<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
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(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 1-10864
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UNITED HEALTHCARE CORPORATION
State of Incorporation: MINNESOTA
I.R.S. Employer Identification No: 41-1321939
Principal Executive Offices:
300 OPUS CENTER
9900 BREN ROAD EAST
MINNETONKA MN, 55343
Telephone Number: (612) 936-1300
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Indicate by check mark (x) whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The number of shares of Common Stock, par value $.01 per share,
outstanding on November 10, 1998, was 186,232,870
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<PAGE>
UNITED HEALTHCARE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION.
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets at September 30, 1998 and December 31, 1997............... 3
Condensed Consolidated Statements of Operations for the three and nine month periods
ended September 30, 1998 and 1997............................................................. 4
Condensed Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 1998 and 1997................................................................... 5
Notes to Condensed Consolidated Financial Statements............................................ 6
Report of Independent Public Accountants........................................................ 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................................................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................................................... 23
ITEM 5. OTHER INFORMATION.......................................................................... 23
ITEM 6. EXHIBITS................................................................................... 23
SIGNATURES............................................................................................ 24
</TABLE>
2
<PAGE>
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current Assets
Cash and Cash Equivalents................................................. $1,025 $750
Short-Term Investments.................................................... 164 506
Accounts Receivable, net (Note 6)......................................... 1,104 768
Assets Under Management (Note 6).......................................... 1,103 28
Other Current Assets...................................................... 127 141
------------------- ----------------
Total Current Assets................................................... 3,523 2,193
Long-Term Investments........................................................ 2,859 2,785
Property and Equipment, net (Note 2)......................................... 332 364
Goodwill and Other Intangible Assets, net (Note 2)........................... 2,200 2,281
------------------- ----------------
TOTAL ASSETS................................................................. $8,914 $7,623
------------------- ----------------
------------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical Costs Payable (Note 6)............................................ $2,646 $1,565
Other Policy Liabilities (Note 6)......................................... 598 235
Accounts Payable and Accrued Liabilities (Note 6)......................... 615 495
Accrued Operational Realignment and Other Charges (Note 2)................ 265 -
Unearned Premiums......................................................... 168 275
------------------- ----------------
Total Current Liabilities.............................................. 4,292 2,570
Long-Term Obligations........................................................ 22 19
Convertible Preferred Stock.................................................. 500 500
------------------- ----------------
Shareholders' Equity
Common Stock, $.01 par value-500,000,000 shares authorized;
187,454,000 and 191,111,000 issued and outstanding..................... 2 2
Additional Paid-in Capital................................................ 1,263 1,398
Retained Earnings......................................................... 2,779 3,105
Net Unrealized Holding Gains on Investments Available for
Sale, net of income tax effects........................................ 56 29
------------------- ----------------
Total Shareholders' Equity............................................. 4,100 4,534
------------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $8,914 $7,623
------------------- ----------------
------------------- ----------------
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums.................................................................. $3,898 $2,551 $11,353 $7,496
Management Services and Fees.............................................. 399 351 1,172 1,073
Investment and Other Income............................................... 63 57 185 172
---------- -------- --------- ---------
Total Revenues......................................................... 4,360 2,959 12,710 8,741
---------- -------- --------- ---------
OPERATING EXPENSES...........................................................
Medical Costs (Note 2).................................................... 3,354 2,144 9,941 6,327
Selling, General and Administrative Expenses.............................. 749 591 2,167 1,758
Depreciation and Amortization............................................. 43 37 133 106
Operational Realignment and Other Charges (Note 2)........................ - - 725 -
---------- -------- --------- ---------
Total Operating Expenses............................................... 4,146 2,772 12,966 8,191
---------- -------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES.......................................... 214 187 (256) 550
Provision for Income Taxes (Note 3)....................................... (79) (71) (42) (209)
---------- -------- --------- ---------
NET EARNINGS (LOSS).......................................................... 135 116 (298) 341
CONVERTIBLE PREFERRED STOCK DIVIDENDS........................................ (7) (7) (22) (22)
---------- -------- --------- ---------
NET EARNINGS (LOSS) APPLICABLE TO COMMON SHAREHOLDERS........................ $128 $109 $(320) $319
---------------------------------------------
---------------------------------------------
BASIC NET EARNINGS (LOSS) PER COMMON SHARE................................... $0.67 $0.58 $(1.67) $1.71
---------------------------------------------
---------------------------------------------
