<PAGE>
As filed with the Securities and Exchange Commission on January 12, 2001
Registration No. 333-48858
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
UNITEDHEALTH GROUP INCORPORATED
(exact name of registrant as specified in its charter)
Minnesota 6324 41-1321939
(state or other (primary standard (IRS employer
jurisdiction industrial classification identification no.)
of organization) code number)
UNITEDHEALTH GROUP CENTER
9900 BREN ROAD EAST
MINNETONKA, MINNESOTA 55343
(952) 936-1300
(address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
David J. Lubben, Esq.
General Counsel and Secretary
UnitedHealth Group Center
9900 Bren Road East
Minnetonka, Minnesota 55343
(952) 936-1300
(name, address, including zip code, and telephone number, including area code,
of agent for service)
copies to:
James D. Alt, Esq. J. Craig Walker, Esq.
Dorsey & Whitney LLP Bell, Boyd & Lloyd LLC
220 South Sixth Street Three First National Plaza
Minneapolis, Minnesota 55402 70 West Madison Street
(612) 340-2803 Chicago, Illinois 60602
Fax: (612) 340-8738 (312) 372-1121
Fax: (312) 372-2098
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: At the
effective time of the merger of a wholly owned subsidiary of the Registrant
with and into Lifemark Corporation, which shall occur as soon as practicable
after the Effective Date of this Registration Statement and the satisfaction or
waiver of all conditions to closing of such merger.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment that specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this registration statement shall become effective
on such date as the Commission, acting pursuant to such Section 8(a), may
determine.
<PAGE>
[LOGO OF LIFEMARK]
Dear Lifemark Stockholders:
I am pleased to forward the enclosed proxy statement/prospectus regarding an
opportunity for Lifemark to merge with a newly formed and wholly owned
subsidiary of UnitedHealth Group Incorporated. As a result of the merger,
Lifemark will become part of a combined company that is a national leader in
forming and operating markets for the delivery of health and well-being
services. By becoming part of a much larger health and well-being company,
Lifemark's ability to market its services and expand its business is expected
to be greatly enhanced. Upon completion of the merger, it is anticipated that
Lifemark's operations will be integrated with those of UnitedHealth Group's
existing EverCare(R) unit to serve the health and well-being needs of older
Americans across the full continuum of care settings.
In the merger, each share of your Lifemark common stock will be exchanged
for either UnitedHealth Group common stock or cash. Unless UnitedHealth Group
makes the cash payment election described in the next paragraph below, for each
share of Lifemark common stock you own, you will receive a number of shares of
UnitedHealth Group common stock based on the average closing price per share of
UnitedHealth Group common stock on the New York Stock Exchange for the ten
consecutive trading days ending with and including the second business day
before the closing date of the merger. If the average closing price is:
. $47.50 or more, for each share of Lifemark common stock you own, you
will receive a number of shares of UnitedHealth Group common stock equal
to $10.55 divided by the average closing price or $56.50, whichever is
less;
. $44.00 or less, and UnitedHealth Group does not make the cash payment
election described below, then for each share of Lifemark common stock
you own, you will receive a number of shares of UnitedHealth Group
common stock equal to $10.08 divided by the average closing price; or
. greater than $44.00, but less than $47.50, for each share of Lifemark
common stock you own, you will receive a number of shares of
UnitedHealth Group common stock equal to between $10.08 and $10.55
(according to a formula described in the proxy statement/prospectus)
divided by the average closing price.
If the average closing price as described above is less than $44.00,
UnitedHealth Group may elect to pay cash rather than shares of its own common
stock in the merger. If UnitedHealth Group makes this election, you will
receive $10.08 in cash per share of Lifemark common stock. UnitedHealth Group
common stock is traded on the New York Stock Exchange under the trading symbol
"UNH." On January 11, 2001, UnitedHealth Group common stock closed at $55.38
per share. We believe the merger offers significant value to our stockholders.
UnitedHealth Group effected a two for one split of its common stock on
December 22, 2000. The discussion above and, except as otherwise noted, the
information presented throughout the proxy statement/prospectus reflect the
stock split.
<PAGE>
Before we can merge, holders of a majority of the common stock of Lifemark
must vote in favor of the merger proposal. This proposal involves the approval
and adoption of the merger agreement related to the merger. Only stockholders
who hold shares of Lifemark common stock at the close of business on January 3,
2001, will be entitled to vote at the special meeting. If the requisite
Lifemark stockholders approve the merger agreement, the parties intend to close
the merger shortly after the special meeting and after all of the conditions to
closing the merger are satisfied.
Your Board of Directors has reviewed and considered the terms and conditions
of the merger agreement, has determined that the merger is in the best
interests of Lifemark and its stockholders, and has approved the merger
agreement. Stephens Inc. has rendered a written opinion dated October 10, 2000
to the effect that, as of such date and based upon and subject to the matters
stated in its opinion, the consideration provided for under the merger
agreement is fair, from a financial point of view, to our stockholders. The
written opinion of Stephens Inc. is attached as Annex C to the proxy
statement/prospectus and you should read it carefully and in its entirety.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
MERGER AND RECOMMENDS THAT YOU VOTE TO APPROVE THE MERGER AGREEMENT AND MERGER.
The proxy statement/prospectus provides you with detailed information
concerning Lifemark, UnitedHealth Group and the merger. Please give all of the
information contained in the proxy statement/prospectus your careful attention.
In particular, you should carefully consider the discussion in the section
entitled "Risk Factors" beginning on page 13 of the proxy statement/prospectus.
YOUR VOTE IS VERY IMPORTANT. TO VOTE YOUR SHARES, you may use the enclosed
proxy card or attend a special stockholders meeting that will be held for this
important vote. The special meeting will be held on Thursday, February 8, 2001,
at 8:00 a.m., at Lifemark's executive offices located at 7600 North 16th
Street, Suite 150, Phoenix, Arizona 85020.
TO APPROVE AND ADOPT THE MERGER AGREEMENT, YOU MUST VOTE "FOR" THE PROPOSAL
BY FOLLOWING THE INSTRUCTIONS STATED ON THE ENCLOSED PROXY CARD. IF YOU DO NOT
VOTE AT ALL, YOU WILL, IN EFFECT, HAVE VOTED AGAINST THE PROPOSAL.
On behalf of the Lifemark board of directors, I thank you for your support
and urge you to VOTE FOR APPROVAL of the merger of Lifemark Corporation and
UnitedHealth Group Incorporated.
Sincerely,
/s/ Rhonda E. Brede
Rhonda E. Brede
President and Chief Executive
Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SHARES OF UNITEDHEALTH GROUP COMMON
STOCK TO BE ISSUED IN THE MERGER, OR DETERMINED IF THE PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
The proxy statement/prospectus is dated January 16, 2001, and was first
mailed to Lifemark stockholders on or about January 19, 2001.
<PAGE>
LIFEMARK CORPORATION
7600 North 16th Street
Suite 150
Phoenix, Arizona 85020
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 8, 2001
To the Stockholders of Lifemark Corporation:
We will hold a special meeting of stockholders of Lifemark Corporation at
8:00 a.m., local time, on Thursday, February 8, 2001 at Lifemark's executive
offices located at 7600 North 16th Street, Suite 150, Phoenix, Arizona 85020,
for the following purposes:
1. To consider and vote on a proposal to adopt and approve the Agreement
and Plan of Merger by and among UnitedHealth Group Incorporated, Leo
Acquisition Corp. and Lifemark Corporation dated as of October 10, 2000,
as amended, which is referred to as the merger agreement in the enclosed
documents. Pursuant to the merger agreement, Leo Acquisition Corp. will
merge with and into Lifemark, and Lifemark will become a wholly owned
subsidiary of UnitedHealth Group. Each outstanding share of Lifemark
common stock will be converted into the right to receive either
UnitedHealth Group common stock or cash, as described in the attached
proxy statement/prospectus.
2. To transact such other business as may properly come before the special
meeting.
We describe the merger proposal more fully in the proxy statement/prospectus
attached to this notice. You are encouraged to read the entire document
carefully.
Only stockholders of record of Lifemark common stock at the close of
business on January 3, 2001 are entitled to notice of, and will be entitled to
vote at, the special meeting or any adjournment or postponement of the special
meeting. Adoption of the merger agreement will require the affirmative vote of
Lifemark stockholders representing a majority of the outstanding shares of
Lifemark common stock entitled to vote at the special meeting.
Lifemark stockholders will have the right to dissent from the merger and
obtain payment in cash of the fair value of their shares of common stock under
applicable provisions of Delaware law only if UnitedHealth Group makes the cash
payment election described in the attached proxy statement/prospectus. In order
to perfect dissenters' rights, stockholders must give written demand for
appraisal of their shares before the taking of the vote on the merger at the
special meeting and must not vote in favor of the merger. A copy of the
applicable Delaware statutory provisions is included as Annex D to the attached
proxy statement/prospectus and a summary of these provisions can be found under
"Appraisal Rights for Lifemark Stockholders" in the attached proxy
statement/prospectus.
Your vote is important. To assure that your shares are represented at the
special meeting, you are urged to complete, date and sign the enclosed proxy
and mail it promptly in the postage-paid envelope provided, whether or not you
plan to attend the special meeting in person.
You may revoke your proxy in the manner described in the accompanying proxy
statement/prospectus at any time before it has been voted at the special
meeting. If you attend the special meeting you may vote in person even if you
returned a proxy.
<PAGE>
Please do not send your stock certificates at this time. If the merger is
consummated, you will be sent instructions regarding the surrender of your
stock certificates.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Rhonda E. Brede
Rhonda E. Brede
President and Chief Executive
Officer
Phoenix, Arizona
January 16, 2001
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SHARES OF UNITEDHEALTH GROUP COMMON
STOCK TO BE ISSUED IN THE MERGER, OR DETERMINED IF THE PROXY
STATEMENT/PROSPECTUS ATTACHED HERETO IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
AVAILABLE INFORMATION
Lifemark Corporation and UnitedHealth Group Incorporated file annual,
quarterly and special reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). You may read and copy any
reports, statements or other information they file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference room.
Lifemark and UnitedHealth Group filings with the SEC are also available to the
public from commercial document retrieval services and at the Internet Website
maintained by the SEC at http://www.sec.gov.
UnitedHealth Group has filed a registration statement on Form S-4 to
register the shares of UnitedHealth Group common stock to be issued to Lifemark
stockholders in the merger. This proxy statement/prospectus is a part of that
registration statement and constitutes the prospectus of UnitedHealth Group as
well as the proxy statement of Lifemark for the Lifemark special meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS TO VOTE ON THE MERGER. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT
IS CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY
STATEMENT/PROSPECTUS IS DATED JANUARY 16, 2001. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THE PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY
DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS PROXY
STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF UNITEDHEALTH GROUP
COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
DOCUMENTS INCLUDED AS ANNEXES E, F, G AND H
UnitedHealth Group has supplied all the information contained in this proxy
statement/prospectus relating to UnitedHealth Group and Lifemark has supplied
all such information relating to Lifemark. Some of the important business and
financial information relating to UnitedHealth Group and Lifemark that you may
want to consider in deciding how to vote is not included in the body of this
proxy statement/prospectus, but rather is "incorporated by reference" to the
documents attached as Annexes E, F, G and H to this proxy statement/prospectus.
Lifemark's Annual Report on Form 10-K for the fiscal year ended May 31, 2000
is incorporated by reference in this proxy statement/prospectus and provided
herewith as Annex E, and its Quarterly Report on Form 10-Q for the quarterly
period ended November 30, 2000 is incorporated by reference in this proxy
statement/prospectus and provided herewith as Annex F.
UnitedHealth Group's Annual Report to Shareholders for the fiscal year ended
December 31, 1999 is incorporated by reference in this proxy
statement/prospectus and provided herewith as Annex G, and its Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 2000 is incorporated
by reference in this proxy statement/prospectus and provided herewith as Annex
H.
The information incorporated by reference is deemed to be a part of this
proxy statement/prospectus, except for any information superseded by
information contained directly in this proxy statement/prospectus. Any
statement contained in a document incorporated herein shall be deemed to be
modified or superseded to the extent that a statement contained in this proxy
statement/prospectus modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this proxy statement/prospectus.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE WE PROPOSING TO MERGE?
A: As a result of the merger, Lifemark will become part of a combined company
that is a national leader in forming and operating markets for the delivery of
health and well-being services. By becoming part of a much larger health and
well-being company, Lifemark's ability to market its services and expand its
business is expected to be greatly enhanced. Upon completion of the merger, it
is anticipated that Lifemark's operations will be integrated with those of
UnitedHealth Group's existing EverCare unit to serve the health and well-being
needs of older Americans across the full continuum of care settings.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: If the merger is completed and UnitedHealth Group does not make the cash
payment election described in the next paragraph, for each share of Lifemark
common stock you own you will receive a number of shares of UnitedHealth Group
common stock equal to (1) between $10.08 and $10.55 (according to a formula
described under "The Merger Agreement--Structure of the Merger and Conversion
of Lifemark Common Stock" in the proxy statement/prospectus) (2) divided by the
lesser of $56.50 or the average closing price per share of UnitedHealth Group
common stock on the New York Stock Exchange for the ten consecutive trading
days ending with and including the second business day before the closing date
of the merger. UnitedHealth Group will not issue fractional shares of common
stock. Instead, in lieu of any fractional share that you would otherwise
receive, you will receive cash based on the closing market price of
UnitedHealth Group common stock as of the last trading date prior to the
effective date of the merger.
If the average closing price per share of UnitedHealth Group common stock on
the New York Stock Exchange for the ten consecutive trading days ending with
and including the second business day before the closing date of the merger is
$44.00 or less, UnitedHealth Group may elect to have each outstanding share of
Lifemark common stock convert into the right to receive cash instead of
UnitedHealth Group common stock. If UnitedHealth Group makes such an election,
you will receive $10.08 for each share of Lifemark common stock you own.
Following the merger, Lifemark's stockholders will no longer own any interest
in Lifemark, whether they receive UnitedHealth Group common stock or cash in
the merger.
In addition, each outstanding option to purchase a share of Lifemark common
stock will be assumed by UnitedHealth Group and converted into an option to
purchase a number of whole shares of UnitedHealth Group common stock determined
according to the same formula provided in the merger agreement for the
conversion of shares of Lifemark common stock to UnitedHealth Group common
stock (unless the cash payment election is made, in which case the exchange
ratio will be calculated based on the greater of $40.00 or the average closing
price of UnitedHealth Group common stock in the time leading up to the merger),
rounded down to the nearest whole number of shares of UnitedHealth Group common
stock, with the exercise price adjusted accordingly.
Q: WHEN AND WHERE WILL THE SPECIAL MEETING TAKE PLACE?
A: The special meeting is scheduled to take place at 8:00 a.m. local time on
Thursday, February 8, 2001 at Lifemark's executive offices located at 7600
North 16th Street, Suite 150, Phoenix, Arizona 85020.
Q: WHO IS ENTITLED TO VOTE AT THE SPECIAL MEETING?
A: Holders of record of Lifemark common stock as of the close of business on
January 3, 2001 are entitled to vote at the special meeting. Each stockholder
has one vote for each share of Lifemark common stock he or she owns.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE MERGER?
A: In order for the merger to be approved, holders of a majority of the
outstanding Lifemark common stock must vote for the merger. If you do not vote
your shares, you will, in effect, have voted against the merger. Certain
stockholders of Lifemark, representing approximately 39% of the outstanding
<PAGE>
shares of Lifemark common stock on the record date, have signed a voting
agreement obligating them to vote in favor of the merger.
Q: WHAT DO I NEED TO DO NOW?
A:Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at the special meeting. If your
shares are held in "street name" by your broker, your broker will vote your
shares only if you provide instructions on how to vote. You should follow the
directions provided by your broker regarding how to instruct your broker to
vote your shares. Without instructions, your shares will not be voted at the
special meeting, which will have the same effect as if they had been voted
against adoption of the merger agreement.
Lifemark's board of directors unanimously recommends that Lifemark
stockholders vote FOR adoption of the merger agreement.
Q: DO I NEED TO ATTEND THE SPECIAL MEETING IN PERSON?
A: No. It is not necessary for you to attend the special meeting to vote your
shares if Lifemark has previously received your proxy, although you are welcome
to attend.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY PROXY?
A: You may change your vote by delivering a signed notice of revocation or a
later-dated, signed proxy card to Lifemark's corporate secretary before the
special meeting, or by attending the special meeting and voting in person.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, UnitedHealth Group will send you
instructions explaining how to exchange your shares of Lifemark common stock
for the appropriate number of shares of UnitedHealth Group common stock or, if
UnitedHealth Group exercises its cash payment election, for cash.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We hope to complete the merger shortly after the special meeting and after
all of the conditions to closing the merger are satisfied. Because the merger
is subject to governmental and third party approvals, however, we cannot
predict the exact timing.
Q: WHAT ARE THE TAX CONSEQUENCES TO ME?
A: If the merger is completed and you receive UnitedHealth Group common stock
in exchange for your shares of Lifemark stock, your receipt of shares of
UnitedHealth Group common stock generally will not be taxable in the United
States. If UnitedHealth Group exercises its cash payment election, your receipt
of cash in consideration for the cancellation of your shares of Lifemark common
stock generally will be a taxable transaction for federal income tax purposes
and may also be taxable under applicable state, local, foreign and other tax
laws. You are urged to both carefully consider the discussion in the section
entitled "The Merger--Certain Federal Income Tax Considerations" on page 33 of
this proxy statement/prospectus and to consult your own tax advisors regarding
the specific tax consequences of the merger to you.
Q: WILL I HAVE APPRAISAL RIGHTS AS A RESULT OF THE MERGER?
A: Only if UnitedHealth Group makes the cash payment election described in the
proxy statement/prospectus. In order to exercise your appraisal rights, you
must follow the requirements of Delaware law. A copy of the applicable Delaware
statutory provisions is included as Annex D to the proxy statement/prospectus
and a summary of these provisions can be found under "Appraisal Rights for
Lifemark Stockholders" in the attached proxy statement/prospectus.
