements include the operating results of
businesses to be disposed of or discontinued in connection with the
operational realignment. The losses anticipated on the disposition of these
businesses, including severance, impairment of assets, abandoned facilities
and additional exit costs, represent approximately $175 million and are
included in the $725 million of operational realignment and other charges.
Our accompanying Consolidated Statements of Operations include revenues and
operating losses from these businesses as follows (in millions):
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Revenues $ 674 $ 644
Loss Before Income Taxes $ (31) $ (31)
- -----------------------------------------------------------------------
</TABLE>
The table above does not include operating results from the counties
where we will be withdrawing our health plan Medicare product offerings
effective January 1, 1999. Annual revenues for 1998 from the Medicare
counties we are exiting were approximately $225 million.
The operational realignment charges do not cover certain aspects of the
Plan, including new information systems, data conversions, process
re-engineering, and employee relocation and training. These costs will be
charged to expense as incurred or capitalized, as appropriate.
MEDICAL COSTS
During the second quarter of 1998, we recorded $175 million of medical cost
charges. Of this amount, $101 million related to Medicare contract losses,
$19 million related to other increases to Medicare medical costs payable
estimates, and $55 million related to increases to commercial medical costs
payable estimates.
The $101 million of contract losses were incurred in 13 of our 24
Medicare markets. These plans contribute half of our annual Medicare premiums
of $2.4 billion. Six of these markets are generally newer markets where we
have been unable to achieve the scale of operations necessary to achieve
profitability. In numerous counties in the seven other markets, we experienced
high medical costs which exceeded the fixed Medicare premiums that only
increased 2.5% on average. We incurred $38 million of these Medicare losses
during the second quarter and accrued $63 million at June 30, 1998, to cover
estimated future losses to be incurred in the third and fourth quarters. We
actually incurred $73 million of losses in the third and fourth quarters, and
we recorded the additional $10 million as medical costs in the fourth quarter.
II-20
<PAGE>
(5) METRAHEALTH RESTRUCTURING CHARGES
In connection with our acquisition of The MetraHealth Companies, Inc.
(MetraHealth) in 1995, we developed a comprehensive plan to integrate the
business activities of the combined companies (the Plan). The Plan included,
among other things, the disposition, discontinuance and restructuring of
certain businesses and product lines, and the recognition of certain asset
impairments. In the fourth quarter of 1995, we recorded $154 million in
restructuring charges associated with the Plan.
In conjunction with ongoing integration efforts, we modified the Plan
during 1996. The restructuring reserves established with the original Plan
were an accurate estimation of the costs incurred; however, we needed to
reallocate the reserve estimates among the associated activities as the
original Plan evolved.
A reconciliation of MetraHealth restructuring activities for the years
ended December 31 is as follows (in millions):
<TABLE>
<CAPTION>
1998 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 11 $ 28 $ 141 $ -
Provision for restructuring costs:
Severance and Outplacement - - (10) 24
Contract Terminations - - 3 58
Noncancelable Lease
Obligations - - 7 20
Asset Impairments - - - 52
Cash Payments:
Severance and Outplacement - (3) (9) (2)
Contract Terminations (4) (9) (39) (9)
Noncancelable Lease
Obligations (7) (5) (13) (2)
Noncash Activities
Property, Equipment and
Software Write-downs - - (52) -
- --------------------------------------------------------------------------------------------
Balance at end of year $ - $ 11 $ 28 $ 141
- --------------------------------------------------------------------------------------------
</TABLE>
(6) PROVISION FOR FUTURE LOSSES
In the second quarter of 1996, we recorded a provision to medical costs of
$45 million to cover estimated losses we expected to incur through the
remaining terms of two large 28 contracts in our St. Louis health plan. One
of the contracts expired in December 1998 and contained a premium rate
increase cap of 2.5% per year. The other contract expires in December 2000
and generally limits premium rate increases to annual Consumer Price Index
adjustments. As of December 31, 1998, there were approximately 35,000 members
under this contract.
Our estimate of future revenues and losses under these contracts is as
follows (in millions):
<TABLE>
<CAPTION>
Revenues Losses
- -----------------------------------------------------------------------------
<S> <C> <C>
1999 estimate $ 59 $ (6)
2000 estimate $ 61 $ (7)
- -----------------------------------------------------------------------------
</TABLE>
We believe the remaining balance in the accrual for future losses of $13
million, which is included in medical costs payable in the accompanying
Consolidated Balance Sheets, will be sufficient to cover expected future
losses from the remaining contract.
(7) AMERICAN ASSOCIATION OF RETIRED PERSONS
On January 1, 1998, we entered into a ten-year contract to provide insurance
products and services to members of the AARP. Under the terms of the
contract, we are compensated for claims administration and other services as
well as for assuming underwriting risk. We are also engaged in product
development activities to complement the insurance offerings under this
program. The AARP has also contracted with certain other vendors to provide
other member and marketing services. We report premium revenues associated
with the AARP program net of the administrative fees paid to these vendors
and an administrative allowance we pay to the AARP.
Our underwriting results related to the AARP business are recorded as an
increase or decrease to a rate stabilization fund (RSF). The RSF is included
in other policy liabilities in the accompanying Consolidated Balance Sheets.
The primary components of our underwriting results are premium revenue,
medical costs, investment income, administrative expenses, member service
expenses, marketing expenses and premium taxes. To the extent we incur
underwriting losses that exceed the balance in the RSF, we would be required
to fund the deficit. Any deficit we fund could be recovered by underwriting
gains in future periods of the contract. The RSF balance was $192 million as
of January 1, 1998, and is $509 million as of December 31, 1998. We believe
the RSF balance is sufficient to cover any potential future underwriting or
other risks associated with the contract.
We assumed the policy and other liabilities related to the AARP program
and received cash and premiums receivables from the previous insurance
carrier equal to the carrying value of the liabilities assumed as of January
1, 1998. The following assets and liabilities were transferred from the
program's previous carrier and are included in our Consolidated Balance
Sheets (in millions):
<TABLE>
<CAPTION>
Amounts Balance
Transferred as of
as of December
January 1, 31,
1998 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Assets Under Management $ 959 $ 1,155
Accounts Receivable $ 300 $ 287
Medical Costs Payable $ 1,024 $ 830
Other Policy Liabilities $ 192 $ 509
Accounts Payable and Accrued Liabilities $ 43 $ 103
- -------------------------------------------------------------------------------------
</TABLE>
The effect of changes in balance sheet amounts associated with the
AARP program accrue to the AARP policyholders through the RSF balance.
Accordingly, we do not include the effect of such changes in our Consolidated
Statements of Cash Flows.
II-21
<PAGE>
(8) CASH AND INVESTMENTS
As of December 31, 1998 and 1997, the amortized cost, gross unrealized
holding gains and losses, and fair value of cash and investments were as
follows (in millions):
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized
1998 Amortized Cost Holding Gains Holding Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 1,644 $ -- $ -- $ 1,644
- ---------------------------------------------------------------------------------------------------------------
Investments Available for Sale
U.S. Government and Agencies 668 10 -- 678
State and State Agencies 675 27 -- 702
Municipalities 535 20 -- 555
Corporate 628 10 (2) 636
Other 105 6 -- 111
- ---------------------------------------------------------------------------------------------------------------
Total Investments Available for Sale 2,611 73 (2) 2,682
- ---------------------------------------------------------------------------------------------------------------
Investments Held to Maturity
U.S. Government and Agencies 53 -- -- 53
State and State Agencies 16 -- -- 16
Municipalities 1 -- -- 1
Corporate 17 -- -- 17
Other 11 -- -- 11
- ---------------------------------------------------------------------------------------------------------------
Total Investments Held to Maturity 98 -- -- 98
- ---------------------------------------------------------------------------------------------------------------
Total Cash and Investments $ 4,353 $ 73 $ (2) $ 4,424
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 750 $ -- $ -- $ 750
- ---------------------------------------------------------------------------------------------------------------
Investments Available for Sale
U.S. Government and Agencies 685 9 (3) 691
State and State Agencies 775 17 -- 792
Municipalities 845 18 -- 863
Corporate 439 6 -- 445
Other 435 -- -- 435
- ---------------------------------------------------------------------------------------------------------------
Total Investments Available for Sale 3,179 50 (3) 3,226
- ---------------------------------------------------------------------------------------------------------------
Investments Held to Maturity
U.S. Government and Agencies 38 -- -- 38
State and State Agencies 2 -- -- 2
Municipalities 1 -- -- 1
Corporate 18 -- -- 18
Other 6 -- -- 6
- ---------------------------------------------------------------------------------------------------------------
Total Investments Held to Maturity 65 -- -- 65
- ---------------------------------------------------------------------------------------------------------------
Total Cash and Investments $ 3,994 $ 50 $ (3) $ 4,041
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, the contractual maturities of cash and cash equivalents
and investments were as follows (in millions):
<TABLE>
<CAPTION>
Less Than One to More Than Five to More Than
Years to Maturity One Year Five Years Ten Years Ten Years Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At Amortized Cost:
Cash and Cash Equivalents $ 1,644 $ -- $ -- $ -- $ 1,644
Investments Available for Sale 139 891 716 865 2,611
Investments Held to Maturity 30 60 7 1 98
- ----------------------------------------------------------------------------------------------------------------
Total Cash and Investments $ 1,813 $ 951 $ 723 $ 866 $ 4,353
- ----------------------------------------------------------------------------------------------------------------
At Fair Value:
Cash and Cash Equivalents $ 1,644 $ -- $ -- $ -- $ 1,644
Investments Available for Sale 140 910 744 888 2,682
Investments Held to Maturity 30 60 7 1 98
- ----------------------------------------------------------------------------------------------------------------
Total Cash and Investments$ $ 1,814 $ 970 $ 751 $ 889 $ 4,424
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Mortgage-backed securities that do not have a single maturity date have
been presented in the above tables based on their estimated maturity dates.
II-22
<PAGE>
Gross realized gains of $31 million, $24 million, and $10 million and
gross realized losses of $5 million, $11 million, and $6 million were
recognized in 1998, 1997 and 1996, respectively, and are included in
investment and other income in the accompanying Consolidated Statements of
Operations.
(9) DEBT
In November 1998, we issued $650 million of unsecured notes payable at a
weighted-average interest rate of 6.0%. The debt placement consisted of $400
million in unsecured notes due December 1, 1999, with an interest rate of
5.65% and $250 million in unsecured notes due December 1, 2003, with an
interest rate of 6.65%.
In December 1998, we also established a $600 million commercial paper
program, thereby providing increased flexibility in managing our capital
structure. At December 31, 1998, we had $59 million in commercial paper
borrowings outstanding at an average interest rate of 5.3%.
In support of our commercial paper program, we entered into a $600
million credit arrangement with a group of banks. The agreement is comprised
of a $300 million five-year revolving credit facility and a $300 million
364-day credit facility. No borrowings were outstanding as of December 31,
1998, under the credit facilities. Debt consists of the following as of
December 31, 1998:
<TABLE>
<CAPTION>
Carrying
(in millions) Par Value Value
- ------------------------------------------------------------------------
<S> <C> <C>
5.65% Senior Unsecured
Note due December 1999 $ 400 $ 400
6.65% Senior Unsecured
Note due December 2003 250 249
Commercial Paper 60 59
- ------------------------------------------------------------------------
710 708
Less: Current Portion (460) (459)
- ------------------------------------------------------------------------
Total Long-Term Debt $ 250 $ 249
- ------------------------------------------------------------------------
</TABLE>
The Company's debt arrangements and credit facilities contain various
covenants, the most restrictive of which place limitations on secured and
unsecured borrowings and require the Company to exceed minimum interest
coverage levels. As of December 31, 1998, we are well within the requirements
of all debt covenants.
Maturities of debt for the years ending December 31, are as follows (in
millions):
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
- ---------------------------------------------------
<S> <C> <C> <C> <C>
$ 459 $ - $ - $ - $ 249
- ---------------------------------------------------
</TABLE>
The carrying value of the Company's outstanding debt approximates its
fair value at December 31, 1998.
(10) CONVERTIBLE PREFERRED STOCK
In December 1998, we redeemed all 500,000 outstanding shares of 5.75% Series
A Convertible Preferred Stock (the Preferred Stock). The Preferred Stock was
issued to certain former shareholders of MetraHealth as a portion of the
total consideration of our 1995 acquisition of MetraHealth. The redemption
price per share of stock was $1,040 per share, or $520 million in the
aggregate, which included a redemption premium of $40 per share, or $20
million in the aggregate. The redemption premium of $20 million is deducted
from net earnings (loss) to arrive at net earnings (loss) applicable to
common shareholders in the accompanying Consolidated Statements of Operations.
(11) SHAREHOLDERS' EQUITY
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
The Company's operations are conducted through United HealthCare Corporation,
its wholly-owned subsidiary United HealthCare Services, Inc. and their
respective subsidiaries, which consist principally of Health Maintenance
Organizations (HMOs) and insurance companies. HMOs and insurance companies
are subject to state regulations that, among other things, may require the
maintenance of minimum levels of statutory capital, as defined by each state,
and restrict the timing and amount of dividends and other distributions that
may be paid to their respective parent companies. Generally, the amount of
dividend distributions that may be paid by regulated insurance and HMO
companies, without prior approval by state regulatory authorities, is limited
based on the entity's level of statutory net income and statutory capital and
surplus.
As of December 31, 1998, the Company's regulated subsidiaries had
aggregate statutory capital and surplus of approximately $1.4 billion,
compared with their aggregate minimum statutory capital and surplus
requirements of $390 million. The amount of dividends that may be paid to the
Company or United HealthCare Services, Inc. by their insurance and HMO
subsidiaries at December 31, 1998, without prior approval by state regulatory
authorities, is limited to approximately $120 million. There are no such
restrictions on distributions from United HealthCare Services, Inc. to the
Company or on distributions from the Company to its shareholders.
II-23
<PAGE>
The National Association of Insurance Commissioners has adopted rules
which, to the extent that they are implemented by the states, will set new
minimum capitalization requirements for insurance companies, HMOs, and other
entities bearing risk for health care coverage. The requirements take the form
of risk-based capital rules. The change in rules for insurance companies was
effective December 31, 1998. The new HMO rules are subject to state-by-state
adoption, but few states had adopted the rules as of December 31, 1998. The HMO
rules, if adopted by the states in their proposed form, would significantly
increase the capital required for certain of our subsidiaries. However, we
believe we can redeploy capital among our regulated entities to minimize the
need for incremental capital investment of general corporate financial
resources into regulated subsidiaries. As such, we do not anticipate a
significant impact on our aggregate capital or investments in regulated
subsidiaries.
STOCK REPURCHASE PROGRAM
Pursuant to a board of directors' authorization, we are operating an 18.7
million share common stock repurchase program. These repurchases may be made
from time to time at prevailing prices, subject to certain restrictions on
volume, pricing and timing. During 1998, we repurchased 11.3 million shares for
an aggregate cost of $436 million, an average cost of approximately $40 per
share.
DIVIDENDS
On February 16, 1999, the board of directors approved an annual dividend for
1999 of $0.03 per share payable on April 15, 1999, to holders of common stock as
of close of business April 1, 1999.
(12) STOCK-BASED COMPENSATION PLANS
We have stock and incentive plans (the Stock Plans) for the benefit of eligible
employees. As of December 31, 1998, the Stock Plans allowed for the future
granting of up to 5 million shares as incentive or non-qualified stock options,
stock appreciation rights, restricted stock awards, and performance awards to
employees.
In 1995, we adopted the Non-employee Director Stock Option Plans (the 1995
Plan) to benefit members of the board of directors who are not employees. As of
December 31, 1998, 34,000 shares were available for future grants of
non-qualified stock options under the 1995 Plan.
Stock options are generally granted at an exercise price not less than the
fair market value of the common stock at the date of grant. They may be
exercised over varying periods up to 10 years from the date of grant.
Do Not Use
A summary of the activity under our Stock Plans and the 1995 Plan during 1998,
1997 and 1996 is presented in the table below (shares in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Weighted - Weighted - Weighted -
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 17,113 $ 34 16,894 $ 29 14,927 $ 28
Granted 5,847 $ 39 4,366 $ 44 4,125 $ 33
Issued in acquisition -- $ -- 507 $ 4 -- $ --
Exercised (3,379) $ 23 (3,095) $ 20 (1,336) $ 19
Forfeited (1,207) $ 39 (1,559) $ 35 (822) $ 33
- --------------------------------------------------------------------------------------------------------
Outstanding at end of year 18,374 $ 37 17,113 $ 34 16,894 $ 29
- --------------------------------------------------------------------------------------------------------
Exercisable at end of year 6,725 $ 33 6,702 $ 28 6,914 $ 23
- --------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------------
Weighted-Average
Number Remaining Weighted-Average Number Weighted-Average
Range of Exercise Prices Outstanding Option Term (years) Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0 - $22 1,672 3.8 $13 1,491 $14
$23 - $35 7,364 8.0 $33 2,265 $31
$36 - $46 6,099 7.7 $42 2,041 $41
$47 - $55 3,156 8.2 $50 888 $49
$56 - $73 83 9.2 $66 40 $73
- ---------------------------------------------------------------------------------------------------------------------
$ 0 - $73 18,374 7.6 $37 6,725 $33
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
II-24
<PAGE>
We increased additional paid-in capital $47 million in 1998, $37 million
in 1997, and $15 million in 1996 to reflect the tax benefit we received upon
the exercise of non-qualified stock options.
We do not recognize compensation expense in connection with stock option
grants because we grant stock options at exercise prices that equal or exceed
the fair market value of the stock at the time options are granted. If we had
determined compensation expense using fair market values for stock options
granted, net earnings (loss) would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Net Earnings (Loss) (in millions)
As Reported $(166) $ 460 $ 356
Pro Forma $(206) $ 430 $ 332
- -----------------------------------------------------------------------
Diluted Net Earnings (Loss) Per
Common Share
As Reported $(1.12) $2.26 $1.76
Pro Forma $(1.33) $2.10 $1.63
- -----------------------------------------------------------------------
Weighted-Average Fair Value Per Share
of Options Granted $ 16 $ 25 $ 23
- -----------------------------------------------------------------------
</TABLE>
To determine compensation cost under the fair value method, the fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model.
Principal assumptions used in applying the Black-Scholes model were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Risk-Free Interest Rate 5.2% 6.0% 6.6%
Expected Volatility 46% 56% 57%
Expected Dividend Yield 0.1% 0.1% 0.1%
Expected Life in Years 5.8 5.6 5.0
- -----------------------------------------------------------------------
</TABLE>
Because we did not apply the fair value method of accounting to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of what can be expected in future years.
EMPLOYEE STOCK OWNERSHIP PLAN
We have a non-leveraged Employee Stock Ownership Plan (the ESOP) for the
benefit of all eligible employees. Company contributions to the ESOP are made
at the discretion of the board of directors. We made contributions to the ESOP
of $4 million in 1998, $4 million in 1997, and $3 million in 1996.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan (the ESPP) allows all eligible employees to
purchase shares of common stock on semiannual offering dates at a price that is
the lesser of 85% of the fair market value of the shares on the first day or
the last day of the semiannual period. Employee contributions were $19 million
for 1998, $17 million for 1997, and $16 million for 1996. Through the ESPP, we
issued to employees 206,000 shares in 1998, 422,000 in 1997, and 392,000 shares
in 1996. As of December 31, 1998, 3.0 million shares were available for future
issuance.
(13) INCOME TAXES
Components of the Provision (Benefit) for Income Taxes
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 273 $ 171 $ 159
State 31 20 18
- ----------------------------------------------------------------------
Total Current 304 191 177
Deferred (184) 91 48
- ----------------------------------------------------------------------
Total Provision $ 120 $ 282 $ 225
- ----------------------------------------------------------------------
</TABLE>
Reconciliation of the Tax Provision at the U.S. Federal Statutory Rate to the
Provision for Income Taxes
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Tax Provision (Benefit) at
U.S. Federal statutory rate $ (16) $ 259 $ 203
State income taxes,
net of federal benefit 19 21 14
Tax-Exempt investment income (25) (21) (11)
Non-deductible asset
impairments and amortization 124 21 18
Non-deductible losses
and expenses 12 7 2
Other, net 6 (5) (1)
- ----------------------------------------------------------------------
Provision for Income Taxes $ 120 $ 282 $ 225
- ----------------------------------------------------------------------
</TABLE>
Components of Deferred Income Tax Assets and Liabilities
<TABLE>
<CAPTION>
December 31, (in millions) 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Deferred Income Tax Assets
Accrued operational realignment and other
charges, and restructuring reserves $ 138 $ 23
Bad debt allowance 13 9
Medical costs payable and
other policy liabilities 22 22
Loss reserve discounting 51 10
Unearned premiums 68 19
Intangible amortization 7 3
Net operating loss carryforwards 34 6
Other 8 2
- ----------------------------------------------------------------------
Subtotal 341 94
Less: Valuation allowance (34) (6)
- ----------------------------------------------------------------------
Total Deferred Income Tax Assets 307 88
- ----------------------------------------------------------------------
Deferred Income Tax Liabilities
Capitalized software development (31) (19)
Depreciation (12) --
Unrealized gains on investments
available for sale (23) (18)
Other (2) (10)
- ----------------------------------------------------------------------
Total Deferred Income Tax Liabilities (68) (47)
- ----------------------------------------------------------------------
Net Deferred Income Tax Assets $ 239 $ 41
- ----------------------------------------------------------------------
</TABLE>
II-25
<PAGE>
Valuation allowances are provided when it is considered unlikely that
deferred tax assets will be realized. The valuation allowance relates to future
tax benefits on certain purchased domestic and foreign net operating losses.