NET EARNINGS (LOSS) PER COMMON SHARE, ASSUMING DILUTION...................... $0.66 $0.57 $(1.67) $1.68
---------------------------------------------
---------------------------------------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING......................... 192 188 192 186
DILUTIVE EFFECT OF OUTSTANDING STOCK OPTIONS................................. 2 4 - 5
---------- -------- --------- ---------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, ASSUMING DILUTION...... 194 192 192 191
---------- -------- --------- ---------
---------- -------- --------- ---------
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings (Loss)............................................................ $(298) $341
Noncash Items:
Depreciation and Amortization............................................... 133 106
Deferred Income Taxes....................................................... (210) 68
Asset Impairments........................................................... 451 -
Net Change in Other Operating Items:
Accounts Receivable and Other Current Assets................................ (94) (159)
Medical Costs Payable....................................................... 181 38
Accounts Payable and Other Current Liabilities.............................. 148 (117)
Accrued Operational Realignment and Other Charges........................... 265 -
Unearned Premiums........................................................... (143) (112)
------------- -----------
Cash Flows From Operating Activities...................................... 433 165
------------- -----------
INVESTING ACTIVITIES
Cash Paid for Acquisitions, net of cash assumed and other effects.............. (125) -
Purchases of Property and Equipment and Capitalized Software, net.............. (112) (132)
Purchases of Investments....................................................... (2,353) (5,084)
Maturities/Sales of Investments................................................ 2,660 4,421
------------- -----------
Cash Flows From (Used for) Investing Activities........................... 70 (795)
------------- -----------
FINANCING ACTIVITIES
Proceeds from Stock Option Exercises........................................... 83 65
Common Stock Repurchases....................................................... (284) -
Dividends Paid................................................................. (27) (27)
------------- -----------
Cash Flows (Used for) From Financing Activities........................... (228) 38
------------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. 275 (592)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD......................................... 750 1,036
------------- -----------
CASH AND EQUIVALENTS, END OF PERIOD............................................... $1,025 $444
------------- -----------
------------- -----------
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
UNITED HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Unless the context otherwise requires, the use of the terms the
"Company," "we," "us," and "our" in the following refers to United HealthCare
Corporation and its subsidiaries.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments, consisting solely of normal recurring adjustments,
needed to present the financial results for these interim periods fairly. 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, 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.
Following the rules and regulations of the Securities and Exchange
Commission, we have omitted footnote disclosures that would substantially
duplicate the disclosures contained in our annual audited financial statements.
Read together with the disclosures below, we believe the interim financial
statements are presented fairly. However, these unaudited condensed consolidated
financial statements should be read together with the consolidated financial
statements and the notes included in our Annual Report on Form 10-K for the year
ended December 31, 1997.
2. SPECIAL OPERATING CHARGES
OPERATIONAL REALIGNMENT AND OTHER CHARGES
In January 1998, we introduced a significant realignment of our
operations into six independent but strategically linked businesses, each
focused on performance, growth and shareholder value. In the months that
followed, we began to realign our resources and activities; introduce new
management processes and policies; evaluate our market positions and customer
segments; and assess the strategic fit, operational performance and contribution
of our business units. We have moved forward to establish more independent
identities, brands and market positions for each of our businesses. We have
realigned significant personnel and activities from corporate functions to more
directly support the operations of our businesses. We also have defined internal
service arrangements, systems platforms, and process requirements to support
each business's markets and products.
In conjunction with our operational realignment initiatives, we
developed and, in the second quarter 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 reduction of more than 4,000 positions, affecting 7,000 people in various
locations. Through September 30, 1998, we have eliminated approximately 1,700
positions pursuant to the Plan.
6
<PAGE>
Our original provision for operational realignment and other charges
was developed based on management's best judgement 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 realignment activities for the
nine-month period ended September 30, 1998 (in millions):
<TABLE>
<CAPTION>
ADDITIONAL
RECORDED CHARGES ACCRUAL AT
PROVISION (CREDITS) CASH NON-CASH SEPTEMBER 30,
--------- --------- ---- -------- 1998
----
<S> <C> <C> <C> <C> <C>
Provision for operational realignment:
Asset impairments................... $430 $ 21 $ - $ (451) $ -
Severance and outplacement costs.... 142 (20) (7) - 115
Noncancellable lease obligations.... 82 (9) - - 73
Disposition of businesses and other
costs............................ 71 8 (2) - 77
------------ ---------- -------- --------- ----------
Total Provision $725 $ - $ (9) $ (451) $265
------------ ---------- -------- --------- ----------
------------ ---------- -------- --------- ----------
</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 final allocation of purchase price
for the acquisition of Medicode, Inc. ("Medicode").
Businesses we intend to dispose 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 the amount of the asset write down for these businesses. The
asset impairments also consist of other operating assets written down to their
estimated 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 September 30, 1998.