<PAGE>
Q: WHEN WILL LIFEMARK STOCKHOLDERS RECEIVE THE MERGER CONSIDERATION?
A:The parties expect to complete the merger promptly following the special
meeting. However, it is possible that delays could require that the merger be
completed at a later time. Following the merger, you will receive instructions
on how to receive shares of UnitedHealth Group common stock or cash in exchange
for Lifemark common stock. You must return your Lifemark stock certificates as
described in the instructions, and you will receive your share of the merger
consideration as soon as practicable after Wells Fargo Bank Minnesota, N.A.
receives your Lifemark stock certificate. If you hold shares through a
brokerage account, your broker will handle the surrender of stock certificates
to Wells Fargo Bank.
Q: WHO CAN I CALL WITH QUESTIONS?
A: If you have any questions about the merger, please call Lifemark Investor
Relations at (602) 331-5150. For additional information about UnitedHealth
Group, please contact its Investor Relations' Department at (952) 936-1300.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS.................................... 1
<S> <C>
MARKET PRICE AND DIVIDEND INFORMATION........................................ 11
RISK FACTORS................................................................. 13
Risks Relating to the Merger............................................... 13
Risks Relating to UnitedHealth Group....................................... 14
THE SPECIAL MEETING OF LIFEMARK STOCKHOLDERS................................. 20
Date, Time and Place of the Special Meeting................................ 20
Matters to be Considered at the Special Meeting............................ 20
Record Date and Shares Entitled to Vote.................................... 20
Voting of Proxies; Revocation of Proxies................................... 20
Vote Required.............................................................. 20
Quorum; Abstentions and Broker Non-Votes................................... 21
Expenses of Solicitation................................................... 21
Board Recommendation....................................................... 21
THE MERGER................................................................... 22
Background of the Merger................................................... 22
UnitedHealth Group's Reasons for the Merger................................ 23
Lifemark's Reasons for the Merger and Board of Directors Recommendation.... 24
Opinion of Lifemark's Financial Advisor.................................... 26
Completion and Effectiveness of the Merger................................. 29
Operations Following the Merger............................................ 29
Interests of Certain Persons in the Merger................................. 30
Indemnification and Insurance.............................................. 31
Lifemark Common Stock Ownership............................................ 32
Regulatory Matters......................................................... 33
Certain Federal Income Tax Considerations.................................. 33
Accounting Treatment....................................................... 35
Dissenters' or Appraisal Rights............................................ 35
Restrictions on Sale of Shares by Affiliates of Lifemark and UnitedHealth
Group..................................................................... 35
Stock Market Listing....................................................... 35
CERTAIN INFORMATION CONCERNING UNITEDHEALTH GROUP............................ 36
Directors.................................................................. 36
Executives................................................................. 38
UnitedHealth Group Common Stock Ownership.................................. 45
Certain Relationships and Transactions..................................... 47
THE MERGER AGREEMENT......................................................... 48
Structure of the Merger and Conversion of Lifemark Common Stock............ 48
Treatment of Lifemark Stock Options........................................ 49
Surrender of Lifemark Stock Certificates................................... 50
Representations and Warranties............................................. 51
Concept of Material Adverse Effect......................................... 52
Lifemark's Conduct of Business before Completion of the Merger............. 52
No Solicitation of Transactions............................................ 53
Conditions to the Merger................................................... 54
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Termination of the Merger Agreement..................................... 54
Payment of Fees and Expenses............................................ 55
Amendments, Extension and Waivers....................................... 56
APPRAISAL RIGHTS FOR LIFEMARK STOCKHOLDERS................................ 56
COMPARISON OF RIGHTS OF SHAREHOLDERS OF UNITEDHEALTH GROUP AND LIFEMARK... 59
EXPERTS................................................................... 67
LEGAL MATTERS............................................................. 67
FUTURE SHAREHOLDER PROPOSALS.............................................. 67
ANNEX A--AGREEMENT AND PLAN OF MERGER BY AND AMONG UNITEDHEALTH GROUP
INCORPORATED, LEO ACQUISITION CORP. AND LIFEMARK CORPORATION
ANNEX B--VOTING AGREEMENT
ANNEX C--FAIRNESS OPINION
ANNEX D--APPRAISAL RIGHTS UNDER SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW
ANNEX E--LIFEMARK ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MAY
31, 2000
ANNEX F--LIFEMARK QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED NOVEMBER 30, 2000
ANNEX G--UNITEDHEALTH GROUP ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1999, AS AMENDED TO REFLECT UNITEDHEALTH GROUP'S
TWO FOR ONE STOCK SPLIT WHICH OCCURRED DECEMBER 22, 2000
ANNEX H--UNITEDHEALTH GROUP QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000, AS AMENDED TO REFLECT
UNITEDHEALTH GROUP'S TWO FOR ONE STOCK SPLIT WHICH OCCURRED DECEMBER 22,
2000
</TABLE>
ii
<PAGE>
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. You should carefully read this entire document and the other
documents referred to for a more complete understanding of the merger. In
particular, you should read the documents attached to this proxy
statement/prospectus, including the merger agreement, the voting agreement and
the fairness opinion, which are attached as Annexes A, B, and C and
incorporated herein by reference. In addition, we have incorporated by
reference important business and financial information about UnitedHealth Group
and Lifemark into this proxy statement/prospectus and have provided such
information as Annexes E, F, G and H.
The Companies
Lifemark Corporation
7600 North 16th Street
Suite 150
Phoenix, Arizona 85020
(602) 331-5100
Lifemark is a national, diversified health care management organization
serving vulnerable, frail, elderly and chronically ill individuals. Within its
health plan operations, Lifemark manages the care of more than 200,000
individuals nationally, who consume in excess of $400 million in annual health
care expenses. Additionally, over 2,500,000 individuals have access to
Lifemark's eldercare consultation and referral center, and over 380,000 people
are served through its diversified services division.
Lifemark's customers include commercial health maintenance organizations
("HMOs"); county, state, and federal agencies; associations of health care
providers; large employer groups; area agencies on aging; long term care
insurance plans; and individuals. Lifemark seeks to achieve substantial cost
savings through implementing innovative, proactive care management strategies
customized for each program's unique characteristics.
Lifemark has signed a letter of intent to purchase the stock of Queen's
Health Management Corporation, a subsidiary of The Queen's Health Systems. The
transaction remains subject to completion of due diligence, execution of
definitive agreements and certain other conditions. If the transaction is
completed, Lifemark will acquire two health plans, Queen's Health Care Plan,
which serves 90,000 TRICARE military dependents and retirees, and Queen's
Hawaii Care, which serves 16,500 participants in the Hawaii Medicaid
initiative, Med-QUEST.
For further information concerning Lifemark, please refer to Lifemark's
Annual Report on Form 10-K for the fiscal year ended May 31, 2000, attached
hereto as Annex E, and its Quarterly Report on Form 10-Q for the quarterly
period ended November 30, 2000, attached hereto as Annex F, both of which are
incorporated by reference in this proxy statement/prospectus.
UnitedHealth Group Incorporated
UnitedHealth Group Center
9900 Bren Road East
Minnetonka, Minnesota 55343
(952) 936-1300
UnitedHealth Group is a national leader in forming and operating markets for
the exchange of health and well-being services. In its five primary businesses,
UnitedHealth Group provides a broad spectrum of resources
1
<PAGE>
to help people improve their health and well-being through all stages of life.
These businesses include UnitedHealthcare, which coordinates network-based
health and well-being services on behalf of local employers and consumers
nationwide; Ovations, which is a business dedicated to advancing the health and
well-being goals of Americans in the second half of life, age 50 and older;
Uniprise, which is devoted to serving the needs of large organizations;
Specialized Care Services, which is comprised of an expanding portfolio of
health and well-being companies, each serving a specialized market need with a
unique blend of benefits, provider networks, services and resources; and
Ingenix, which is a leader in the field of health care data and information,
research, analysis and application. While separate, these businesses remain
interrelated as part of UnitedHealth Group's health and well-being enterprise.
UnitedHealth Group's businesses share customers, and in some instances, use
common information systems and have access to shared administrative services.
Upon completion of the merger, it is anticipated that Lifemark's operations
will be integrated with those of the existing EverCare unit within Ovations to
create an organization which serves the health and well-being needs of older
Americans across the full continuum of care settings. EverCare, which was
founded in 1987, has pioneered coordinated care for older Americans living in
nursing homes. Upon completion of the merger, the combined operations of
Lifemark and EverCare will conduct business in over a dozen states, serving
Medicare, Medicaid, and private-pay patients in a variety of care settings,
including home, community-based and nursing facilities.
UnitedHealth Group Incorporated, formerly known as United HealthCare
Corporation, is a Minnesota corporation, incorporated in January 1977. For
further information concerning UnitedHealth Group, please see "Certain
Information Concerning UnitedHealth Group" beginning on page 36 and refer to
UnitedHealth Group's Annual Report to Shareholders for the fiscal year ended
December 31, 1999, attached hereto as Annex G, and its Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000, attached hereto as
Annex H, both of which are incorporated by reference in this proxy
statement/prospectus.
Structure of the Transaction (see page 48)
Lifemark will merge with Leo Acquisition Corp., a newly formed, wholly owned
subsidiary of UnitedHealth Group. Lifemark will be the surviving corporation
and will become a wholly owned subsidiary of UnitedHealth Group. Provided that
UnitedHealth Group does not exercise its cash payment election described in the
last sentence of this paragraph, holders of Lifemark common stock will receive
a number of shares of UnitedHealth Group common stock determined by applying a
formula contained in the merger agreement and described below under "The Merger
Agreement--Structure of the Merger and Conversion of Lifemark Common Stock."
Stockholders will receive cash for any fractional shares which they would
otherwise receive in the merger. If the average closing price per share of
UnitedHealth Group common stock on the New York Stock Exchange for the ten
consecutive trading days ending with and including the second business day
preceding the closing date of the merger is $44.00 or less, UnitedHealth Group
may elect to convert each outstanding share of Lifemark common stock into the
right to receive $10.08 in cash rather than shares of UnitedHealth Group common
stock.
In addition, each Lifemark stock option outstanding on the effective date of
the merger will be assumed by UnitedHealth Group and converted into an option
to acquire a number of shares of UnitedHealth Group common stock equal to the
number of shares that were issuable upon exercise of the Lifemark option
immediately prior to the effective time of the merger multiplied by the
exchange ratio set forth in the merger agreement (unless the cash payment
election is made, in which case the exchange ratio will be calculated based on
the greater of $40.00 or the average closing price of UnitedHealth Group common
stock in the time leading up to the merger), rounded down to the nearest whole
number of shares. The per share exercise price of the new UnitedHealth Group
option will equal the exercise price per share at which the Lifemark option was
exercisable immediately prior to the effective time divided by the exchange
ratio set forth in the merger agreement (calculated, if UnitedHealth Group
makes the cash payment election, in the same manner described
2
<PAGE>
above for determining the number of shares issuable upon exercise of the
option), rounded up to the nearest whole cent. After the merger, the other
terms and conditions of the UnitedHealth Group option will be substantially the
same as the terms and conditions of the Lifemark option immediately before the
merger, except that each UnitedHealth Group option issued in exchange for a
Lifemark option will be exercisable for the entire remaining term of the
option, even if the option holder ceases to be an employee or director of
Lifemark or UnitedHealth Group and, pursuant to the terms of the Lifemark
options, each previously unvested Lifemark option will be converted into a
fully vested UnitedHealth Group option.
Stockholder Approval (see page 20)
In order for the merger to be completed, holders of a majority of the
outstanding shares of Lifemark common stock must approve and adopt the merger
agreement. UnitedHealth Group shareholders are not required to approve and
adopt the merger agreement and will not vote on the merger.
You are entitled to cast one vote per share of Lifemark common stock you
owned as of January 3, 2001, the record date.
Recommendation of Lifemark's Board of Directors (see page 21)
After careful consideration, Lifemark's board of directors has unanimously
approved the merger agreement and determined that the merger is advisable and
in the best interests of Lifemark and its stockholders and recommends that
Lifemark stockholders vote FOR approval and adoption of the merger agreement.
Fairness Opinion (see page 26)
Stephens Inc. has delivered to the Lifemark Board of Directors its opinion,
dated October 10, 2000, that the merger consideration is fair to the holders of
Lifemark common stock from a financial point of view.
Conditions to the Merger (see page 54)
The parties' respective obligations to complete the merger are subject to
the prior satisfaction or waiver of certain conditions. The following
conditions, among others, must be satisfied or waived before the completion of
the merger:
. the merger agreement must be approved and adopted by Lifemark's
stockholders;
. all necessary governmental and other third party consents must be
obtained;
. Lifemark must receive an opinion of its tax counsel to the effect that
the merger will qualify as a tax-free reorganization (unless
UnitedHealth Group makes the cash payment election);
. certain employees of Lifemark must have entered into employment
agreements with UnitedHealth Group;
. there must have been no developments between the date of the merger
agreement and completion of the merger that either had, or with the
passage of time would reasonably be expected to have, a material adverse
effect on either Lifemark or UnitedHealth Group;
. UnitedHealth Group must have received resignations from all of
Lifemark's directors and officers;
. The William Gardner Brown GST Trust, established by William G. Brown, a
director of Lifemark, must have exercised certain warrants to purchase
Lifemark common stock and converted certain notes held by it into
Lifemark common stock; and
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. If UnitedHealth Group makes the cash payment election, holders of no
more than 10% of outstanding Lifemark stock must have perfected and
maintained their appraisal rights.
Termination of the Merger Agreement (see page 54)
The merger agreement may be terminated by mutual consent, or by either
UnitedHealth Group or Lifemark under certain circumstances, at any time before
the completion of the merger, including:
. if the merger is not completed, without the fault of the terminating
party, by March 31, 2001;
. if the Lifemark stockholders do not approve and adopt the merger
agreement at the special meeting;
. if Lifemark commits to or enters into an acquisition proposal from a
third party which Lifemark's board of directors determines in good faith
to be superior to the terms of the merger with UnitedHealth Group; or
. If Lifemark or UnitedHealth Group materially breaches any of its
representations, warranties, covenants or other agreements made in the
merger agreement.
The merger agreement may also be terminated by UnitedHealth Group if, among
other things, Lifemark's board of directors or any of its committees withdraws
or modifies, in a manner adverse to UnitedHealth Group, its recommendation of
the merger to Lifemark's stockholders, or approves or recommends an acquisition
proposal other than the merger with UnitedHealth Group.
Payment of Termination Fee (see page 55)
Lifemark has agreed to pay UnitedHealth Group a termination fee of
$2,000,000 and reimburse UnitedHealth Group for its out-of-pocket expenses if
the merger agreement is terminated under certain circumstances described under
the heading "The Merger Agreement--Payment of Fees and Expenses."
No Other Negotiations Involving Lifemark (see page 53)
Lifemark has agreed, subject to limited exceptions, that it will not,
whether directly or indirectly, until the merger is completed or the merger
agreement is terminated:
. initiate, solicit or encourage, directly or indirectly, any inquiries
concerning, or the making of, any acquisition proposals (as described
below);
. engage or participate in negotiations or discussions with, or furnish
any information or data to, or facilitate any inquiries or proposals by,
a third party relating to an acquisition proposal; or
. enter into any agreement with respect to an acquisition proposal or
approve an acquisition proposal.
However, Lifemark may engage in any of these acts otherwise prohibited,
other than solicitation, initiation or encouragement of any takeover proposal,
if Lifemark's board of directors determines that Lifemark has received an
acquisition proposal that is superior, from a financial point of view, to the
merger with UnitedHealth Group and also determines that there is a substantial
probability that the failure to act on the acquisition proposal would amount to
a violation of its fiduciary duties.
Under the merger agreement, an acquisition proposal is any proposal made by
a party other than UnitedHealth Group to acquire 15% or more of the assets, or
15% or more of the outstanding capital stock, of Lifemark or any of its
subsidiaries. Lifemark has also agreed to provide UnitedHealth Group with
detailed information about any acquisition proposal it receives.
Certain Individuals Have Entered Into a Voting Agreement (see page 20)
In connection with the merger, certain Lifemark officers and directors who
are also stockholders of Lifemark have entered into a voting agreement with
UnitedHealth Group. The voting agreement requires,
4
<PAGE>
among other things, that these Lifemark stockholders vote all shares of
Lifemark common stock beneficially owned by them in favor of adoption of the
merger agreement. These Lifemark stockholders were not paid additional
consideration in connection with the voting agreement.
The Lifemark stockholders who entered into the voting agreement
collectively held approximately 39% of the outstanding Lifemark common stock
as of January 3, 2001.
You are urged to read the voting agreement in its entirety, a copy of which
is attached hereto as Annex B.
Interests of Certain Persons in the Merger (see page 30)
Certain executive officers and directors of Lifemark have interests in the
merger that are different from and in addition to their interests as Lifemark
stockholders generally. Six executive officers of Lifemark will execute
employment agreements with UnitedHealth Group that provide for certain
benefits, including signing bonuses, stock option grants, severance payments
and benefits, and debt forgiveness.
U.S. Federal Income Tax Consequences of the Merger (see page 33)
We have structured the merger so that, in general, Lifemark's stockholders
will not recognize gain or loss for United States federal income tax purposes
in the merger, except for taxes payable because of cash received by Lifemark
stockholders instead of fractional shares of UnitedHealth Group common stock.
If UnitedHealth Group exercises its cash payment election, however, your
receipt of cash in consideration for the cancellation of your shares of
Lifemark common stock will be a taxable transaction for federal income tax
purposes and may also be taxable under applicable state, local, foreign and
other tax laws. It is a condition to the merger that Lifemark receives a legal
opinion to the effect that, as long as UnitedHealth Group does not exercise
its cash payment election, the merger will constitute a tax-free
reorganization within the meaning of the U.S. Internal Revenue Code. You are
urged to both carefully consider the discussion under "The Merger--Certain
Federal Income Tax Considerations" beginning on page 33 of this proxy
statement/prospectus and to consult your own tax advisors regarding the
specific tax consequences of the merger to you.