We paid income taxes of $245 million in 1998, $124 million in 1997, and
$96 million in 1996.
Consolidated income tax returns for fiscal years 1995 and 1994 were
examined by the Internal Revenue Service (IRS). The audit was concluded with no
material impact on our consolidated operating results or financial position.
Consolidated income tax returns for fiscal years 1997 and 1996 are
currently being examined by the IRS. We do not believe any adjustments that may
result will have a material effect on our consolidated operating results or
financial position.
(14) COMMITMENTS AND CONTINGENCIES
LEASES
We lease facilities, computer hardware and other equipment under long-term
operating leases that are noncancelable and expire on various dates through
2011. Rent expense under all operating leases was $119 million in 1998, $104
million in 1997, and $114 million in 1996.
At December 31, 1998, future minimum annual lease payments under all
noncancelable operating leases were as follows (in millions):
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter
- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$105 $88 $70 $52 $37 $157
- ----------------------------------------------------------
</TABLE>
SERVICE AGREEMENTS
In June 1996 and November 1995, we entered into separate 10-year contracts with
nonaffiliated third parties for information technology services. Under the
terms of the contracts, the third parties assumed responsibility for certain
data center operations and support. In September 1996, we entered into a
10-year contract with a third party for certain data network and voice
communication services. Future payments under all of these contracts are
estimated to be $1.3 billion; however, the actual timing and amount of payments
will vary based on usage. Expenses incurred in connection with these agreements
were $162 million in 1998, $125 million in 1997, and $70 million in 1996.
LEGAL PROCEEDINGS
Six suits assert claims under the United States securities laws against
UnitedHealth Group and certain of its current and former officers and
directors. The plaintiffs are shareholders of the Company who purport to sue on
behalf of a class of purchasers of the Company's common shares during the
period February 12, 1998, through August 5, 1998 (the "Class Period"). Each
complaint was filed in the United States District Court for the District of
Minnesota. Each of the six actions claims violations of Sections 10(b) and
20(a) of the Securities Exchange Act and SEC Rule 10b-5. In substance, the
complaints allege that the Company made materially false or misleading
statements about the profitability and performance of the Company's Medicare
business during the Class Period. Two of the complaints also allege that the
Company made materially false statements about its medical costs and the
expenses related to its realignment. The complaints also allege that the
statements were made with the intention of deceiving members of the investing
public and with the intention that the price of the Company's shares would
rise, making it possible for insiders at the Company to profit by selling
shares at a time when they knew the Company's true financial condition, but the
investing public did not. The complaints allege that once the Company's true
financial condition was revealed on August 6, 1998, the price of its common
shares fell from a closing price of $52 7/8 per share on August 5, 1998, to a
closing price of $37 7/8 per share on August 6, 1998. The complaints seek
compensatory damages in unspecified amounts.
On January 19, 1999, we received a consolidated amended complaint (In re
United HealthCare Corporation Securities Litigation, No. 98-1888 in the United
States District Court for the District of Minnesota) for the six suits which
essentially restates the allegations made in the earlier complaints.
On March 22, 1999, two actions were filed in the United States District
Court for the District of Minnesota by two pension funds against United,
certain current and former officers and directors, and other individuals yet
to be identified. The pension funds wish to "opt-out" of the aforementioned
purported class action suits. These individual actions essentially restate
the allegations made in the purported class actions and claim violations of
Sections 10(b), 18(a) and 20 of the Securities Exchange Act. In addition,
both actions assert a claim of negligent misrepresentation and securities
claims under state law. In the aggregate, the plaintiff pension funds seek
compensatory damages totaling approximately $12.1 million.
We intend to defend these actions vigorously.
We are also involved in other legal actions that arise in the ordinary
course of business. Although we cannot predict outcomes of legal actions, it is
our opinion that the resolution of all currently pending or threatened actions,
including the class action lawsuit described above, will not have an adverse
effect on our consolidated financial position or results of operations.
BUSINESS RISKS
Certain factors relating to the health care industry and our business should be
carefully considered. Companies offering health care coverage and health care
management services are heavily regulated at federal and state levels. While we
cannot predict regulatory changes or their impact, it is possible that
operations and financial results could be negatively affected.
After several years of moderate increases in health care costs and
utilization, the industry experienced a pronounced increase during 1996.
Although the rate of these increases appears to have stabilized, there is no
assurance that health care costs and utilization will not continue to increase
at a more rapid pace. If they do, we may not be able to meet our objective of
maintaining price increases at least sufficient to cover health care cost
increases.
Additionally, the health care industry is highly competitive and has seen
significant consolidation over the past few years. The current competitive
markets in certain areas may limit our ability to price products at appropriate
levels. These competitive factors may adversely affect our consolidated
financial results.
II-26
<PAGE>
CONCENTRATIONS OF CREDIT RISK
Investments in financial instruments such as marketable securities and
commercial premiums receivable may subject UnitedHealth Group to concentrations
of credit risk. Our investments in marketable securities are managed by
professional investment managers within an investment policy authorized by the
board of directors. This policy limits the amounts that may be invested in any
one issuer. Concentrations of credit risk with respect to commercial premiums
receivable are limited to the large number of employer groups that comprise our
customer base. As of December 31, 1998, there were no significant concentrations
of credit risk.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the date of the Company's quarterly report filed on Form 10-Q for the
quarter ended September 30, 1998, no material changes have occurred in the
Company's exposure to market risk associated with our investments in market
risk-sensitive financial instruments. We do not believe that our risk of a loss
in future earnings or a decline in fair values or cash flow attributable to such
investments is material.
(15) SEGMENT FINANCIAL INFORMATION
Our accounting policies for our business segment operations are the same as
those described in the Summary of Significant Accounting Policies (see Note 2).
Transactions between business segments are recorded at their estimated fair
value, as if they were purchased from or sold to third parties. All intersegment
transactions are eliminated in consolidation. Generally accepted accounting
principles provide for the combined reporting of segments with similar economic
characteristics. Accordingly, the financial results of UnitedHealthcare and
Ovations have been combined to form the Health Care Services segment in the
tables presented below (in millions):
<TABLE>
<CAPTION>
Specialized
Health Care Care Corporate
1998 Services Uniprise Services Ingenix and Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues - External Customers $ 15,463 $ 1,238 $ 274 $ 131 $ -- $ 17,106
Revenues - Intersegment -- 357 339 52 (748) --
Investment and Other Income 149 29 5 1 65 249
- -----------------------------------------------------------------------------------------------------------------
Total Revenues $ 15,612 $ 1,624 $ 618 $ 184 $ (683) $ 17,355
- -----------------------------------------------------------------------------------------------------------------
Earnings (Loss) From Operations $ (46) $ 10 $ 14 $ (66) $ 46 $ (42)
Total Assets(1) $ 6,585 $ 1,592 $ 231 $ 472 $ 555 $ 9,435(1)
Net Assets(1) $ 2,428 $ 1,024 $ 89 $ 388 $ 555 $ 4,484(1)
Purchases of Property and Equipment
and Capitalized Software $ 80 $ 93 $ 27 $ 10 $ -- $ 210
Depreciation and Amortization $ 90 $ 59 $ 14 $ 22 $ -- $ 185
- -----------------------------------------------------------------------------------------------------------------
1997
- -----------------------------------------------------------------------------------------------------------------
Revenues - External Customers $ 10,103 $ 1,182 $ 255 $ 23 $ -- $ 11,563
Revenues - Intersegment -- 297 291 59 (647) --
Investment and Other Income 106 11 3 1 110 231
- -----------------------------------------------------------------------------------------------------------------
Total Revenues $ 10,209 $ 1,490 $ 549 $ 83 $ (537) $ 11,794
- -----------------------------------------------------------------------------------------------------------------
Earnings From Operations $ 379 $ 159 $ 92 $ 2 $ 110 $ 742
Total Assets(1) $ 4,038 $ 1,533 $ 208 $ 204 $ 1,599 $ 7,582(1)
Net Assets(1) $ 2,066 $ 1,094 $ 116 $ 170 $ 1,599 $ 5,045(1)
Purchases of Property and Equipment
and Capitalized Software $ 80 $ 79 $ 23 $ 5 $ -- $ 187
Depreciation and Amortization $ 78 $ 54 $ 12 $ 2 $ -- $ 146
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In 1998, total assets and net assets exclude, where applicable, debt of $708
million, income tax-related assets of $266 million, and income tax-related
liabilities of $4 million. In 1997, total assets and net assets exclude, where
applicable, redeemable preferred stock of $500 million, income tax-related
assets of $41 million, and income tax-related liabilities of $52 million.
Excluding the $725 million operational realignment and other charges and
$175 million of charges related to contract losses associated with certain
Medicare markets and other increase to commercial and Medicare medical costs
payable estimates, 1998 earnings from operations were $503 million for Health
Care Services, $161 million for Uniprise, $109 million for Specialized Care
Services, $20 million for Ingenix, $65 million for Corporate and $858 million
for consolidated UnitedHealth Group.
II-27
<PAGE>
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 1998 and 1997 (in millions, except per share data):
<TABLE>
<CAPTION>
Quarters Ended
------------------------------------------------
March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Revenues $ 4,115 $ 4,235 $ 4,360 $ 4,645
Operating Expenses $ 3,906 $ 4,914 $ 4,146 $ 4,431
Net Earnings (Loss) $ 132 $ (565) $ 135 $ 132
Net Earnings (Loss) Applicable to Common Shareholders $ 125 $ (572)(1) $ 128 $ 106(2)
Basic Net Earnings (Loss) per Common Share $ 0.65 $ (2.96) $ 0.67 $ 0.57
Diluted Net Earnings (Loss) per Common Share $ 0.63 $ (2.96)(1) $ 0.66 $ 0.57(2)
- -------------------------------------------------------------------------------------------------------
1997
Revenues $ 2,851 $ 2,931 $ 2,958 $ 3,054
Operating Expenses $ 2,673 $ 2,746 $ 2,771 $ 2,862
Net Earnings $ 109 $ 116 $ 116 $ 119
Net Earnings Applicable to Common Shareholders $ 102 $ 108 $ 109 $ 112
Basic Net Earnings per Common Share $ 0.55 $ 0.58 $ 0.58 $ 0.59
Diluted Net Earnings per Common Share $ 0.54 $ 0.57 $ 0.57 $ 0.58
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $725 million of operational realignment and other charges and $175
million of charges related to contact losses associated with certain Medicare
markets and other increases to commercial and Medicare medical costs payable
estimates. Excluding these charges, net earnings applicable to common
shareholders would have been $132 million, or $0.66 diluted net earnings per
common share.
(2) Includes $20 million convertible preferred stock redemption premium.
Excluding the effects of the convertible preferred stock redemption premium,
net earnings applicable to common shareholders would have been $125 million,
or $0.67 diluted net earnings per common share.
II-28
<PAGE>
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND DIRECTORS OF UNITEDHEALTH GROUP:
We have audited the accompanying consolidated balance sheets of UnitedHealth
Group and its corporate entity, United HealthCare Corporation (a Minnesota
Corporation), and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of UnitedHealth
Group and Subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 18, 1999
REPORT OF MANAGEMENT
The management of UnitedHealth Group is responsible for the integrity and
objectivity of the consolidated financial information contained in this
annual report. The consolidated financial statements and related information
were prepared according to generally accepted accounting principles and
include some amounts that are based on management's best estimates and
judgements.
To meet its responsibility, management depends on its accounting systems
and related internal accounting controls. These systems are designed to
provide reasonable assurance, at an appropriate cost, that financial records
are reliable for use in preparing financial statements and that assets are
safeguarded. Qualified personnel throughout the organization maintain and
monitor these internal accounting controls on an ongoing basis. Internal
auditors review the accounting practices, systems of internal control and
compliance with these practices and controls.
The Audit Committee of the board of directors, composed entirely of
directors who are not employees of the Company, meets periodically and
privately with the Company's independent public accountants and its internal
auditors, as well as management, to review accounting, auditing, internal
control, financial reporting and other matters.
William W. McGuire, M.D.
President, Chairman and Chief Executive Officer
Stephen J. Hemsley
Chief Operating Officer
Arnold H. Kaplan
Chief Financial Officer
II-29
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
II-30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held May
12, 1999, is incorporated herein by reference.
Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K, information regarding executive officers of the
Company is provided in Part I of this Form 10-K under separate caption.
ITEM 11. EXECUTIVE COMPENSATION
The information included under the heading "Executive Compensation" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held May 12, 1999, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held May 12, 1999, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions that
appears under the heading "Certain Relationships and Transactions" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held May 12, 1999, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included
in Part II above:
Consolidated Statements of Operations for each of the three years ended
December 31, 1998.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Changes in Shareholders' Equity for the years
ended as of December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the three years ended December
31, 1998.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
(a) 2. FINANCIAL STATEMENT SCHEDULES
None
(a) 3. EXHIBITS
<TABLE>
<C> <S>
3(a) Copy of the Company's Second Restated Articles of Incorporation. (Incorporated by
reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.)
3(b) Amended and Restated Bylaws of United HealthCare Corporation, as amended. (Incorpo-
rated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1998.)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
4(a) Senior Indenture, dated as of November 15, 1998, between United HealthCare
Corporation and the Bank of New York. (Incorporated by reference to Registration
Statement on Form S-3 filed by the Company on October 22, 1998.)
4(b) Form of Security for 5.65% Notes due December 1, 1999.
4(c) Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining
the rights of holders of long-term debt are not filed. The Company agrees to
furnish a copy thereof to the Securities and Exchange Commission upon request.
*10(a) United HealthCare Corporation 1990 Stock and Incentive Plan, as amended.
(Incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.)
*10(b) United HealthCare Corporation Amended and Restated 1991 Stock and Incentive Plan,
Amended and Restated Effective May 14, 1997. (Incorporated by reference to Exhibit
10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.)
*10(c) United HealthCare Corporation Non-employee Director Stock Option Plan.
(Incorporated by reference to Exhibit 10(x) to the Company's Annual Report on Form
10-K for the year ended December 31, 1994.)
*10(d) United HealthCare Corporation 1997 Long-Term Incentive Plan. (Incorporated by
reference to Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.)
*10(e) United HealthCare Corporation 1998 Management Incentive Plan.
*10(f) United HealthCare Corporation 1998 Executive Savings Plan Brochure.
*10(g) Employment Agreement, dated as of January 6, 1996, between United HealthCare
Corporation and William W. McGuire, M.D. (Incorporated by reference to Exhibit
10(b) to the Company's Annual Report on Form 10-K for the year ended December 31,
1995.)
*10(h) Employment Agreement, dated as of October 16, 1998, between United HealthCare Ser-
vices, Inc. and Jeannine Rivet.
*10(i) Employment Agreement, dated as of May 20, 1998, between United HealthCare Ser-
vices, Inc. and R. Channing Wheeler. (Incorporated by reference to Exhibit 10(c) to
the Company's Quarterly Report of Form 10-Q for the quarterly period ended June 30,
1998.)
*10(j) Employment Agreement, dated as of October 16, 1998, between United HealthCare Ser-
vices, Inc. and David J. Lubben.
*10(k) Separation and Release Agreement, dated as of January 1, 1999, between United
HealthCare Corporation and Travers H. Wills, and Consulting Agreement, dated as of
January 2, 1999, between United HealthCare Services, Inc. and Travers H. Wills.
*10(l) Employment Agreement, dated as of June 30, 1998, between United HealthCare
Corporation and David Koppe.
+10(m) Information Technology Services Agreement between The MetraHealth Companies, Inc.
and Integrated Systems Solutions Corporation dated as of November 1, 1995.
(Incorporated by reference to Exhibit 10(t) to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.)
+10(n) AARP Health Insurance Agreement by and among American Association of Retired
Persons, Trustees of the AARP Insurance Plan and United HealthCare Insurance
Company dated as of February 26, 1997. (Incorporated by reference to Exhibit 10(p)
to the Company's Annual Report on Form 10-K/A for the period ended December 31,
1996.)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
+10(o) First Amendment to the AARP Health Insurance Agreement by and among American Asso-
ciation of Retired Persons, Trustees of the AARP Insurance Plan and United
HealthCare Insurance Company effective January 1, 1998. (Incorporated by reference
to Exhibit 10(a) to the Company's Quarterly Report of Form 10-Q for the quarterly
period ended June 30, 1998.)
+10(p) Second Amendment to the AARP Health Insurance Agreement by and among American
Association of Retired Persons, Trustees of the AARP Insurance Plan and United
HealthCare Insurance Company effective January 1, 1998. (Incorporated by reference
to Exhibit 10(b) to the Company's Quarterly Report of Form 10-Q for the quarterly
period ended June 30, 1998.)
+10(q) Information Technology Services Agreement between United HealthCare Services, Inc.,
a wholly owned subsidiary of the Company, and Unisys Corporation dated June 1,
1996. (Incorporated by reference to Exhibit 10 to the Company's Quarterly Report of
Form 10-Q for the quarterly period ended March 31, 1998.)
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants.
24 Powers of Attorney.
27 Financial Data Schedule. (E.D.G.A.R. version only)
+ Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of these Exhibits have been deleted and filed separately with
the Securities and Exchange Commission pursuant to a request for confidential
treatment.
* Denotes management contracts and compensation plans in which certain directors and
named executive officers participate and which are being filed pursuant to Item
601(b)(10)(iii)(A) of Regulation S-K.
</TABLE>
(b) REPORTS ON FORM 8-K
The Company filed the following report on Form 8-K during the three month period
ended December 31, 1998.
1. Form 8-K Dated December 1, 1998. The items reported were items 5 and 7
concerning the announcement that on November 19, 1998 it had priced its
private placement of $650 million in principal amount of senior
unsecured notes offered pursuant to Rule 144A and other registration
exemptions under the Securities Act of 1933, as amended.
(c) See Exhibits listed in Item 14 hereof and the Exhibits attached as a
separate section of this Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 31, 1999
<TABLE>
<S> <C> <C>
UNITED HEALTHCARE CORPORATION
By: /s/ WILLIAM W. MCGUIRE, M.D.
-----------------------------------------
William W. McGuire, M.D.
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Director, Chief Executive
- ------------------------------ Officer (principal March 31, 1999
William W. McGuire, M.D. executive officer)
Chief Financial Officer
- ------------------------------ (principal financial and March 31, 1999
Arnold H. Kaplan accounting officer)
*
- ------------------------------ Director March 31, 1999
William C. Ballard, Jr.
*
- ------------------------------ Director March 31, 1999
Richard T. Burke
*
- ------------------------------ Director March 31, 1999
James A. Johnson
*
- ------------------------------ Director March 31, 1999
Thomas H. Kean
*
- ------------------------------ Director March 31, 1999
Douglas W. Leatherdale
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director March 31, 1999
Walter F. Mondale
*
- ------------------------------ Director March 31, 1999
Mary O. Mundinger
*
- ------------------------------ Director March 31, 1999
Robert L. Ryan
*
- ------------------------------ Director March 31, 1999
William G. Spears
*
- ------------------------------ Director March 31, 1999
Gail R. Wilensky
*By /s/ WILLIAM W. MCGUIRE,
M.D.
- ------------------------------ Director March 31, 1999
William W. McGuire, M.D.
AS ATTORNEY-IN-FACT
</TABLE>
24
<PAGE>
EXHIBITS INDEX
<TABLE>
<C> <S>
3(a) Copy of the Company's Second Restated Articles of Incorporation. (Incorporated by
reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.)
3(b) Amended and Restated Bylaws of United HealthCare Corporation, as amended.
(Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998.)
4(a) Senior Indenture, dated as of November 15, 1998, between United HealthCare
Corporation and the Bank of New York. (Incorporated by reference to Registration
Statement on Form S-3 filed by the Company on October 22, 1998.)
