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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
/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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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
12
<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>
William W. McGuire, M.D......... 50 President, Chairman, Chief Executive Officer and
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
1998
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.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS UNITEDHEALTH GROUP
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<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.
(FOOTNOTES ON THE FOLLOWING PAGE)
19
<PAGE>
(FOOTNOTES FOR PRECEDING PAGE)
- ------------------------------
(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.
20
<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.
21
<PAGE>
(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.
22
<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.
23
<PAGE>
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-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.
24
<PAGE>
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
25
<PAGE>
approximately 4%. 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.
26
<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.
27
<PAGE>
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 assets 291 A decision to exit Operating assets The carrying value
of certain health plan and small group insurance $ or reconfigure will be abandoned of the assets will
markets $ 39 these businesses, or disposed of be depreciated
markets and upon exit or over the estimated
Specialized Care Services intangible and operating products. reconfiguration of remaining life,
assets the market, with physical
business, or disposal during
products. either the fourth
quarter of 1998 or
the first six
months of 1999.
- -------------------------------------------------------------------------------------------------------------------------
Ingenix purchased in-process research and $ 68 The acquisition of Not applicable. Written down
development Medicode, Inc. during second
occurred in quarter of 1998.
December 1997. The
final allocation
of purchase price
and valuation of
acquired
intangibles was
completed in June
1998.
- -------------------------------------------------------------------------------------------------------------------------
Corporate operating assets $ 53 Realignment Operating assets The carrying value
initiatives have been or will of the assets will
resulted in be written off, be depreciated
operating assets abandoned or over the estimated
to be abandoned or disposed of upon remaining life
disposed. exit of certain with physical
businesses or as a disposal during
result of other either the fourth
realignment quarter of 1998 or
initiatives. 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 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.
28
<PAGE>
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
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<PAGE>
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.
- 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.
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<PAGE>
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.
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<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
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<PAGE>
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.
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<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
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<PAGE>
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>
<CAPTION>
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>
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,
35
<PAGE>
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
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<PAGE>
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.
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.
37
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UNITEDHEALTH GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS,
EXCEPT PER SHARE DATA)
<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
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<PAGE>
UNITEDHEALTH GROUP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN MILLIONS, EXCEPT
SHARE AND PER SHARE
DATA)
<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.
39
<PAGE>
UNITEDHEALTH GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED HOLDING
COMMON STOCK ADDITIONAL GAINS (LOSSES) ON
-------------------------- PAID-IN RETAINED INVESTMENTS AVAILABLE FOR
SHARES AMOUNT CAPITAL EARNINGS SALE
----------- ------------- ----------- ----------- -------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.................... 175 $ 2 $ 822 $ 2,359 $ 5
Issuance of Common Stock
Stock Plans and Related Tax Benefits........ 2 -- 56 -- --
Acquisitions................................ 8 -- 270 -- --
Comprehensive Income
Net Earnings................................ -- -- -- 356 --
Other Comprehensive Income Adjustments
Change in Net Unrealized Holding Losses
on Investments Available for Sale,
net of income tax effects............ -- -- -- -- (12)
Comprehensive Income.................... -- -- -- -- --
Cash Dividends
Common Stock ($0.03 per share).............. -- -- -- (6) --
Convertible Preferred Stock ($57.50 per
share).................................... -- -- -- (29) --
--
--- ----------- ----------- ---
BALANCE AT DECEMBER 31, 1996.................... 185 2 1,148 2,680 (7)
Issuance of Common Stock
Stock Plans and Related Tax Benefits........ 3 -- 116 -- --
Acquisitions................................ 3 -- 144 -- --
Stock Repurchases............................. -- -- (10) -- --
Comprehensive Income
Net Earnings................................ -- -- -- 460 --
Other Comprehensive Income Adjustments
Change in Net Unrealized Holding Gains on
Investments Available for Sale, net of
income tax effects...................... -- -- -- -- 36
Comprehensive Income...................... -- -- -- -- --
Cash Dividends
Common Stock ($0.03 per share).............. -- -- -- (6) --
Convertible Preferred Stock ($57.50 per
share).................................... -- -- -- (29) --
--
--- ----------- ----------- ---
BALANCE AT DECEMBER 31, 1997.................... 191 2 1,398 3,105 29
Issuance of Common Stock
Stock Plans and Related Tax Benefits........ 4 -- 131 -- --
Acquisitions................................ -- -- 14 -- --
Stock Repurchases............................. (11) -- (436) -- --
Comprehensive Income (Loss)
Net Loss.................................... -- -- -- (166) --
Other Comprehensive Income Adjustments
Change in Net Unrealized Holding Gains on
Investments Available for Sale, net of
income tax effects...................... -- -- -- -- 15
Comprehensive Loss...................... -- -- -- -- --
Cash Dividends
Common Stock ($0.03 per share).............. -- -- -- (6) --
Convertible Preferred Stock ($56.03 per
share).................................... -- -- -- (28) --
Convertible Preferred Stock Redemption
Premium..................................... -- -- -- (20) --
--
--- ----------- ----------- ---
BALANCE AT DECEMBER 31, 1998.................... 184 $ 2 $ 1,107 $ 2,885 $ 44
--
--
--- ----------- ----------- ---
--- ----------- ----------- ---
<CAPTION>
TOTAL
SHAREHOLDERS' COMPREHENSIVE
EQUITY INCOME (LOSS)
------------- -----------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995.................... $ 3,188
Issuance of Common Stock
Stock Plans and Related Tax Benefits........ 56
Acquisitions................................ 270
Comprehensive Income
Net Earnings................................ 356 $ 356
Other Comprehensive Income Adjustments
Change in Net Unrealized Holding Losses
on Investments Available for Sale,
net of income tax effects............ (12) (12)
------
Comprehensive Income.................... -- $ 344
------
Cash Dividends
Common Stock ($0.03 per share).............. (6)
Convertible Preferred Stock ($57.50 per
share).................................... (29)
------------- ------
BALANCE AT DECEMBER 31, 1996.................... 3,823
Issuance of Common Stock
Stock Plans and Related Tax Benefits........ 116
Acquisitions................................ 144
Stock Repurchases............................. (10)
Comprehensive Income
Net Earnings................................ 460 $ 460
Other Comprehensive Income Adjustments
Change in Net Unrealized Holding Gains on
Investments Available for Sale, net of
income tax effects...................... 36 36
------
Comprehensive Income...................... -- $ 496
------
Cash Dividends
Common Stock ($0.03 per share).............. (6)
Convertible Preferred Stock ($57.50 per
share).................................... (29)
------------- ------
BALANCE AT DECEMBER 31, 1997.................... 4,534
Issuance of Common Stock
Stock Plans and Related Tax Benefits........ 131
Acquisitions................................ 14
Stock Repurchases............................. (436)
Comprehensive Income (Loss)
Net Loss.................................... (166) $ (166)
Other Comprehensive Income Adjustments
Change in Net Unrealized Holding Gains on
Investments Available for Sale, net of
income tax effects...................... 15 15
------
Comprehensive Loss...................... -- $ (151)
------
Cash Dividends
Common Stock ($0.03 per share).............. (6)
Convertible Preferred Stock ($56.03 per
share).................................... (28)
Convertible Preferred Stock Redemption
Premium..................................... (20)
------------- ------
BALANCE AT DECEMBER 31, 1998.................... $ 4,038
------------- ------
------------- ------
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
UNITEDHEALTH GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<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 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.