Accounting Treatment of the Merger (see page 35)
UnitedHealth Group intends to account for the merger using the purchase
method of accounting in accordance with generally accepted accounting
principles.
Antitrust Approval (see page 33)
The merger is subject to U.S. antitrust laws. We have made the required
filings with the U.S. Department of Justice and the Federal Trade Commission,
and the applicable waiting period was terminated on November 6, 2000. The
Department of Justice or the Federal Trade Commission, as well as a state or
private person, may challenge the merger at any time before or after its
completion.
Restrictions on the Ability to Sell UnitedHealth Group Common Stock (see page
35)
All shares of UnitedHealth Group common stock you receive in connection
with the merger will be freely transferable unless you are considered an
"affiliate" of either of Lifemark or UnitedHealth Group for purposes of the
Securities Act of 1933, in which case you will be permitted to sell the shares
of UnitedHealth Group common stock you receive in the merger only pursuant to
an effective registration statement or an exemption from the registration
requirements of the Securities Act. This proxy statement/prospectus does not
register the resale of stock held by affiliates.
Dissenters' or Appraisal Rights (see page 35)
Under Delaware law, you are not entitled to dissenters' or appraisal rights
in connection with the merger unless UnitedHealth Group elects to pay cash in
lieu of shares of its common stock.
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<PAGE>
If you do not wish to accept cash in the amount provided under the merger
agreement as payment for your Lifemark shares and UnitedHealth Group makes the
cash payment election described in the proxy statement/prospectus, you will
have the right under Delaware law to have the fair value of your shares of
Lifemark determined by the Delaware Chancery Court. This right to appraisal is
subject to a number of restrictions and technical requirements. Generally, in
order to exercise your appraisal rights you must:
. send a written demand to Lifemark for appraisal in compliance with the
Delaware General Corporation Law before the vote on the merger;
. not vote in favor of the merger; and
. continuously hold your Lifemark common stock, from the date you make the
demand for appraisal through the closing of the merger.
Merely voting against the merger will not protect your rights to an
appraisal, which requires following all the steps provided under Delaware law.
Delaware law requirements for exercising appraisal rights are described in
further detail beginning on page 56 and are attached as Annex D to this
document.
IF YOU VOTE FOR THE MERGER, YOU WILL WAIVE YOUR RIGHTS TO SEEK APPRAISAL OF
YOUR LIFEMARK SHARES UNDER DELAWARE LAW.
Surrender of Stock Certificates (see page 50)
Following the effective time of the merger, UnitedHealth Group will cause a
letter of transmittal to be mailed to all holders of Lifemark common stock
containing instructions for surrendering their certificates. Certificates
should not be surrendered until the letter of transmittal is received, fully
completed and returned as instructed in the letter of transmittal.
Certain Effects of the Merger (see page 59)
Upon consummation of the merger, Lifemark stockholders will become
shareholders of UnitedHealth Group. The internal affairs of UnitedHealth Group
are governed by the Minnesota Business Corporation Act and UnitedHealth Group's
restated articles of incorporation and bylaws. The merger will result in
certain differences in the rights of Lifemark stockholders. See "Comparison of
Rights of Shareholders of UnitedHealth Group and Lifemark."
Forward-Looking Statements in this Proxy Statement/Prospectus
This proxy statement/prospectus and the documents incorporated by reference
into this proxy statement/prospectus contain forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, as amended. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions identify forward-
looking statements. These forward-looking statements are not guarantees of
future performance and are subject to risks and uncertainties that could cause
actual results to differ materially from the results contemplated by the
forward-looking statements. In evaluating the merger, you should carefully
consider the discussion of risks and uncertainties in the section entitled
"Risk Factors" beginning on page 13 of this proxy statement/prospectus.
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<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
OF UNITEDHEALTH GROUP INCORPORATED
The following table summarizes selected consolidated historical financial
data of UnitedHealth Group. The financial data for the years ended December 31,
1999, 1998 and 1997 and as of December 31, 1999 and 1998 was derived from the
audited consolidated financial statements of UnitedHealth Group incorporated by
reference in this proxy statement/prospectus. The financial data for the years
ended December 31, 1996 and 1995 and as of December 31, 1997, 1996 and 1995 was
derived from the audited consolidated financial statements of UnitedHealth
Group not included or incorporated by reference in this proxy
statement/prospectus. The financial data as of September 30, 2000 and for the
nine months ended September 30, 2000 and 1999 was derived from the unaudited
condensed consolidated financial statements of UnitedHealth Group incorporated
by reference in this proxy statement/prospectus. The financial data as of
September 30, 1999 was derived from the unaudited condensed consolidated
financial statements of UnitedHealth Group not incorporated by reference in
this proxy statement/prospectus. In the opinion of UnitedHealth Group's
management, all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the financial data for the nine months
ended September 30, 2000 and 1999 have been reflected therein. Operating
results for the nine months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the full year.
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Years Ended December 31,
--------------- ----------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
(in millions, except per share data)
Statement of Operations
Data:
Revenues................ $15,688 $14,570 $19,562 $17,355 $11,794 $10,074 $5,671
======= ======= ======= ======= ======= ======= ======
Earnings (Loss) from
Operations............. $ 870 $ 685 $ 943 $ (42)(1) $ 742 $ 581(2) $ 461(3)
======= ======= ======= ======= ======= ======= ======
Net Earnings (Loss)..... $ 526 $ 411 $ 568 $ (166)(1) $ 460 $ 356(2) $ 286(3)
Convertible Preferred
Stock Dividends........ -- -- -- (28) (29) (29) (7)
Preferred Stock
Redemption Premium..... -- -- -- (20) -- -- --
------- ------- ------- ------- ------- ------- ------
Net Earnings (Loss)
Applicable to Common
Shareholders........... $ 526 $ 411 $ 568 $ (214)(1) $ 431 $ 327(2) $ 279(3)
======= ======= ======= ======= ======= ======= ======
Basic Net Earnings
(Loss) per Common
Share................ $ 1.62 $ 1.17 $ 1.63 $ (0.56)(1) $ 1.15 $ 0.90(2) $ 0.80(3)
======= ======= ======= ======= ======= ======= ======
Diluted Net Earnings
(Loss) per Common
Share................ $ 1.56 $ 1.15 $ 1.60 $ (0.56)(1) $ 1.13 $ 0.88(2) $ 0.79(3)
======= ======= ======= ======= ======= ======= ======
Dividends per Share:
Common Stock.......... $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.02
Convertible Preferred
Stock................ -- -- -- 56.03 57.50 57.50 14.38
Weighted Average Number
of Common Shares
Outstanding:
Basic................. 325.2 352.6 348.2 381.2 374.0 363.2 347.2
Diluted............... 337.2 358.6 355.0 381.2 381.6 371.6 354.8
Balance Sheet Data (as
of):
Cash and Investments.... $ 4,685 $ 4,224 $ 4,719 $ 4,424 $ 4,041 $ 3,453 $3,078
Total Assets............ 10,463 9,785 10,273 9,675 7,623 6,997 6,161
Debt.................... 1,065 650 991 708 -- -- --
Convertible Preferred
Stock.................. -- -- -- -- 500 500 500
Shareholders' Equity.... 3,657 3,970 3,863 4,038 4,534 3,823 3,188
</TABLE>
7
<PAGE>
--------
(1) Excluding the operational realignment and other charges of $725, charges
related to contract losses associated with certain Medicare markets and
other increases to commercial and Medicare medical costs payable estimates
of $175 and the convertible preferred stock redemption premium of $20 from
the year ended December 31, 1998, 1998 earnings from operations, net
earnings and net earnings applicable to common shareholders would have been
$858, $537 and $509, respectively, or $1.31 diluted net earnings per common
share.
(2) Excluding the merger costs associated with the April 1996 acquisition of
HealthWise of America, Inc. ("HealthWise") of $15 ($9 after tax or $0.03
diluted net earnings per common share) and the provision for future losses
on two large multi-year contracts of $45 ($27 after tax, or $0.08 diluted
net earnings per common share), 1996 earnings from operations and net
earnings would have been $641 and $392, or $0.98 diluted net earnings per
common share. The HealthWise merger was accounted for using the pooling-of-
interests method of accounting; however, UnitedHealth Group did not restate
its historical financial statements, as the effects on the historical
consolidated financial statements were not material.
(3) Excluding restructuring charges associated with the October 1995
acquisition of The MetraHealth Companies, Inc. ("MetraHealth") of $154 ($97
after tax, or $0.28 diluted net earnings per common share), 1995 earnings
from operations and net earnings would have been $615 and $383, or $1.06
diluted net earnings per common share. The MetraHealth acquisition was
accounted for using the purchase method of accounting and, accordingly, its
operating results have been included in UnitedHealth Group's historical
consolidated financial information from the acquisition date.
8
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
OF LIFEMARK CORPORATION
The following table summarizes selected consolidated historical financial
data of Lifemark. The financial data for the years ended May 31, 2000, 1999 and
1998 and as of May 31, 2000 and 1999 was derived from the audited consolidated
financial statements of Lifemark incorporated by reference in this proxy
statement/prospectus. The financial data for the years ended May 31, 1997 and
1996 and as of May 31, 1998, 1997 and 1996 was derived from the audited
consolidated financial statements of Lifemark not included or incorporated in
this proxy statement/prospectus. The financial data as of November 30, 2000 and
for the six months ended November 30, 2000 and 1999 was derived from the
unaudited condensed consolidated financial statements of Lifemark incorporated
by reference in this proxy statement/prospectus. The financial data as of
November 30, 1999 was derived from the unaudited condensed consolidated
financial statements of Lifemark not incorporated by reference in this proxy
statement/prospectus. In the opinion of Lifemark's management, all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial data for the six months ended November 30, 2000
and 1999 have been reflected therein. Operating results for the six months
ended November 30, 2000 are not necessarily indicative of the results that may
be expected for the full year.
<TABLE>
<CAPTION>
Six Months
Ended
November 30, Years Ended May 31,
------------- ------------------------------
2000 1999 2000 1999 1998 1997 1996
------ ------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(in millions, except per share data)
Statement of Operations Data:
Revenues........................ $ 106 $ 48 $ 150 $ 85 $ 66 $ 64 $ 23
====== ====== ===== ===== ===== ===== =====
Earnings (Loss) from
Operations..................... $ 2 $ 1 $ 3 $ 2 $ 1 $ (2) $ (3)
====== ====== ===== ===== ===== ===== =====
Net Earnings (Loss) Applicable
to Common Stockholders......... $ 2 $ 1 $ 2 $ 2 $ 1 $ (1) $ (2)
====== ====== ===== ===== ===== ===== =====
Basic Net Earnings (Loss) per
Common Share................. $ .40 $ .15 $ .50 $ .41 $ .19 $(.21) $(.82)
====== ====== ===== ===== ===== ===== =====
Diluted Net Earnings (Loss)
per Common Share............. $ .35 $ .14 $ .47 $ .36 $ .18 $(.21) $(.82)
====== ====== ===== ===== ===== ===== =====
Dividends per Share:
Common Stock.................. $ -- $ -- $ -- $ -- $ -- $ -- $0.14
Weighted Average Number of
Common Shares Outstanding:
Basic......................... 5 5 5 5 4 4 3
Diluted....................... 6 6 5 6 6 4 3
Balance Sheet Data (as of):
Cash and Investments............ $ 20 $ 14 $ 19 $ 14 $ 14 $ 9 $ 7
Total Assets.................... 67 37 59 35 32 28 28
Debt............................ 4 4 5 4 4 4 2
Stockholders' Equity............ 21 17 19 16 14 11 12
</TABLE>
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COMPARATIVE PER SHARE DATA
In the following table and footnotes, we provide you with certain historical
per share data and combined per share data on an unaudited pro forma basis,
after giving effect to the merger and assuming that 0.1867 shares of
UnitedHealth Group common stock are issued in exchange for each share of
Lifemark common stock. This data should be read along with the summary
financial data and the historical financial statements of UnitedHealth Group
and the historical financial statements of Lifemark and the notes thereto that
are incorporated by reference herein and attached hereto. The pro forma
information is presented for illustrative purposes only. You should not rely on
the pro forma financial information as an indication of the combined financial
position or results of operations of future periods or the results that
actually would have been realized had the entities been a single entity during
the periods presented.
<TABLE>
<CAPTION>
UnitedHealth Group Lifemark
Common Stock Common Stock
---------------------- ------------------------
Pro Forma Pro Forma
Historical Combined(4) Historical Equivalent(4)
---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Book value per share(1):
November 30, 2000........... NA NA $3.96 $2.17
September 30, 2000.......... $11.47 $11.63 NA NA
November 30, 1999........... NA NA 3.29 2.18
December 31, 1999........... 11.53 11.67 NA NA
Cash dividends per share(2):
Nine months ended November
30, 2000................... NA NA $ -- $ --
Nine months ended September
30, 2000................... $ -- -- NA NA
Year ended November 30,
1999....................... NA NA -- --
Year ended December 31,
1999....................... 0.02 0.02 NA NA
Diluted earnings per share
from continuing
operations(3):
Nine months ended November
30, 2000................... NA NA $0.52 $0.29
Nine months ended September
30, 2000................... $1.56 $1.56 NA NA
Year ended November 30,
1999....................... NA NA 0.33 0.30
Year ended December 31,
1999....................... 1.60 1.60 NA NA
</TABLE>
--------
NA Not applicable.
(1) The pro forma combined book value per share of UnitedHealth Group common
stock is based upon the pro forma common shareholders' equity of the
combined companies divided by the total pro forma common shares of the
combined companies outstanding as of the date indicated, assuming
conversion of the Lifemark common stock at an exchange ratio of 0.1867. The
pro forma equivalent book value per share of Lifemark common stock
represents the pro forma combined book value per share multiplied by the
exchange ratio.
(2) The pro forma combined dividends per share for UnitedHealth Group common
stock assumes no changes in cash dividends per share. The pro forma
equivalent dividends per share for Lifemark common stock represent the cash
dividends declared per share of UnitedHealth Group common stock multiplied
by the exchange ratio.
(3) The pro forma combined net earnings per share from continuing operations
(based on fully diluted weighted average shares outstanding) of
UnitedHealth Group common stock is based on the pro forma net earnings for
the combined companies, divided by the pro forma weighted average common
shares of the combined companies. The pro forma equivalent net earnings per
share from continuing operations of Lifemark common stock represents pro
forma combined net earnings per share from continuing operations multiplied
by the exchange ratio.
(4) All pro forma amounts exclude one-time costs associated with the merger.
10
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
Recent Closing Prices
The table below presents the closing price per share of UnitedHealth Group
common stock on the New York Stock Exchange, as adjusted to reflect
UnitedHealth Group's December 22, 2000 two for one stock split, and the closing
price per share of Lifemark common stock on the Nasdaq National Market, on
October 10, 2000, the last full trading day immediately preceding the public
announcement of the proposed merger, and on January 11, 2001, the most recent
practicable date prior to the mailing of this document, as well as the
"equivalent stock price" of shares of Lifemark common stock on such dates. The
"equivalent stock price" of shares of Lifemark common stock represents the
closing sales price per share for UnitedHealth Group's common stock on the New
York Stock Exchange on October 10, 2000 and January 11, 2001, multiplied by
0.2084 and 0.1867, estimates of the exchange ratio based on the closing price
of UnitedHealth Group common stock on the New York Stock Exchange on the days
leading up to such dates. Keep in mind that because of market price
fluctuations the equivalent stock price may be greater than or less than the
value of the UnitedHealth Group common stock and cash in lieu of fractional
shares (or cash, if UnitedHealth Group makes the cash payment election) that a
Lifemark stockholder will receive for each share of Lifemark common stock in
connection with the merger. Stockholders should obtain current market
quotations for shares of UnitedHealth Group common stock and Lifemark common
stock prior to making any decision with respect to the merger.
<TABLE>
<CAPTION>
UnitedHealth Lifemark
Group Lifemark Equivalent
Common Stock Common Stock Stock Price
(price per share) (price per share) (price per share)
----------------- ----------------- -----------------
<S> <C> <C> <C>
October 10, 2000... $52.94 $ 9.00 $11.03
January 11, 2001... $55.38 $10.31 $10.34
</TABLE>
Historical Market Price Data
Lifemark's common stock is quoted on the Nasdaq National Market under the
symbol "LMRK." UnitedHealth Group's common stock is quoted on the New York
Stock Exchange under the symbol "UNH."