4(b) Form of Security for 5.65% Notes due December 1, 1999.
4(c) Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining
the rights of holders of long-term debt are not filed. The Company agrees to
furnish a copy thereof to the Securities and Exchange Commission upon request.
10(a) United HealthCare Corporation 1990 Stock and Incentive Plan, as amended.
(Incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.)
10(b) United HealthCare Corporation Amended and Restated 1991 Stock and Incentive Plan,
Amended and Restated Effective May 14, 1997. (Incorporated by reference to Exhibit
10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.)
10(c) United HealthCare Corporation Non-employee Director Stock Option Plan.
(Incorporated by reference to Exhibit 10(x) to the Company's Annual Report on Form
10-K for the year ended December 31, 1994.)
10(d) United HealthCare Corporation 1997 Long-Term Incentive Plan. (Incorporated by
reference to Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.)
10(e) United HealthCare Corporation 1998 Management Incentive Plan.
10(f) United HealthCare Corporation 1998 Executive Savings Plan Brochure.
10(g) Employment Agreement, dated as of January 6, 1996, between United HealthCare
Corporation and William W. McGuire, M.D. (Incorporated by reference to Exhibit
10(b) to the Company's Annual Report on Form 10-K for the year ended December 31,
1995.)
10(h) Employment Agreement, dated as of October 16, 1998, between United HealthCare
Services, Inc. and Jeannine Rivet.
10(i) Employment Agreement, dated as of May 20, 1998, between United HealthCare Services,
Inc. and R. Channing Wheeler. (Incorporated by reference to Exhibit 10(c) to the
Company's Quarterly Report of Form 10-Q for the quarterly period ended June 30,
1998.)
10(j) Employment Agreement, dated as of October 16, 1998, between United HealthCare
Services, Inc. and David J. Lubben.
10(k) Separation and Release Agreement, dated as of January 1, 1999, between United
HealthCare Corporation and Travers H. Wills, and Consulting Agreement, dated as of
January 2, 1999, between United HealthCare Services, Inc. and Travers H. Wills.
10(l) Employment Agreement, dated as of June 30, 1998, between United HealthCare
Corporation and David Koppe.
</TABLE>
25
<PAGE>
<TABLE>
<C> <S>
10(m) Information Technology Services Agreement between The MetraHealth Companies, Inc.
and Integrated Systems Solutions Corporation dated as of November 1, 1995.
(Incorporated by reference to Exhibit 10(t) to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.)
10(n) AARP Health Insurance Agreement by and among American Association of Retired
Persons, Trustees of the AARP Insurance Plan and United HealthCare Insurance
Company dated as of February 26, 1997. (Incorporated by reference to Exhibit 10(p)
to the Company's Annual Report on Form 10-K/A for the period ended December 31,
1996.)
10(o) First Amendment to the AARP Health Insurance Agreement by and among American
Association of Retired Persons, Trustees of the AARP Insurance Plan and United
HealthCare Insurance Company effective January 1, 1998. (Incorporated by reference
to Exhibit 10(a) to the Company's Quarterly Report of Form 10-Q for the quarterly
period ended June 30, 1998.)
10(p) Second Amendment to the AARP Health Insurance Agreement by and among American
Association of Retired Persons, Trustees of the AARP Insurance Plan and United
HealthCare Insurance Company effective January 1, 1998. (Incorporated by reference
to Exhibit 10(b) to the Company's Quarterly Report of Form 10-Q for the quarterly
period ended June 30, 1998.)
10(q) Information Technology Services Agreement between United HealthCare Services, Inc.,
a wholly owned subsidiary of the Company, and Unisys Corporation dated June 1,
1996. (Incorporated by reference to Exhibit 10 to the Company's Quarterly Report of
Form 10-Q for the quarterly period ended March 31, 1998.)
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants.
24 Powers of Attorney.
27 Financial Data Schedule. (E.D.G.A.R. version only)
</TABLE>
26
<PAGE>
THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT
BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A) BY THE INITIAL
INVESTOR (1) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES
ACT) PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A,
(2) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), OR (3) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (B) BY
SUBSEQUENT INVESTORS, AS SET FORTH IN (A) ABOVE AND, IN ADDITION, TO AN
INSTITUTIONAL ACCREDITED INVESTOR IN A TRANSACTION EXEMPT FROM REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, IN EACH CASE (A) AND (B) IN ACCORDANCE
WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES.
<PAGE>
THIS NOTE IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY (AS
DEFINED IN THE INDENTURE) OR A NOMINEE THEREOF. THIS NOTE IS EXCHANGEABLE
FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS
NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND,
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO
A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE
DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY.
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION, TO THE COMPANY (AS DEFINED
BELOW) OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND
ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME
AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
REGISTERED UNITED HEALTHCARE $
CORPORATION CUSIP
NO. 5.65% NOTES DUE DECEMBER 1, 1999 NO. 910581 AB 3
UNITED HEALTHCARE CORPORATION, a Minnesota corporation (hereinafter
called the "Company", which term includes any successor corporation under the
Indenture referred to below), for value received, hereby promises to pay to
CEDE & CO., or registered assigns, the principal sum of __________________
DOLLARS ($_____________) on December 1, 1999 (the "Stated Maturity"), and to
pay interest thereon from __________________ or from the most recent date to
which interest has been paid or duly provided for, semi-annually on June 1
and December 1 in each year (each, an "Interest Payment Date"), commencing
__________________ , and at Maturity, at the rate of 5.65% per annum, until
the principal hereof is paid or duly made available for payment. Interest on
this Note shall be calculated on the basis of a 360-day year consisting of
twelve 30-day months. The interest so payable and punctually paid or duly
provided for on any Interest Payment Date will, as provided in such
Indenture, be paid to the Person in whose name this Note
<PAGE>
(or one or more predecessor Notes) is registered at the close of business on
the "Regular Record Date" for such interest, which shall be the May 15 or the
November 15 (whether or not a Business Day) next preceding such Interest
Payment Date; PROVIDED, HOWEVER, that interest payable at the Maturity of
this Note shall be payable to the Person to whom principal shall be payable.
Any such interest which is payable, but is not punctually paid or duly
provided for, on any Interest Payment Date shall forthwith cease to be
payable to the registered Holder hereof on the relevant Regular Record Date
by virtue of having been such Holder, and may be paid (i) to the Person in
whose name this Note (or one or more predecessor Notes) is registered at the
close of business on a Special Record Date for the payment of such Defaulted
Interest to be fixed by the Trustee, notice whereof shall be given to the
Holder of this Note not less than 10 days prior to such Special Record Date
or (ii) in any other lawful manner not inconsistent with the requirements of
any securities exchange on which such Notes may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this clause (ii),
such manner of payment shall be deemed practicable by the Trustee. In the
event that any Interest Payment Date or date of Maturity is not a Business
Day, the interest and, with respect to the date of Maturity, principal
otherwise payable on such date will be paid on the next succeeding Business
Day with the same force and effect as if made on such Interest Payment Date
or on such date of Maturity. "Business Day" shall mean any day that is not a
Saturday or Sunday and that, in the City of New York, is not a day on which
banking institutions are generally authorized or obligated by law to close.
Payment of the principal of and the interest on this Note will be made
at the office or agency of the Company maintained for that purpose in The
City of New York, in such coin or currency of the United States of America as
at the time of payment is legal tender for payment of public and private
debts; PROVIDED, HOWEVER, that, at the option of the Company, interest may be
paid by check mailed to the address of the Person entitled thereto as such
address shall appear in the Security Register. Payment of the principal of
and interest on this Note due at Maturity will be made in immediately
available funds upon presentation of this Note.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by or
on behalf of the Trustee under the Indenture by the manual signature of one
of its authorized signatories, this Note shall not be entitled to any
benefits under the Indenture or be valid or obligatory for any purpose.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated: November 24, 1998
UNITED HEALTHCARE CORPORATION
By: ____________________
Name: Allan J. Weiss
Title: Vice President and Treasurer
Attest: ____________________
Name: David J. Lubben
Title: General Counsel and Secretary
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
THIS IS ONE OF THE SECURITIES OF THE
SERIES DESIGNATED HEREIN AND ISSUED
PURSUANT TO THE WITHIN-MENTIONED
INDENTURE.
DATED: NOVEMBER 24, 1998
THE BANK OF NEW YORK,
as Trustee
By:________________________
Authorized Signatory
<PAGE>
UNITED HEALTHCARE CORPORATION
5.65% NOTES DUE DECEMBER 1, 1999
[REVERSE SIDE OF NOTE]
This Note is one of a duly authorized issue of securities of the Company
(herein called the "Notes") issued and to be issued in one or more series
under an Indenture dated as of November 15, 1998, as supplemented pursuant
to Section 301 thereof by the Officers' Certificate and Company Order dated
November 24, 1998 (herein called, the "Indenture") between the Company and
The Bank of New York, as Trustee (herein called the "Trustee", which term
includes any successor trustee under the Indenture), to which Indenture and
all indentures supplemental thereto reference is hereby made for a statement
of the respective rights, limitations of rights, duties and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and the
terms upon which the Notes are, and are to be, authenticated and delivered.
This Note is one of the series designated on the face hereof, limited in
aggregate principal amount to $ .
REDEMPTION
The Notes are not subject to redemption prior to the Stated Maturity.
MISCELLANEOUS PROVISIONS
If an Event of Default with respect to the Notes shall occur and be
continuing, the principal of the Notes may be declared due and payable in the
manner and with the effect provided in the Indenture.
The Indenture contains provisions for defeasance at any time of the
Company's obligations in respect of (i) the entire indebtedness of this Note
or (ii) certain restrictive covenants with respect to this Note, in each case
upon compliance with certain conditions set forth therein.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series issued
under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of not less than a majority in aggregate principal
amount of the Securities at the time Outstanding of each series affected
thereby. The Indenture also contains provisions permitting the Holders of
specified percentages in aggregate principal amount of the Securities of any
series at the time Outstanding to waive certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder
of this Note shall be conclusive and binding upon such Holder and upon all
future Holders of this Note and of any Notes issued upon the registration of
transfer hereof or in exchange herefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Note, at the time, place and rate, and in the coin or
currency, herein and in the Indenture prescribed.
<PAGE>
As provided in the Indenture and subject to certain limitations set
forth therein and in this Note, the transfer of this Note is registrable in
the registry books of the Company, upon surrender of this Note for
registration of transfer at the office or agency of the Company maintained
for the purpose in any place where the principal of (and premium, if any) and
interest on this Note are payable, duly endorsed, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Trustee
duly executed by the Holder hereof or by his attorney duly authorized in
writing, and thereupon one or more new Notes, of authorized denominations and
for the same aggregate principal amount, will be issued to the designated
transferee or transferees.
The Notes of this series are issuable only in fully registered form
without coupons in minimal initial purchase amounts of $100,000 and any
amount in excess thereafter which is an integral multiple of $1,000. As
provided in the Indenture and subject to certain limitations therein set
forth, Notes of this series are exchangeable for a like aggregate principal
amount of Notes of this series and of like tenor of a different authorized
denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith, other
than in certain cases provided in the Indenture.
Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
This Note shall be governed by and construed in accordance with the laws
of the State of New York.
All terms used in this Note which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
<PAGE>
---------------------------------
ABBREVIATIONS
The following abbreviations, when used in this instrument, shall be
construed as though they were written out in full according to applicable
laws or regulations:
TEN COM--as tenants in common
TEN ENT--as tenants by the entireties
JT TEN--as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT--_______________Custodian_______________
(Cust) (Minor)
under Uniform Gift to Minors Act
_______________________
(State)
Additional abbreviations may be used though not in the above list.
---------------------------------
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
-------------------------------------------
| |
-------------------------------------------
- ------
(Please print or typewrite name and address,
including postal zip code of assignee)
the within Note and all rights thereunder and hereby irrevocably constitutes
and appoints _________________________________________
to transfer said Note on the books of the Company, with full power of
substitution in the premises.
Dated _______________
NOTICE: The signature on this assignment
must correspond with the name as written
upon the face of the within Note in every
particular, without alteration or
enlargement or any change whatsoever.
Signature Guarantee
SIGNATURE GUARANTEE: Signatures must be guaranteed by an "eligible
institution" meeting the requirements of the [Registrar], which requirements
include membership or participation in the Security Transfer Agent Medallion
Program ("STAMP") or such other "signature guarantee program" as may be
determined by the [Registrar] in addition to, or in substitution for, STAMP,
all in accordance with the Securities Exchange Act of 1934, as amended.
CERTIFICATE OF TRANSFER
<PAGE>
In connection with any transfer of this Note occurring prior to the date
that is two years after the later of November 24, 1998 and the last date on
which this Note (or any predecessor Note) was owned by the Company or any
affiliate of the Company, the undersigned confirms that this Note is being
transferred:
CHECK ONE BOX BELOW
___ (a) As long as this Note is eligible for resale pursuant to Rule
144A under the Securities Act of 1933, as amended, to a person the
undersigned reasonably believes is a "qualified institutional buyer"
(a "QIB") as defined in such Rule 144A that purchases for its own
account or for the account of a QIB to whom notice is given that the
transfer is being made in reliance on such Rule 144A;
___ (b) to an institutional "accredited investor" (as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as
amended) that has furnished to the Trustee a signed letter containing
certain representations and agreements (the form of which letter can
be obtained from the Trustee); or
___ (c) pursuant to an exemption from registration under the
Securities Act of 1933, as amended, pursuant to Rule 144 thereunder;
or
___ (d) to the Company.
Unless the certificate of authentication hereon has been executed by or
on behalf of the Trustee under the Indenture by the manual signature of one
of its authorized signatories, this Note shall not be entitled to any
benefits under the Indenture or be valid or obligatory for any purpose.
Dated:________________
SIGNATURE
Signature Guaranteed:
SIGNATURE
<PAGE>
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is acquiring this Note for
its own account or an account with respect to which it exercises sole investment
discretion and that it or any such account , as the case may be, is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Dated:______________________
NOTICE: To be executed by an executive officer
<PAGE>
1998
Management
Incentive Plan
- ------------------------------------------------------------------------------
[LOGO]
- ------------------------------------------------------------------------------
<PAGE>
1998
MANAGEMENT INCENTIVE PLAN
The realignment of United HealthCare into six strategically aligned, but
independent business segments established a framework for our company's ongoing
growth and opportunity well into the next century. One of the principal
advantages the new structure offers is the capability to leverage our
considerable resources and capacity, while still nurturing and sustaining the
entrepreneurial spirit that brought us to where we are today.
Our compensation programs have been and will continue to be structured to
encourage leaders to strive for and be rewarded for excellence and continuous
improvement. The belief in pay for performance is inherent in our culture. The
1998 Management Incentive Program carries this philosophy forward within the
framework of our new organization by aligning incentive pools and measurement
goals not only with overall company and individual results, but also more
closely with business segment and business/corporate unit results.
We will measure our success against the goals we set for ourselves, not against
the benchmarks or predictions set by Wall Street. To be truly great, we must
reach for the future. We must believe in ourselves and in what we are capable
of achieving.
This is and will continue to be a challenging year. While part of our energies
must go into continuing to shape and construct our new organization, we also
must achieve even higher levels of growth and financial performance in a dynamic
and competitive environment. We must deliver high quality service and improved
product choices for our customers. And we must remain focused on appropriate
health care delivery, operating and medical cost trends.
As leaders of United HealthCare, we set the standards of excellence for the
organization. I believe we can achieve great things.
William W. McGuire, MD
President, Chairman and
Chief Executive Officer
2
<PAGE>
1998
MANAGEMENT INCENTIVE PLAN
- ------------------------------------------------------------------------------
OVERVIEW
Annual management incentive plan funding and payout amounts are determined by
the overall performance of United HealthCare, as well as the performance of your
Business Segment, Business Unit/Corporate or Enterprise Services group and
your individual performance as compared to the goals and objectives established
in our internal business planning process as shown in the diagram on page 4 and
as described below:
1) The OVERALL PERFORMANCE OF UNITED HEALTHCARE will be measured by
accomplishment of strategic initiatives, employment of capital and resources,
market valuation, merger and acquisition activity, and public image and
recognition, as well as financial results in the following categories: earnings,
earnings per share, revenue, operating costs, medical care ratio, growth and
membership. Strategic and financial goals have been determined by the Office of
the Chairman and are imbedded in our current year operating plans.
2) United HealthCare is now organized into six business segments. The
OVERALL FINANCIAL AND STRATEGIC PERFORMANCE OF EACH BUSINESS SEGMENT WILL BE
DETERMINING FACTORS FOR EACH BUSINESS SEGMENT AND BUSINESS UNIT PARTICIPANT. If
you are part of a United HealthCare business segment, your strategic and
financial goals will be determined jointly by Senior Leaders and the Office
of the Chairman.
3) The OVERALL FINANCIAL AND STRATEGIC PERFORMANCE OF YOUR BUSINESS UNIT/
CORPORATE OR ENTERPRISE SERVICES GROUP WILL BE CONSIDERED. If you are part of a
business unit, goals will be developed jointly by your Senior Leader and the
person to whom they report. If you are part of the corporate or enterprise
services group, goals will be established by the appropriate Senior Leader and
the person to whom they report.
4) INDIVIDUAL PERFORMANCE and accomplishment of individual goals and
objectives are also considered in determining incentive awards.
All four performance measures are used to determine incentive pools and
incentive awards. This blend of performance measurements helps ensure that all
of United HealthCare works together toward common goals and allows us the
greatest opportunities for success professionally and personally. The company's
internal targeted goals and measures always exceed the externally anticipated
results held by the investment community.
3
<PAGE>
OVERVIEW OF THE MIP PROCESS
The diagram below graphically depicts the MIP program process detailed above.
[DIAGRAM]
4
<PAGE>
INCENTIVE POOLS
Incentive pools for 1998 will be more closely aligned with the results of the
business segments and business units to reflect the operational realignment of
the organization. Performance against the internal goals at these levels and
the company's overall performance will determine the size of the incentive
pools. Corporate and Enterprise Service units will be aligned with overall
company performance and the results of their unit objectives.
INCENTIVE TARGETS
Incentives are an important part of your total compensation package. Each
participant is assigned an MIP Incentive Target percent. This target percent is
determined by your grade, overall level of responsibility within the
organization and market competitiveness.
The calculation of the incentive pools will generally be determined as follows
with the final decision on incentive pools subject to the discretion of the
company's top management:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
GENERAL DETERMINERS OF INCENTIVE POOLS
- ------------------------------------------------------------------------------------------------------------------------------
ORGANIZATION LEVEL OVERALL COMPANY BUSINESS SEGMENT BUSINESS UNIT CORP. & ENTERPRISE
RESULTS RESULTS RESULTS SERVICES RESULTS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE & ENTERPRISE
SERVICES LEADERS AND MANAGERS: Critical Very Important Very Important Critical
Incentive pool will be
primarily based on overall
United HealthCare Results and
results of
Corporate/Enterprise Services
Scorecard.
BUSINESS SEGMENT LEADERS AND
MANAGERS: Very Important Critical Critical Important
The incentive pool will be
primarily based on the
performance of your business
segment and units and the
overall company
BUSINESS UNIT LEADERS AND
MANAGERS: Important Very Important Critical Important
The incentive pool will be
primarily based on the
performance of your business
unit with consideration of the
overall business segment
performance.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
- ------------------------------------------------------------------------------
Your targeted incentive award is determined by your eligible base earnings paid
during the fiscal year multiplied by your MIP Target percent (or prorated target
percent if it changed during the year).
Your senior business leader will communicate this year's overall company,
business segment, business unit/corporate or enterprise services and individual
goals.
MIP PROGRAM
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 review the overall financial and
strategic results of each business segment in order to determine the overall
company performance and the total amount available in the incentive pool.
The Compensation and Stock Option Committee will approve an incentive pool
amount.
STEP 2 - ESTABLISHMENT OF BUSINESS SEGMENT, CORPORATE & ENTERPRISE SERVICES
POOLS
Business segment and business unit performance will play an increased role in
determining incentive pools. Once the company overall incentive pool is
established, Senior Leaders will determine the performance and incentive pools
specific to the business segments.
The ratings for determining incentive pool amounts for individual business
segments and units may exceed or be less than that of the overall company
rating.
STEP 3 - ESTABLISHMENT OF BUSINESS UNIT POOLS
Business segment senior leaders and corporate top management will be responsible
for allocating the pools among the business units and corporate divisions based
on their relative performance.
STEP 4 - ESTABLISHMENT OF INDIVIDUAL INCENTIVE PAYMENTS
After pools are established and allocated to each entity, management will then
shift the focus to the individuals in their groups to determine individual
incentive awards. Incentive awards will be based on individual performance
and accomplishment of objectives.