In December 1997, we acquired 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 fair value of net asset acquired by $123 million,
which was originally assigned to goodwill. During the second quarter of 1998,
the Company completed the valution of the intangible assets acquired in the
Medicode transaction. Pursuant to the findings of the independent valuation, we
expensed $68 million of the excess purchase price reprensenting purchased
in-process technology that previously had been assigned to goodwill. In
management's judgement, this amount reflects the amount we would reasonably
expect to pay an unrelated
7
<PAGE>
party for each project included in the technology. The value of in process
research and development of $68 million represented approximately 48% of the
purchase price and was determined by estimating the costs to develop the
purchased technology into commercially viable products, then estimating the
resulting net cash flows from each project that was incomplete at the
acquisition date, and discounting the resulting net cash flows to their present
value. The amount of research and development expended by Medicode on these
projects prior to the acquisition date totaled $8.5 million, with an additional
$2.5 million spent through September 30, 1998, and another $2.1 million expected
to be spent to complete these research and development projects. The in-process
technology has not yet reached technological feasibility and has not alternative
future use. The in-process projects were focused on the continued development
and evolution of next generation medical databases and software solutions. The
$68 million charge is included as a component of Operational Realignment and
Other Charges in the accompanying Consolidated Statements of Operations for the
six months ended June 30, 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.
Our accompanying financial statements include the operating results of
businesses to be disposed of or discontinued in connection with the operational
realignment. The losses anticipated on the disposition of these businesses,
including severance, impairment of assets, abandoned facilities, and additional
exit costs, total approximately $245 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>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues........................................... $246 $212 $722 $613
Operating losses before income taxes............... $(1) $(3) $(25) $(26)
</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 counties in which
we will no longer be offering the Medicare product are expected to approximate
$225 million.
The operational realignment and other 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 in Medicare medical costs payable
estimates, and $55 million related to increases in commercial medical costs
payable estimates.
The $101 million of contract losses were related to 13 of our 24
Medicare markets. These plans contribute half of our annual Medicare premiums of
$2.3 billion. 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
increased 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
8
<PAGE>
quarters. We incurred $39 million of losses in the third quarter, and we believe
the remaining loss contract reserve of $24 million is adequate to cover fourth
quarter losses to be incurred.
3. INCOME TAXES
The income tax provision of $42 million for the nine-month period ended
September 30, 1998, included an income tax benefit of $196 million related to
our second quarter operating charges.
4. STOCK REPURCHASE PROGRAM
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 on volume, pricing, and
timing. During the nine month period ended September 30, 1998, we repurchased
7.6 million shares at an average price of $39 per share. Since inception of the
program in November 1997, we have repurchased 7.8 million shares.
5. CASH AND INVESTMENTS
As of September 30, 1998, the amortized cost, gross unrealized holding
gains and losses and fair value of cash and investments were as follows (in
millions):
<TABLE>
<CAPTION>
AMORTIZED COST GROSS UNREALIZED GROSS UNREALIZED FAIR VALUE
-------------- HOLDING GAINS HOLDING LOSSES ----------
------------- --------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents.................. $1,025 $ - $ - $1,025
Investments Available for Sale............. 2,852 97 (9) 2,940
Investments Held to Maturity............... 83 - - 83
------------------ ---------------------- ------------------------ ---------------
Total Cash and Investments.............. $3,960 $97 $(9) $4,048
------------------ ---------------------- ------------------------ ---------------
------------------ ---------------------- ------------------------ ---------------
</TABLE>
6. AMERICAN ASSOCIATION OF RETIRED PERSONS CONTRACT
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 Condensed Consolidated Balance
Sheet. 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 covered by underwriting gains in
future periods of the contract. The RSF balance was $192 million as of January
1, 1998, and is $370 million as of September 30, 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 policy 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 Condensed Consolidated Balance Sheet
(in millions):
9
<PAGE>
<TABLE>
<CAPTION>
AMOUNTS
TRANSFERRED BALANCE AS OF
DESCRIPTION AS OF SEPTEMBER 30,
----------- JANUARY 1, 1998 1998
--------------- ----
<S> <C> <C>
Assets Under Management............................ $ 959 $1,075
Premiums Receivable................................ $ 300 $ 298
Medical Costs Payable.............................. $1,024 $ 893
Other Policy Liaibilities.......................... $ 192 $ 370
Other Liabilities.................................. $ 43 $ 55
</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.
7. COMPREHENSIVE INCOME
The table below presents comprehensive income, defined as changes in
the equity of our business excluding changes resulting from investments by and
distributions to our shareholders, for the nine-month periods ended September
30, 1998 and 1997 (in millions):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Earnings (Loss)..................................................................... $(298) $341
Change in Net Unrealized Holding Gains on Investments Available for Sale,
net of income tax effects............................................................ 27 26
---------- -------
Comprehensive Income (Loss)............................................................. $(271) $367
---------- -------
---------- -------
</TABLE>
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In the fourth quarter of 1998, we will adopt a new accounting standard
(SFAS No. 131) that will require us to report financial and descriptive
information about our reportable operating segments. Generally, financial
information will be required to be reported on the basis that is used internally
to evaluate segment performance and allocate resources to segments. This new
standard will not affect how we determine net earnings or shareholders' equity.