The following table sets forth the high and low sales prices per share of
Lifemark's common stock for the periods indicated:
<TABLE>
<CAPTION>
Lifemark
Common Stock
------------
High Low
------ -----
<S> <C> <C>
1999
Quarter ended August 31, 1998.............................. $ 8.00 $3.38
Quarter ended November 30, 1998............................ 5.88 3.88
Quarter ended February 28, 1999............................ 6.00 4.00
Quarter ended May 31, 1999................................. 5.00 3.38
2000
Quarter ended August 31, 1999.............................. $ 5.00 $2.75
Quarter ended November 30, 1999............................ 3.50 2.12
Quarter ended February 29, 2000............................ 3.75 2.94
Quarter ended May 31, 2000................................. 5.88 3.25
2001
Quarter ended August 31, 2000.............................. $ 9.88 $5.50
Quarter ended November 30, 2000............................ 11.44 7.63
Quarter ending February 28, 2001 (through January 11,
2001)..................................................... 12.13 9.88
</TABLE>
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The following table sets forth the high and low sales prices per share of
UnitedHealth Group's common stock. For purposes of comparison, the Lifemark
common stock price information is also presented for the fiscal periods of
UnitedHealth Group rather than for Lifemark's historical fiscal periods:
<TABLE>
<CAPTION>
UnitedHealth
Group Lifemark
Common Stock Common Stock
--------------- -------------
High Low High Low
------- ------- ------ ------
<S> <C> <C> <C> <C>
1998
Quarter ended March 31, 1998.................... $ 33.41 $ 23.28 $ 7.63 $ 3.50
Quarter ended June 30, 1998..................... 36.97 30.63 9.50 5.50
Quarter ended September 30, 1998................ 33.25 14.78 6.00 3.38
Quarter ended December 31, 1998................. 25.31 16.69 6.25 3.75
1999
Quarter ended March 31, 1999.................... $ 27.34 $ 19.72 $ 6.00 $ 3.25
Quarter ended June 30, 1999..................... 35.00 22.35 5.13 3.38
Quarter ended September 30, 1999................ 33.35 24.03 5.00 2.75
Quarter ended December 31, 1999................. 29.25 19.69 3.50 2.13
2000
Quarter ended March 31, 2000.................... $ 31.42 $ 23.80 $ 5.00 $ 3.00
Quarter ended June 30, 2000..................... 34.00 30.00 8.09 3.38
Quarter ended September 30, 2000................ 49.72 39.10 11.44 5.50
Quarter ended December 31, 2000 ................ 63.44 48.63 12.13 7.83
2001
Quarter ending March 31, 2001 (through January
11, 2001) ..................................... $ 62.19 $ 52.81 $11.94 $10.13
</TABLE>
Dividend Information
UnitedHealth Group has paid a cash dividend equal to $.02 per share, per
year, on its common stock for its fiscal years 1999, 1998, 1997, 1996 and 1995.
Lifemark did not pay a cash dividend on its common stock in its fiscal years
2000, 1999, 1998 or 1997, but did pay a cash dividend of $.14 per share in
fiscal 1996 prior to its reorganization in that year. Lifemark anticipates that
if the merger is not consummated, it will continue to retain any earnings for
the foreseeable future for use in the operation of its business.
Number of Stockholders
As of January 3, 2001, there were approximately 400 stockholders of record
who held shares of Lifemark common stock, as shown on the records of Lifemark's
transfer agent for such shares.
Shares Held by Certain Stockholders
Adoption of the merger agreement by Lifemark's stockholders requires the
affirmative vote of the holders of a majority of the shares of Lifemark common
stock outstanding and entitled to vote at the special meeting. As of January 3,
2001, approximately 39% of the outstanding shares of Lifemark common stock were
held by directors and executives officers of Lifemark and their affiliates. All
of these directors and officers and their affiliates have entered into a voting
agreement, a copy of which is attached hereto as Annex B, to vote in favor of
the merger.
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RISK FACTORS
By voting in favor of the merger, you will be choosing to invest in
UnitedHealth Group common stock. In addition to the other information contained
in or incorporated by reference into this proxy statement/prospectus, you
should carefully consider the following risk factors in deciding whether to
approve and adopt the merger agreement.
Risks Relating to the Merger
The number of shares of UnitedHealth Group common stock you receive will
depend on the market value of UnitedHealth Group common stock in the time
leading up to the merger.
Upon completion of the merger, if UnitedHealth Group does not make the cash
payment election, each share of Lifemark common stock will be exchanged for a
number of shares of UnitedHealth Group common stock equal to between $10.08 and
$10.55 (according to a formula described under "The Merger Agreement--Structure
of the Merger and Conversion of Lifemark Common Stock" below) divided by the
lesser of $56.50 or the average closing price per share of UnitedHealth Group
common stock on the New York Stock Exchange for the ten consecutive trading
days ending with and including the second business day before the closing date
of the merger. Thus, the actual exchange ratio will depend on the market price
of UnitedHealth Group common stock in the time leading up to the merger. No
prediction can be made as to the market price of UnitedHealth Group common
stock at such time or after the completion of the merger. Lifemark and
UnitedHealth Group are not permitted to terminate the merger agreement or
resolicit the vote of Lifemark's stockholders solely because of changes in the
market price of Lifemark common stock or UnitedHealth Group common stock.
You may receive cash instead of shares of UnitedHealth Group common stock in
the merger.
If the average closing price per share of UnitedHealth Group common stock on
the New York Stock Exchange for the ten consecutive trading days ending with
and including the second business day before the closing date of the merger is
$44.00 or less, UnitedHealth Group may elect to pay cash, instead of shares of
its own common stock, for each share of Lifemark common stock. If UnitedHealth
Group makes this cash payment election, you will receive $10.08 in cash for
each share of Lifemark common stock you own, and you may be required to pay
taxes on the difference between your tax basis in your Lifemark shares and the
amount of cash you receive for your shares. See "The Merger--Certain Federal
Income Tax Considerations--Consequences if the Cash Payment Election is
Exercised."
Failure to complete the merger could negatively impact Lifemark's stock
price and future business and operations.
If the merger is not completed for any reason, Lifemark may be subject to a
number of material risks, including the following:
. Lifemark may be required to pay UnitedHealth Group a termination fee of
$2,000,000 under certain circumstances;
. the price of Lifemark common stock may decline to the extent that the
current market price of Lifemark common stock reflects a market
assumption that the merger will be completed; and
. Lifemark may not be able to obtain reimbursement by UnitedHealth Group
of Lifemark's costs related to the merger, such as legal, accounting and
certain financial advisory fees.
In addition, potential customers of Lifemark may, in response to the
announcement of the merger, delay or defer contracting decisions. Any delay or
deferral in contracting decisions by potential customers could have a material
adverse effect on Lifemark's business, regardless of whether or not the merger
is ultimately completed. Similarly, current and prospective Lifemark employees
may experience uncertainty about their future role with UnitedHealth Group
until UnitedHealth Group's strategies with regard to Lifemark are executed.
This may adversely affect Lifemark's ability to attract and retain key
management, sales, marketing and technical personnel.
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Further, if the merger is terminated and Lifemark's board of directors
determines to seek another merger or business combination, there can be no
assurance that Lifemark will be able to find a partner willing to pay an
equivalent or more attractive price than that which would be paid in the
merger. In addition, while the merger agreement is in effect, subject to
certain limited exceptions described on page 53 of this proxy
statement/prospectus, Lifemark is prohibited from soliciting, initiating or
encouraging or entering into a transaction with any party other than
UnitedHealth Group that would result in the acquisition of Lifemark.
Risks Relating to UnitedHealth Group
Health Care Costs.
UnitedHealth Group uses a large portion of its revenue to pay the costs of
health care services or supplies delivered to its members. Total health care
costs that UnitedHealth Group incurs are affected by the number of individual
services rendered and the cost of each service. Much of UnitedHealth Group's
premium revenue is priced before services are delivered and the related costs
are incurred, usually on a prospective annual basis. Although UnitedHealth
Group bases the premiums it charges on its estimate of future health care costs
over the fixed premium period, competition, regulations and other 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, medical cost inflation, new mandated
benefits or other regulatory changes and insured population characteristics. In
addition, the earnings UnitedHealth Group reports for any particular quarter
include estimates of covered services incurred by its enrollees during that
period for claims that have not been received or processed. Because these are
estimates, UnitedHealth Group's earnings may be adjusted later to reflect the
actual costs. Relatively insignificant changes in the medical care ratio,
because of the narrow margins of UnitedHealth Group's health plan business, can
create significant changes in UnitedHealth Group's earnings.
In addition, UnitedHealth Group's 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 that this pattern will continue, 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 and has
been the subject of large jury awards. This publicity has been accompanied by
increased litigation, legislative activity, regulation and governmental review
of industry practices. These factors may adversely affect UnitedHealth Group's
ability to market its products or services, may require it to change its
products and services, and may increase the regulatory burdens under which it
operates, further increasing its costs of doing business and adversely
affecting its profitability.
Competition.
In many of UnitedHealth Group's geographic or product markets, UnitedHealth
Group competes with a number of other entities, some of which may have certain
characteristics or capabilities that give them a competitive advantage.
UnitedHealth Group believes 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 providers of
health and well-being services. Certain of UnitedHealth Group's customers may
decide to perform for themselves functions or services that UnitedHealth Group
provides, which would decrease UnitedHealth Group's revenues. Certain of
UnitedHealth Group's contracted providers may decide to market products and
services to UnitedHealth Group's customers in competition with UnitedHealth
Group. In addition, significant merger and acquisition activity has occurred in
the industry in which UnitedHealth Group operates as well as in industries that
act as suppliers to UnitedHealth Group, such as the hospital, physician,
pharmaceutical, medical device and health information systems industries. To
the extent that there is strong competition or that competition intensifies in
any market, UnitedHealth Group's ability to retain or increase customers or
providers, or maintain or increase its revenue growth, pricing flexibility,
control over medical cost trends and marketing expenses may be adversely
affected.
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<PAGE>
AARP Contract.
Under UnitedHealth Group's long-term contract with AARP, UnitedHealth Group
provides Medicare supplemental, hospital indemnity health insurance and other
products to AARP members. As a result of the agreement, the number of members
UnitedHealth Group serves, products UnitedHealth Group offers, and services
UnitedHealth Group provides has grown significantly. As of September 30, 2000,
UnitedHealth Group's portion of AARP's insurance program represents
approximately $3.5 billion in annual net premium revenue from approximately 3.6
million AARP members. The success of the AARP arrangement will depend, in part,
on UnitedHealth Group's 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 AARP or one of its other business
partners for its member insurance program could have an adverse effect on the
success of UnitedHealth Group's arrangement with AARP.
Medicare Operations.
In the second quarter of 1998, UnitedHealth Group experienced a significant
rise in the medical care ratio for UnitedHealth Group's 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, UnitedHealth Group announced in October 1998
its decision to withdraw Medicare product offerings from 86 of the 206 counties
it then served. The decision, effective January 1, 1999, affected approximately
60,000, or 12%, of Medicare members as of December 31, 1998. On July 1, 1999,
UnitedHealth Group announced its decision to withdraw Medicare+Choice product
offerings from an additional 49 counties. This decision, effective January 1,
2000, affected approximately 40,000 additional Medicare members. Also effective
January 1, 2000, UnitedHealth Group filed significant benefit adjustments. In
June 2000, UnitedHealthcare announced that it will not renew its
Medicare+Choice contracts in 21 counties across the United States, effective
January 1, 2001, affecting 56,000 individuals served. Annual revenues for 2000
from the Medicare markets UnitedHealth Group exited effective January 1, 2001,
are expected to be approximately $320 million. These actions and other actions
are expected to further reduce Medicare enrollment and may result in further
withdrawals of Medicare product offerings, when and as permitted by
UnitedHealth Group's contracts with the Health Care Financing Administration
("HCFA"). As a consequence of these withdrawals, UnitedHealth Group is
precluded from re-entering these counties with Medicare product offerings until
5 years after the respective effective date of withdrawal.
UnitedHealth Group will continue to offer Medicare products in strong and
economically viable markets. However, its ability to improve the financial
results of all of its Medicare operations will depend on a number of factors,
including future premium increases, growth in markets where it has achieved
sufficient size to operate efficiently, benefit design, provider contracting
and other factors. There can be no assurance that UnitedHealth Group will be
able to successfully prevent future losses on its Medicare operations.
Realignment of Operations.
In the second quarter of 1998, UnitedHealth Group recognized a charge to
earnings for its realignment. The original operational realignment plan
provided for substantial completion in 1999. UnitedHealth Group continues to
implement its original realignment plan. However, some initiatives including
the consolidation of certain claims and administrative processing functions and
certain divestitures and market realignment activities have required additional
time to complete in the most effective manner and to obtain certain required
regulatory approvals, and will extend through the middle of 2001. Based on
current facts and circumstances, UnitedHealth Group believes the remaining
realignment reserve is adequate to cover the costs to be incurred in executing
the remainder of the plan. However, as UnitedHealth Group proceeds with the
execution of the plan and more current information becomes available, it may be
necessary for UnitedHealth Group to adjust its estimates for severance, lease
obligations on exited facilities and losses on disposition of businesses.
Government Programs and Regulation.
UnitedHealth Group's business is heavily regulated at federal, state and
local levels. The laws and rules governing UnitedHealth Group's 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
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<PAGE>
rules could force UnitedHealth Group to change how it does business, restrict
revenue and enrollment growth, increase its health care and administrative
costs and capital requirements, and increase its liability for medical
malpractice or other actions. UnitedHealth Group must obtain and maintain
regulatory approvals to market many of its products. Delays in obtaining or
failure to obtain or maintain these approvals could adversely affect its
revenue or could increase its costs. UnitedHealth Group participates in
federal, state and local government health care coverage programs. These
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 reduce or increase UnitedHealth Group's
administrative or health care costs under such programs. Such changes have
adversely affected UnitedHealth Group's results and willingness to participate
in such programs in the past and may also do so in the future.
State legislatures and Congress continue to focus on health care issues. In
Congress, managed health care has been the subject of proposed legislation, in
the form of a "Patients Bill of Rights" bill. In addition, other proposed bills
and regulations may impact certain aspects of UnitedHealth Group's business
including provider contracting, claims payments and processing, confidentiality
of health information and government-funded programs. Further, tax code changes
considered from time to time by Congress may make it easier and more cost
effective for employers to establish deferred contribution plans. While
UnitedHealth Group cannot predict if any of these initiatives will ultimately
become binding law or regulation, or if enacted, what their terms will be,
their enactment could increase UnitedHealth Group's costs, expose it to
expanded liability, require it to revise the ways in which it conducts business
or put it at risk for a loss of business to new health care funding
arrangements. As UnitedHealth Group's businesses continue to implement their e-
commerce initiatives, uncertainty surrounding the regulatory authority and
requirements in this area will make it difficult to ensure compliance.
UnitedHealth Group is also 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 civil or
criminal fines, penalties and other sanctions. In addition, disclosure of any
adverse investigation or audit results or sanctions could damage UnitedHealth
Group's reputation in various markets and make it more difficult for it to sell
its products and services. UnitedHealth Group is currently involved in various
governmental investigations, audits and reviews. These include routine, regular
and special audits by HCFA, state insurance departments, the Office of
Personnel Management and the Office of the Inspector General. UnitedHealth
Group does not believe the results of any of the current audits, individually
or in the aggregate, will have a material adverse effect on its financial
position or results.
UnitedHealth Group's operations are conducted through its wholly owned
subsidiaries, which include 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 may 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 September 30, 2000, UnitedHealth Group'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 approximately $400 million.
Provider Relations.
One of the significant techniques UnitedHealth Group uses to manage health
care costs and facilitate care delivery is contracting with physicians,
hospitals and other providers. Because UnitedHealth Group's health plans are
geographically diverse and most of those health plans contract with a large
number of providers, UnitedHealth Group currently believes its aggregate
exposure to provider relations issues is limited. A number of organizations are
advocating for legislation that would exempt certain providers from federal and
state antitrust laws, the adoption of which could impact this assessment. In
any particular market, providers could refuse to contract, demand higher
payments, or take other actions that could result in higher health care costs,
16
<PAGE>
less desirable products for customers and members, or difficulty meeting
regulatory or accreditation requirements. In some markets, certain providers,
particularly hospitals, physician/hospital organizations or multi-specialty
physician groups, may have significant market positions or near monopolies. In
addition, physician or practice management companies, which aggregate physician
practices for administrative efficiency and marketing leverage, continue to
expand. These providers may compete directly with UnitedHealth Group. If these
providers refuse to contract with UnitedHealth Group, use their market position
to negotiate favorable contracts, or place UnitedHealth Group at a competitive
disadvantage, those activities could adversely affect UnitedHealth Group's
ability to market products or to be profitable in those areas.
Litigation and Insurance.
UnitedHealth Group 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 UnitedHealth Group's business,
UnitedHealth Group is subject to a variety of legal actions relating to its
business operations, including the design, management and offering of its
products and services. These could include: claims relating to the denial of
health care benefits; medical malpractice actions; allegations of anti-
competition and unfair business activities; 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 calculations; claims related to the
failure to disclose certain business practices; and claims relating to customer
audits and contract performance. Recently, a number of class action lawsuits
have been filed against UnitedHealth Group and certain of its competitors in
the managed care business. The suits are purported class actions on behalf of
all of UnitedHealth Group's managed care members and network providers for
alleged breaches of federal statutes, including the Employee Retirement Income
Security Act and the Racketeer Influenced Corrupt Organization Act. While
UnitedHealth Group believes these suits against it are without merit and
intends to defend its position vigorously, it will incur expenses in the
defense of these matters and cannot predict their outcome.
Recent court decisions and legislative activity may increase UnitedHealth
Group's exposure for any of these types of claims. In some cases, substantial
non-economic, treble or punitive damages may be sought. UnitedHealth Group
currently has 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.
UnitedHealth Group's businesses depend significantly on effective
information systems, and UnitedHealth Group has many different information
systems for its various businesses. Its information systems require an ongoing
commitment of significant 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 and regulatory standards,
and changing customer preferences. For example, the Health Insurance
Portability and Accountability Act's ("HIPAA's") administrative simplification
provisions and the Department of Labor's claim processing regulations may
ultimately require significant changes to current systems. In addition,
UnitedHealth Group may from time to time obtain significant portions of its
systems-related or other services or facilities from independent third parties,
which may make its operations vulnerable to such third parties' failure to
perform adequately. As a result of UnitedHealth Group's acquisition activities,
it has acquired additional systems and has been taking steps to reduce the
number of systems and has upgraded and expanded its information systems
capabilities. Failure to maintain effective and efficient information systems
could cause the loss of existing customers, difficulty in attracting new
customers, issues in determining medical cost estimates, customer and provider
disputes, regulatory problems, increases in administrative expenses or other
adverse consequences.
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Administrative and Management.
Efficient and cost-effective administration of UnitedHealth Group's
operations is essential to its profitability and competitive positioning. While
UnitedHealth Group attempts to effectively manage expenses, staff-related and
other administrative expenses may arise 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. Further, UnitedHealth
Group believes it currently has 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 key employees or a number of managers or technical
staff could adversely affect UnitedHealth Group's ability to administer and
manage its business.
Marketing.