6
<PAGE>
ELIGIBILITY
Generally, full-time regular employees grade 28 and above are eligible for MIP
awards. At this level, positions are directly accountable for meeting key
corporate/enterprise, business segment or business unit objectives, generally
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 and promotions to MIP eligible positions in the FOURTH
QUARTER of a plan year are eligible for the plan in the following year but
are not eligible to participate in the plan for the current year.
However, employees who were eligible for the performance incentive plan
(PIP) or business incentive plan (BIP) prior to their promotion in the
fourth quarter are eligible for a year-end PIP or BIP award.
- - Participants eligible for a full or partial year MIP award are not eligible
for PIP or BIP.
- - If you are promoted to a position that carries a higher management
incentive target, any incentive paid to you would be based on a combination
of both your existing and new incentive targets. The targets are weighted
according to the time you held each position. Your bonus is based on your
eligible fiscal year base earnings and MIP target (prorated if necessary).
- - If you are on leave of absence during the performance measurement period,
any pay received during the leave (e.g., short term disability) will not be
included in your eligible base earnings for purposes of calculating the
amount of the incentive payment.
- - If a participant transfers during the year from an MIP eligible position to
a non-eligible position (e.g. sales), they will not be eligible for a
partial MIP incentive. Employees must be classified as eligible at
year-end to receive an MIP award.
- - If an MIP participant is reclassified to part-time or temporary status,
they are eligible for an MIP award in the current year if the
reclassification occurs after year-end.
- - MIP payout for employees rehired in the same MIP year will only be based
on eligible base earnings from the employees date of re-hire. Earnings
from service prior to their rehire date will not be considered.
- - 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 paid-out are not eligible
for any awards. If you are on a leave of absence and are scheduled to
receive an incentive, you will receive that award upon your return to work.
Employees who do not return to work from leave are not eligible to receive
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.
7
<PAGE>
401(K) PLAN AND ESOP CONTRIBUTIONS
Management Incentive Plan payments are considered compensation under the United
HealthCare 401(k) plan and Employee Stock Ownership Plan. In addition,
incentive payments are included in benefits compensation for employees enrolled
in the flexible benefit plans.
However, management incentive payments are not eligible for contributions to the
United HealthCare Employee Stock Purchase Plan.
PAYMENTS
Management Incentive Plan payments generally are made during the first quarter
following the close of the corporate and business segment books for the fiscal
year.
For questions regarding the Management Incentive Plan, contact your manager, the
head of your business unit or your human resources generalist.
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 THE MANAGEMENT INCENTIVE PLAN AT ANY
TIME AND WITHOUT NOTICE. CHANGES TO THIS PLAN MUST BE MADE IN WRITING BY THE
SENIOR VICE PRESIDENT OF HUMAN RESOURCES OR THE CHIEF EXECUTIVE OFFICER OF THE
COMPANY. UNITED HEALTHCARE ALSO HAS THE DISCRETION TO UNILATERALLY MAKE BOTH
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.
8
<PAGE>
1998 EXECUTIVE
SAVINGS PLANS BROCHURE
[LOGO]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Advantages of the Executive Savings Plans for You.......................... 1
Important Information About the Executive Savings Plans.....................2
Why Executive Savings Plans..............................................2
Who is Eligible..........................................................2
How the Plans Work..........................................................4
Automatic Restoration Option Mirrors 401(k)..............................4
Incentive (MIP) Deferral Option Offers Company Match.....................4
Salary Deferral Option Offers Flexibility................................5
Limited Bonus Deferral Option............................................5
Making Changes...........................................................5
Investing Your Savings......................................................6
Changing Your Investment Choices.........................................6
More About Your Investment Credit Choices................................7
Receiving Information About Your Account.................................7
Distributions From the ESP..................................................8
Receiving Your Distributions.............................................8
Choosing Your Distribution Method........................................8
What to Do Next.............................................................9
Important Questions and Answers About the Executive Savings Plans Options..10
</TABLE>
<PAGE>
As an executive of United HealthCare, you are eligible to participate in the
Executive Savings Plans. These plans have been enhanced for 1998 to make them
more effective for you by clarifying the deferral opportunities and
simplifying the enrollment procedures. This brochure outlines the changes and
provides details of how you can benefit from these special compensation
deferral plans.
ADVANTAGES OF THE EXECUTIVE SAVINGS PLANS FOR YOU
As an important component of United HealthCare's competitive benefits
program, the Executive Savings Plans (ESP) offer you a tremendous opportunity
to save for your future. The Plans:
- - Enable you to postpone taxes by deferring your compensation until a later
date when you leave the company, or until the event of total permanent
disability or death;
- - Ensure that you receive the advantages of the 401(k) Savings Plan,
including the maximum tax deferral opportunity and company matching
contributions, by automatically enrolling you in the ESP Automatic
Restoration Option and allowing you to defer your MIP bonus under the
Incentive (MIP) Deferral Option; and
- - Have been designed to be flexible and allow you to choose among the various
options to develop an individual deferral strategy that best meets your
personal financial needs.
For 1998, the ESP Options include:
- - Automatic Restoration Option
- - Incentive (MIP) Deferral Option
- - Salary Deferral Option
- - Limited Bonus Deferral Option
1
<PAGE>
IMPORTANT INFORMATION ABOUT THE EXECUTIVE SAVINGS PLANS
WHY EXECUTIVE SAVINGS PLANS
At United HealthCare, we are committed to providing you opportunities that
help you prepare for a financially secure future. The 401(k) Savings Plan,
Employee Stock Ownership Plan and Employee Stock Purchase Plan offer all
eligible employees options for accumulating savings and retirement assets.
However, these plans are subject to restrictive tax rules. Recognizing that
these rules limit the amount you can defer into those plans, United
HealthCare created the Executive Savings Plans. These non-qualified deferred
compensation plans allow you to defer virtually as much of your compensation
as you wish through means that leverage the current tax environment.
The Plans are not subject to the same restrictions placed upon qualified
plans, such as the annual 401(k) elective deferral dollar limits or
compensation limits. The Plans are unfunded plans, which means that funds or
contributions are not set aside in a trust and are subject to the claims of
the general creditors of United HealthCare. Each plan is intended to be an
unfunded pension plan maintained by United HealthCare for a select group of
management or highly compensated employees.
WHO IS ELIGIBLE
To participate in the Executive Savings Plans, you must meet certain
eligibility requirements.
1. For all Options, you must be an employee with at least 30 days of service
in an eligible class at United HealthCare. The following are eligible
classes in 1998:
AUTOMATIC RESTORATION OPTION, INCENTIVE (MIP) DEFERRAL OPTION AND SALARY
DEFERRAL OPTION:
- Grades 33 and above
- Medical Directors M2 - M4
- Clinical Medical Staff DC2 - CD3, CM2 - CM3
LIMITED BONUS DEFERRAL OPTION:
- As designated by the Board of Directors
2
<PAGE>
2. Participation under the Plans is available the first day of the calendar
month following completion of the 30-day eligibility requirement. Employees
who become newly eligible during the year will receive enrollment materials
prior to their eligibility date.
3. To participate in the Automatic Restoration Option, you must participate
in the 401(k) Savings Plan and reach one of the following IRS limits during
1998:
- Earn $160,000 in eligible compensation (the same limit was applicable in
1997)
- Make 401(k) Savings Plan deferrals that reach the 1998 IRS annual limit
of $10,000 (increased from $9,500 in 1997)
YOU WILL AUTOMATICALLY BE ENROLLED IN THIS OPTION, AS DESCRIBED IN FURTHER
DETAIL ON THE NEXT PAGE, UNLESS YOU ELECT NOT TO PARTICIPATE.
4. You may enroll in the Incentive (MIP) Deferral Option for 1998 only during
the December 1997 enrollment period or when you become newly eligible during
the year.
5. Enrollment for the Salary Deferral Option may be made for 1998 during the
December 1997 enrollment period or during the 1998 calendar year for future
1998 earnings.
3
<PAGE>
HOW THE PLANS WORK
AUTOMATIC RESTORATION OPTION MIRRORS 401(K)
As long as you participate in the 401(k) Savings Plan, you automatically
participate in the ESP Automatic Restoration Option. The Option:
- - Automatically defers the same percentage amount of your eligible pay on a
pre-tax basis that you contribute to the 401(k) Savings Plan, after your
401(k) Savings Plan elective deferrals reach the 1998 IRS dollar limit of
$10,000 or when you earn $160,000 in eligible pay; and
- - Provides a United HealthCare matching contribution of 50 cents for each
dollar deferred, up to the first six percent of your eligible pay. These
matching contributions receive the same investment credits that you elect for
your own contributions.
When you reach one of the IRS 401(k) annual limits (listed above), your
Automatic Restoration Option deferrals begin in the following pay period. If
you do not wish to participate in the Automatic Restoration Option, you may
"opt out" by electing not to participate in this Option on the Deferral
Election Form.
INCENTIVE (MIP) DEFERRAL OPTION OFFERS COMPANY MATCH
This Option allows you to defer a portion or all of your Management Incentive
Plan (MIP) bonus (1997 MIP bonus paid in 1998) into the ESP and receive a
company matching contribution. Enrollment in this Option is the only way to
get an employer match on your MIP bonus.
You may defer 6 percent, 25 percent, 50 percent, 75 percent, or 100 percent
of your bonus by making a one-time election prior to the beginning of each
calendar year. You may not change your incentive deferral election during the
year. You will receive a company matching contribution of 50 cents on every
dollar you defer up to 6 percent of your total Incentive (MIP) Deferral
Option amount.
4
<PAGE>
SALARY DEFERRAL OPTION OFFERS FLEXIBILITY
With this Option, you can defer from 1 percent to 100 percent of all 1998
eligible pay, excluding MIP bonus payments. Salary Deferral Option
contributions begin within your first eligible pay period in 1998. There is
no employer match in this Option.
During the course of the year, you may make an election that will allow you
to increase your deferral percentage or stop your deferral entirely. This
election must be made at least one full pay period in advance of the date
when you want this change to become effective.
LIMITED BONUS DEFERRAL OPTION
This Option is available only to those United HealthCare executives who are
eligible for special bonus amounts that are declared by United HealthCare's
Board of Directors or Compensation Committee or their designees.
If you are eligible to make deferrals of special bonuses under the Limited
Bonus Deferral Option, you will be notified in advance. At that time, you
will receive an enrollment form. You may defer from 1 percent to 100 percent
of any 1998 special bonuses before they are earned.
MAKING CHANGES
Under the current tax laws, once your deferral election is made, it is
irrevocable. However, you may increase or stop your deferral during the year
under the Salary Deferral Option. Once the deferrals are suspended, they may
not be resumed until the beginning of the next calendar year.
If you wish to increase or stop your payroll deductions, call the Plan
Administrator at (612) 936-1653 to obtain the appropriate Executive Savings
Plans form.
5
<PAGE>
INVESTING YOUR SAVINGS
You may elect to have your ESP deferrals and matching United HealthCare
contributions credited with investment earnings from one or more of the four
investment credit funds offered under the Plans.
These funds include the:
- - First American Prime Obligations Fund
- - Loomis Sayles Bond Fund
- - First American Equity Index Fund
- - PBHG Growth Fund
As you select your investment credit fund(s), keep in mind that your
elections are subject to investment risk. As with any investment, if the
returns credited on the fund(s) you choose are positive, your account balance
will have positive credits. If the returns credited are negative, your
account balance will decline. Remember, as unfunded plans, the investment
credit funds are merely measuring tools to determine the value of your
account under the Plans, and United HealthCare is not required to purchase
such investments. Please review the fund information provided with your
enrollment materials before making your decision.
If you make no investment credit election, you will receive credits as if you
had elected the Loomis Sayles Bond Fund.
CHANGING YOUR INVESTMENT CHOICES
You may change your investment credit choices once per calendar quarter on
any business day during that quarter. To make a change, you must complete and
submit an Investment Credit Election Form to the Plan Administrator. If the
form is received by the Plan Administrator by noon Central time, the change
will become effective the following business day.
You also may elect to have your future contributions credited differently
from your existing account balance for investment return purposes. When you
make your investment election for 1998, it will not affect your existing
account balance unless you actively elect to reallocate it. To reallocate your
existing account balance, complete the Investment Credit Election Form.
6
<PAGE>
MORE ABOUT YOUR INVESTMENT CREDIT CHOICES
You can elect to have your account credited with the investment performance
of one or any combination of the following four funds:
- - FIRST AMERICAN PRIME OBLIGATIONS FUND. The fund's investment objective is
maximum current income to the extent consistent with the preservation of
capital and the maintenance of liquidity. The fund invests in money market
instruments including debt obligations issued by the U.S. government, its
agencies or instrumentalities, and corporate obligations including high-grade
commercial paper, non-convertible corporate debt and loan participation
interests. The fund may also invest in repurchase agreements related to these
securities.
- - LOOMIS SAYLES BOND FUND. The fund's investment objective is high total
investment return through a combination of current income and capital
appreciation. The fund seeks to attain its objective by normally investing
substantially all of its assets in debt securities (including convertibles),
although up to 20 percent of its assets may be invested in preferred stocks.
At least 65 percent of the fund's total assets may be invested in bonds. The
fund may invest any portion of its assets in securities of Canadian issuers,
and a limited portion of its assets in securities of other foreign issuers.
The fund will also invest less than 35 percent of its assets in securities of
below investment grade quality.
- - FIRST AMERICAN EQUITY INDEX FUND. This fund seeks to achieve investment
results that correspond to the performance of the Standard and Poor's 500
Composite Stock Price Index (S&P 500). The fund invests substantially in
common stocks included in the S&P 500. The fund's advisor believes that its
objective can best be achieved by investing in the common stocks of
approximately 250 to 500 of the issues included in the S&P 500.
- - PBHG GROWTH FUND. The fund seeks capital appreciation and invests primarily
in common stocks of small and medium capitalization companies believed to
have an outlook for strong earnings growth and the potential for significant
capital appreciation. The average market capitalizations or annual revenues
of holdings in the portfolio may fluctuate over time as a result of market
valuation levels and the availability of specific investment opportunities.
You may elect to have your accounts credited with investment performance in
any combination of the investment credit funds in 1 percent increments, as
long as your total investment percentage equals 100 percent. If you make no
investment credit election, you will receive credits as if you had elected
the Loomis Sayles Bond Fund.
RECEIVING INFORMATION ABOUT YOUR ACCOUNT
You will receive a statement, currently on a quarterly basis, showing the
status of your account credits in the ESP. In addition, you have daily access
to information about your account by calling the Retirement Plans Service
Center at 1-888-842-2756.
7
<PAGE>
DISTRIBUTIONS FROM THE ESP
RECEIVING YOUR DISTRIBUTIONS
Distributions will be available only upon termination, permanent total
disability or death. You can expect to receive your lump sum or first
installment distribution beginning the February following the end of the
calendar year in which the distribution event occurs. The distribution method
is chosen upon your initial enrollment in the Plans and cannot be changed.
CHOOSING YOUR DISTRIBUTION METHOD
You have three distribution methods to choose from. The method you choose
will be used for distributions for all four options in the Executive Savings
Plans. If you do not elect a distribution option, you will automatically
receive a lump sum payout of your account balance the February following the
year of your termination, permanent total disability or death.
- - LUMP SUM: A single payment of your entire account balance is paid out to
you in February following the year in which you terminate, become disabled or
die. For example, if you terminate employment on January 12, 1998, you will
receive a single lump sum distribution in February 1999.
- - THREE-YEAR INSTALLMENTS: The three installments will be paid annually
beginning the February following the end of the calendar year in which you
terminate, become disabled or die. For example, if you terminate employment
on November 1, 1998, your installments will be paid in February 1999,
February 2000 and February 2001.
- - FIVE-YEAR INSTALLMENTS: The five installments are paid annually beginning
the February following the end of the calendar year in which you terminate,
become disabled or die. For example, if you terminate employment on April 25,
1998, your installments will be paid in February 1999, February 2000,
February 2001, February 2002 and February 2003.
8
<PAGE>
WHAT TO DO NEXT
- - If you make a deferral election in the 401(k) Savings Plan, you will be
enrolled automatically in the Automatic Restoration Option at your then
current 401(k) Savings Plan deferral percentage. If you wish to "opt out" of
this election, you must indicate so on a Deferral Election form.
- - Decide whether or not participating in one of the other ESP Options is
right for you. You may find it helpful to consult with a tax or financial
advisor. Then, if you decide to enroll, complete and return the appropriate
ESP election and beneficiary forms included in your packet. If you do not
designate a beneficiary, your benefits will be paid in accordance with the
Plan's provisions in the event of your death.
- - If you have questions, call the Plan Administrator at (612) 936-1645.
9
<PAGE>
IMPORTANT QUESTIONS AND ANSWERS ABOUT THE EXECUTIVE SAVINGS PLANS OPTIONS
Q1. WHAT ARE THE DIFFERENCES BETWEEN THE EXECUTIVE SAVINGS PLANS AND THE
401(k) SAVINGS PLAN?
A1. The United HealthCare 401(k) Savings Plan is a "qualified plan" under
the Internal Revenue Code. Under 401(k) plans, participants can defer
income into a trust fund, subject to certain limits. The chief limitations
of 401(k) plans for executives are the various IRS-imposed caps on the
amount that can be deferred.
Because the Executive Savings Plans apply only to a select group of
senior management and highly compensated employees and are not qualified
plans, these limitations do not apply. Non-qualified plans are more
flexible in their design and can be more selective in terms of the
employees who are allowed to participate.
The main advantages of these Plans are the substantially greater
deferral opportunity they can offer, as well as the 50 cents per dollar
match on the first six percent of salary deferred in the Automatic
Restoration Option, or first six percent of MIP bonuses deferred into the
Incentive (MIP) Deferral Option. The main disadvantage is that the Plans
are not funded nor are assets held in a trust, but rather the account
balances are paid directly by United HealthCare out of its general assets.
As a result, there is not the same security as in a qualified plan.
Participation in the Executive Savings Plans does not affect your
ability to participate in the 401(k) Savings Plan. You can participate in
either or both Plans. However, you will be enrolled in the Executive
Savings Plans Automatic Restoration Option only if you are participating
in the 401(k) Savings Plan.
Q2. WHAT ARE MY CHOICES FOR RECEIVING DISTRIBUTIONS FROM THE PLANS?
A2. When you enroll in the Plans, you need to elect the form of payment you
wish to receive upon termination, death or disability:
- One lump sum payment;
- Annual installments over a three-year period; or
- Annual installments over a five-year period.
IF YOU DO NOT ELECT HOW YOU WANT YOUR ACCOUNT BALANCE DISTRIBUTED, IT
WILL BE PAID OUT IN ONE LUMP SUM PAYMENT THE FEBRUARY FOLLOWING THE YEAR OF
YOUR TERMINATION, PERMANENT TOTAL DISABILITY OR DEATH. THE DISTRIBUTION
METHOD YOU ELECT DURING YOUR INITIAL ENROLLMENT FOR ESP IS IRREVOCABLE. YOU
CANNOT CHANGE YOUR DISTRIBUTION METHOD IN THE FUTURE.
10
<PAGE>
Q3. WHY DO I HAVE TO MAKE A DEFERRAL ELECTION BEFORE I KNOW WHAT I WILL BE
PAID?
A3. In exchange for the opportunity to defer taxation on unearned income,
the IRS requires that an irrevocable election to defer income must be made
before the income is actually earned. Since your election will remain in
effect for an entire year, you may want to be conservative in your deferral
amount.
Q4. WHAT WOULD HAPPEN TO MY DEFERRALS IN THE EVENT THAT UNITED HEALTHCARE
DECLARES BANKRUPTCY?
A4. In the unlikely event that United HealthCare declares bankruptcy, ESP
participants would be viewed as general creditors and the claims for their
accounts would be treated in the manner and sequence stipulated by the
bankruptcy laws. Typically, ESP participants would share, on a pro-rata
basis with all other general unsecured creditors of the company, in any
assets that remain after payment of the company's obligations to secured
creditors. In contrast, benefits under the United HealthCare 401(k) Savings
Plan would not be affected by the bankruptcy of United HealthCare since
they already are funded in trust.
Q5. ARE DISTRIBUTIONS ELIGIBLE TO BE ROLLED OVER INTO AN IRA?
A5. No. Because these are not IRS tax-qualified plans, you cannot roll over
your ESP distributions into an IRA or to another employer's qualified plan
when you leave United HealthCare. When electing a non-qualified plan
distribution, we encourage you to seek professional tax advice to determine
the best course of action for your individual financial circumstances.
Q6. HOW DO I KNOW HOW WELL THE INVESTMENT CREDIT OPTIONS ARE PERFORMING?