41
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
42
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
43
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
44
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(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
45
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) ACQUISITIONS (CONTINUED)
research and development expended by Medicode on these projects prior to the
acquisition date totaled $8.5 million. Another $3.7 million was spent on these
projects in 1998, with an additional $.8 million expected to be spent in 1999 to
complete these research and development projects. 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.
46
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) SPECIAL OPERATING CHARGES (CONTINUED)
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>
CHARGES INCURRED
ADDITIONAL
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 the final valuation of management. 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
47
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) SPECIAL OPERATING CHARGES (CONTINUED)
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.
48
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 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.
49
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
50
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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
------ --- --- -----------
------ --- --- -----------
1997
- --------------------------------------------------
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>
51
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) CASH AND INVESTMENTS (CONTINUED)
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.
52
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross realized gains of $31 million, $37 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
PAR VALUE VALUE
----------- -----------
(IN MILLIONS)
<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
53
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) CONVERTIBLE PREFERRED STOCK (CONTINUED)
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.
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.
54
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
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
RANGE OF WEIGHTED-AVERAGE ----------------------------------
EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
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>
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
55
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCK-BASED COMPENSATION PLANS (CONTINUED)
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.
56
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) INCOME TAXES
COMPONENTS OF THE PROVISION (BENEFIT) FOR INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<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,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<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>
57
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) INCOME TAXES (CONTINUED)
COMPONENTS OF DEFERRED INCOME TAX ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1998 1997
--------- ---------
(IN MILLIONS)
<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>
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.
58
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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
59
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
60
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
61
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SEGMENT FINANCIAL INFORMATION (CONTINUED)
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
62
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SEGMENT FINANCIAL INFORMATION (CONTINUED)
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.
(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 30
----------- ----------- ------------- -------------
<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.
63
<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
64
<PAGE>
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
65
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
66
<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>
<S> <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.)
</TABLE>
67
<PAGE>
<TABLE>
<S> <S>
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.)
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. (Previously filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.)
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. (Previously filed
with the Company's Annual Report on Form 10-K for the year ended December 31,
1998.)
*10(f) United HealthCare Corporation 1998 Executive Savings Plan Brochure. (Previously
filed with the Company's Annual Report on Form 10-K for the year ended December 31,
1998.)
*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. (Previously filed with the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.)
*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. (Previously filed with the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.)
*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.
(Previously filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.)
</TABLE>
68
<PAGE>
<TABLE>
<S> <S>
*10(l) Employment Agreement, dated as of June 30, 1998, between United HealthCare
Corporation and David Koppe. (Previously filed with the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.)
+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 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. (Previously filed with the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.)
23 Consent of Independent Public Accountants. (Filed herewith.)
24 Powers of Attorney. (Previously filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.)
27 Financial Data Schedule. (E.D.G.A.R. version only) (Previously filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.)
+ 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.
69
<PAGE>
SIGNATURE
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: April 22, 1999
<TABLE>
<S> <C> <C>
UNITED HEALTHCARE CORPORATION
By: /s/ DAVID J. LUBBEN
-----------------------------------------
David J. Lubben
GENERAL COUNSEL AND SECRETARY
</TABLE>
70
<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. (Previously filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.)
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. (Previously filed
with the Company's Annual Report on Form 10-K for the year ended December 31,
1998.)
10(f) United HealthCare Corporation 1998 Executive Savings Plan Brochure. (Previously
filed with the Company's Annual Report on Form 10-K for the year ended December 31,
1998.)
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. (Previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.)
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. (Previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.)
</TABLE>
71
<PAGE>
<TABLE>
<C> <S>
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.
(Previously filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.)
10(l) Employment Agreement, dated as of June 30, 1998, between United HealthCare
Corporation and David Koppe. (Previously filed with the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.)
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. (Previously filed with the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.)
23 Consent of Independent Public Accountants. (Filed herewith.)
24 Powers of Attorney. (Previously filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.)
27 Financial Data Schedule. (E.D.G.A.R. version only) (Previously filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.)
</TABLE>
72
<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/A, 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,
April 22, 1999