UnitedHealth Group markets its products and services through both employed
sales people and independent sales agents. Although UnitedHealth Group has many
sales employees and agents, the departure of certain key sales employees or
agents or a large subset of these individuals could impair its ability to
retain existing customers and members. In addition, certain of its customers or
potential customers consider rating, accreditation or certification of
UnitedHealth Group by various private or governmental bodies or rating agencies
necessary or important. Certain of its 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 its ability to obtain or retain business with these customers.
Acquisitions and Dispositions.
UnitedHealth Group 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 transactions 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 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 UnitedHealth Group's knowledge and
information-related business depend significantly on the integrity of the data
on which they are based. If the information contained in UnitedHealth Group's
databases were found or perceived to be inaccurate, or if such information were
generally perceived to be unreliable, commercial acceptance of UnitedHealth
Group's database-related products would be adversely and materially affected.
Furthermore, the use of individually identifiable data by UnitedHealth Group's
businesses 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 certain of UnitedHealth
Group's products or services and, more generally, affect UnitedHealth Group's
business, financial condition and results of operations.
There are various proposals currently under consideration that address the
use of individually identifiable health data from federal and state legislative
and regulatory bodies. The United States Department of Health and Human
Services has recently released final regulations regarding this issue, as
directed under HIPAA. UnitedHealth Group is currently evaluating the effect
these rules will have on its existing policies and practices and anticipates
that certain systems changes and new administrative processes will be required,
which may lead to cost increases. Additionally, if state and/or federal laws
are enacted, some of these provisions may impose restrictions on UnitedHealth
Group's use of patient data and may increase UnitedHealth Group's cost to use
health care data.
The success of UnitedHealth Group's knowledge and information-related
business also depends significantly on its ability to maintain proprietary
rights to its products. UnitedHealth Group relies on its agreements with
customers, confidentiality agreements with employees, and its trade secrets,
copyrights and
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<PAGE>
patents to protect its proprietary rights. UnitedHealth Group cannot assure
that these legal protections and precautions will prevent misappropriation of
its proprietary information. In addition, substantial litigation regarding
intellectual property rights exists in the software industry, and UnitedHealth
Group expects 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 effect on the ability of
UnitedHealth Group's knowledge and information-related business to market and
sell its products and on its business, financial condition and results of
operations.
Financial Outlook
From time to time in earnings releases and otherwise, UnitedHealth Group may
publish forecasts or other forward-looking statements regarding its future
results, including estimated revenues or net earnings. Any forecast of its
future performance reflects various assumptions. These assumptions are subject
to significant uncertainties, and as a matter of course, any number of them may
prove to be incorrect. Further, the achievement of any forecast depends on
numerous risk and other factors (including those described in this discussion),
many of which are beyond UnitedHealth Group's control. As a result,
UnitedHealth Group cannot assure you that its performance will be consistent
with any management forecasts or that the variation from such forecasts will
not be material and adverse. You are cautioned not to base your entire analysis
of UnitedHealth Group's business and prospects upon isolated predictions, but
instead are encouraged to utilize UnitedHealth Group's entire publicly
available mix of historical and forward-looking information, as well as other
available information affecting UnitedHealth Group and its services, when
evaluating UnitedHealth Group's prospective results of operations.
Stock Market.
The market prices of the securities of the publicly-held companies in the
industry in which UnitedHealth Group operates have shown volatility and
sensitivity in response to many factors, including general market trends,
public communications regarding managed care, litigation and judicial
decisions, legislative or regulatory actions, health care cost trends, pricing
trends, competition, earnings, membership reports of particular industry
participants and acquisition activity. UnitedHealth Group cannot assure the
level or stability of the price of its securities at any time or the impact of
the foregoing or any other factors on such prices.
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THE SPECIAL MEETING OF LIFEMARK STOCKHOLDERS
This proxy statement/prospectus is furnished in connection with the
solicitation of proxies from the holders of Lifemark common stock by the
Lifemark board of directors for use at the special meeting of Lifemark
stockholders.
Date, Time and Place of the Special Meeting
The special meeting will be held on Thursday, February 8, 2001 at 8:00 a.m.,
local time, at Lifemark's executive offices located at 7600 North 16th Street,
Suite 150, Phoenix, Arizona 85020.
Matters to be Considered at the Special Meeting
At the special meeting, stockholders of Lifemark will be asked to consider
and vote upon a proposal to approve and adopt the merger agreement and to
transact such other business as may properly come before the special meeting or
any postponements or adjournments thereof. Adoption of the merger agreement
will also constitute approval of the merger and the other transactions
contemplated by the merger agreement.
Record Date and Shares Entitled to Vote
Lifemark's board of directors has fixed the close of business on January 3,
2001, as the record date for determination of Lifemark stockholders entitled to
notice of and to vote at the special meeting. As of the close of business on
January 3, 2001, there were 5,198,076 shares of Lifemark common stock
outstanding and entitled to vote, held of record by approximately 400
stockholders. A majority of these shares, present in person or represented by
proxy, will constitute a quorum for the transaction of business. If a quorum is
not present, it is expected that the special meeting will be adjourned or
postponed to solicit additional proxies. Each Lifemark stockholder is entitled
to one vote for each share of Lifemark common stock held as of the record date.
Voting of Proxies; Revocation of Proxies
You are requested to complete, date and sign the accompanying proxy and
promptly return it in the accompanying envelope or otherwise mail it to
Lifemark. If your shares are held in "street name" by your broker, your broker
will vote your shares for you only if you provide instructions on how to vote.
Your broker will provide you directions regarding how to instruct your broker
to vote your shares. All properly executed proxies received by Lifemark prior
to the vote at the special meeting, and that are not revoked, will be voted in
accordance with the instructions indicated on the proxies or, if no direction
is indicated, to approve and adopt the merger agreement. Votes will be
tabulated, using an automated scanner, by the inspectors of election appointed
by Lifemark.
Lifemark's board of directors does not presently intend to bring any other
business before the special meeting and, so far as is presently known to
Lifemark's board of directors, no other matters are to be brought before the
special meeting. As to any business that may properly come before the special
meeting, however, it is intended that proxies, in the form enclosed, will be
voted in respect thereof in accordance with the judgment of the persons voting
such proxies.
You may revoke your proxy at any time prior to its use by delivering to the
Secretary of Lifemark a signed notice of revocation or a later-dated, signed
proxy, or by attending the special meeting and voting in person. Attendance at
the special meeting does not in itself constitute the revocation of a proxy.
Vote Required
Adoption of the merger agreement by Lifemark's stockholders is required by
the Delaware General Corporation Law. Such adoption requires the affirmative
vote of the holders of a majority of the shares of Lifemark common stock
outstanding and entitled to vote at the special meeting. Certain stockholders
of Lifemark have entered into a voting agreement obligating them to vote in
favor of the merger agreement and
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the merger. As of January 3, 2001, such stockholders as a group beneficially
owned 2,019,232 shares (exclusive of any shares issuable upon the exercise of
options) of Lifemark common stock (constituting approximately 39% of the shares
of Lifemark common stock outstanding as of the record date). As of the record
date and the date of this proxy statement/prospectus, UnitedHealth Group owns
no shares of Lifemark common stock.
Quorum; Abstentions and Broker Non-Votes
The required quorum for the transaction of business at the special meeting
is a majority of the shares of Lifemark common stock issued and outstanding on
the record date. Abstentions and broker non-votes each will be included in
determining the number of shares present and voting at the meeting for the
purpose of determining the presence of a quorum. Because adoption of the merger
agreement and the consummation of the merger requires the affirmative vote of a
majority of the outstanding shares of Lifemark common stock entitled to vote,
abstentions and broker non-votes will have the same effect as votes against the
merger agreement and the consummation of the merger. In addition, a failure of
a Lifemark stockholder to return a proxy will have the effect of a vote against
the adoption of the merger agreement.
THE ACTIONS PROPOSED IN THIS PROXY STATEMENT/PROSPECTUS ARE NOT MATTERS THAT
CAN BE VOTED ON BY BROKERS HOLDING SHARES FOR BENEFICIAL OWNERS WITHOUT THE
OWNERS' SPECIFIC INSTRUCTIONS. ACCORDINGLY, YOU ARE URGED TO RETURN THE
ENCLOSED PROXY CARD MARKED TO INDICATE YOUR VOTE.
Expenses of Solicitation
Lifemark will assume the cost of solicitation of proxies from you, which is
estimated to be approximately $10,000 plus reasonable out-of-pocket expenses.
In addition to solicitation by mail, the directors, officers and employees of
Lifemark may solicit proxies from stockholders by telephone, facsimile or in
person. Following the original mailing of the proxies and other soliciting
materials, Lifemark will request brokers, custodians, nominees and other record
holders to forward copies of the proxy and other soliciting materials to
persons for whom they hold shares of Lifemark common stock and to request
authority for the exercise of proxies. In such cases, Lifemark, upon the
request of the record holders, will reimburse such holders for their reasonable
expenses.
Board Recommendation
THE LIFEMARK BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS THAT LIFEMARK STOCKHOLDERS VOTE FOR ADOPTION OF THE
MERGER AGREEMENT.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE STOCKHOLDERS OF LIFEMARK. ACCORDINGLY, YOU ARE URGED TO READ AND
CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES AT THIS TIME. A
TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF STOCK CERTIFICATES FOR
LIFEMARK COMMON STOCK WILL BE MAILED TO YOU AS SOON AS PRACTICABLE AFTER
COMPLETION OF THE MERGER.
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THE MERGER
This section of the proxy statement/prospectus describes material aspects of
the proposed merger. While we believe that the description covers the material
terms of the merger and the related transactions, this summary may not contain
all of the information that is important to you. You should read this entire
document, the attached exhibits and the other documents we refer to carefully
for a more complete understanding of the merger.
Background of the Merger
On September 1, 1999, Richard M. Jelinek, Executive Vice President of
Lifemark, met with Marcia Smith, Chief Executive Officer of EverCare, to
discuss potential joint venture or business combination transactions between
Lifemark and EverCare. Following this meeting, Mr. Jelinek provided Ms. Smith
with additional background information concerning Lifemark.
On October 28, 1999, representatives of Lifemark and Ovations executed a
confidentiality agreement providing for the companies to exchange business
information in connection with a possible transaction between them. On the same
date, Mr. Jelinek and Michael J. Kennedy, Lifemark's Chief Financial Officer,
met with John K. Ellingboe, Ovations' Chief Operating Officer, Ms. Smith, and
other representatives of UnitedHealth Group, in order to discuss such a
possible transaction.
On January 27, 2000, Rhonda E. Brede, Lifemark's Chief Executive Officer,
and Mr. Jelinek met with Ms. Smith and Mary Paoli, Vice President of Strategic
Business Development of EverCare, to explore possible synergies that might
result from Lifemark and EverCare working together. On April 25, 2000, Mr.
Jelinek and Mr. Kennedy met with Ms. Smith and Ronald Watson, Senior Vice
President of Ovations, in order to discuss the possible acquisition of Lifemark
by UnitedHealth Group.
On May 3, 2000, Mr. Jelinek, Mr. Kennedy, and representatives of
UnitedHealth Group discussed the process that UnitedHealth Group typically
follows in considering a corporate transaction. On May 11, 2000, Mr. Jelinek
and Ms. Smith discussed who would participate in this process on behalf of
Lifemark and discussed in general terms certain employee, structural and
transition matters that would need to be addressed.
On May 22, 2000, Ms. Brede, Mr. Jelinek and Mr. Kennedy met with Ms. Smith
and Mr. Watson in order to continue discussions of the strategic fit between
Lifemark and EverCare and to discuss the timing of the process going forward.
By letter agreement dated May 25, 2000, Lifemark retained Stephens Inc. to
act as its financial adviser in connection with possible business combination
transactions. On May 25 and on June 2, 2000 representatives of the parties
again discussed the timing of the process going forward.
On June 5, 2000, Lifemark delivered a copy of its business plan, including
financial forecasts, to representatives of UnitedHealth Group, and the parties
again discussed the timing of the process. These materials were reviewed and
discussed by various representatives of the parties on June 8, June 12, and
June 19, 2000. On the latter date, representatives of the parties also
discussed Lifemark's current contracts, and UnitedHealth Group provided a list
of other issues to be discussed.
On June 23, 2000, Mr. Watson indicated to Mr. Jelinek that UnitedHealth
Group desired to continue working toward a possible transaction. On July 5,
2000, Ms. Brede, Mr. Jelinek and Mr. Kennedy met with Ms. Smith and Mr. Watson
in order to discuss organizational structure, personnel, and contractual issues
relating to a transaction. On July 13, 2000, Ms. Brede, Mr. Jelinek and Mr.
Kennedy met with Mr. Ellingboe, Ms. Smith, Mr. Watson, and representatives of
Stephens Inc. to discuss Lifemark's programs and results to date
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and its forecasts for 2001, and to begin discussions concerning the possible
valuation of Lifemark. After this meeting, UnitedHealth Group requested and
received additional information concerning Lifemark's current contracts.
On July 20, 2000, Ms. Brede, Mr. Jelinek, Ms. Smith and Mr. Watson met again
to discuss the possible valuation of Lifemark and the factors that could affect
this valuation. On July 24, 2000, Ms. Smith and Mr. Watson delivered a proposed
letter of intent to Ms. Brede which called for Ovations to acquire Lifemark for
an estimated total consideration of between $55 million and $60 million,
subject to several assumptions and conditions set forth in the letter.
This letter of intent was presented to and discussed by Lifemark's board of
directors at a meeting held on July 26 and 27, 2000. At this meeting,
representatives of Stephens Inc. also discussed the terms set forth in the
letter of intent and the potential valuation of Lifemark. At the conclusion of
this discussion, Lifemark's board of directors authorized management and
Stephens Inc. to commence negotiations toward a definitive agreement with
UnitedHealth Group (rather than entering into a letter of intent), subject to
certain parameters established by the board.
On August 2 and 3, 2000, representatives of the parties made arrangements
for UnitedHealth Group representatives to conduct a due diligence review of
Lifemark. At a meeting of Lifemark's board of directors on August 4,
representatives of Stephens Inc. presented a revised proposal from UnitedHealth
Group, which included a total purchase price of $60 million. The board
authorized management and Stephens to continue negotiations. UnitedHealth
Group's due diligence commenced on August 9, 2000, and continued throughout the
remaining negotiations. On August 11, 2000, Lifemark's board of directors met
and was advised that this due diligence review had begun and that UnitedHealth
Group would circulate a draft merger agreement shortly.
On August 16, 2000, representatives of UnitedHealth Group provided a draft
merger agreement and related documents to representatives of Lifemark. This
draft was presented to and discussed at a Lifemark board of directors meeting
held on August 18, 2000. At the conclusion of this meeting, the board of
directors directed management to continue the discussions and to seek several
changes to the draft merger agreement.
UnitedHealth Group's due diligence review and the parties' negotiation of
the terms of the merger agreement and related documents continued for the
remainder of August and through September and early October 2000, with the
Lifemark board of directors meeting again on August 25, September 1, September
13, and September 18 to receive updates and provide direction regarding the
negotiations. At various of these meetings, representatives of Stephens Inc.
and outside counsel to Lifemark provided advice to Lifemark's directors
concerning issues arising in the course of the negotiations. In addition,
outside counsel to Lifemark advised the directors concerning their
responsibilities under applicable law in connection with the possible
acquisition of Lifemark.
The negotiations were concluded on October 10, 2000, at which time a
definitive merger agreement and related documents were presented at a meeting
of Lifemark's board of directors for consideration. At this meeting,
representatives of Stephens Inc. delivered its fairness opinion described below
under "--Opinion of Lifemark's Financial Adviser," and outside counsel to
Lifemark reviewed the directors' responsibilities in considering the proposed
merger agreement. Following a discussion of this information and of the
proposed definitive merger agreement, Lifemark's board of directors unanimously
determined that the merger is advisable and in the best interests of Lifemark
and its stockholders and approved the merger agreement. Representatives of
UnitedHealth Group and Lifemark then executed and delivered the merger
agreement, and the transaction was publicly announced.
UnitedHealth Group's Reasons for the Merger
Management of UnitedHealth Group believes that Lifemark's business is
complementary to that of the existing EverCare unit within Ovations, a
UnitedHealth Group subsidiary, which has pioneered coordinated care for older
Americans living in nursing homes. Accordingly, upon completion of the merger,
it is anticipated that Lifemark's operations will be integrated with those of
EverCare to create an organization which serves the
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health and well-being needs of older Americans across the full continuum of
care settings. These combined operations will conduct business in over a dozen
states, serving Medicare, Medicaid, and private-pay patients in a variety of
care settings, including home, community-based and nursing facilities. In
addition, the combined operations will provide a platform for further expansion
of this portion of Ovations' business.