A6. You have daily access to your account and the performance of the
investment credit options by calling the Retirement Plans Service Center at
1-888-842-2756. In addition, you will receive a statement of your account
balance (currently quarterly). The statement includes a chart showing the
investment credit performance of each of the fund options. Of course, past
performance is not a guarantee of future performance.
11
<PAGE>
Q7. WHY AM I CREDITED WITH AN EMPLOYER MATCH CONTRIBUTION ON MY DEFERRALS
UNDER THE AUTOMATIC RESTORATION OPTION AND INCENTIVE (MIP) DEFERRAL OPTION,
BUT NOT UNDER MY DEFERRALS FOR THE SALARY DEFERRAL OPTION?
A7. The Automatic Restoration Option and the Incentive (MIP) Deferral Option
are intended to provide you with deferral and matching contribution
opportunities that are similar to what would be available to you under the
401(k) Savings Plan, but which are not available to you because you are
prevented from making further 401(k) Savings Plan deferrals as a result
of reaching the 1998 $10,000 IRS deferral limit or the $160,000
compensation limit. The Salary Deferral Option is not designed or intended
to "make up" for the 401(k) Savings Plan limitations, thus you are not
credited with an employer match on deferrals you make under this Option.
Q8. CAN I CHANGE MY DISTRIBUTION ELECTION AFTER I BEGIN PARTICIPATING IN THE
PLANS?
A8. No. Once your election has been made to defer funds into the Plans, the
IRS prevents you from exercising any control over the form or timing of
your distribution. This concept is referred to as "constructive receipt."
Q9. IS THE EMPLOYER MATCH IN THE PLANS SUBJECT TO SOCIAL SECURITY (FICA)
AND/OR INCOME TAXES?
A9. The employer match is subject to FICA tax at the time that the match is
credited to your ESP account. Whether the match is actually taxed depends
on whether, at the time it is credited, you have exceeded the Social
Security taxable wage base. The match will always be subject to and taxed
under the OASDI portion of the FICA tax. The match is not, however, subject
to federal or state income taxes at the time it is credited to your
account. Instead, the match is generally subject to income tax when you
receive a distribution from the Plans.
12
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[LOGO]
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement, effective as of October 16, 1998 (the "Effective Date"), is
made by and between Jeannine M. Rivet ("Executive") and United HealthCare
Services, Inc. ("United HealthCare") for the purpose of setting forth the terms
and conditions of Executive's employment by United HealthCare, or an affiliate
or subsidiary of United HealthCare, and to protect United HealthCare's
knowledge, expertise, customer relationships and the confidential information
United HealthCare has developed about its customers, products, operations and
services. Unless the context otherwise requires, when used in this Agreement
"United HealthCare" includes any entity affiliated with United HealthCare.
WHEREAS, as additional consideration for entering into this Agreement
Executive shall receive, upon execution of this Agreement, a nonqualified stock
option to purchase 60,000 shares of United HealthCare Corporation ("UHC") common
stock with a grant date the same as the Effective Date pursuant to the terms of
the UHC Amended and Restated 1991 Stock and Incentive Plan.
WHEREAS, Executive and United HealthCare desire to enter into this
Agreement, which shall supersede any and all other prior employment-related
agreements between Executive and United HealthCare.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound hereby, the parties hereto
agree as follows:
1. EMPLOYMENT AND DUTIES; TERMINATION OF PRIOR AGREEMENTS.
A. EMPLOYMENT. United HealthCare hereby employs Executive, either
directly or through an affiliate or subsidiary of United HealthCare, and
Executive hereby accepts such employment on the terms and conditions set
forth in this Agreement. Except as specifically superseded by this
Agreement, Executive's employment hereunder shall be subject to all of
United HealthCare's policies and procedures in regard to its employees.
Executive's employment hereunder shall begin on the Effective Date and
shall continue until terminated as set forth in Section 3 hereof.
B. DUTIES. Executive shall initially hold the executive level position of
CEO, Health Plans and perform the duties associated therewith. Executive
shall perform such other executive level responsibilities as are reasonably
assigned Executive from time to time. Executive agrees to devote
substantially all of Executive's business time and energy to the
performance of Executive's duties in a diligent and proper manner.
C. TERMINATION OF PRIOR AGREEMENTS. As of the Effective Date all other
prior employment related agreements between Executive and United
HealthCare will terminate in their entirety and no longer be of any
force or effect.
<PAGE>
2. COMPENSATION.
A. BASE SALARY. Executive shall initially be paid a base annual salary
in the amount of $400,000, payable bi-weekly, less all applicable
withholdings and deductions (the "Initial Base Salary"). Executive
shall receive a periodic performance review and consideration for an
increase in the Initial Base Salary.
B. BONUS AND STOCK PLANS. Executive shall be eligible to participate in
the incentive compensation plans and the stock option and grant plans
maintained by United HealthCare or an affiliate or subsidiary of United
HealthCare, in the sole discretion of United HealthCare and in
accordance with the terms and conditions of those plans and applicable
laws and regulations.
C. EMPLOYEE BENEFITS. Executive shall be eligible to participate in the
employee benefit plans maintained by either United HealthCare or an
affiliate or subsidiary of United HealthCare, including without limitation,
any life, health, dental, short-term and long-term disability insurance
coverages and any retirement plans, in the sole discretion of United
HealthCare and in accordance with the terms and conditions of those plans
and applicable laws and regulations.
D. VACATION; ILLNESS. Executive shall be eligible for paid vacation and
sick leave each year in accordance with the then-current policies of
either United HealthCare or an affiliate or subsidiary of United
HealthCare, in the sole discretion of United HealthCare and in
accordance with the terms and conditions of those plans and applicable
laws and regulations.
3. TERM AND TERMINATION.
A. TERM. The term of this Agreement shall begin on the Effective Date and
shall continue until terminated as set forth in Section 3B.
B. TERMINATION OF AGREEMENT.
1. BY MUTUAL AGREEMENT. This Agreement and Executive's employment
hereunder may be terminated at any time by the mutual written
agreement of the parties.
2. BY UNITED HEALTHCARE. United HealthCare may terminate this
Agreement and Executive's employment hereunder on 30 days' written
notice.
3. BY EXECUTIVE. Executive may terminate this Agreement and
Executive's employment hereunder on 30 days' written notice.
4. DEATH, DISABILITY, ETC. This Agreement and Executive's employment
by United HealthCare shall terminate immediately upon Executive's
death. This Agreement and Executive's employment hereunder shall
automatically terminate in the event of a permanent and total
disability which renders Executive incapable of
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<PAGE>
performing Executive's duties, with or without reasonable
accommodation. United HealthCare has the sole discretion to
determine whether Executive is permanently or totally disabled with
the meaning of this Section 3B4, and the effective date on which
Executive was rendered so disabled.
C. EMPLOYEE BENEFITS. On the effective date of the termination of this
Agreement and Executive's employment by United HealthCare, Executive shall
cease to be eligible for all employee benefit plans maintained by United
HealthCare, except as required by federal or state continuation of coverage
laws ("COBRA Benefits"). If Executive elects COBRA Benefits, Executive
shall pay the entire cost of such benefits either through after-tax payroll
deductions from the cash component of any severance compensation Executive
receives or directly if Executive does not receive such severance
compensation or if such severance compensation ceases.
D. SEVERANCE EVENTS AND BENEFITS. If a Severance Event, as hereinafter
defined, occurs, Executive shall receive the severance benefits set forth
in this Section 3D for a period of 12 months from the effective date of the
applicable Severance Event (the "Severance Period"). For purposes of this
Agreement a Severance Event shall occur if and when:
(i) United HealthCare (a) terminates this Agreement and Executive's
employment without Cause, as hereinafter defined, or (b) terminates
this Agreement without terminating Executive's employment and
Executive elects to treat such termination of this Agreement as a
Change in Employment, as hereinafter defined (collectively a
"Termination without Cause"), or
(ii) Within two years following a Change in Control, as hereinafter
defined, either (a) United HealthCare terminates this Agreement and
Executive's employment without Cause, or (b) a Change in Employment
occurs and Executive elects to treat such Change in Employment as a
termination of Executive's employment (collectively a "Termination
following a Change in Control").
1. SEVERANCE COMPENSATION. Executive shall receive the following severance
compensation (the "Severance Compensation"):
a) TERMINATION WITHOUT CAUSE. Subject to Section 3D(1)(b) below,
upon a Termination without Cause Executive shall receive biweekly
payments equal to 1/26 of two times the sum of (1) Executive's
annualized base salary as of the date of the Severance Event, less
all applicable withholdings or deductions required by law and
Executive's COBRA Benefit payments, if any, plus (2) one-half of
the total of any bonus or incentive compensation paid or payable to
Executive for the two most recent calendar years (excluding any
special or one-time bonus or incentive compensation payments), or
if Executive has been eligible for such bonus or incentive
compensation payments for less than two such periods, the last such
payment paid or payable to Executive (excluding any special or
one-time bonus or incentive compensation payments).
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<PAGE>
b) TERMINATION FOLLOWING A CHANGE IN CONTROL. Upon a Termination
following a Change in Control, Executive shall receive biweekly
payments equal to 1/26 of three times the sum of (1) Executive's
highest annualized base salary during the 2 year period immediately
preceding the Severance Event, less all applicable withholdings or
deductions required by law and Executive's COBRA Benefit payments, if
any, plus (2) the greater of (i) all bonuses that would be payable to
Executive under any incentive compensation plans in which Executive
then participates at Executive's then-current target level, or (ii)
one-half of the total of any bonus or incentive compensation paid or
payable to Executive for the two most recent calendar years (excluding
any special or one-time bonus or incentive compensation payments), or
if Executive has been eligible for such bonus or incentive
compensation payments for less than two such periods, the last such
payment paid or payable to Executive (excluding any special or
one-time bonus or incentive compensation payments.
2. CASH PAYMENT. Executive shall receive a one-time cash payment within a
reasonable time following commencement of the Severance Period in an amount
equal to the portion of the premiums that United HealthCare, or its
affiliate or subsidiary, as applicable, subsidizes for employee-only
health, dental and group term life benefit coverages (the "Cash Payment").
The Cash Payment shall cover the Severance Period and shall be determined
as of the effective date of the applicable Severance Event.
3. JOB SEARCH FEES. For a period not to exceed the Severance Period,
United HealthCare shall pay to an outplacement firm selected by United
HealthCare an amount deemed reasonable by United HealthCare for
outplacement and job search services for Executive.
4. EXCISE TAX PAYMENT. If any portion of the Severance Compensation
payable upon a Termination following a Change in Control constitutes an
Excess Parachute Payment, as hereinafter defined, such that an Excise
Tax, as hereinafter defined, is due, Executive shall receive a one-time
cash payment in an amount sufficient to cover (a) the full cost of the
Excise Tax plus (b) Executive's federal, state and city income,
employment and Excise Tax on this one-time cash payment and on all such
iterative payments so that Executive is made entirely whole for the
impact of the Excise Tax (collectively the "Gross-Up Payment"). United
HealthCare shall calculate these amounts on a timely and accurate basis,
and for this purpose Executive shall be deemed to be in the highest
marginal rate of federal, state and city taxes. The Gross-Up Payment
shall be made within 30 days following the effective date of Executive's
employment termination. For purposes of this Agreement the term "Excess
Parachute Payment" shall have the meaning set forth in Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code"). For
purposes of this Agreement the term "Excise Tax" shall mean the tax
imposed on an Excess Parachute Payment pursuant to Sections 280G and
4999 of the Code.
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<PAGE>
This Section 3D shall be the sole liability of United HealthCare to Executive
upon the termination of this Agreement and Executive's employment hereunder, and
shall replace and be in lieu of any payments or benefits which otherwise might
be owed Executive under any other severance plan or program maintained by United
HealthCare. Such compensation and benefits shall be conditioned on receipt by
United HealthCare of a separation agreement and a release of claims by Executive
on terms and conditions acceptable to United HealthCare in its sole discretion.
E. DEFINITIONS AND PROCEDURES.
1. CAUSE. For purposes of this Agreement "Cause" shall mean (a) the
refusal of Executive to follow the reasonable direction of the Board
of Directors of United HealthCare or Executive's supervisor or to
perform any duties reasonably required on material matters by United
HealthCare, (b) material violations of United HealthCare's Code of
Conduct or (c) the commission of any criminal act or act of fraud or
dishonesty by Executive in connection with Executive's employment by
United HealthCare. Prior to the termination of Executive's
employment under subsection (a) of this definition of Cause, United
HealthCare shall provide Executive with a 30 day notice specifying
the basis for Cause. If the Cause described in the notice is cured
to United HealthCare's reasonable satisfaction prior to the end of
the 30 day notice period, Executive's employment hereunder shall not
be terminated on that basis.
2. CHANGE IN CONTROL. For purposes of this Agreement "Change in
Control" shall mean (a) the acquisition by any person, entity or
"group," within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934 (the "Exchange Act"), other than
United HealthCare or any employee benefit plan of United HealthCare,
of beneficial ownership (as defined in the Exchange Act) of 20% or
more of the common stock of UHC or the combined voting power of UHC's
then-outstanding voting securities in a transaction or series of
transactions not approved in advanced by a vote of at least
three-quarters of the directors of UHC; (b) a change in 50% or more
of the directors of UHC in any 12 month period; (c) the approval by
the shareholders of UHC of a reorganization, merger, consolidation,
liquidation or dissolution of UHC or of the sale (in one transaction
or a series of related transactions) of all or substantially all of
the assets of UHC other than a reorganization, merger, consolidation,
liquidation, dissolution or sale approved in advance by a vote of at
least three-quarters of the directors; (d) the first purchase under
any tender offer or exchange offer (other than an offer by UHC)
pursuant to which shares of UHC common stock are purchased; or (e) at
least a majority of the directors of UHC determine in their sole
discretion that there has been a change of control of UHC.
3. CHANGE IN EMPLOYMENT. For purposes of this Agreement a "Change in
Employment" shall be deemed to have occurred (a) if (i) Executive's
duties are materially and adversely changed without Executive's prior
consent, (ii) Executive's salary or benefits are reduced other than
as a general reduction of salaries and
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<PAGE>
benefits by United HealthCare, (iii) without terminating Executive's
employment United HealthCare terminates this Agreement, or (iv) the
geographic location for the performance of Executive's duties
hereunder is moved more than 50 miles from the geographic location at
the Effective Date without Executive's prior consent, and (b) if in
each case under subsections (a) (i), (ii), (iii) and (iv), in the
period beginning 90 days before the time the Change in Employment
occurs, Cause does not exist or if Cause does exist United HealthCare
has not given Executive written notice that Cause exists.
Notwithstanding the foregoing, an isolated, insubstantial or
inadvertent action by United HealthCare, which is remedied by United
HealthCare within 30 days after receipt of notice thereof by
Executive, shall not constitute a Change in Employment. Executive
may elect to treat a Change in Employment as a termination of this
Agreement and Executive's employment hereunder. To do so Executive
shall send written notice of such election to United HealthCare
within 90 days after the date Executive receives notice from United
HealthCare or otherwise is definitively informed of the events
constituting the Change in Employment. No Change in Employment shall
be deemed to have occurred if Executive fails to send the notice of
election within the 90 day period. Executive's failure to treat a
particular Change in Employment as a termination of employment shall
not preclude Executive from treating a subsequent Change in
Employment as a termination of employment. The effective date of a
Change in Employment termination shall be the date 30 days after
United HealthCare receives the written notice of election.
4. PROPERTY RIGHTS, CONFIDENTIALITY, NON-DISPARAGEMENT, NON-SOLICIT AND
NON-COMPETE PROVISIONS.
A. UNITED HEALTHCARE'S PROPERTY.
1. ASSIGNMENT OF PROPERTY RIGHTS. Executive shall promptly disclose
to United HealthCare in writing all inventions, discoveries and works
of authorship, whether or not patentable or copyrightable, which are
conceived, made, discovered, written or created by Executive alone or
jointly with another person, group or entity, whether during the
normal hours of employment at United HealthCare or on Executive's own
time, during the term of this Agreement. Executive assigns all
rights to all such inventions and works of authorship to United
HealthCare. Executive shall give United HealthCare any assistance it
reasonably requires in order for United HealthCare to perfect,
protect, and use its rights to inventions and works of authorship.
This provision shall not apply to an invention for which no
equipment, supplies, facility or trade secret information of United
HealthCare was used and which was developed entirely on the
Executive's own time and which (1) does not relate to the business of
United HealthCare or to United HealthCare's anticipated research or
development, or (2) does not result from any work performed by the
Executive for United HealthCare.
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<PAGE>
2. NO REMOVAL OF PROPERTY. Executive shall not remove any records,
documents, or any other tangible items (excluding Executive's
personal property) from the premises of United HealthCare in either
original or duplicate form, except as is needed in the ordinary
course of conducting business for United HealthCare.
3. RETURN OF PROPERTY. Executive shall immediately deliver to United
HealthCare, upon termination of employment with United HealthCare, or
at any other time upon United HealthCare's request, any property,
records, documents, and other tangible items (excluding Executive's
personal property) in Executive's possession or control, including
data incorporated in word processing, computer and other data storage
media, and all copies of such records, documents and information,
including all Confidential Information, as defined below.
B. CONFIDENTIAL INFORMATION. During the course of employment Executive
will develop, become aware of and accumulate expertise, knowledge and
information regarding United HealthCare's organization, strategies,
business and operations and United HealthCare's past, current or
potential customers and suppliers. United HealthCare considers such
expertise, knowledge and information to be valuable, confidential and
proprietary and it shall be considered Confidential Information for
purposes of this Agreement. During this Agreement and at all times
thereafter Executive shall not use such Confidential Information or
disclose it to other persons or entities except as is necessary for the
performance of Executive's duties for United HealthCare or as has been
expressly permitted in writing by United HealthCare. This Section 4B
shall survive the termination of this Agreement.
C. NON-DISPARAGEMENT. Executive agrees that he will not criticize, make
any negative comments or otherwise disparage or put in disrepute United
HealthCare, or those associated with United HealthCare, in any way,
whether orally, in writing or otherwise, directly or by implication in
communication with any person, including but not limited to customers or
agents of United HealthCare. This Section 4C shall survive the
termination of this Agreement.
D. NON-SOLICITATION. During (i) the term of this Agreement, (ii) the
Severance Period or any period in which Executive receives severance
compensation pursuant to United HealthCare' election under Section 4E, as
applicable (iii) any period following the termination or expiration of this
Agreement during which Executive remains employed by United HealthCare and
(iv) for a period of one year after the last day of the latest of any
period described in (i), (ii) or (iii), Executive shall not (y) directly or
indirectly attempt to hire away any then-current employee of United
HealthCare or a subsidiary of United HealthCare or to persuade any such
employee to leave employment with United HealthCare, or (z) directly or
indirectly solicit, divert, or take away, or attempt to solicit, divert, or
take away, the business of any person, partnership, company or corporation
with whom United HealthCare (including any subsidiary or affiliated company
in which United HealthCare has a more than 20% equity interest) has
established or is actively seeking to establish a business or customer
relationship. This Section 4D shall survive the termination of this
Agreement.
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<PAGE>
E. NON-COMPETITION. During (i) the term of this Agreement, (ii) the
Severance Period or any period in which Executive receives severance
compensation pursuant to United HealthCare' election under this Section
4E, as applicable, and (iii) any period following the termination or
expiration of this Agreement during which Executive remains employed by
United HealthCare, Executive shall not, without United HealthCare's
prior written consent, engage or participate, either individually or as
an employee, consultant or principal, partner, agent, trustee, officer
or director of a corporation, partnership or other business entity, in
any business in which United HealthCare (including any subsidiary or
affiliated company in which United HealthCare has more than a 20% equity
interest) is engaged. If Executive terminates this Agreement, and as of
such termination or within 90 days of such termination Executive also
terminates Executive's employment by United HealthCare, United
HealthCare may elect to have the provisions of this Section 4E be in
effect for up to 24 months following the effective date of Executive's
employment termination if, during the period up to 24 months specified
by United HealthCare, United HealthCare pays Executive severance
compensation equal to biweekly payments of 1/26 of the Severance
Compensation and the Cash Payment. United HealthCare must send written
notice of such election within 10 days after it receives written notice
of Executive's termination of employment. This Section 4E shall survive
the termination of this Agreement.
5. MISCELLANEOUS.
A. ASSIGNMENT. This Agreement shall be binding upon and shall inure to the
benefit of the parties and their successors and assigns, but may not be
assigned by either party without the prior written consent of the other
party, except that United HealthCare in its sole discretion may assign this
Agreement to an entity controlled by United HealthCare at the time of the
assignment. If United HealthCare subsequently loses or gives up control of
the entity to which this Agreement is assigned, such entity shall become
United HealthCare for all purposes under this Agreement, beginning on the
date on which United HealthCare loses or gives up control of the entity.