We anticipate that we will have four reportable segments under SFAS 131. Those
segments will be Healthcare Services, Uniprise, Specialized Care Services, and
Corporate and other.
Effective January 1, 1998, we adopted a new accounting pronouncement on
accounting for costs of computer software developed or obtained for internal use
(SOP 98-1). This new pronouncement did not have a material impact on the our
financial position or results of operations.
In April 1998, a new pronouncement for reporting on the costs of
start-up activities (SOP 98-5) was issued. Our current accounting practices are
consistent with this new pronouncement and, accordingly, SOP 98-5 will not
change our financial position or results of operations.
In June 1998, a new standard on accounting for derivative instruments
and hedging activities (SFAS No. 133) was issued. This new standard will not
materially affect our financial results or disclosures based upon our current
investment portfolio.
10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United HealthCare Corporation:
We have reviewed the accompanying condensed consolidated balance sheet
of United HealthCare Corporation (a Minnesota corporation) and Subsidiaries as
of September 30, 1998 and the related condensed consolidated statements of
operations and cash flows for the three and nine month periods ended September
30, 1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated financial statements of United HealthCare
Corporation and Subsidiaries as of and for the year-ended December 31, 1997 (not
presented herein), and, in our report dated February 12, 1998, we expressed an
unqualified opinion on those statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 1997, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota,
November 5, 1998
11
<PAGE>
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, the use of the terms the
"Company," "we," "us," and "our" in the following refers to United HealthCare
Corporation and its subsidiaries.
On January 1, 1998, we began delivering Medicare supplement insurance
and other medical insurance coverage for the American Association of Retired
Persons (AARP) to approximately 4 million AARP members. In the second quarter of
1998, we recorded special operating charges related to our operational
realignment activities ($725 million), Medicare loss contracts ($120 million)
and certain medical cost adjustments ($55 million). The significance of the AARP
business and the special charges affects the year-to-year comparability of our
consolidated financial position and results of operations. The Summary Operating
Information below should be read together with the narrative portions of
Management's Discussion and Analysis that more fully describe the specific
effects of the AARP business and the special charges.
The following discussion should be read together with the accompanying
condensed consolidated financial statements and notes. In addition, the
following discussion should be considered in light of a number of factors that
affect the Company, the industry in which we operate, and business generally.
These factors are described in Exhibit 99 to this Quarterly Report.
SUMMARY OPERATING INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
OPERATING RESULTS 1998 1997 PERCENT 1998 1997 PERCENT
- ----------------- ---- ---- CHANGE ---- ---- CHANGE
------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total Revenues.......................................... $4,360 $2,959 47% $12,710 $8,741 45 %
Earnings (Loss) from Operations......................... $214 $187 14% $(256) $550 (147)%
Net Earnings (Loss)..................................... $135 $116 16% $(298) $341 (187)%
Net Earnings (Loss) Per Common Share,
Assuming Dilution..................................... $0.66 $0.57 16% $(1.67) $1.68 (199)%
Medical Costs to Premium Revenues....................... 86.0% 84.1% 87.6%(a) 84.4%
SG&A Expenses to Total Revenues......................... 17.2% 20.0% 17.0% 20.1%
<CAPTION>
ENROLLMENT BY PRODUCT SEPTEMBER 30, SEPTEMBER 30, PERCENT
- --------------------- ------------- ------------- -------
1998 1997 CHANGE
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Health Plan Products
Commercial...................................................... 5,837(b) 5,237(b) 11%
Medicare........................................................ 450 318 42%
Medicaid........................................................ 509 526 (3)%
-------------------- ------------------ ----------
Total Health Plan Products................................... 6,796 6,081 12%
Other Network-Based Products....................................... 4,940(b) 4,619(b) 7%
Indemnity Products................................................. 1,631 2,321 (30)%
-------------------- ------------------ ----------
Total Enrollment............................................. 13,367 13,021 3%
-------------------- ------------------ ----------
-------------------- ------------------ ----------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, PERCENT
ENROLLMENT BY FUNDING ARRANGEMENT 1998 1997 CHANGE
- --------------------------------- ---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Fully Insured
Health Plan Products..................................................... 5,831 5,218 12%
Other Network-Based Products............................................. 495 489 1%
Indemnity Products....................................................... 274 391 (30)%
--------------- ------------------ -------------
Total Fully Insured.................................................... 6,600 6,098 8%
--------------- ------------------ -------------
Self-Funded
Health Plan Products..................................................... 965 863 12%
Other Network-Based Products............................................. 4,445 4,130 8%
Indemnity Products....................................................... 1,357 1,930 (30)%
--------------- ------------------ -------------
Total Self Funded...................................................... 6,767 6,923 (2)%
--------------- ------------------ -------------
Total Enrollment.................................................... 13,367 13,021 3%
--------------- ------------------ -------------
--------------- ------------------ -------------
</TABLE>
- ------------
(a) Includes $120 million of losses related to certain Medicare markets and
$55 million related to reserve strengthening associated with increasing
pressure on medical costs trends.