Lifemark's Reasons for the Merger and Board of Directors Recommendation
In reaching its conclusions to approve the merger agreement and merger and
recommend that stockholders vote in favor of approval of the merger agreement
and merger, the board of directors of Lifemark consulted with management, legal
counsel, and Stephens Inc., Lifemark's financial adviser, and considered a
number of factors, including, without limitation, the following:
. that, at $10.55 per share, the consideration to be received by
Lifemark's stockholders in the merger represents a premium of
approximately 25% over the closing market price of $8.44 per share on
October 9, 2000, the last full trading day prior to the October 10, 2000
board meeting at which the merger was approved, and premiums of
approximately 40.1% and 116.6% over the average closing prices for the
three-month period and the twelve-month period, respectively, preceding
October 9, 2000;
. the other terms and conditions of the merger agreement, including:
. that the consideration to be received in the merger would be in the
form of UnitedHealth Group stock (unless UnitedHealth Group
exercises its election to pay cash in certain circumstances),
resulting in a tax-free transaction to Lifemark stockholders, that
the board believes that there is a possibility of significant
appreciation in the value of such stock in the future, and that such
stock represents a more liquid investment than Lifemark's stock;
. the fact that the reduction in the consideration to be received for
each Lifemark share resulting from a drop in UnitedHealth Group's
price below $47.50 is limited (the value can not go below $10.08),
while, if UnitedHealth Group's price increases above $56.50, there
is no limit on the increase in the consideration to be received by
Lifemark stockholders;
. the fact that, to the extent required by the fiduciary obligations
of Lifemark's board of directors to stockholders under Delaware law,
Lifemark may terminate the merger agreement in order to approve an
acquisition proposal by a third party on terms more favorable to
Lifemark's stockholders than the merger, upon the payment of a $2
million termination fee and reimbursement of UnitedHealth Group's
expenses associated with the merger;
. the board of directors' review, particularly since the beginning of
calendar year 2000, of Lifemark's strategic plan, and the determination
of the board and management that continued growth and success of
Lifemark could best be achieved through increased risk assumption in its
business, and their belief that this risk assumption required
significantly more capital than was currently available to Lifemark;
. Lifemark's business, financial condition, results of operations, assets,
liabilities, business strategy and prospects, as well as various
uncertainties associated with those prospects;
. information concerning UnitedHealth Group's businesses, financial
condition, and results of operations;
. the opinion of Stephens Inc. delivered at the October 10 meeting that
the consideration to be received by the holders of Lifemark stock in the
merger is fair to such stockholders from a financial point of view; a
copy of the Stephens Inc. opinion is attached to this proxy
statement/prospectus as Annex C and is incorporated herein by reference;
. the presentations of Stephens Inc. to the board of directors at its
meetings on July 26, 2000 and October 10, 2000, as to various financial
and other matters involving Lifemark and the transaction which the board
of directors deemed relevant, including, among other things, (a) a
review of
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Lifemark's historical and projected financial performance and other data
provided to Stephens Inc. by Lifemark relating to Lifemark's business,
(b) a review of UnitedHealth Group's historical financial performance,
and the views of Stephens Inc. on the outlook for UnitedHealth Group in
the future, (c) a review of the historical stock prices and trading
volumes of Lifemark common stock and UnitedHealth Group common stock,
(d) a review of the trading and operating performance of certain
publicly traded managed care companies, (e) a review of certain
transactions in the managed care industry, (f) a review of premiums paid
in certain other transactions, (g) a discounted cash flow valuation of
Lifemark, and (h) an analysis of the consideration implied by the merger
consideration as a multiple of various measures of Lifemark's operating
performance;
. the risks associated with remaining an independent company, particularly
given Lifemark's size and small market capitalization, including the
reliance on a relatively small number of significant customers, the
potential losses resulting from risk sharing arrangements, the
possibility of unfavorable changes in government reimbursement rates,
and increasing exposure to possible third party claims, as well as the
difficulties in obtaining the funds needed to execute management's
strategic growth plans;
. the historic volatility and relative lack of liquidity of Lifemark's
common stock;
. the board's belief that the combination of Lifemark and EverCare would
be extremely beneficial to both businesses, because of the shared values
and philosophies of the two organizations and the complementary nature
of Lifemark's and EverCare's business operations, including the fact
that the particular skills and experience of Lifemark management fulfill
a perceived need of EverCare, and that the expertise and assets of each
company could be applied to, and significantly enhance, the business of
the other;
. the board and management's belief that the merger would provide Lifemark
with additional revenue sources and expanded product offerings, as well
as much greater access to capital, and would significantly enhance its
ability to achieve its strategic goals;
. the tax and other potential effects on stockholders if UnitedHealth
Group exercised its election to pay cash in certain circumstances;
. the risks that the conditions to consummation of the merger might not be
satisfied and that it might take a significant length of time to
consummate the merger;
. the future of Lifemark's employees, management's view that UnitedHealth
Group is a very employee-focused organization, and management's belief
that the transaction was not being driven on UnitedHealth Group's part
by any opportunities for substantial employee-related cost savings; and
. the impact of the merger on existing options and employment agreements
with Lifemark personnel and the terms and conditions of the new
employment agreements to be entered into between UnitedHealth Group and
Lifemark's executive officers.
The discussion above addresses the material factors considered by the
Lifemark board of directors in its consideration of the merger. In view of the
variety of factors and the amount of information considered, the Lifemark
board did not find it practical to, and did not, make specific assessments of,
quantify or otherwise assign relative weights to the specific factors
considered in making its determination. The determination was made after
consideration of all of the factors as a whole. In addition, individual
members of the Lifemark board may have given different weights to the
different factors. For a discussion of the interests of certain members of
Lifemark's management and the Lifemark board of directors in the merger, see
"--Interests of Certain Persons in the Merger" below.
FOR THE REASONS DISCUSSED ABOVE, THE LIFEMARK BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT LIFEMARK
STOCKHOLDERS VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
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In considering the recommendation of Lifemark's board of directors with
respect to the merger agreement, you should be aware that certain directors and
officers of Lifemark may have certain interests in the merger that are
different from, or are in addition to, the interests of Lifemark stockholders
generally. Please see the section entitled "--Interests of Certain Persons in
the Merger" on page 30 of this proxy statement/prospectus.
Opinion of Lifemark's Financial Advisor
The board of directors of Lifemark retained Stephens Inc. to act as its
financial advisor in connection with the proposed merger of a subsidiary of
UnitedHealth Group with and into Lifemark pursuant to the merger agreement.
Stephens delivered a written opinion, dated October 10, 2000, to the Board
of Directors of Lifemark to the effect that, as of such date and subject to the
qualifications set forth therein, the consideration to be received by the
stockholders of Lifemark in exchange for the shares of common stock of Lifemark
was fair from a financial point of view to the stockholders of Lifemark.
The full text of the fairness opinion of Stephens, dated October 10, 2000,
which sets forth the assumptions made, general procedures followed, factors
considered and limitations on the review undertaken by Stephens in rendering
its opinion, is attached as Annex C hereto and is incorporated herein by
reference. You should read this opinion in its entirety.
Stephens has consented to the use of its fairness opinion as an annex to
this proxy statement/prospectus. Stephens provided the fairness opinion to the
board of directors of Lifemark for its information, and the fairness opinion is
directed only to the fairness from a financial point of view of the
consideration to be received in exchange for the Lifemark common stock and does
not constitute a recommendation to any stockholder of Lifemark as to how any
stockholder should vote on the merger or any matter related thereto. The
summary of the fairness opinion set forth in this proxy statement/prospectus is
qualified in its entirety by reference to the full text of the fairness
opinion.
In arriving at the fairness opinion, Stephens:
. reviewed certain publicly available financial statements and reports
regarding Lifemark and UnitedHealth Group;
. reviewed certain internal financial statements and other financial and
operating data (including financial projections) concerning Lifemark
prepared by the management of Lifemark;
. reviewed, on a pro forma basis, the effect of the merger;
. reviewed the reported prices and trading activity for Lifemark common
stock and UnitedHealth Group common stock;
. reviewed the financial terms, to the extent publicly available, of other
mergers that Stephens deemed to be relevant;
. reviewed the merger agreement and related documents;
. discussed with the management of Lifemark the operations of and future
business prospects for Lifemark and the anticipated financial
consequences of the transaction to Lifemark;
. assisted in deliberations regarding the material terms of the merger
agreement and the negotiations with UnitedHealth; and
. reviewed other analyses and performed other investigations and took into
account other matters that Stephens deemed appropriate.
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In preparing the fairness opinion, Stephens assumed and relied on the
accuracy and completeness of all information supplied or reviewed by it in
connection with its analysis of the transaction and has further relied on the
assurances of management of Lifemark that they are not aware of any facts that
would make this information inaccurate or misleading. Stephens has not assumed
any responsibility for independently verifying this information and has not
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of Lifemark or UnitedHealth Group or been furnished with any
evaluation or appraisal, nor conducted a physical inspection of the properties
or facilities of Lifemark or UnitedHealth Group. With respect to the financial
projections furnished to or discussed with Stephens by Lifemark, Stephens
assumed that the financial projections were reasonably prepared and reflected
the best currently available estimates and judgment as to the expected future
financial performance of Lifemark, including after giving effect to the merger.
Stephens expressed no opinion as to these financial projections or the
assumptions on which they were based.
For purposes of rendering the fairness opinion, Stephens assumed, in all
respects material to its analysis, that the representations and warranties of
each party to the merger agreement and all related documents and instruments
contained therein were true and correct, that each party to these documents
would perform all of the covenants and agreements required to be performed by
each party under these documents and that all conditions to the consummation of
the merger would be satisfied without waiver thereof. Stephens assumed that in
the course of obtaining the necessary regulatory or other consents or approvals
(contractual or otherwise) for the merger, no restrictions, including any
divestiture requirements or amendments or modifications, would be imposed that
would have a material adverse effect on the contemplated benefits of the
merger.
Stephens was not asked to consider, and the fairness opinion does not in any
manner address, the price at which Lifemark or UnitedHealth Group common stock
would trade following either the announcement or consummation of the merger.
The fairness opinion is necessarily based upon market, economic and other
conditions as they existed on, and could be evaluated, as of the date of the
opinion.
Stephens noted that with a merger consideration of $10.55 of UnitedHealth
Group common stock for each outstanding share of Lifemark common stock, the
value of common equity, including the value of stock options, plus the amount
of assumed debt of Lifemark is approximately $66.9 million, representing 10.2x
and 5.7x Lifemark's earnings before taxes, depreciation and amortization, and
costs associated with software development and implementation for fiscal 2000
and the projected twelve month period ending November 30, 2000, respectively;
15.8x and 7.4x Lifemark's earnings before taxes and costs associated with
software development and implementation for fiscal 2000 and the projected
twelve month period ending November 30, 2000, respectively; and that the value
of common equity, including the value of stock options was approximately $63.0
million, representing 25.9x and 12.1x Lifemark's earnings for fiscal 2000 and
the projected twelve month period ending November 30, 2000, respectively.
The following is a summary of the material financial analyses used by
Stephens in connection with its presentation to the board of directors of
Lifemark on October 10, 2000, and the preparation of its fairness opinion.
Publicly Traded Company Analysis. Stephens analyzed certain publicly
available financial information, operating data and projected financial
performance (per research analyst estimates) of ten selected publicly traded
companies that Stephens believed to be appropriate for comparison to
corresponding financial information and operating data of Lifemark,
specifically, UnitedHealth Group, Wellpoint Health Network, Oxford Health
Plans, Inc., Foundation Health Systems, Humana, Inc., Trigon Healthcare, Inc.,
Pacificare Health Systems, Inc., Coventry Health Care, Inc., Mid Atlantic
Medical Services, Inc., and Rightchoice Managed Care, Inc. (collectively, the
"Public Comparables"). Stephens' analysis of the Public Comparables yielded
ratios of market value of common equity (as of October 6, 2000) ("Equity
Value") to the latest twelve month ("LTM") earnings ranging from 3.4x to 26.8x
with a median of 16.3x; Equity Value to projected fiscal 2000 earnings ranging
from 3.5x to 25.3x with a median of 17.2x; Equity Value plus total outstanding
debt ("Enterprise Value") to LTM earnings before taxes, depreciation and
amortization ("Operating Cash Flow") ranging from 3.1x to 14.3x with a median
of 8.6x; Enterprise Value to projected fiscal 2000 Operating Cash Flow ranging
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from 3.1x to 13.5x with a median of 9.7x; Enterprise Value to LTM earnings
before taxes ("Operating Income") ranging from 3.8x to 17.0x with a median of
11.7x; and Enterprise Value to projected fiscal 2000 Operating Income ranging
from 3.8x to 19.8x with a median of 11.5x.
Stephens derived a range of implied trading value of Lifemark common stock
of $6.38 to $8.30 per share based on a ratio of Equity Value to LTM earnings; a
range of $10.49 to $12.13 per share based on a ratio of Equity Value to
projected earnings for the twelve month period ending November 30, 2000; a
range of $8.25 to $10.31 per share based on a ratio of Enterprise Value to LTM
Operating Cash Flow; a range of $9.31 to $13.04 per share based on a ratio of
Enterprise Value to projected Operating Cash Flow for the twelve month period
ending November 30, 2000; a range of $7.36 to $8.70 per share based on a ratio
of Enterprise Value to LTM Operating Income; and a range of $9.94 to $12.78 per
share based on a ratio of Enterprise Value to projected Operating Income for
the twelve month period ending November 30, 2000.
Stock Price History. To provide contextual data and comparative market data,
Stephens examined the history of the trading prices for both Lifemark common
stock and UnitedHealth Group common stock for the two year period prior to
October 6, 2000. Stephens reviewed the daily closing prices of Lifemark common
stock and compared the performance of the price of Lifemark common stock to
that of the Nasdaq Composite Index and an index of the share prices of the
Public Comparables. Stephens also reviewed the daily closing prices of
UnitedHealth Group common stock and compared the performance of the price of
UnitedHealth Group common stock to that of the Standard and Poor's 500 Stock
Index and an index of the share prices of the Public Comparables (excluding
UnitedHealth Group). This information was presented solely to provide the Board
of Directors of Lifemark with background information regarding the prices of
Lifemark common stock and UnitedHealth Group common stock over the period
indicated.
Discounted Cash Flow Analysis. Stephens performed a discounted cash flow
analysis of Lifemark based upon estimates of projected financial performance
prepared by the management of Lifemark. Utilizing these projections, Stephens
calculated a range of implied equity value per share based upon the discounted
net present value of the sum of the projected stream of unlevered free cash
flows for the years ending May 31, 2001 to May 31, 2010 and a projected
terminal value at May 31, 2010 less debt outstanding as of August 31, 2000
divided by the number of Lifemark's fully-diluted shares outstanding. Stephens
applied several discount rates (ranging from 22.0% to 24.0%) and multiples of
Operating Cash Flow ranging from 6.0x to 8.0x to generate the terminal value.
Utilizing this methodology, the implied value per share of Lifemark common
stock ranged from $9.22 to $12.30 per share.
Precedent Transaction Analysis. Stephens analyzed the financial terms, to
the extent publicly available, of eight transactions involving businesses
comparable to that of Lifemark, which were announced since August 1, 1997. The
selected transactions include UnitedHealth Group's merger with Humana, Inc.
(subsequently terminated), CIGNA Corporation's acquisition of Healthsource,
Inc., Humana, Inc.'s acquisition of Physician's Corporation of America, Blue
Cross & Blue Shield of Kansas City's acquisition of Rightchoice Managed Care,
Inc., Coventry Corporation's acquisition of Principal Health Care, Inc.,
Foundation Health Systems, Inc.'s acquisition of Physician Health Services,
Inc., Humana, Inc.'s acquisition of ChoiceCare Corporation, and UICI's
acquisition of Healthplan Services Corporation (subsequently terminated).
Stephens' analysis of the selected transactions yielded a ratio of the price
paid for the common equity plus the assumed debt ("Total Transaction Value") to
the LTM revenue ranging from 0.3x to 1.0x with a median of 0.6x; a ratio of
Total Transaction Value to the LTM Operating Cash Flow ranging from 5.9x to
28.3x with a median of 14.7x; and a ratio of Total Transaction Value to the LTM
Operating Income ranging from 8.9x to 48.4x with a median of 21.8x.
Stephens derived a range of implied value of Lifemark common stock of $7.70
to $12.42 per share based on a ratio of Total Transaction Value to LTM revenue;
a range of $8.25 to $10.31 per share based on a ratio of Total Transaction
Value to LTM Operating Cash Flow; and a range of $8.70 to $10.71 per share
based on a ratio of Total Transaction Value to LTM Operating Income.
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The summary set forth above does not purport to be a complete description of
the analyses performed by Stephens but describes, in summary form, the
principal elements of the presentation made by Stephens to the Lifemark board
of directors on October 10, 2000. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
to the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Each of the analyses conducted by Stephens
was carried out in order to provide a different perspective on the transaction
and to add to the total mix of information available. Stephens did not form a
conclusion as to whether any individual analysis, considered in isolation,
supported or failed to support an opinion as to fairness from a financial point
of view. Rather, in reaching its conclusion, Stephens considered the results of
the analyses in light of each other and ultimately reached its opinion based on
the results of all analyses taken as a whole. Accordingly, notwithstanding the
separate factors summarized above, Stephens has indicated to Lifemark that it
believes that consideration of some of the analyses and factors considered,
without considering all analyses and factors, could create an incomplete or
inaccurate view of the evaluation process underlying the opinion. The analyses
performed by Stephens are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses.
Fees. Stephens will receive a fee for its services to Lifemark. Pursuant to
a letter agreement between Lifemark and Stephens, Lifemark agreed to pay
Stephens $300,000 upon the rendering of a fairness opinion. In addition,
Lifemark engaged Stephens as its financial advisor in connection with the
proposed transaction and has agreed, if the merger is consummated, to pay
Stephens additional compensation in an amount that is reasonable and customary
for such services. Stephens will also be reimbursed for its out-of-pocket
expenses, including reasonable fees and expenses for its legal counsel. In
addition, Lifemark has agreed to indemnify Stephens for certain liabilities
related to or arising out of the engagement.
As part of Stephens' investment banking business, it regularly issues
fairness opinions and is continually engaged in the valuation of companies and
their securities in connection with business reorganizations, private
placements, negotiated underwritings, mergers and acquisitions and valuations
for estate, corporate and other purposes. In the ordinary course of business,
Stephens and its affiliates at any time may hold long or short positions, and
may trade or otherwise effect transactions as principal or for the accounts of
customers, in debt or equity securities or options on securities of Lifemark
and UnitedHealth Group.
Completion and Effectiveness of the Merger
The merger will be completed when all of the conditions to completion of the
merger are satisfied or waived, including approval and adoption of the merger
agreement by the stockholders of Lifemark. The merger will become effective
upon the filing of a Certificate of Merger with the State of Delaware.
We are working to complete the merger as quickly as possible. We hope to do
so shortly after the special meeting and after all of the conditions to the
merger are satisfied. Because the merger is subject to government and third
party approvals, however, we cannot predict the exact timing of its closing.