Any successor to United HealthCare shall be deemed to be United HealthCare
for all purposes of this Agreement.
B. NOTICES. All notices under this Agreement shall be in writing and
shall be deemed to have been duly given if delivered by hand or mailed
by registered or certified mail, return receipt requested, postage
prepaid, to the party to receive the same at the address set forth below
or at such other address as may have been furnished by proper notice.
United HealthCare: 300 Opus Center
9900 Bren Road East
Minnetonka, MN 55343
Attn: General Counsel
Executive:
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<PAGE>
C. ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties with respect to its subject matter and may be amended or
modified only by a subsequent written amendment executed by the parties.
This Agreement replaces and supersedes any and all prior employment or
employment related agreements and understandings, including any letters
or memos which may have been construed as agreements, between the
Executive and United HealthCare.
D. CHOICE OF LAW. This Agreement shall be construed and interpreted
under the applicable laws and decisions of the State of Minnesota.
E. WAIVERS. No failure on the part of either party to exercise, and no
delay in exercising, any right or remedy under this Agreement shall
operate as a waiver; nor shall any single or partial exercise of any
right or remedy preclude any other or further exercise of any right or
remedy.
F. ADEQUACY OF CONSIDERATION. Executive acknowledges and agrees that
Executive has received adequate consideration from United HealthCare to
enter into this Agreement.
G. DISPUTE RESOLUTION AND REMEDIES. Any dispute arising between the
parties relating to this Agreement or to Executive's employment by
United HealthCare shall be resolved by binding arbitration pursuant to
United HealthCare' Employment Arbitration Policy. The arbitrators
shall not ignore or vary the terms of this Agreement and shall be bound
by and apply controlling law. The parties acknowledge that Executive's
failure to comply with the Confidential Information, Non-Solicitation
and Non-Competition provisions of this Agreement will cause immediate
and irreparable injury to United HealthCare and that therefore the
arbitrators, or a court of competent jurisdiction if an arbitration
panel cannot be immediately convened, will be empowered to provide
injunctive relief, including temporary or preliminary relief, to
restrain any such failure to comply.
H. NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer or be
deemed or construed to confer any rights or benefits upon any person
other than the parties.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE ENFORCED BY
THE PARTIES.
IN WITNESS WHEREOF, this Agreement has been signed by the parties hereto as
of the Effective Date set forth above.
United HealthCare Services, Inc. Executive
By /s/ Robert J. Backes /s/ Jeannine M. Rivet
-------------------------------- --------------------------
Its Senior Vice President,
Human Resources
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<PAGE>
This memorandum of understanding, effective as of October 16, 1998, supplements
and amends the employment agreement, effective as of October 16, 1998, between
Jeannine Rivet and United HealthCare Services, Inc. as set forth below.
1. The parties agree that Section 3(D)(i) is amended in its entirety
to read:
United HealthCare (a) terminates this Agreement and Executive's
employment without Cause, as hereinafter defined, or (b) a Change
in Employment, as hereinafter defined occurs (collectively a
"Termination without Cause"), or
2. The parties confirm that a change in responsibility, in and of
itself will not constitute a Change in Employment, acknowledging
that so long as Executive retains senior executive level
functional, administrative, or operational responsibility no
Change of Employment shall have occurred solely as a result of
such change in responsibility or title.
3. For purposes of the non-competition provisions of Section 4(E),
the parties concur that employment in the health care industry
is not absolutely prohibited by Section 4(E), it being the
intent of the parties in Section 4 (E) to limit Executive's
future employment by managed care, health care insurance,
physician management, or other, similar type of organization.
4. The references in Section 4(E) to "24 months" are amended to
read "12 months."
In all other respects the parties reaffirm and agree to be bound by the
provisions of the Employment Agreement, effective as of the date set forth
above.
United HealthCare Services, Inc. Executive
By /s/ Robert J. Backes /s/ Jeannine M. Rivet
-------------------------------- --------------------------
Its Senior Vice President, Jeannine M. Rivet
Human Resources
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement, effective as of October 16, 1998 (the "Effective Date"),
is made by and between David J. Lubben ("Executive") and United HealthCare
Services, Inc. ("United HealthCare") for the purpose of setting forth the
terms and conditions of Executive's employment by United HealthCare, or an
affiliate or subsidiary of United HealthCare, and to protect United
HealthCare's knowledge, expertise, customer relationships and the
confidential information United HealthCare has developed about its customers,
products, operations and services. Unless the context otherwise requires,
when used in this Agreement "United HealthCare" includes any entity
affiliated with United HealthCare.
WHEREAS, as additional consideration for entering into this Agreement
Executive shall receive, upon execution of this Agreement, a nonqualified stock
option to purchase 50,000 shares of United HealthCare Corporation ("UHC") common
stock with a grant date the same as the Effective Date pursuant to the terms of
the UHC Amended and Restated 1991 Stock and Incentive Plan.
WHEREAS, Executive and United HealthCare desire to enter into this
Agreement, which shall supersede any and all other prior employment-related
agreements between Executive and United HealthCare.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound hereby, the parties hereto
agree as follows:
1. EMPLOYMENT AND DUTIES; TERMINATION OF PRIOR AGREEMENTS.
A. EMPLOYMENT. United HealthCare hereby employs Executive, either
directly or through an affiliate or subsidiary of United HealthCare, and
Executive hereby accepts such employment on the terms and conditions set
forth in this Agreement. Except as specifically superseded by this
Agreement, Executive's employment hereunder shall be subject to all of
United HealthCare's policies and procedures in regard to its employees.
Executive's employment hereunder shall begin on the Effective Date and
shall continue until terminated as set forth in Section 3 hereof.
B. DUTIES. Executive shall initially hold the executive level position of
General Counsel and perform the duties associated therewith. Executive
shall perform such other executive level responsibilities as are reasonably
assigned Executive from time to time. Executive agrees to devote
substantially all of Executive's business time and energy to the
performance of Executive's duties in a diligent and proper manner.
C. TERMINATION OF PRIOR AGREEMENTS. As of the Effective Date all other
prior employment related agreements between Executive and United
HealthCare will terminate in their entirety and no longer be of any
force or effect.
<PAGE>
2. COMPENSATION.
A. BASE SALARY. Executive shall initially be paid a base annual salary
in the amount of $300,000, payable bi-weekly, less all applicable
withholdings and deductions (the "Initial Base Salary"). Executive
shall receive a periodic performance review and consideration for an
increase in the Initial Base Salary.
B. BONUS AND STOCK PLANS. Executive shall be eligible to participate in
the incentive compensation plans and the stock option and grant plans
maintained by United HealthCare or an affiliate or subsidiary of United
HealthCare, in the sole discretion of United HealthCare and in
accordance with the terms and conditions of those plans and applicable
laws and regulations.
C. EMPLOYEE BENEFITS. Executive shall be eligible to participate in the
employee benefit plans maintained by either United HealthCare or an
affiliate or subsidiary of United HealthCare, including without limitation,
any life, health, dental, short-term and long-term disability insurance
coverages and any retirement plans, in the sole discretion of United
HealthCare and in accordance with the terms and conditions of those plans
and applicable laws and regulations.
D. VACATION; ILLNESS. Executive shall be eligible for paid vacation and
sick leave each year in accordance with the then-current policies of
either United HealthCare or an affiliate or subsidiary of United
HealthCare, in the sole discretion of United HealthCare and in
accordance with the terms and conditions of those plans and applicable
laws and regulations.
3. TERM AND TERMINATION.
A. TERM. The term of this Agreement shall begin on the Effective Date and
shall continue until terminated as set forth in Section 3B.
B. TERMINATION OF AGREEMENT.
1. BY MUTUAL AGREEMENT. This Agreement and Executive's employment
hereunder may be terminated at any time by the mutual written
agreement of the parties.
2. BY UNITED HEALTHCARE. United HealthCare may terminate this
Agreement and Executive's employment hereunder on 30 days' written
notice.
3. BY EXECUTIVE. Executive may terminate this Agreement and
Executive's employment hereunder on 30 days' written notice.
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4. DEATH, DISABILITY, ETC. This Agreement and Executive's employment
by United HealthCare shall terminate immediately upon Executive's
death. This Agreement and Executive's employment hereunder shall
automatically terminate in the event of a permanent and total
disability which renders Executive incapable of performing
Executive's duties, with or without reasonable accommodation. United
HealthCare has the sole discretion to determine whether Executive is
permanently or totally disabled with the meaning of this Section 3B4,
and the effective date on which Executive was rendered so disabled.
C. EMPLOYEE BENEFITS. On the effective date of the termination of this
Agreement and Executive's employment by United HealthCare, Executive shall
cease to be eligible for all employee benefit plans maintained by United
HealthCare, except as required by federal or state continuation of coverage
laws ("COBRA Benefits"). If Executive elects COBRA Benefits, Executive
shall pay the entire cost of such benefits either through after-tax payroll
deductions from the cash component of any severance compensation Executive
receives or directly if Executive does not receive such severance
compensation or if such severance compensation ceases.
D. SEVERANCE EVENTS AND BENEFITS. If a Severance Event, as hereinafter
defined, occurs, Executive shall receive the severance benefits set forth
in this Section 3D for a period of 12 months from the effective date of the
applicable Severance Event (the "Severance Period"). For purposes of this
Agreement a Severance Event shall occur if and when:
(i) United HealthCare (a) terminates this Agreement and Executive's
employment without Cause, as hereinafter defined, or (b) terminates
this Agreement without terminating Executive's employment and
Executive elects to treat such termination of this Agreement as a
Change in Employment, as hereinafter defined (collectively a
"Termination without Cause"), or
(ii) Within two years following a Change in Control, as hereinafter
defined, either (a) United HealthCare terminates this Agreement and
Executive's employment without Cause, or (b) a Change in Employment
occurs and Executive elects to treat such Change in Employment as a
termination of Executive's employment (collectively a "Termination
following a Change in Control").
1. SEVERANCE COMPENSATION. Executive shall receive the following severance
compensation (the "Severance Compensation"):
a) TERMINATION WITHOUT CAUSE. Subject to Section 3D(1)(b) below,
upon a Termination without Cause Executive shall receive biweekly
payments equal to 1/26 of two times the sum of (1) Executive's
annualized base salary as of the date of the Severance Event, less
all applicable withholdings or deductions required by law and
Executive's COBRA Benefit
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payments, if any, plus (2) one-half of the total of any bonus or
incentive compensation paid or payable to Executive for the two
most recent calendar years (excluding any special or one-time bonus
or incentive compensation payments), or if Executive has been
eligible for such bonus or incentive compensation payments for less
than two such periods, the last such payment paid or payable to
Executive (excluding any special or one-time bonus or incentive
compensation payments).
b) TERMINATION FOLLOWING A CHANGE IN CONTROL. Upon a Termination
following a Change in Control, Executive shall receive biweekly
payments equal to 1/26 of three times the sum of (1) Executive's
highest annualized base salary during the 2 year period immediately
preceding the Severance Event, less all applicable withholdings or
deductions required by law and Executive's COBRA Benefit payments, if
any, plus (2) the greater of (i) all bonuses that would be payable to
Executive under any incentive compensation plans in which Executive
then participates at Executive's then-current target level, or (ii)
one-half of the total of any bonus or incentive compensation paid or
payable to Executive for the two most recent calendar years (excluding
any special or one-time bonus or incentive compensation payments), or
if Executive has been eligible for such bonus or incentive
compensation payments for less than two such periods, the last such
payment paid or payable to Executive (excluding any special or
one-time bonus or incentive compensation payments.
2. CASH PAYMENT. Executive shall receive a one-time cash payment within a
reasonable time following commencement of the Severance Period in an amount
equal to the portion of the premiums that United HealthCare, or its
affiliate or subsidiary, as applicable, subsidizes for employee-only
health, dental and group term life benefit coverages (the "Cash Payment").
The Cash Payment shall cover the Severance Period and shall be determined
as of the effective date of the applicable Severance Event.
3. JOB SEARCH FEES. For a period not to exceed the Severance Period,
United HealthCare shall pay to an outplacement firm selected by United
HealthCare an amount deemed reasonable by United HealthCare for
outplacement and job search services for Executive.
4. EXCISE TAX PAYMENT. If any portion of the Severance Compensation
payable upon a Termination following a Change in Control constitutes an
Excess Parachute Payment, as hereinafter defined, such that an Excise
Tax, as hereinafter defined, is due, Executive shall receive a one-time
cash payment in an amount sufficient to cover (a) the full cost of the
Excise Tax plus (b) Executive's federal, state and city income,
employment and Excise Tax on this one-time cash payment and on all such
iterative payments so that Executive is made entirely
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whole for the impact of the Excise Tax (collectively the "Gross-Up
Payment"). United HealthCare shall calculate these amounts on a timely
and accurate basis, and for this purpose Executive shall be deemed to be
in the highest marginal rate of federal, state and city taxes. The
Gross-Up Payment shall be made within 30 days following the effective
date of Executive's employment termination. For purposes of this
Agreement the term "Excess Parachute Payment" shall have the meaning set
forth in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"). For purposes of this Agreement the term "Excise Tax"
shall mean the tax imposed on an Excess Parachute Payment pursuant to
Sections 280G and 4999 of the Code.
This Section 3D shall be the sole liability of United HealthCare to Executive
upon the termination of this Agreement and Executive's employment hereunder, and
shall replace and be in lieu of any payments or benefits which otherwise might
be owed Executive under any other severance plan or program maintained by United
HealthCare. Such compensation and benefits shall be conditioned on receipt by
United HealthCare of a separation agreement and a release of claims by Executive
on terms and conditions acceptable to United HealthCare in its sole discretion.
E. DEFINITIONS AND PROCEDURES.
1. CAUSE. For purposes of this Agreement "Cause" shall mean (a) the
refusal of Executive to follow the reasonable direction of the Board of
Directors of United HealthCare or Executive's supervisor or to perform
any duties reasonably required on material matters by United HealthCare,
(b) material violations of United HealthCare's Code of Conduct or (c)
the commission of any criminal act or act of fraud or dishonesty by
Executive in connection with Executive's employment by United
HealthCare. Prior to the termination of Executive's employment under
subsection (a) of this definition of Cause, United HealthCare shall
provide Executive with a 30 day notice specifying the basis for Cause.
If the Cause described in the notice is cured to United HealthCare's
reasonable satisfaction prior to the end of the 30 day notice period,
Executive's employment hereunder shall not be terminated on that basis.
2. CHANGE IN CONTROL. For purposes of this Agreement "Change in Control"
shall mean (a) the acquisition by any person, entity or "group," within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934 (the "Exchange Act"), other than United HealthCare or any employee
benefit plan of United HealthCare, of beneficial ownership (as defined in
the Exchange Act) of 20% or more of the common stock of UHC or the combined
voting power of UHC's then-outstanding voting securities in a transaction
or series of transactions not approved in advanced by a vote of at least
three-quarters of the directors of UHC; (b) a change in 50% or more of the
directors of UHC in any 12 month period; (c) the approval by the
shareholders of UHC of a reorganization, merger,
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consolidation, liquidation or dissolution of UHC or of the sale (in one
transaction or a series of related transactions) of all or substantially
all of the assets of UHC other than a reorganization, merger,
consolidation, liquidation, dissolution or sale approved in advance by a
vote of at least three-quarters of the directors; (d) the first purchase
under any tender offer or exchange offer (other than an offer by UHC)
pursuant to which shares of UHC common stock are purchased; or (e) at
least a majority of the directors of UHC determine in their sole
discretion that there has been a change of control of UHC.
3. CHANGE IN EMPLOYMENT. For purposes of this Agreement a "Change in
Employment" shall be deemed to have occurred (a) if (i) Executive's duties
are materially and adversely changed without Executive's prior consent,
(ii) Executive's salary or benefits are reduced other than as a general
reduction of salaries and benefits by United HealthCare, (iii) without
terminating Executive's employment United HealthCare terminates this
Agreement, or (iv) the geographic location for the performance of
Executive's duties hereunder is moved more than 50 miles from the
geographic location at the Effective Date without Executive's prior
consent, and (b) if in each case under subsections (a) (i), (ii), (iii) and
(iv), in the period beginning 90 days before the time the Change in
Employment occurs, Cause does not exist or if Cause does exist United
HealthCare has not given Executive written notice that Cause exists.
Notwithstanding the foregoing, an isolated, insubstantial or inadvertent
action by United HealthCare, which is remedied by United HealthCare within
30 days after receipt of notice thereof by Executive, shall not constitute
a Change in Employment. Executive may elect to treat a Change in
Employment as a termination of this Agreement and Executive's employment
hereunder. To do so Executive shall send written notice of such election
to United HealthCare within 90 days after the date Executive receives
notice from United HealthCare or otherwise is definitively informed of the
events constituting the Change in Employment. No Change in Employment
shall be deemed to have occurred if Executive fails to send the notice of
election within the 90 day period. Executive's failure to treat a
particular Change in Employment as a termination of employment shall not
preclude Executive from treating a subsequent Change in Employment as a
termination of employment. The effective date of a Change in Employment
termination shall be the date 30 days after United HealthCare receives the
written notice of election.
4. PROPERTY RIGHTS, CONFIDENTIALITY, NON-DISPARAGEMENT, NON-SOLICIT AND
NON-COMPETE PROVISIONS.
A. UNITED HEALTHCARE'S PROPERTY.
1. ASSIGNMENT OF PROPERTY RIGHTS. Executive shall promptly disclose
to United HealthCare in writing all inventions, discoveries and works
of authorship, whether or not patentable or copyrightable, which are
conceived, made, discovered, written
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or created by Executive alone or jointly with another person, group
or entity, whether during the normal hours of employment at United
HealthCare or on Executive's own time, during the term of this
Agreement. Executive assigns all rights to all such inventions and
works of authorship to United HealthCare. Executive shall give
United HealthCare any assistance it reasonably requires in order for
United HealthCare to perfect, protect, and use its rights to
inventions and works of authorship.
This provision shall not apply to an invention for which no
equipment, supplies, facility or trade secret information of United
HealthCare was used and which was developed entirely on the
Executive's own time and which (1) does not relate to the business of
United HealthCare or to United HealthCare's anticipated research or
development, or (2) does not result from any work performed by the
Executive for United HealthCare.
2. NO REMOVAL OF PROPERTY. Executive shall not remove any records,
documents, or any other tangible items (excluding Executive's
personal property) from the premises of United HealthCare in either
original or duplicate form, except as is needed in the ordinary
course of conducting business for United HealthCare.
3. RETURN OF PROPERTY. Executive shall immediately deliver to United
HealthCare, upon termination of employment with United HealthCare, or
at any other time upon United HealthCare's request, any property,
records, documents, and other tangible items (excluding Executive's
personal property) in Executive's possession or control, including
data incorporated in word processing, computer and other data storage
media, and all copies of such records, documents and information,
including all Confidential Information, as defined below.
B. CONFIDENTIAL INFORMATION. During the course of employment Executive
will develop, become aware of and accumulate expertise, knowledge and
information regarding United HealthCare's organization, strategies,
business and operations and United HealthCare's past, current or
potential customers and suppliers. United HealthCare considers such
expertise, knowledge and information to be valuable, confidential and
proprietary and it shall be considered Confidential Information for
purposes of this Agreement. During this Agreement and at all times
thereafter Executive shall not use such Confidential Information or
disclose it to other persons or entities except as is necessary for the
performance of Executive's duties for United HealthCare or as has been
expressly permitted in writing by United HealthCare. This Section 4B
shall survive the termination of this Agreement.
C. NON-DISPARAGEMENT. Executive agrees that he will not criticize, make
any negative comments or otherwise disparage or put in disrepute United
HealthCare, or those associated with United HealthCare, in any way,
whether orally, in writing or otherwise, directly or by implication in
communication with any person, including but not limited to
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<PAGE>
customers or agents of United HealthCare. This Section 4C shall survive
the termination of this Agreement.
D. NON-SOLICITATION. During (i) the term of this Agreement, (ii) the
Severance Period or any period in which Executive receives severance
compensation pursuant to United HealthCare' election under Section 4E, as
applicable (iii) any period following the termination or expiration of this
Agreement during which Executive remains employed by United HealthCare and
(iv) for a period of one year after the last day of the latest of any
period described in (i), (ii) or (iii), Executive shall not (y) directly or
indirectly attempt to hire away any then-current employee of United
HealthCare or a subsidiary of United HealthCare or to persuade any such
employee to leave employment with United HealthCare, or (z) directly or
indirectly solicit, divert, or take away, or attempt to solicit, divert, or
take away, the business of any person, partnership, company or corporation
with whom United HealthCare (including any subsidiary or affiliated company
in which United HealthCare has a more than 20% equity interest) has
established or is actively seeking to establish a business or customer
relationship. This Section 4D shall survive the termination of this
Agreement.