(b) In conjunction with the realignment of our operations, small group and
middle market point-of-service membership, previously classified as
other network based products, are now being presented with our
commercial health plan products (907,000 members at September 30, 1998
and 766,000 members at September 30, 1997).
13
<PAGE>
RESULTS OF OPERATIONS
SPECIAL OPERATING CHARGES
OPERATIONAL REALIGNMENT AND OTHER CHARGES In January 1998, we
introduced a significant realignment of our operations into six independent but
strategically linked businesses, each focused on performance, growth and
shareholder value. In the months that followed, we began to realign our
resources and activities; introduce new management processes and policies;
evaluate our market positions and customer segments; and assess the strategic
fit, operational performance and contribution of our business units. We have
moved forward to establish more independent identities, brands and market
positions for each of our businesses. We have realigned significant personnel
and activities from corporate functions to more directly support the operations
of our businesses. We also have defined internal service arrangements, systems
platforms, and process requirements to support each business's markets and
products.
In conjunction with our operational realignment initiatives, we
developed and, in the second quarter 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 reduction of more than 4,000 positions, affecting 7,000 people in various
locations. Through September 30, 1998, we have eliminated approximately 1,700
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 judgement 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 realignment activities for the
nine-month period ended September 30, 1998 (in millions):
<TABLE>
<CAPTION>
ADDITIONAL
RECORDED CHARGES ACCRUAL AT SEPTEMBER 30,
PROVISION (CREDITS) CASH NON-CASH 1998
--------- --------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Provision for operational realignment:
Asset impairments................... $430 $ 21 $ - $(451) $ -
Severance and outplacement costs.... 142 (20) (7) - 115
Noncancellable lease obligations.... 82 (9) - - 73
Disposition of businesses and other
costs............................ 71 8 (2) - 77
-------------- ----------- -------- ----------- ---------------
Total Provision $725 $ - $(9) $(451) $265
-------------- ----------- -------- ----------- ---------------
-------------- ----------- -------- ----------- ---------------
</TABLE>
14
<PAGE>
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 health care payers and
providers to use the same data generated in the treatment documentation process
to be then used in the financial transaction process, which involves provider
compensation, care utilization review, trend analysis and management reporting.
Through September 30, 1998, we had expended an additional $2.5 million and
estimate that it will be necessary to dedicate approximately $2.1 million in
order to successfully complete these projects.
Details of the asset impairments are as follows (in millions):
<TABLE>
<CAPTION>
TRIGGERING EVENT EXPECTED DISPOSAL DISPOSAL DATE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Intangibles and operating assets of A decision to exit Operating assets The carrying value of the
certain health plan and small group or reconfigure will be abandoned or assets will be depreciated
health insurance markets $291 these businesses, disposed upon exit over the estimated remaining
markets and or reconfiguration life with physical disposal
Specialized Care Services intangibles 39 products. of the market, during either the fourth
and operating assets business, or quarter of 1998 or the first
products. six months of 1999.
- --------------------------------------------------------------------------------------------------------------------------------
Ingenix purchased in-process research The acquisition of Not applicable. Written down during second
and development 68 Medicode, Inc. quarter 1998.
occurred on
December 31, 1997.
The final allocation
of purchase price
and valuation was
completed in June
1998.
- --------------------------------------------------------------------------------------------------------------------------------
Corporate and other business segment 53 Realignment Operating assets The carrying value of the
operating assets initiatives have been or will be assets will be depreciated
resulted in written off, over the estimated remaining
operating assets to abandoned or life with physical disposal
be abandoned or disposed upon exit during either the fourth
disposed. of certain quarter of 1998 or the first
businesses or as a six months of 1999.
result of other
realignment
initiatives.
- --------------------------------------------------------------------------------------------------------------------------------
Total $451
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
We believe the aggregate reduction in our overall cost structure from
our realignment activities will approximate $300 million. We expect to realize
$75 million of these reductions by the end of 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.
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.
15
<PAGE>
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 in Medicare medical costs payable
estimates, and $55 million related to increases to commercial medical costs
payable estimates.
The $101 million of contract losses were related to 13 of our 24
Medicare markets. These plans contribute half of our annual Medicare premiums of
$2.3 billion. 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
increased medical costs which exceeded the fixed Medicare premiums that only
increased 2.5% on average. We incurred $38 and $39 million of these Medicare
losses in the second quarter and third quarter, and have a loss contract accrual
of $24 million for the losses we expect to incur over the remainder of 1998.