Operations Following the Merger
Following the merger, Lifemark will continue its operations as a wholly
owned subsidiary of UnitedHealth Group. Upon consummation of the merger, the
current members of Lifemark's board of directors will resign, and the new
members will be designated by UnitedHealth Group. Unless UnitedHealth Group
elects to pay cash instead of shares of its common stock in exchange for
Lifemark shares, the stockholders of Lifemark will become shareholders of
UnitedHealth Group and their rights as shareholders will be governed by the
UnitedHealth Group second restated articles of incorporation, the UnitedHealth
Group amended and restated bylaws and the laws of the State of Minnesota. See
"Comparison of Rights of Shareholders of UnitedHealth Group and Lifemark."
Following the merger, current directors and executive officers of
UnitedHealth Group will continue to serve in their present capacities.
Information with respect to the business experience of UnitedHealth Group's
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<PAGE>
directors and executive officers, compensation of UnitedHealth Group's
executive officers and certain relationships and related transactions involving
UnitedHealth Group's directors and executive officers, as well as information
with respect to UnitedHealth Group's voting securities and principal holders
thereof, is included herein. See "Certain Information Concerning UnitedHealth
Group" beginning on page 36.
Interests of Certain Persons in the Merger
Certain executive officers and directors of Lifemark have interests in the
merger that are different from and in addition to their interests as Lifemark
stockholders generally. The Lifemark board of directors was aware of these
interests and considered them in approving the merger agreement.
Employment Agreements. UnitedHealth Group's obligation to complete the
merger is conditioned upon the execution of employment agreements by five
designated employees of Lifemark: Rhonda E. Brede, Lifemark's President and
Chief Executive Officer; Michael J. Kennedy, Lifemark's Vice President, Chief
Financial Officer, Treasurer and Assistant Secretary; Richard M. Jelinek,
Lifemark's Executive Vice President; David G. Decker, Lifemark's Chief
Information Officer; and Mete Sahin, Lifemark's Vice President--Finance. In
addition, the parties expect UnitedHealth Group and Chuck Dow, Lifemark's
Senior Vice President--Health Program Services, to enter into an employment
agreement in connection with the merger. Each employment agreement will take
effect upon the effectiveness of the merger and will have an indefinite term,
but be terminable by either UnitedHealth Group or the individual on 45 days'
written notice. Each employment agreement provides for a base salary, payable
bi-weekly, and eligibility for participation in UnitedHealth Group's bonus plan
(up to 20%-30% of initial base salary), employee benefit plans, incentive
compensation plans, and stock option and grant plans. Each individual that
signs an employment agreement with UnitedHealth Group will receive stock
options upon signing and, with the exception of Mr. Sahin and Mr. Dow, will
receive cash payments equal to approximately 15% of the individual's base
salary, payable in March 2001, and approximately 35% of the individual's base
salary, payable in December 2002, if the individual remains employed in good
standing with UnitedHealth Group at such times.
Each employment agreement (other than those for Messrs. Sahin and Dow)
contains provisions for the forgiveness over time of certain debt owed by the
individual to Lifemark under a promissory note. On December 31 of each year
during the term of the note, if the individual remains employed and in good
standing with UnitedHealth Group, payment of interest under the note will be
forgiven. On December 31 of each of the years 2003 through 2006, if the
individual remains employed and in good standing, UnitedHealth Group will
forgive 25% of the original principal amount of the note. UnitedHealth Group
will forgive the entire unpaid principal and accrued and unpaid interest if the
individual's employment is terminated due to death or disability. The aggregate
principal amount of debt subject to forgiveness as described above is $690,000.
Each employment agreement contains customary terms concerning the assignment of
property rights, nondisclosure of confidential information, non-disparagement
of UnitedHealth Group, non-solicitation of UnitedHealth Group employees and
non-competition with Ovations' and/or UnitedHealth Group's Medicare/Medicaid
business.
If one of the foregoing individuals is terminated without cause, that
individual will receive bi-weekly payments, for a period of twelve months,
equal to 1/26 of the sum of (1) the individual's annualized base salary (less
withholdings or deductions), plus (2) one-half of the total of certain bonus or
incentive compensation paid or payable for the two most recent calendar years,
or if the individual has been eligible for the bonus for less than the two
years, one-half of the last bonus or incentive payment paid or payable to the
individual. Upon termination following a change in control, the terminated
individual will receive, for a period of twelve months, bi-weekly payments
equal to 1/26 of the sum of (1) the individual's highest annualized base salary
during the two year period immediately preceding the termination (less
withholdings or deductions), plus (2) the greater of (a) all bonuses payable to
the individual, or (b) one-half of the total of certain bonus or incentive
compensation paid or payable for the two most recent calendar years, or if the
individual has been eligible for the bonus for less than the two years, one-
half of the last bonus or incentive payment paid or payable to the individual.
An individual entitled to severance compensation will also receive a cash
payment equal to the portion of the
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<PAGE>
premiums that UnitedHealth Group subsidized for health, dental and group life
benefits. In addition, for a one-year period, UnitedHealth Group will pay for
outplacement and job search services for that individual. Mr. Kennedy's
employment agreement provides for a one-time election, upon 60 days notice, to
terminate his employment for any reason between the tenth and twelfth month of
his employment. Upon such election, Mr. Kennedy would receive the same
severance compensation that he would receive if he were terminated without
cause.
Stock-Based Rights. In the merger, each outstanding option to purchase
shares of Lifemark common stock will be converted into an option to acquire, on
substantially the same terms and conditions as applied to the Lifemark option
(except that each UnitedHealth Group option issued in exchange for a Lifemark
option will be exercisable for the entire remaining term of the option, even if
the option holder ceases to be an employee or director of Lifemark or
UnitedHealth Group and, pursuant to the terms of the Lifemark options, each
previously unvested Lifemark option will be converted into a fully vested
UnitedHealth Group option), a number of shares of UnitedHealth Group common
stock to be determined by multiplying the number of shares of Lifemark common
stock subject to such option immediately prior to the merger by the exchange
ratio (calculated, if the cash payment election is made, based on the greater
of $40.00 or the average closing price), rounded down to the nearest whole
share, at a price per share equal to the aggregate exercise price of such
option divided by the exchange ratio (calculated, if the cash payment election
is made, as described above) and rounded up to the nearest whole cent.
The following table presents, as of January 3, 2001, the number of Lifemark
shares covered by options held by each of Lifemark's directors and executive
officers and estimates of the number of UnitedHealth Group shares to be covered
by options that Lifemark's directors and executive officers will receive in
connection with the merger. The number of UnitedHealth Group shares covered by
options have been calculated based on the closing price of UnitedHealth Group
common stock on the days leading up to the mailing of this proxy
statement/prospectus, which would result in an exchange ratio of approximately
0.1867:
<TABLE>
<CAPTION>
Name of Director or Shares Covered by Shares to be Covered by
Executive Officer Lifemark Options UnitedHealth Group Options
------------------- ----------------- --------------------------
<S> <C> <C>
Rhonda E. Brede.............. 260,000 48,548
William G. Brown............. 75,000 14,004
Richard C. Jelinek........... 30,000 5,601
Henry H. Kaldenbaugh......... 30,000 5,601
Risa Lavizzo-Mourey.......... 75,000 14,004
John G. Lingenfelter......... 30,000 5,601
Michael J. Kennedy........... 127,000 23,714
David G. Decker.............. 75,000 14,004
Richard M. Jelinek........... 208,823 38,992
</TABLE>
Exchange of Warrant and Convertible Debt. In satisfaction of one of the
conditions to the merger, the William Gardner Brown GST Trust, established by
William G. Brown, a director of Lifemark, intends to enter into an agreement
with Lifemark pursuant to which the trust will exchange a warrant held by it to
purchase Lifemark common stock (exercisable for a total of 10,000 shares at
$4.45 per share) and a convertible note held by it (convertible into 77,922
shares). In exchange for the warrant and the note, Lifemark will issue 87,922
shares of Lifemark common stock, and will make a cash payment of $51,500, to
the William Gardner Brown GST Trust.
Indemnification and Insurance
The merger agreement provides that UnitedHealth Group will, for a period of
six years after the completion of the merger, cause Lifemark to indemnify and
hold harmless the present and former officers and directors of Lifemark and its
subsidiaries in each case to the fullest extent such person is permitted to be
indemnified under applicable law, Lifemark's certificate of incorporation or
bylaws, or certain indemnification agreements to which Lifemark is a party, in
each case as in effect on October 10, 2000. The merger agreement
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<PAGE>
also provides that, for six years after the completion of the merger,
UnitedHealth Group will maintain Lifemark's policies of directors' and
officers' liability insurance or substitute comparable policies.
Lifemark Common Stock Ownership
The following table sets forth, as of January 3, 2001, information regarding
the beneficial ownership of Lifemark common stock by certain of Lifemark's
directors and executive officers, by all directors and executive officers of
Lifemark as a group, and by each person known by Lifemark to be the beneficial
owner of 5% or more of the outstanding common stock of Lifemark. The address of
all of the persons named or identified below, except Michael D. Hernandez and
Hollybank Investments, LP, is c/o Lifemark Corporation, 7600 North 16th Street,
Suite 150, Phoenix, Arizona 85020.
<TABLE>
<CAPTION>
Shares Percent of
Name Beneficially Owned Common Stock
---- ------------------ ------------
<S> <C> <C>
Rhonda E. Brede.................... 284,595(1) 5.4
William G. Brown................... 257,842(1)(2) 4.9
Richard C. Jelinek................. 814,520(1)(2)(3) 15.5
Henry H. Kaldenbaugh............... 521,703(1) 10.1
Risa Lavizzo-Mourey................ 78,965(1) 1.5
John G. Lingenfelter............... 436,718(1) 8.4
Michael J. Kennedy................. 216,493(1) 4.1
David G. Decker.................... 73,135(1) 1.4
Richard M. Jelinek(4).............. 276,840(1) 5.2
Michael D. Hernandez(5)............ -- --
Hollybank Investments, LP.......... 596,347(6) 11.6
All directors and executive
officers as a group (10 persons).. 2,802,889(1)(2)(3) 47.4
</TABLE>
--------
(1) Includes 158,750, 56,250, 11,250, 11,250, 38,750, 11,250, 127,000, 42,500,
208,823, and 665,823 shares covered by options held by Ms. Brede, Mr.
Brown, Richard C. Jelinek, Dr. Kaldenbaugh, Dr. Lavizzo-Mourey, Dr.
Lingenfelter, Mr. Kennedy, Mr. Decker, Richard M. Jelinek, and all
directors and executive officers as a group, respectively, which were
exercisable within sixty days of January 3, 2001. These amounts also
include 90,000, 60,000, 60,000 and 25,000 shares of stock pledged by Ms.
Brede, Mr. Kennedy, Richard M. Jelinek and Mr. Decker, respectively, to
Lifemark as security for payment pursuant to loans made by Lifemark in
connection with the acquisition of such shares pursuant to the exercise of
stock options.
(2) Includes 77,922 shares which may be acquired upon conversion of $300,000
in principal amount of a Convertible Note of Lifemark and 10,000 shares
covered by a currently exercisable stock purchase warrant. Each of the
Convertible Note, the Stock Purchase Warrant and an additional 70,000
shares are held by a trust created by Mr. Brown for the benefit of members
of his family, of which Mr. Jelinek is one of the co-trustees.
(3) Includes 1,635, 25,333, 2,135 and 809 shares owned by the spouses of Ms.
Brede, Richard C. Jelinek, Dr. Lavizzo-Mourey and Dr. Lingenfelter,
respectively.
(4) Richard M. Jelinek is the son of Richard C. Jelinek.
(5) The address of Michael D. Hernandez is 770 Park Avenue, New York, New York
10021.
(6) Represents shares as of June 5, 2000, as reported on Form 4. Except to the
extent of his interest as a limited partner of Hollybank Investments, LP,
Dorsey R. Gardner, the general partner of Hollybank Investments, LP,
disclaims beneficial ownership with respect to all of the shares for all
purposes other than for reporting purposes on Schedule 13G. The address of
Hollybank Investments, LP is One Financial Center, Suite 1600, Boston,
Massachusetts, 02111.
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Regulatory Matters
The merger is subject to the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, which prevents certain acquisitions from
being completed until required information and materials are furnished to the
Antitrust Division of the Department of Justice and the Federal Trade
Commission and certain waiting periods are terminated or expire. The applicable
waiting period was terminated on November 6, 2000. The parties may close the
merger at any time within one year from the termination of the waiting period
without having to file updated materials with the Department of Justice or
Federal Trade Commission.
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may, however, challenge the merger on antitrust grounds after
termination of the waiting period. Private parties could take action under the
antitrust laws, including seeking an injunction prohibiting or delaying the
merger, divestiture or damages. Additionally, at any time before or after the
completion of the merger, notwithstanding termination of the applicable waiting
period, any state could take action under its antitrust laws as it deems
necessary or desirable in the public interest. There can be no assurance that a
challenge to the merger will not be made or that, if a challenge is made,
Lifemark and UnitedHealth Group will prevail.
The closing of the merger is conditioned upon receipt by Lifemark and
UnitedHealth Group of the consent of the Arizona Health Care Cost Containment
System Administration. Neither Lifemark nor UnitedHealth Group is aware of any
other material governmental or regulatory approval required for completion of
the merger, other than those described in this section.
Certain Federal Income Tax Considerations
The following is a summary of the material anticipated U.S. federal income
tax considerations relevant to the exchange of shares of Lifemark common stock
pursuant to the merger for either UnitedHealth Group common stock or cash (if
UnitedHealth Group exercises its cash payment election) that are generally
applicable to Lifemark stockholders who hold Lifemark common stock as a capital
asset. This summary is based on existing provisions of the Internal Revenue
Code of 1986, as amended, existing and proposed Treasury regulations, and
current administrative rulings and court decisions, all of which are subject to
change at any time, possibly with retroactive effect. Any such change could
alter the tax consequences described below.
Lifemark stockholders should be aware that this discussion does not deal
with all federal income tax consequences that may be relevant to particular
Lifemark stockholders in light of their particular facts and circumstances.
Furthermore, this discussion does not address the tax consequences to Lifemark
stockholders subject to special treatment under United States federal income
tax law, including, for example, foreign persons, financial institutions,
dealers in securities, insurance companies, tax-exempt entities, holders who
acquired their Lifemark common stock pursuant to the exercise of employee stock
options or otherwise as compensation, and holders who hold Lifemark common
stock as part of a hedge, straddle, or conversion transaction. This summary
does not purport to be a complete analysis of all potential tax effects of the
merger and any transactions effectuated in conjunction with the merger. No
information is provided herein with respect to the tax consequences, if any, of
the merger under state, local, or foreign tax laws.
LIFEMARK STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.
Consequences if the Cash Payment Election is Not Exercised
If UnitedHealth Group does not exercise its cash payment election, Lifemark
stockholders will receive UnitedHealth Group common stock in exchange for their
Lifemark common stock (plus cash in lieu of any fractional shares to which they
would otherwise be entitled). Subject to the limitations and qualifications set
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<PAGE>
forth below, the merger (within the limitations noted in the introductory
paragraphs of this section above) will generally result in the following U.S.
federal income tax consequences:
. The merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code and Lifemark, UnitedHealth
Group, and Leo Acquisition Corp. will each be a party to the
reorganization within the meaning of Section 368(b) of the Internal
Revenue Code;
. Neither Lifemark nor UnitedHealth Group will recognize income, gain, or
loss as a result of the consummation of the merger;
. No gain or loss will be recognized by holders of Lifemark common stock
upon their exchange of Lifemark common stock for UnitedHealth Group
common stock in the merger (except to the extent of cash received in
lieu of a fractional share of UnitedHealth Group common stock, as
described below);
. The aggregate tax basis of the UnitedHealth Group common stock received
by Lifemark stockholders in the merger, including any fractional shares
deemed received as described below, will be the same as the aggregate
tax basis of the Lifemark common stock surrendered in exchange therefor;
. The holding period of the UnitedHealth Group common stock received by
each Lifemark stockholder in the merger will include the period for
which the Lifemark common stock surrendered in exchange therefor was
considered to be held, provided that the Lifemark common stock so
surrendered is a capital asset in the hands of the Lifemark stockholder
at the time of the merger; and
. A cash payment received by a holder of Lifemark common stock in lieu of
a fractional share of UnitedHealth Group common stock will generally be
treated as received in redemption of such fractional share interest, and
a Lifemark stockholder will generally recognize gain or loss, which gain
or loss will be capital gain or loss provided the Lifemark common stock
was a capital asset in the hands of the Lifemark stockholder at the time
of the merger. For U.S. federal income tax purposes, the gain or loss is
measured by the difference between the amount of cash received and the
portion of the tax basis of the share of Lifemark common stock allocable
to such fractional share interest.
The parties have not requested and will not request a ruling from the
Internal Revenue Service regarding the tax consequences of the merger. If the
cash payment election is not exercised, the consummation of the merger will be
contingent upon the receipt by Lifemark of an opinion from Bell, Boyd & Lloyd
LLC, its outside legal counsel, or from Dorsey & Whitney LLP, UnitedHealth
Group's outside legal counsel, to the effect that the merger will constitute a
reorganization within the meaning of the Internal Revenue Code. Lifemark
stockholders should be aware that the tax opinion does not bind the Internal
Revenue Service and the Internal Revenue Service is therefore not precluded
from successfully asserting a contrary opinion. The tax opinion will be subject
to certain assumptions and qualifications, including, but not limited to, the
truth and accuracy of certain representations made by Lifemark and UnitedHealth
Group.