5. MISCELLANEOUS.
A. ASSIGNMENT. This Agreement shall be binding upon and shall inure to the
benefit of the parties and their successors and assigns, but may not be
assigned by either party without the prior written consent of the other
party, except that United HealthCare in its sole discretion may assign this
Agreement to an entity controlled by United HealthCare at the time of the
assignment. If United HealthCare subsequently loses or gives up control of
the entity to which this Agreement is assigned, such entity shall become
United HealthCare for all purposes under this Agreement, beginning on the
date on which United HealthCare loses or gives up control of the entity.
Any successor to United HealthCare shall be deemed to be United HealthCare
for all purposes of this Agreement.
B. NOTICES. All notices under this Agreement shall be in writing and
shall be deemed to have been duly given if delivered by hand or mailed
by registered or certified mail, return receipt requested, postage
prepaid, to the party to receive the same at the address set forth below
or at such other address as may have been furnished by proper notice.
United HealthCare: 300 Opus Center
9900 Bren Road East
Minnetonka, MN 55343
Executive:
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<PAGE>
C. ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties with respect to its subject matter and may be amended or
modified only by a subsequent written amendment executed by the parties.
This Agreement replaces and supersedes any and all prior employment or
employment related agreements and understandings, including any letters
or memos which may have been construed as agreements, between the
Executive and United HealthCare.
D. CHOICE OF LAW. This Agreement shall be construed and interpreted under
the applicable laws and decisions of the State of Minnesota.
E. WAIVERS. No failure on the part of either party to exercise, and no
delay in exercising, any right or remedy under this Agreement shall
operate as a waiver; nor shall any single or partial exercise of any
right or remedy preclude any other or further exercise of any right or
remedy.
F. ADEQUACY OF CONSIDERATION. Executive acknowledges and agrees that
Executive has received adequate consideration from United HealthCare to
enter into this Agreement.
G. DISPUTE RESOLUTION AND REMEDIES. Any dispute arising between the
parties relating to this Agreement or to Executive's employment by
United HealthCare shall be resolved by binding arbitration pursuant to
United HealthCare' Employment Arbitration Policy. The arbitrators
shall not ignore or vary the terms of this Agreement and shall be bound
by and apply controlling law. The parties acknowledge that Executive's
failure to comply with the Confidential Information, Non-Solicitation
and Non-Competition provisions of this Agreement will cause immediate
and irreparable injury to United HealthCare and that therefore the
arbitrators, or a court of competent jurisdiction if an arbitration
panel cannot be immediately convened, will be empowered to provide
injunctive relief, including temporary or preliminary relief, to
restrain any such failure to comply.
H. NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer or be
deemed or construed to confer any rights or benefits upon any person
other than the parties.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE ENFORCED BY
THE PARTIES.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed by the parties hereto as
of the Effective Date set forth above.
United HealthCare Services, Inc. Executive
By /s/ Robert J. Backes /s/ David J. Lubben
---------------------------- ----------------------------
Its Senior Vice President, David J. Lubben
Human Resources
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<PAGE>
SEPARATION AND RELEASE AGREEMENT
THIS SEPARATION AND RELEASE AGREEMENT ("Release") is made and entered into
between Travers H. Wills ("I," "Me," and "My") and United HealthCare
Corporation, including its present and former subsidiaries and affiliated
corporations ("Employer").
RECITALS:
A. My employment with Employer will terminate on January 1, 1999.
B. It is the Employer's policy to require employees who receive
separation payments to sign a release of claims. In exchange for the
consideration set forth in this Agreement, I have agreed to the provisions of
this Agreement and to release Employer from any claims arising out of my
employment or termination of employment.
AGREEMENT
In consideration of the recitals stated above and the mutual promises made
below, Employer and I agree as follows:
1. TERMINATION. My last day of work will be January 1, 1999 and my
termination shall be effective as of that date. I agree that I will not be
entitled to any severance payments under my employment agreement.
2. PAYMENTS. Employer will pay me my final payroll check for work through
January 1, 1999. I will be eligible for the 1998 MIP and will receive any
additional payment in accordance with company guidelines.
3. CONSULTING AGREEMENT. Employer and I have entered into a consulting
agreement concurrent herewith in the form attached to this agreement
pursuant to which I will be entitled to receive monthly payments of $49,000
through July 1, 2000, all in accordance with such agreement.
4. ADDITIONAL CONSIDERATION. As additional consideration for my agreement to
the terms contained herein, Employer agrees to: continue to vest through
December 31, 1999 any unvested stock option grants awarded to me under
Employer's stock option plans. Such options shall vest (a) at a rate of at
least 20% of the total number of shares covered by each such option grant
on the anniversary date of the option grant for grants made before July 1,
1996; and (b) at a rate of at least 25% of the total number of shares
covered by each such option grant on the anniversary date of the option
grant for grants made after July 1, 1996. In addition the option grant of
October 1997 will be considered for vesting by March 31, 2000. I shall
have until December 31, 2002 to exercise vested options including options
that vest through December 31, 1999 and the options vesting in
<PAGE>
the first quarter of 2000. Employer also agrees to continue health care
coverage in accordance with COBRA for an additional 18 months after the
date of termination of employment. Following the COBRA eligibility period,
Employer agrees to offer me the ability to purchase health insurance under
the United HealthCare policy at company rates until I am eligible for
Medicare or become eligible for other health insurance through new
employment and similarly agrees to offer my spouse the ability so to
purchase health insurance until my spouse is eligible for Medicare or
becomes eligible for other health insurance through new employment. I
shall be responsible for the premiums payable with respect to such health
care coverage. In addition, Employer agrees to pay me the pro rata share
of Employer's Long Term Incentive Plan for the two-year period ending
December 31, 1998. This payment will be made in the Spring of 1999 in
accordance with the Long Term Incentive Plan.
5. RELEASE. In exchange for these payments, I agree to release Employer from
all claims, demands, actions or liabilities I may have against Employer of
whatever kind, including but not limited to those which are related to my
employment with Employer or the termination of that employment. I agree
that this also releases from liability Employer's subsidiary and affiliated
corporations, their predecessors, and each of their present or former
agents, directors, officers, employees, representatives, shareholders,
successors and assigns ("those associated with Employer"), whether in their
official or individual capacities. I agree that I have executed this
Release on my own behalf, and also on behalf of any heirs, agents,
representatives, successors and assigns that I may have now or in the
future.
I also agree that this Release covers claims under any federal, state or
local statute, regulation or common law doctrine regarding or relating to
employment discrimination, terms and conditions of employment, or
termination of employment including, but not limited to, the following:
Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866,
the Civil Rights Act of 1991, the Age Discrimination in Employment Act,
the Older Workers Benefit Protection Act, the Rehabilitation Act of 1973,
the Americans With Disabilities Act, the Employee Retirement Income
Security Act of 1974, and all applicable amendments; state human rights or
fair employment practices laws; breach of contract, promissory estoppel,
or any other contract theory; defamation, employment negligence, or any
other tort theory; and rights in any welfare benefit plan or any pension
or retirement plan sponsored by Employer. However, this Release does not
preclude my right to obtain the vested and non-forfeitable balance in my
accounts under any pension or retirement plan sponsored by the Employer
or preclude me from exercising my right to continuation coverage or my
conversion rights, if any, under Employer's welfare benefit plans.
I also agree that with respect to any released claim(s), that I will never
file a lawsuit or demand for arbitration, or institute a claim of any kind
against Employer, or those associated with Employer, including, but not
limited to, claims
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related to my employment with Employer or the termination of that
employment. Nothing contained herein, however, shall be construed to
constitute a waiver of future claims, or to prohibit me from seeking
recourse through a government agency. However, this Release includes a
release of my right to file a court action or to seek individual remedies
or damages in any court action filed by any such government agency and my
release of these rights shall apply with full force and effect to any
proceedings arising from or relating to such recourse including, but not
limited to, the right to monetary damages or other individual legal or
equitable relief awarded by any governmental agency.
If I violate this Release by breaching any of the promises contained
herein, including but not limited to filing a lawsuit or demand for
arbitration, or instituting a claim against Employer or those associated
with Employer, I agree that I will return all separation payments received
pursuant to this Release. I further agree that I will pay all costs and
expenses of defending against the suit, arbitration, or claim incurred by
Employer or those associated with Employer, including reasonable attorneys'
fees.
Nothing in the foregoing release, however, shall be construed to limit
Employer's obligation to indemnify me for my actions while employed by
Employer as provided in Employer's governing documents or to limit my
ability to pursue a claim against Employer for not complying with its
indemnification obligations.
6. PERIOD TO CONSIDER SIGNING RELEASE. I have been given a period of
twenty-one (21) days to consider whether I want to sign this Release.
7. REVOCATION PERIOD. This Release does not become effective for a period of
seven days after it is signed by me and I have the right to revoke it
during that period. Any revocation must be in writing and delivered to
Robert J. Backes, Senior Vice President, Human Resources, 9900 Bren Road
East, MN008-8317, Minnetonka, Minnesota, 55343 within the seven-day
period. If this person does not RECEIVE a written revocation by the end
of the seven-day period, this Release will become fully enforceable at
that time. I understand that if I revoke this Release, I will not be
entitled to receive the additional separation payments.
8. COOPERATION WITH EMPLOYER. I agree to cooperate with Employer with respect
to any administrative or legal investigations or proceedings concerning
matters that arose during my employment. My cooperation includes making
myself available to assist with such matters as requested by Employer. I
acknowledge that I am not entitled to further compensation or consideration
from Employer for such cooperation or assistance, except to the extent any
witness fees are mandated under federal or state law.
9. CONSULTING AN ATTORNEY. I acknowledge that I have been advised to
consult with an attorney and that any legal consultation will be at my
own expense. I have
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had adequate opportunity to consult with an attorney, and I have read
and understand the terms of this Release and am voluntarily signing this
Release.
10. CONFIDENTIALITY. The terms of this Release will be treated as confidential
by me and Employer and neither of us shall disclose its terms to anyone
except I may disclose the terms of this Release to my spouse, legal
counsel, accountant, and as required by law. Employer may disclose the
terms of this Release to its officers and directors, outside auditors, and
to employees or agents of it or its parent corporation who have a
legitimate need to know the terms in the course of performing their duties,
and as required by law. I recognize and agree that this confidentiality
provision was a significant inducement for the Employer to enter into this
Release. In the event of a breach by me of the terms of this paragraph,
all payments to me shall cease and I shall reimburse all payments made
under this Release.
11. NO FUTURE EMPLOYMENT WITH EMPLOYER. I agree that I will not, at any time
in the future, apply for or accept employment with Employer or any
corporation that is an affiliate of Employer. I agree that any such
corporation has the right not to consider my application for future
employment and the right to deny me future employment without any
recourse.
12. CONFIDENTIAL OR PROPRIETARY INFORMATION. During the course of my
employment, I may have developed knowledge regarding Employer's
organization, strategies, business and operation, and Employer's
past, current or potential customers and suppliers. I acknowledge
that Employer considers such information to be valuable, confidential,
and proprietary. I understand that I may not disclose confidential or
proprietary information obtained by me during my employment with Employer.
13. NON-ADMISSION. Nothing in this Release is intended to be, nor will be
deemed to be, an admission of liability by the Employer that it has
violated any state or federal statute, local ordinance, or principle of
common law, or that it has engaged in any wrongdoing.
14. CONTINUATION RIGHTS. All benefits and coverages will cease on the effective
date of my termination, except in accordance with the terms of the benefit
plan or applicable law.
15. NON-DISPARAGEMENT AND NON-SOLICITATION. I agree that I will not criticize,
make any negative comments or otherwise disparage or put in disrepute
Employer, or those associated with Employer in any way, whether orally, in
writing or otherwise, directly or by implication in communication with any
person, including but not limited to customers or agents of Employer. In
addition, for the one-year period after I cease receiving any payments
pursuant to this Release, I agree that I will not directly or indirectly
recruit, induce, or solicit any employee of Employer for employment.
Employer agrees that in response to written inquiries
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concerning my employment, it will provide only my dates of employment and
last position held with Employer.
16. DISCLOSURE. I acknowledge that I have advised Employer's legal counsel
completely and candidly of all facts that I am aware of that constitute or
might constitute violations of Employer's ethical or legal obligations or
standards.
17. INVALIDITY. In case any one or more of the provisions of this Release
shall be invalid, illegal, or unenforceable in any respect, the validity,
legality, and enforceability of the remaining provisions contained in this
Release will not in any way be affected or impaired thereby.
18. GOVERNING LAW. This Release will be construed and interpreted in
accordance with the laws of the State of Minnesota.
19. ENFORCEABILITY. In case any part of this Release shall be invalid, or
unenforceable for any reason, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired. Any
claim that I bring to enforce the terms of this Release will be subject to
Employer's Arbitration Policy.
20. ENTIRE AGREEMENT. I have signed this Release with the understanding that
this is the entire agreement between me and Employer relating to my
employment and termination from employment. This Release includes all
prior discussions and agreements between me and Employer. I acknowledge
that this Release cannot be changed except by writing signed by both me
and Employer.
United HealthCare Corporation
By: /s/ Robert J. Backes
-----------------------------
Its: Senior Vice President
----------------------------
/s/ Travers H. Wills
- -------------------------------
Travers H. Wills
Date: January 14, 1999
--------------------------
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CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made by and among United
HealthCare Services, Inc. ("UHS") and Travers H. Wills ("Contractor") to be
effective as of January 2, 1999 (the "Effective Date") for the purpose of
setting forth the terms and conditions under which Contractor shall provide
certain services to UHS. When used in this Agreement, "UHS" includes any
affiliated entity of UHS.
WHEREAS, UHS desires to retain Contractor to render consulting and
advisory services for UHS on the terms and conditions set forth in this
agreement, and Contractor desires to be retained by UHS on such terms and
conditions.
NOW, THEREFORE, in consideration of the premises, the respective
covenants and commitments of UHS and Contractor set forth in this Agreement,
and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, UHS and Contractor agree as follows:
1. RETENTION OF CONTRACTOR, SERVICES TO BE PERFORMED. UHS hereby retains
Contractor to render consulting services regarding strategic and business
issues related to UHS as mutually agreed upon from time to time by the
parties. Contractor shall perform the services called for by this
Agreement in accordance with the highest standards of the industry.
2. TERM AND TERMINATION. Unless earlier terminated as set forth herein, this
Agreement shall commence on the Effective Date and shall continue through
July 1, 2000. Notwithstanding the foregoing, this Agreement may be
terminated at any time by either party on 30 days' prior written notice,
and this Agreement shall immediately terminate in the event of the death or
disability of Contractor. If UHS terminates this Agreement prior to July
1, 2000, UHS shall pay Contractor any sums that remain payable under
Section 3A through July 1, 2000. Provided, however, UHS shall not be
obligated to make such payments if it terminates this Agreement because
Contractor has materially breached this Agreement and has not
satisfactorily remedied the breach within 30 days following UHS' notice of
breach.
3. COMPENSATION. As compensation in full for the services to be provided
hereunder, UHS shall pay Contractor the following amounts:
A. RETAINER. UHS shall pay Contractor a retainer of $49,000 per month,
commencing on the Effective Date.
B. EXPENSE REIMBURSEMENT. UHS will reimburse Contractor for all
reasonable out-of-pocket expenses related to the provision of services
hereunder in accordance with the UHS's expense reimbursement policies.
<PAGE>
4. CONFIDENTIALITY. Contractor acknowledges that in the course of providing
services to UHS, he may become aware of or come into possession of certain
confidential or proprietary information and documents belonging to UHS.
Contractor shall not copy any such information without UHS's prior written
permission, shall not disclose such information to any other person, shall
not use such information for any purpose other than performing services
under this Agreement and shall return all copies of any such information
when all services to be performed under this Agreement have been performed
or immediately upon request by UHS. This Section 4 shall survive
termination of this Agreement.
5. OWNERSHIP OF WORK PRODUCT. Contractor acknowledges that any work product
of any type generated by Contractor under this Agreement belongs solely to
UHS, and Contractor hereby assigns and transfers to UHS any and all rights
which Contractor might have asserted to such work product, including any
copyright, patent, trademark, trade secret or other intellectual property
rights. Contractor will cooperate with UHS and will execute any
documentation required by UHS to assert or protect its property rights in
the work product. This Section 5 shall survive termination of this
Agreement.
6. RELATIONSHIP OF PARTIES. The sole relationship of the parties is that of
independent contractors and nothing in this Agreement or otherwise shall be
deemed or construed to create any other relationship, including one of
employment, joint venture or agency. Contractor shall be solely
responsible for any taxes of any type, including social security taxes,
workers' compensation taxes or costs, unemployment compensation taxes or
costs or any other similar taxes, costs or charges or any other taxes or
charges related to Contractor's receipt of compensation and performance of
services under this Agreement, and shall indemnify and hold UHS harmless
against any such taxes or charges. This Section 6 shall survive
termination of this Agreement.
7. INDEMNIFICATION. Contractor indemnifies and holds harmless UHS, its
directors, officers and employees from any claims, liability, judgments,
damages or costs, including reasonable attorneys' fees, asserted or awarded
against or incurred by UHS, its directors, officers or employees as a
result of any act or omission of Contractor. This Section 7 shall survive
termination of this Agreement.
8. DISPUTES. Any dispute relating to or arising under this Agreement shall be
resolved by binding arbitration pursuant to the Commercial Rules of the
American Arbitration Association. This Section 8 shall survive termination
of this Agreement.
9. NON-DISPARAGEMENT AND NON-SOLICITATION. Contractor agrees that he will not
criticize, make any negative comments or otherwise disparage or put in
disrepute UHS, or those associated with UHS in any way, whether orally, in
writing or otherwise, directly or by implication in communication with any
person, including but not limited to customers or agents of UHS. In
addition, during the term of this Agreement, during any successive terms
thereafter, and for one year after the
<PAGE>
termination of this Agreement, Contractor will not directly or indirectly
recruit, induce, or solicit any employee of UHS for employment. This
Section 9 shall survive termination of this Agreement.
10. MISCELLANEOUS.
A. ENTIRE AGREEMENT: This Agreement contains the entire understanding of
the parties and may be amended only in writing signed by the parties.
This Agreement shall supersede any prior agreements between the
parties in regard to the same subject matter for services rendered
after the effective date.
B. ASSIGNMENT: Contractor may not assign this Agreement or any rights
and obligations under it this unless UHS has given its prior written
consent to such assignment.
C. GOVERNING LAW: This Agreement shall by governed by and construed in
accordance with the laws of the State of Minnesota.
D. INJUNCTIVE RELIEF: Contractor acknowledges that it would be difficult
to fully compensate UHS for damages resulting from any breach by
Contractor of the provisions of Sections 4, 5, 9 or 10 of this
Agreement. Accordingly, in the event of any actual or threatened
breach of such provisions, UHS shall, in addition to any other
remedies it may have, be entitled to temporary and/or permanent
injunctive relief to enforce such provisions, and such relief may be
granted without the necessity of proving actual damages.
E. SEVERABILITY: To the extend any provision of this Agreement shall be
determined to be invalid or unenforceable, such provision shall be
deleted from this Agreement, and the validity and enforceability of
the remainder of such provision and of this Agreement shall be
unaffected.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY
THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Effective Date.
United HealthCare Services, Inc.
/s/ Travers H. Wills
By /s/ David J. Lubben -----------------------------
----------------------------------- Travers H. Wills
Date Date 1/04/99
--------------------------------- -----------------------------
<PAGE>
EXHIBIT A
EMPLOYMENT AGREEMENT
This Agreement is made by and between David Koppe ("Employee") and United
HealthCare Services, Inc. ("UHS") (when used in this Agreement, UHS includes any
affiliated entity of UHS) for the purpose of setting forth certain terms and
conditions of Employee's employment by UHS and to protect UHS's knowledge,
expertise, customer relationships and the confidential information UHS has
developed about its customers, products, operations and services. As of the
Effective Date, this Agreement supersedes any prior employment-related agreement
or agreements between Employee and UHS or any subsidiary or affiliate of UHS but
does not supersede the Release Agreements that UHS and I execute.
1. EMPLOYMENT AND DUTIES.
A. EMPLOYMENT. UHS hereby directly or through its subsidiaries
employs Employee. Employee accepts such employment on the terms
and conditions set forth in this Agreement and, except as
specifically superseded by this Agreement, subject to all of
UHS's policies and procedures in regard to its employees.