PREMIUM REVENUES
Premium revenues in the third quarter of 1998 totaled $3.9 billion, an
increase of $1.3 billion, or 53%, over the third quarter of 1997. For the nine
months ended September 30, 1998, premium revenues of $11.4 billion increased
$3.9 billion, or 51%, over the same period in 1997. On January 1, 1998, we began
delivering Medicare supplement insurance and other medical insurance coverage
for the American Association of Retired Persons (AARP) to approximately 4
million AARP members. Premium revenues from our portion of the AARP insurance
offerings during the first nine months of 1998 were $2.6 billion.
Excluding the AARP business, third quarter 1998 premium revenues
totaled $3.0 billion, an increase of 19% over third quarter 1997. For the nine
months ended September 30, 1998, premium revenues excluding the AARP business
were $8.7 billion, a 16% increase over the same period in 1997. This increase is
primarily the result of growth in year-over-year same-store health plan premium
revenues of $1.3 billion, or 22%, through the third quarter of 1998. Increases
in the health plan premium revenue reflect same-store enrollment growth of 12%
and an average year-over-year premium rate increase on renewing commercial
groups exceeding 6%. Growth in our health plan Medicare programs also
contributed to the increase in premium revenues. The total health plan
same-store enrollment growth of 12% includes a year-over-year same-store
increase of 42% in Medicare enrollment. Significant growth in Medicare
enrollment affects year-over-year comparability of premium revenues. The
Medicare product generally has per member premium rates three to four times
higher than average commercial premium rates because Medicare members typically
use proportionately more medical care services.
The nine-month year-over-year increase in premium revenues from health
plan operations was partially offset by a decrease in premium revenues from
fully insured non-network-based indemnity products of $54 million. This decrease
is primarily attributable to a relationship that we discontinued 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.
MEDICAL COSTS
Our medical care ratio (the percent of premiums expensed as medical costs)
increased from 84.1% in the third quarter of 1997 to 86.0% in the third quarter
of 1998. The year-over-year increase includes the effects of the AARP business
on our medical care ratio. We report 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 twenty basis points to 84.3%.
On a comparable basis for the nine-month periods ended September 30,
the medical care ratio increased from 84.4% in 1997 to 86.3% in 1998. The most
significant cause of the increase in the year-over-year medical
16
<PAGE>
care ratio is the $175 million of medical cost charges recorded in the second
quarter of 1998. Of this amount, $120 million related to losses we expect to
incur in 13 of our 22 Medicare health plans. These plans contribute half of our
annualized Medicare premiums of $2.3 billion and are generally located in newer
markets where we have been unable to achieve the scale of operations necessary
to achieve profitability. We incurred $89 million of these Medicare losses in
the second and third quarter. We have reserves of $31 million as of September
30, 1998 and mangement believes that these reserves are adequate to cover the
Medicare losses we expect to incur in the fourth quarter of 1998. We recorded an
additional $55 million of medical costs during the second quarter to strengthen
our reserves in light of increasing pressure on medical cost trends in certain
health plan markets, including those where we may reposition or withdraw our
operating presence.
In addition to the second quarter charges, lower margins in our nine
other Medicare health plans also adversely affected the medical care ratio.
While these plans are profitable, average Medicare premium rate increases of
2.5% in these plans were more than offset by increased medical utilization,
reflected mostly in inpatient hospital costs. Although we see improvement in our
overall commercial medical care ratio, performance in a few of our commercial
health plans lagged behind the performance of our remaining commercial health
plans and modestly contributed to the increased medical care ratio. We are
addressing the overall 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 and will curtail activities
or exit markets where we believe near term prospects are unacceptable. In
October 1998, we announced 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.
We will continue to offer Medicare products in strong and economically viable
markets. Annual revenues for 1998 from Medicare markets we are exiting are
expected to be approximately $225 million.
MANAGEMENT SERVICES AND FEE REVENUES
Management services and fee revenues during the three months and nine months
ended September 30, 1998, totaled $399 million and $1.2 billion, representing
increases of $48 million and $99 million, respectively, over the same periods in
1997. These revenues are primarily generated from self-funded products where we
receive a fee for administrative services and generally assume no financial
responsibility for health care costs associated with these products. In
addition, we generate fee revenues from administrative services we perform on
behalf of managed health plans and for services provided by our Specialized Care
Services and Knowledge and Information businesses.
The overall increase in management services and fee revenues is
primarily the result of acquisitions by our Knowledge and Information business
during 1997 and 1998. Additionally, our Specialized Care Services business, most
notably in United Behavioral Health and Optum, our telephone- and Internet-based
health information and personal care management business, continues to increase
the number of individuals it serves.
OPERATING EXPENSES
Selling, general and administrative expenses as a percent of total revenues (the
SG&A ratio) decreased from 20.0% during the third quarter of 1997 to 17.2%
during the third quarter of 1998. The improvement in the year-over-year SG&A
ratio reflects the operating leverage we gained with the addition of the AARP
business. On a sequential basis, selling, general and administrative expenses
increased by $43 million, or 6%, from the second quarter of 1998. This increase
is primarily attributable to our efforts to convert and integrate members onto
our two core operating platforms, expenses related to initiation of enrollment,
set up and support costs for over 500,000 new members that we will begin
servicing in January 1999, and incremental Year 2000 compliance costs. For the
nine months ended September 30, 1998, selling, general and administrative
expenses increased $409 million, or 23%, over the comparable period in 1997.
This increase reflects the additional costs to support the corresponding $4.0
17
<PAGE>
billion, or 45%, increase in revenues, as well as our additional investment in
future growth platforms.
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 need 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 affects on our financial results.
Also, it could be more difficult for us to control medical costs if federal and
state bodies continue to consider and enact significant and onerous managed care
laws and regulations.
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.
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; 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.
INFLATION
Although the general rate of inflation has remained relatively stable and health
care cost inflation has stabilized in recent years, the national health care
cost inflation rate still exceeds the general inflation rate. We use various
strategies to mitigate the negative effects of health care cost inflation,
including setting commercial premiums based on anticipated health care costs,
risk-sharing arrangements with various health care providers, and other health
care cost containment measures. Specifically, health plans try to control
medical and hospital costs through contracts with independent providers of
health care services. Through these contracted care providers, our health plans
emphasize preventive health care and appropriate use of specialty and hospital
services.
18
<PAGE>
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.
FINANCIAL CONDITION AND LIQUIDITY
Cash and investments at September 30, 1998, were $4.0 billion, comparable to
December 31, 1997 balances. Through the third quarter of 1998, we generated cash
from operations of $433 million and realized proceeds from stock option
exercises and the sale of property and equipment of $115 million. In the same
period, we used $580 million in cash for capital expenditures, acquisitions,
common stock repurchases, and dividends.
Under applicable government regulations, several subsidiaries are
required to maintain specific capital levels to support their operations. After
taking these regulations and certain business considerations into account, we
had $665 million in cash and investments available for general corporate use at
September 30, 1998.
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, Health Maintenance
Organizations (HMO's), 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 is effective December 31, 1998. The new HMO rules are
subject to state-by-state adoption, but it appears that very few states will
adopt the rules by the end of 1998. The HMO rules, if adopted by the states in
their proposed form, would significantly increase the capital required for
certain of our subsidiaries. Although some reallocation of capital among our
regulated entities will be necessary, we do not anticipate a significant impact
on financial resources available for general corporate purposes. We have
initiated a plan to redeploy capital among our regulated entities to minimize
the need for incremental capital investments of general corporate financial
resources into regulated subsidiaries.
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. During the first nine months of 1998, we repurchased 7.6
million shares at an average price of $39 per share. Since inception of the
program in November of 1997, we have repurchased 7.8 million shares.
Effective October 1, 1998, we have the right to redeem in whole or in
part the 500,000 outstanding shares of our 5.75% Series A Convertible Preferred
Stock (the Preferred Stock) at certain defined redemption rates. The initial
aggregate redemption price of the Preferred Stock would be $520 million, or
$1,040 per share.
On October 1, 1998, we completed our acquisition of Health Partners of
Arizona, a 501,000 member health plan, for $235 million in cash.
In the second quarter of 1998, we recognized special charges to
operations of $725 million associated with the implementation of our operational
realignment and certain medical cost adjustments of $175 million. We believe our
after tax cash outlay associated with these charges will be in the range of $275
million to $325 million over the next twelve months.
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
19
<PAGE>
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. This registration
statement has not yet been approved by the SEC and, accordingly, these
securities may not be sold until their approval is received.
We expect our available cash resources and operating cash flows will be
sufficient to meet our current operating requirements and internal development
and realignment initiatives. In addition, based on our current financial
condition and results of operations, we should be able to finance additional
cash requirements in the public or private markets, if necessary. In the fourth
quarter of 1998, we expect to obtain additional financing through one or more of
the following financing alternatives; a revolving credit facility; a commercial
paper program; fixed and floating rate notes pursuant to a Rule 144A offering.
Proceeds received from our financing activities may be used to redeem
outstanding preferred stock, repurchase common stock, or for other general
corporate purposes, including financing possible future acquisitions.
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.
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 on-going enhancements to keep pace with the continuing changes
in information technology, evolving industry standards, and customer
preferences. We are currently 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 as a
common business practice. 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 96% or more of our
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 December 31, 1998. We have also
installed separate test environments (both mainframe and distributed) to test
our business applications in a simulated Year 2000 environment.
DESKTOP HARDWARE & SOFTWARE We have recently 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
will be modified or replaced with compliant systems by September 30, 1999. In
addition, all of our UNIX client server installations are compliant at September
30, 1998.