B. DUTIES. Employee shall perform such duties as are commonly
associated with his/her position or as are reasonably assigned
to Employee by his/her supervisor from time-to-time. Employee
acknowledges that he will not be employed as Chief Financial
Officer effective July 1, 1998. After that date, Employee will
provide services to UHS regarding financial and other related
issues as requested by senior management on a flexible work
schedule to be mutually determined by Employee and the Senior
Executive Vice-President. Employee shall be generally available
to senior management during regular business hours and shall
remain classified as a full-time employee.
2. COMPENSATION.
A. BASE SALARY. Employee shall be paid a base annual salary in the
amount of $367,500 payable bi-weekly, less all applicable
withholdings and deductions.
B. VACATION; ILLNESS. Employee shall be entitled to paid vacation
and sick leave each year in accordance with UHS's then-current
policies.
C. MIP AND LTIP PAYMENTS. UHS also agrees to pay Employee pursuant
to the Long Term Incentive Plan ("LTIP") for the 1997-1998 cycle
according to the terms of the plan and continue Employee's
eligibility for the MIP for 1998 according to the terms of the
plan. This MIP payment will be made pursuant to the terms of
the Plan but no later than March, 1999. Employee's MIP payment
for 1998 will be at least one-half Employee's target under the
MIP.
D. STOCK OPTION VESTING. For the period December 1, 1998 through
September 30, 1999, UHS also agrees to vest Employee's United
HealthCare performance based stock option grants in the
following manner: (1) for grants made before July 1, 1996, UHS
agrees to vest the grants at a rate of 20% of the number of
shares covered by the option or grant on the anniversary date of
the option or grant; (2) for grants or options made after July
1, 1996, UHS agrees to vest the grant at a rate of 25% of the
number of shares covered by the grant on the anniversary date of
the option or grant.
E. OTHER BENEFITS. Employer shall continue provide Employee with
the same employee benefit coverages that it is currently
providing to Employee subject to his elections. Employer agrees
to provide Employee with use of UHS' voice-mail and computer
e-mail.
<PAGE>
3. TERM AND TERMINATION.
A. TERM. The term of this Agreement shall begin on July 1, 1998
(the "Effective Date") and shall continue until the earlier of
the date of termination pursuant to Section 3B or September 30,
1999.
B. TERMINATION OF AGREEMENT AND/OR EMPLOYMENT.
i. This Agreement may be terminated at any time by the
mutual written agreement of the parties.
ii. UHS may terminate Employee's employment or terminate
this Agreement for Cause (as defined below) by giving
written notice of termination which is received by
Employee at least 30 days before the effective date of
termination of employment or of this Agreement, as the
case may be. UHS will specify the reasons for the
termination and provide Employee with the reasonable
opportunity to respond to the reasons stated. If
Employee has not adequately resolved the issue that gave
rise to the termination, the termination will become
effective on the date specified by UHS.
iii. Employee may terminate his/her employment by giving
written notice of termination of employment which is
received by UHS at least 30 days before the effective
date of termination of employment.
iv. This Agreement shall automatically terminate on the
effective date of the termination of Employee's
employment or on the date of Employee's death,
retirement or permanent and total disability which
renders Employee incapable of performing Employee's
duties; provided, however, notwithstanding such
termination, (i) in the event of Employee's death, UHS
shall continue to pay to Employee or his estate or
representative the base salary scheduled to be made in
accordance with Section 2A of this Agreement through
September 30, 1999; (ii) in the event of Employee's
permanent and total disability, UHS will continue to pay
Employee the difference between his base salary and any
disability payments that Employee receives through
September 30, 1999; and (iii) in the event of Employee's
death or permanent and total disability, UHS will vest
all of Employee's stock options, will provide the health
coverage to the extent applicable to Employee's family
members and pursuant to the terms of the post career
coverage program included in the attached second
release, and will allow Employee's estate, personal
representative or heirs to have the extended stock
option exercise date (September 30, 2002) included in
the attached second release. UHS has the sole right, in
its reasonable discretion, to determine whether Employee
is permanently or totally disabled within the meaning of
this Section 3B4.
4. SEVERANCE EVENTS AND COMPENSATION.
A. In the event Employee's employment with UHS is terminated by UHS
pursuant to Section 3B(ii) with Cause, then:
i. This Agreement shall also be terminated along with all
future payments, stock vesting and benefits described in
this Agreement. UHS will not execute the Second Release
attached to this Agreement.
ii. As of the effective date of termination of employment,
Employee shall cease to be eligible for all benefit
plans maintained by UHS, except as required by federal
or state continuation of coverage laws.
2
<PAGE>
B. In the event Employee's employment with UHS is terminated by
Employee pursuant to Section 3B(iii), then:
i. This Agreement shall also be terminated. However, UHS
shall continue to pay Employee his bi-weekly base
salary, less withholdings and deductions, through
September 30, 1999. As of the effective date of
termination, however, Employee shall not receive any
future stock vesting, LTIP or MIP Payments described in
this Agreement.
ii. UHS will execute the Second Release attached to this
Agreement within 21 days of Employee's termination of
employment.
C. Definitions and Procedure.
i. For purposes of this Agreement, "Cause" shall mean the
(a) the willful failure or refusal of Employee to follow
the reasonable directions of UHS's Board of Directors or
Employee's supervisor or to perform any duties
reasonably required by UHS, (b) a failure to adequately
meet reasonable performance expectations, (c) material
violations of UHS's Code of Conduct or (d) the
commission of any criminal act or act of fraud or
dishonesty by Employee in connection with Employee's
employment by UHS. In the event that UHS terminates
Employee's employment under subsections (a), (b) or (c)
of this Cause definition, UHS shall specify in the
notice of termination the basis for Cause. If the Cause
described in the notice is cured to UHS's reasonable
satisfaction prior to the end of the 30 day notice
period, the notice of termination of employment shall be
withdrawn.
5. PROPERTY RIGHTS, CONFIDENTIALITY, NON-SOLICIT AND NON-COMPETE
PROVISIONS.
A. UHS'S PROPERTY.
i. Except for inventions, discoveries or works referred to
in the next paragraph, Employee shall promptly disclose
to UHS in writing all inventions, discoveries and works
of authorship, whether or not patentable or
copyrightable, which are conceived, made, discovered,
written or created by Employee alone or jointly with
another person, group or entity, whether during the
normal hours of employment at UHS or on Employee's own
time, during the term of this Agreement. Employee
assigns all rights to all such inventions and works of
authorship to UHS. Employee shall give UHS any
assistance it reasonably requires in order for UHS to
perfect, protect, and use its rights to inventions and
works of authorship.
This provision shall not apply to an invention,
discovery or work for which no equipment, supplies,
facility or trade secret information of UHS was used and
which was developed entirely on the Employee's own time
and which (1) does not relate to the business of UHS or
to UHS's anticipated research or development, or (2)
does not result from any work performed by the Employee
for UHS.
ii. Employee shall not remove any records, documents, or any
other tangible items (excluding Employee's personal
property) from the premises of UHS in either original or
duplicate form, except as is needed in the ordinary
course of conducting business for UHS.
iii. Employee shall immediately deliver to UHS, upon
termination of employment with UHS, or at any other time
upon UHS's request, any property, records, documents,
and other tangible items (excluding Employee's personal
property) in Employee's possession or
3
<PAGE>
control, including data incorporated in word processing,
computer and other data storage media, and all copies of
such records, documents and information, including all
Confidential Information, as defined below. UHS agrees
that Employee can purchase his personal computer from
UHS at the depreciated value, according to the Company's
records.
B. CONFIDENTIAL INFORMATION. During the course of his employment
Employee will develop, become aware of and accumulate expertise,
knowledge and information regarding UHS's organization,
strategies, business and operations and UHS's past, current or
potential customers and suppliers. UHS considers such
expertise, knowledge and information to be valuable,
confidential and proprietary and it shall be considered
Confidential Information for purposes of this Agreement. During
this Agreement and at all times thereafter Employee shall not
use such Confidential Information or disclose it to other
persons or entities except as is necessary for the performance
of Employee's duties for UHS or as has been expressly permitted
in writing by UHS unless such information is available to the
public at the time of its disclosure by Employee in which case
such information is no longer Confidential Information.
C. NON-SOLICITATION. During (i) the term of this Agreement, (ii)
any period for which Employee is receiving payments under
Section 4B of this Agreement, (iii) any period following the
termination or expiration of this Agreement during which
Employee remains employed by UHS and (iv) for a period of one
year after the last day of the latest of any period described in
(i), (ii) or (iii), Employee shall not (y) directly or
indirectly attempt to hire away any then-current employee of UHS
or a subsidiary of UHS or to persuade any such employee to leave
employment with UHS, or (z) directly or indirectly solicit,
divert, or take away, or attempt to solicit, divert, or take
away, the business of any person, partnership, company or
corporation with whom UHS (including any subsidiary or
affiliated company in which UHS has a more than 20% equity
interest) has established or is actively seeking to establish a
business or customer relationship, in each case, on the date
hereof.
D. NON-COMPETITION. During (i) the term of this Agreement, (ii)
any period for which Employee is receiving payments under
Section 4B of this Agreement, and (iii) any period following the
termination or expiration of this Agreement during which
Employee remains employed by UHS, Employee shall not, without
UHS's prior written consent, engage or participate, either
individually or as an employee, consultant or principal,
partner, agent, trustee, officer or director of a corporation,
partnership or other business entity, in any business in which
UHS (including any subsidiary or affiliated company in which UHS
currently has a more than 20% equity interest) is engaged on the
date hereof. Notwithstanding anything contained in this Section
4D, after (i), (ii), and (iii) above, Employee may become
employed by or consult with (i) any hospital, physician or other
medical group excluding for these purposes any HMO, PPO,
physician practice management type company, or similar entity
controlled by such hospital, physician, or medical group, (ii)
any medical device or supply company, (iii) any securities or
venture capital firm, money management entity, or (iv)
consulting firm even if the firm provides consulting services in
the health care area (provided that employee does not provide
any services in the health care or health care management area),
or (v) to any pharmaceutical company or pharmacy benefits
company.
6. MISCELLANEOUS.
A. ASSIGNMENT. This Agreement shall be binding upon and shall
inure to the benefit of the parties and their successors and
assigns, but may not be assigned by either party without the
prior written consent of the other party, except that UHS in its
sole discretion may assign this Agreement to an entity
controlled by UHS at the time of the assignment. If UHS
subsequently loses or gives up control of the entity to which
this Agreement is assigned, such entity shall become UHS for all
purposes under this Agreement, beginning on the date on which
UHS loses or gives up control of the entity. Any successor to
UHS shall be deemed to be UHS for all purposes of this
Agreement.
4
<PAGE>
B. NOTICES. All notices under this Agreement shall be in writing
and shall be deemed to have been duly given if delivered by hand
or mailed by registered or certified mail, return receipt
requested, postage prepaid, to the party to receive the same at
the address set forth below or at such other address as may have
been furnished by proper notice.
UHS: 300 Opus Center
9900 Bren Road East
Minnetonka, MN 55343
Attn: Senior Vice President Human
Resources
Employee:
C. ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties with respect to its subject matter
and may be amended or modified only by a subsequent written
amendment executed by the parties. This Agreement replaces and
supersedes any and all prior employment or employment related
agreements and understandings, including any letters or memos
which may have been construed as agreements, between the
Employee and UHS or any of its subsidiaries and affiliated
companies.
D. CHOICE OF LAW. This Agreement shall be construed and
interpreted under the applicable laws and decisions of the State
of Minnesota.
E. WAIVERS. No failure on the part of either party to exercise,
and no delay in exercising, any right or remedy under this
Agreement shall operate as a waiver; nor shall any single or
partial exercise of any right or remedy preclude any other or
further exercise of any right or remedy.
F. ADEQUACY OF CONSIDERATION. Employee acknowledges and agrees
that he has received adequate consideration from UHS to enter
into this Agreement.
G. DISPUTE RESOLUTION AND REMEDIES. Any dispute arising between
the parties relating to this Agreement or to Employee's
employment by UHS shall be resolved by binding arbitration
pursuant to UHS's Employment Arbitration Policy. In no event
may the arbitration be initiated more than one year after the
date one party first gave written notice of the dispute to the
other party. The parties acknowledge that Employee's failure to
comply with the Confidentiality, Non-Solicit and Non-Compete
provisions of this Agreement will cause immediate and
irreparable injury to UHS and that therefore the arbitrators, or
a court of competent jurisdiction if an arbitration panel cannot
be immediately convened, will be empowered to provide injunctive
relief, including temporary or preliminary relief, to restrain
any such failure to comply.
H. NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer
or be deemed or construed to confer any rights or benefits upon
any person other than the parties.
I. SECOND RELEASE. UHS and Employee agree to execute the second
release within 21 days of employee's termination from employment
unless Employee is terminated of employment for Cause, as
defined in Section 4C of this Agreement.
5
<PAGE>
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE ENFORCED BY
THE PARTIES.
UNITED HEALTHCARE SERVICES, INC.
By /s/ Robert J. Backes /s/ David Koppe
------------------------------ --------------------------------
Employee
Date 6/30/98 Date 6/30/98
------------------------------ ----------------------------
6
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
- --------------------------------------- --------------------- ------------------------------ -----------------------------
- --------------------------------------- --------------------- ------------------------------ -----------------------------
Name of Entity State of Subsidiary of What Entity "Doing Business As" Name(s)
Incorporation
- --------------------------------------- --------------------- ------------------------------ -----------------------------
<S> <C> <C> <C>
- --------------------------------------- --------------------- ------------------------------ -----------------------------
Ingenix, Inc. Delaware United HealthCare Corporation
- --------------------------------------- --------------------- ------------------------------ -----------------------------
- --------------------------------------- --------------------- ------------------------------ -----------------------------
Ovations, Inc. Delaware United HealthCare Corporation
- --------------------------------------- --------------------- ------------------------------ -----------------------------
- --------------------------------------- --------------------- ------------------------------ -----------------------------
Specialized Care Services, Inc. Delaware United HealthCare Corporation
- --------------------------------------- --------------------- ------------------------------ -----------------------------
- --------------------------------------- --------------------- ------------------------------ -----------------------------
Unimerica, Inc. Delaware United HealthCare Corporation
- --------------------------------------- --------------------- ------------------------------ -----------------------------
- --------------------------------------- --------------------- ------------------------------ -----------------------------
Uniprise, Inc. Delaware United HealthCare Corporation
- --------------------------------------- --------------------- ------------------------------ -----------------------------
- --------------------------------------- --------------------- ------------------------------ -----------------------------
UnitedHealthcare, Inc. Delaware United HealthCare Corporation
- --------------------------------------- --------------------- ------------------------------ -----------------------------
- --------------------------------------- --------------------- ------------------------------ -----------------------------
UnitedHealth Capital, Inc. Delaware United HealthCare Corporation
- --------------------------------------- --------------------- ------------------------------ -----------------------------
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare Insurance Company Connecticut United HealthCare Corporation
- --------------------------------------- --------------------- ------------------------------ -----------------------------
MetraHealth Care Management Delaware United HealthCare Insurance
Corporation Company
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of California, Inc. California MetraHealth Care Management
Corporation
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Colorado, Inc. Colorado MetraHealth Care Management
Corporation
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of New Jersey, Inc. New Jersey MetraHealth Care Management
Corporation
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of New York, Inc. New York United HealthCare Insurance
Company
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare Insurance Company Illinois United healthcare Insurance
of Illinois Company
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare Insurance Company Ohio United HealthCare Insurance
of Ohio Company
- --------------------------------------- --------------------- ------------------------------ -----------------------------
The MetraHealth Employee Benefits Connecticut United HealthCare Insurance
Company, Inc. Company
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare Services, Inc. Minnesota United HealthCare Corporation EverCare, Optum, United
Resource Networks, United
HealthCare
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Alabama, Inc. Alabama United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Arizona, Inc. Arizona United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Arkansas Arkansas United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of California, Inc. California United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Colorado, Inc. Colorado United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Florida, Inc. Florida United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Georgia, Inc. Georgia United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Illinois, Inc. Illinois United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Kentucky, Ltd. Kentucky United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Louisiana, Inc. Louisiana United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Mississippi, Inc. Mississippi United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Nevada, Inc. Nevada United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of New England, Inc. Rhode Island United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of New Jersey, Inc. New Jersey United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of New York, Inc. New York United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of North Carolina, North Carolina United HealthCare Services,
Inc. Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Ohio, Inc. Ohio United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Oregon, Inc. Oregon United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Tennessee, Inc. Tennessee United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Texas, Inc. Texas United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Utah Utah United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Virginia, Inc. Virginia United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of Washington, Inc. Washington United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of the Maryland United HealthCare Services,
Mid-Atlantic, Inc. Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of the Midlands Nebraska United HealthCare Services,
Network, Inc. Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare of the Midlands, Nebraska United HealthCare Services,
Inc. Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
CAC Medical Centers, Inc. Florida United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
Commonwealth Physicians Services, Inc. Kentucky United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
Coordinated Vision Care, Inc. Delaware United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
GenCare Dental Plan, Inc. Missouri United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
HealthPartners of Arizona, Inc. Arizona United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
HealthWise of Arkansas, Inc. Tennessee United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
MetraComp, Inc. Connecticut United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
PrimeCare Health Plan, Inc. Wisconsin United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United Behavioral Health California United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
United HealthCare Service Corp. New York United HealthCare Services,
Inc.
- --------------------------------------- --------------------- ------------------------------ -----------------------------
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated February 18, 1999 included in this Form 10-K, into the
Company's previously filed Registration Statement File Nos. 2-95342, 33-3558,
33-22310, 33-27208, 33-36579, 33-50282, 33-67918, 33-68300, 33-75846,
33-79632, 33-79634, 33-79636, 33-79638, 33-59083, 33-59623, 33-63885,
333-01517, 333-01915, 333-02525, 333-04875, 333-04401, 333-05717, 333-05291,
333-06533, 333-25923, 333-27277, 333-44569, 333-44613, 333-45319, 333-41661,
333-45289, 333-50461 and 333-55777.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 31, 1999
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints William W. McGuire, M.D.,
Stephen J. Hemsley, and David J. Lubben, and each of them, his or her true
and lawful attorneys-in-fact and agents, each acting alone, with full power
of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign an Annual Report on Form
10-K of United HealthCare Corporation, and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or
his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Dated: March 31, 1999
/s/ William C. Ballard, Jr. /s/ Walter F. Mondale
- --------------------------- ---------------------------
William C. Ballard, Jr. Walter F. Mondale
/s/ Richard T. Burke /s/ Mary O. Mundinger
- --------------------------- ---------------------------
Richard T. Burke Mary O. Mundinger
/s/ James A. Johnson /s/ Robert L. Ryan
- --------------------------- ---------------------------
James A. Johnson Robert L. Ryan
/s/ Thomas H. Kean /s/ William G. Spears
- --------------------------- ---------------------------
Thomas H. Kean William G. Spears
/s/ Douglas W. Leatherdale /s/ Gail R. Wilensky
- --------------------------- ---------------------------
Douglas W. Leatherdale Gail R. Wilensky
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> OCT-01-1998 OCT-01-1997
<PERIOD-END> DEC-31-1998 OCT-01-1997
<CASH> 1,644 750
<SECURITIES> 2,780 3,291
<RECEIVABLES> 1,055 813
<ALLOWANCES> (64) (45)
<INVENTORY> 0 0
<CURRENT-ASSETS> 320 141
<PP&E> 757 714
<DEPRECIATION> (463) (350)
<TOTAL-ASSETS> 9,701 7,623
<CURRENT-LIABILITIES> 5,342 2,570
<BONDS> 0 0
0 0
0 500
<COMMON> 2 2
<OTHER-SE> 4,036 4,532
<TOTAL-LIABILITY-AND-EQUITY> 9,701 7,623
<SALES> 4,581 2,944
<TOTAL-REVENUES> 4,645 3,054
<CGS> 4,379 2,822
<TOTAL-COSTS> 4,435 2,862
<OTHER-EXPENSES> 52 40
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4 0
<INCOME-PRETAX> 210 192
<INCOME-TAX> (78) (73)
<INCOME-CONTINUING> 132 119
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 106<F1> 112
<EPS-PRIMARY> .57 .59
<EPS-DILUTED> .57 .58
<FN>
<F1>INCLUDES $20 MILLION CONVERTIBLE PREFERRED STOCK REDEMPTION PREMIUM. EXCLUDING
THE REDEMPTION PREMIUM FROM FOURTH QUARTER OPERATING RESULTS. NET EARNINGS
APPLICABLE TO COMMON SHAREHOLDERS WOULD HAVE BEEN $126 MILLION, OR $0.67 DILUTED
NET EARNINGS PER SHARE.
</FN>
</TABLE>