TELECOMMUNICATIONS We have inventoried all of our telecommunication systems over
28,000 telecommunication
20
<PAGE>
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 September 30, 1998, we are approximately 50% 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 475 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 those systems that will be modified for Year 2000 compliance. We
have determined that 37% of our software applications will not be used after
December 31, 1999 due to conversions, consolidations and software replacements.
Of the remaining applications, over 75% have been made Year 2000 compliant,
tested and certified or are scheduled to be certified for compliance, with the
balance yet to be tested. We expect all Year 2000 software modifications to be
completed by March 31, 1999, with further testing and certification during 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 are currently identifying, 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 over 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 identification of alternative vendors, where necessary, by July
31, 1999. We will not be 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, the ability of our significant vendors, providers,
customers and others with which we conduct business to identify and resolve
their own Year 2000 issues.
21
<PAGE>
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 September 30, 1998, our
historical and projected costs to complete our Year 2000 remediation plan is as
follows (amounts in millions):
<TABLE>
<CAPTION>
COSTS INCURRED TO DATE PROJECTED COSTS
YEAR RESOURCES AMORTIZATION RESOURCES AMORTIZATION TOTAL
- ---- --------- ------------ --------- ------------ -----
<C> <C> <C> <C> <C> <C>
1996........................................... $1 $- $ - $ - $ 1
1997........................................... 12 - - - 12
1998........................................... 12 - 5 *1 18
1999........................................... - - 17 *8 25
2000........................................... - - 3 *9 12
2001........................................... - - - *9 9
2002........................................... - - - *2 2
-------------- ----------------- ------------- ----------------- --------
$25 $- $25 $29 $79
-------------- ----------------- ------------- ----------------- --------
-------------- ----------------- ------------- ----------------- --------
</TABLE>
- -----------
* Equipment expense assumes a three year useful life for $29 million in
purchased hardware and software.
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 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) 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 in the event we are unable to complete remediation
efforts by December 31, 1999. These contingency plans are expected to be
developed by the end of the first quarter of 1999.
ITEM 3. 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 June 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.
22
<PAGE>
UNITED HEALTHCARE CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Six suits assert claims under the United States securities laws against the
Company and certain of its officers and directors. The plantiffs are individual
stockholders of the Company who purport to sue on behalf of a class of
purchasers of common shares of the Company during the period February 12, 1998
through August 5, 1998 (the Class Period). 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 statements were made
with the intention of deceiving members of the investing public and with the
intention that the price of United HealthCare Corporation'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 seek compensatory damages in unspecified amounts.
We do not expect that the ultimate resolution of these matters will have a
material adverse effect on the results of operations and financial position of
the Company.
ITEM 5. OTHER INFORMATION
The Company on November 4, 1998 amended its Amended and Restated Bylaws (the
Bylaws) to extend the advance notice provisions for business to be brought by a
shareholder at an annual meeting and for director(s) to be nominated by a
shareholder at an annual meeting. The Company must now receive notice of such
shareholder proposals within 120 days before the date of the prior year's proxy
materials. For the 1999 Annual Meeting, to be held on May 12, 1999, the Company
must receive advance notice of business to be brought by a shareholder and for
director(s) to be nominated by a shareholder no later than December 1, 1998. The
foregoing is qualified in its entirety by reference to the full text of the
Bylaws, as amended, filed as Exhibit 3.1 hereto and incorporated herein by
reference.
ITEM 6. EXHIBITS
(a) The following exhibits are filed in response to Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER -----------
------
<S> <C>
*Exhibit 3.1 - Amended and Restated Bylaws of United HealthCare
Corporation, as amended
**Exhibit 15 - Letter Re Unaudited Interim Financial Information
*Exhibit 99 - Cautionary Statements
</TABLE>
* Previously filed.
** Filed herewith.
(b) No reports on Form 8-K were filed during the three month period ended
September 30, 1998.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED HEALTHCARE CORPORATION
/s/ DAVID J. LUBBEN General Counsel and Secretary Dated: April 22, 1999
- ------------------------
David J. Lubben
24
<PAGE>
UNITED HEALTHCARE CORPORATION
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER -----------
------
<S> <C>
*Exhibit 3.1 - Amended and Restated Bylaws of United HealthCare
Corporation, as amended
**Exhibit 15 - Letter Re Unaudited Interim Financial Information
*Exhibit 99 - Cautionary Statements
</TABLE>
* Previously filed
** Filed herewith
25
<PAGE>
EXHIBIT 15
LETTER RE UNAUDITED FINANCIAL INFORMATION
April 22, 1999
To United HealthCare Corporation:
We are aware that United HealthCare Corporation and Subsidiaries has
incorporated by reference in its Registration Statements 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, its Form 10-Q/A for the quarter ended
September 30, 1998, which includes our report dated November 5, 1998, covering
the unaudited interim condensed consolidated financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report is
not considered a part of the registration statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