Consequences if Cash Payment Election is Exercised
If UnitedHealth Group exercises its cash payment election, the merger will
be treated for federal income tax purposes as a taxable sale or exchange of
common stock for cash by each Lifemark stockholder. Accordingly, the federal
income tax consequences to the Lifemark stockholders if UnitedHealth Group
exercises its cash payment election (within the limitations noted in the
introductory paragraphs of this "Certain Federal Income Tax Considerations"
section) will generally be as follows:
. The stockholders may recognize a capital gain or loss by reason of the
disposition of their shares of common stock pursuant to the merger;
. The capital gain or loss, if any, will be long-term with respect to
shares of the Lifemark common stock held for more than 12 months as of
the date of the merger; and
. The amount of capital gain or loss to be recognized by each stockholder
will be measured by the difference between the amount of cash received
by such stockholder in connection with the merger and such stockholder's
tax basis in the common stock on the date of the merger.
34
<PAGE>
Cash payments made pursuant to the merger will be reported to the extent
required by the Internal Revenue Code to Lifemark stockholders and to the
Internal Revenue Service. Such amounts will ordinarily not be subject to
withholding of U.S. federal income tax. However, backup withholding of such tax
at a rate of 31% may apply to certain stockholders by reason of the events
specified in Section 3406 of the Internal Revenue Code and the Treasury
regulations promulgated thereunder, which include failure of a stockholder to
supply Lifemark or its agent with such stockholder's taxpayer identification
number. Accordingly, Lifemark stockholders will be asked to provide their
correct taxpayer identification numbers on Substitute Forms W-9, which should
be included in the appropriate letter of transmittal for the Lifemark stock.
Withholding may also apply to Lifemark stockholders who are otherwise exempt
from such withholding, such as foreign persons, if such stockholders fail to
properly document their status as exempt recipients.
Accounting Treatment
The merger will be accounted for by UnitedHealth Group using the purchase
method of accounting in accordance with Accounting Principles Board Opinion No.
16, "Business Combinations," as amended. Under this method of accounting, the
purchase price will be allocated to assets acquired and liabilities assumed
based on their fair market values at the date of the acquisition. The results
of operations and cash flows of UnitedHealth Group after the merger will not
include the operations of Lifemark prior to the Effective Date.
Dissenters' or Appraisal Rights
Unless UnitedHealth Group elects to pay cash in lieu of shares of its common
stock, you will not be entitled to exercise dissenter's or appraisal rights as
a result of the merger or to demand payment in cash for your shares under
Delaware law. In order to exercise your appraisal rights if UnitedHealth Group
makes the cash payment election, you must follow the requirements of Delaware
law. Under these requirements, you must notify Lifemark of your intent to
exercise your appraisal rights before the merger closes and before it is known
whether UnitedHealth Group will make the cash payment election. See "Appraisal
Rights for Lifemark Stockholders" beginning on page 56.
Restrictions on Sale of Shares by Affiliates of Lifemark and UnitedHealth Group
The shares of UnitedHealth Group common stock to be received by Lifemark's
stockholders in connection with the merger will be freely transferable, except
for shares of UnitedHealth Group common stock issued to any person who is
deemed to be an affiliate of either Lifemark or UnitedHealth Group at the time
of the special meeting. Persons who may be deemed to be affiliates include
individuals or entities that control, are controlled by, or are under common
control of either of Lifemark or UnitedHealth Group and may include the
executive officers and directors, as well as the principal stockholders, of
both companies. Affiliates may not sell their shares of UnitedHealth Group
common stock acquired in connection with the merger except pursuant to:
. an effective registration statement under the Securities Act of 1933
covering the resale of those shares;
. in accordance with paragraph (d) of Rule 145 under the Securities Act;
or
. any other applicable exemption under the Securities Act.
The merger agreement requires Lifemark to deliver a written agreement from
each of its affiliates to the effect that such person will not offer or sell or
otherwise dispose of any of the shares of UnitedHealth Group common stock
issued to such person in or pursuant to the merger except in compliance with
the Securities Act and the rules and regulations promulgated by the Securities
and Exchange Commission thereunder. This proxy statement/prospectus may not be
used in connection with the resale of shares of UnitedHealth Group common stock
received in the merger by affiliates of Lifemark.
Stock Market Listing
An application will be filed for listing the shares of UnitedHealth Group
common stock to be issued in the merger on the New York Stock Exchange. If the
merger is completed, Lifemark common stock will be delisted from the Nasdaq
National Market and will be deregistered under the Securities Exchange Act of
1934.
35
<PAGE>
CERTAIN INFORMATION CONCERNING UNITEDHEALTH GROUP
For a detailed description of UnitedHealth Group's business, the latest
financial statements of UnitedHealth Group, management's discussion and
analysis of UnitedHealth Group's financial condition and results of operations,
and other important information concerning UnitedHealth Group, please refer to
UnitedHealth Group's Annual Report to Shareholders for the fiscal year ended
December 31, 1999, attached hereto as Annex G, and its Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000, attached hereto as
Annex H, both of which are incorporated by reference in this proxy
statement/prospectus.
Directors
The Board of Directors of UnitedHealth Group is divided into three classes
as nearly equal in number as possible. Each class serves three years with the
term of office of one class expiring at the Annual Meeting each year in
successive years. The following table provides certain information about the
directors of UnitedHealth Group.
<TABLE>
<CAPTION>
Director
Name Age since
---- --- --------
<S> <C> <C>
Directors Whose Terms Expire in 2001
William C. Ballard, Jr....................................... 60 1993
Richard T. Burke............................................. 57 1977
Stephen J. Hemsley........................................... 48 2000
William W. McGuire, M.D...................................... 52 1989
Directors Whose Terms Expire in 2002
Thomas H. Kean............................................... 65 1993
Robert L. Ryan............................................... 57 1996
William G. Spears............................................ 62 1991
Gail R. Wilensky............................................. 57 1993
Directors Whose Terms Expire in 2003
James A. Johnson............................................. 57 1993
Douglas W. Leatherdale....................................... 64 1983
Walter F. Mondale............................................ 73 1997
Mary O. Mundinger............................................ 63 1997
</TABLE>
Mr. Ballard is currently of counsel to Greenebaum, Doll & McDonald, a law
firm in Louisville, Kentucky. In 1992, Mr. Ballard retired after serving 22
years as the Chief Financial Officer and a director of Humana, Inc., a company
operating managed health care facilities. Mr. Ballard is a director of
Healthcare Recoveries, Inc., HealthCare REIT, Inc., LG&E Energy Corp. and Mid-
America Bancorp.
Mr. Burke has been a member of UnitedHealth Group's Board of Directors since
inception and was its Chief Executive Officer until February 1988. Mr. Burke is
owner, Chief Executive Officer and Governor of the Phoenix Coyotes, a National
Hockey League team. Mr. Burke is also a director of First Cash, Inc.
Mr. Hemsley has been a member of UnitedHealth Group's Board of Directors
since February 2000. Mr. Hemsley joined UnitedHealth Group in May 1997 and
became President in May 1999. Prior to that time, Mr. Hemsley served as Chief
Operating Officer and Senior Executive Vice President of UnitedHealth Group.
Prior to joining UnitedHealth Group, 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. Hemsley is also a
director of DAMARK International, Inc.
Mr. Johnson is the Chairman and Chief Executive Officer of Johnson Capital
Partners, a private investment company. On January 1, 1999, Mr. Johnson retired
as the Chairman and Chief Executive Officer of
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<PAGE>
Fannie Mae, positions he had held since 1990. Mr. Johnson is also a director of
Cummins Engine Company, Inc., The Goldman Sachs Group, Inc., Kaufman and Broad
Home Corporation, Target Corporation and Temple-Inland, Inc.
Mr. Kean is currently the President of Drew University in New Jersey. Mr.
Kean served as the Governor of the State of New Jersey from 1982 to 1990. From
1968 to 1977, Mr. Kean served in the New Jersey State Assembly, including two
years in the position of Speaker. Mr. Kean is also a director of Amerada Hess
Corporation, Aramark Corporation, Bell Atlantic Corporation, The CIT Group,
Inc., Fiduciary Trust Company International and The Pepsi Bottling Group, Inc.
Mr. Leatherdale has been the Chairman, Chief Executive Officer, President
and Chief Operating Officer of The St. Paul Companies, Inc. since 1990. The St.
Paul Companies, Inc. is an insurance, financial and general business
corporation. In addition, Mr. Leatherdale is a director of The John Nuveen
Company and Xcel Energy Inc.
Dr. McGuire is the Chairman of the Board of Directors and Chief Executive
Officer of UnitedHealth Group. Dr. McGuire joined UnitedHealth Group as
Executive Vice President in November 1988 and became its Chief Executive
Officer in February 1991. Dr. McGuire also served as UnitedHealth Group's Chief
Operating Officer from May 1989 to June 1995 and as its President from November
1989 until May 1999.
Mr. Mondale has been a partner in the law firm of Dorsey & Whitney LLP since
January 1997, and was also a partner in that firm from 1987 to 1993. He
previously served as a director of UnitedHealth Group from August 1991 to
August 1993. Mr. Mondale served as United States Ambassador to Japan from
August 1993 through December 1996. In 1984, Mr. Mondale was the Democratic
nominee for President of the United States. From 1977 to 1981, Mr. Mondale was
the Vice President of the United States. From 1964 to 1976, Mr. Mondale was a
U.S. Senator from Minnesota, and Mr. Mondale served as the Attorney General of
Minnesota from 1960 to 1964. Mr. Mondale also serves as a director of CNA
Financial Corporation, Northwest Airlines Corporation, St. Jude Medical, Inc.
and several BlackRock mutual funds managed by BlackRock Financial Management,
Inc.
Ms. Mundinger is Dean and Centennial Professor of Health Policy, School of
Nursing and Associate Dean, Faculty of Medicine at Columbia University in New
York. Ms. Mundinger has been with Columbia University since 1982. She is also a
director of Cell Therapeutics, Inc.
Mr. Ryan has been Senior Vice President and Chief Financial Officer of
Medtronic, Inc., a leading medical technology company specializing in
implantable and invasive therapies, since 1993. Mr. Ryan is also a director of
Brunswick Corporation.
Mr. Spears is a Managing Partner of W. G. Spears Grisanti & Brown LLC, an
investment counseling and management firm. Mr. Spears was the Chairman of the
Board of Spears, Benzak, Salomon & Farrell, Inc., an investment counseling and
management firm, from 1972 until 1999. In April 1995, Spears, Benzak, Salomon &
Farrell became a wholly owned subsidiary of KeyCorp. Mr. Spears also serves as
Chairman of Key Asset Management and as a director of Alcide Corporation and
Avatar Holdings, Inc.
Ms. Wilensky is currently the John M. Olin Senior Fellow at Project HOPE, an
international health foundation, and Chair of the Medicare Payment Advisory
Commission. From 1992 to 1993, Ms.Wilensky served as the Deputy Assistant to
President George Bush for policy development, and from 1990 to 1992, she was
the Administrator of the Health Care Financing Administration directing the
Medicaid and Medicare programs for the United States. Ms. Wilensky also serves
as a director of Advanced Tissue Sciences, Inc., Manor Care, Inc., Quest
Diagnostics Incorporated, St. Jude Medical, Inc., Shared Medical Systems
Corporation and Syncor International Corporation.
37
<PAGE>
Director Compensation
UnitedHealth Group pays directors who are not employees of UnitedHeath Group
an annual retainer of $30,000, a $1,500 fee for attending each Board meeting in
person ($750 for attending by telephone), and a $1,000 fee for attending each
committee meeting in person ($500 for attending by telephone). In addition,
UnitedHealth Group pays each of the Chairman of the Audit Committee and the
Chairman of the Compensation and Human Resources Committee an annual retainer
of $5,000.
UnitedHealth Group also provides health care coverage to current and past
directors who are not eligible for coverage under another group health care
benefit program or Medicare. During 2000, UnitedHealth Group paid approximately
$4,297 in health care premiums on behalf of Mr. Burke and an aggregate of
approximately $5,084 on behalf of past directors.
Directors of UnitedHealth Group who are not employees of UnitedHealth Group
receive grants of non-qualified stock options under the 1995 Non-employee
Director Stock Option Plan (the "Director Plan"). Under the Director Plan,
directors receive two types of option grants: initial grants and annual grants.
The initial grants (non-qualified stock options to purchase 18,000 shares of
UnitedHealth Group common stock) are made automatically on the date the
eligible director is first elected to the Board of Directors and become
exercisable over the following three-year period at the rate of 6,000 shares
per year. The annual grants (non-qualified stock options to purchase 10,000
shares of UnitedHealth Group common stock) are made automatically in four equal
quarterly installments on the first business day of each fiscal quarter. They
become exercisable six months after grant. The exercise price for options
granted under the Director Plan is the closing sale price of UnitedHealth Group
common stock on the date the option is granted. In 2000, each non-employee
director also received a special one-time grant of 3,000 shares of restricted
stock. These shares become available in equal installments over a period of
three years.
Executives
Executive Officers of UnitedHealth Group
<TABLE>
<CAPTION>
First Elected as
Name Age Position Executive Officer
---- --- -------- -----------------
<S> <C> <C> <C>
William W. McGuire,
M.D. .................. 52 Chairman, Chief Executive Officer and Director 1988
Stephen J. Hemsley...... 48 President and Director 1997
Patrick J. Erlandson.... 41 Chief Financial Officer 2001
David J. Lubben......... 49 General Counsel and Secretary 1996
Lois E. Quam............ 39 Chief Executive Officer, Ovations 1998
Jeannine R. Rivet....... 52 Executive Vice President and Chief Executive Officer, Ingenix 1998
Robert J. Sheehy........ 43 Chief Executive Officer, UnitedHealthcare 2001
R. Channing Wheeler..... 48 Chief Executive Officer, Uniprise 1998
</TABLE>
UnitedHealth Group's Board of Directors elects executive officers annually.
UnitedHealth Group'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 UnitedHealth Group in November 1988, was appointed UnitedHealth
Group's Chief Operating Officer in May 1989, its President in November 1989,
and its Chief Executive Officer in February 1991.
Mr. Hemsley joined UnitedHealth Group in May 1997. He became President in
May 1999 and a member of the Board of Directors in February 2000. Prior to that
time, he served as Chief Operating Officer and Senior Executive Vice President
of UnitedHealth Group. Prior to joining UnitedHealth Group, 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. Erlandson joined UnitedHealth Group in 1997 and became Chief Financial
Officer in January 2001. Prior to January 2001, Mr. Erlandson served in various
capacities with UnitedHealth Group, including
38
<PAGE>
Corporate Controller and Chief Accounting Officer. Prior to joining
UnitedHealth Group, Mr. Erlandson was a partner with Arthur Andersen LLP where
he served from 1981 to 1997.
Mr. Lubben became UnitedHealth Group's General Counsel and Secretary in
October 1996. Prior to joining UnitedHealth Group, 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 Chief Executive
Officer of Ovations in April 1998. Prior to April 1998, Ms. Quam served in
various capacities including Chief Executive Officer, AARP Division, Vice
President, Public Sector Services and Director, Research. Prior to joining
UnitedHealth Group, Ms. Quam served as Research Director from 1987 to 1989 for
Partners National Health Plan.
Ms. Rivet joined UnitedHealth Group in June 1990 and became Executive Vice
President and Chief Executive Officer of Ingenix in January 2001. Ms. Rivet was
an Executive Vice President of UnitedHealthcare from October 1994 to March 1998
and served as the Chief Executive Officer of UnitedHealthcare from April 1998
to December 2000. She served as UnitedHealth Group's Senior Vice President,
Health Plan Operations from September 1993 to September 1994 and its Vice
President of Health Service Operations from June 1990 to September 1993.
Mr. Sheehy joined UnitedHealth Group in 1992 and became the Chief Executive
Officer of UnitedHealthcare in January 2001. From April 1998 to December 2000,
he was President of UnitedHealthcare. Prior to April 1998, Mr. Sheehy served in
various capacities with UnitedHealth Group, including Chief Executive Officer
of United HealthCare of Ohio.
Mr. Wheeler joined UnitedHealth Group in March 1995 and became Chief
Executive Officer of Uniprise in May 1998. Prior to May 1998, he served in
various capacities with UnitedHealth Group, including Chief Executive Officer,
Northeast HealthPlans.
39
<PAGE>
Cash and Other Compensation
The following table provides certain summary information for the fiscal
years ended December 31, 2000, 1999 and 1998 relating to cash and other forms
of compensation paid to, or accrued by UnitedHealth Group on behalf of,
UnitedHealth Group's Chief Executive Officer and each of the four other most
highly compensated executive officers of UnitedHealth Group in the fiscal year
ended December 31, 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Other Annual Securities All Other
Name and Principal Salary Compensation Underlying Compensation
Position Year ($) Bonus ($) ($)(2) Options/(#) ($)(3)
------------------ ---- --------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
William W. McGuire,
M.D.................... 2000 1,696,154 --(1) 109,159 650,000 2,822,599
Chief Executive Officer 1999 1,588,461 2,978,365 81,479 4,150,000 123,863
1998 1,300,000 -0- 54,985 980,000 110,682
Stephen J. Hemsley...... 2000 871,154 --(1) 22,108 300,000 662,672
President and Chief 1999 747,116 1,167,368 19,303 2,020,000 23,929
Operating Officer 1998 559,615 -0- 14,400 560,000 8,913
Jeannine M. Rivet....... 2000 462,961 --(1) -0- 80,000 15,633
Chief Executive
Officer, 1999 442,831 442,831 6,400 199,624 14,608
UnitedHealthcare 1998 374,039 178,200 14,400 222,104 11,000
R. Channing Wheeler..... 2000 457,308 --(1) 3,200 100,000 31,839
Chief Executive
Officer, 1999 420,192 475,000 -0- 277,520 12,100
Uniprise 1998 365,385 146,650 6,300 160,000 7,154
Arnold H. Kaplan(4)..... 2000 414,400 --(1) 12,616 30,000 29,133
Chief Financial Officer 1999 405,715 400,000 13,352 180,000 12,959
1998 177,400 141,000 11,096 250,000 -0-
</TABLE>
--------
(1) UnitedHealth Group anticipates that bonus amounts for the fiscal year ended
December 31, 2000 will be determined by the Board of Directors of
UnitedHealth Group at its regularly scheduled meeting in February 2001.
(2) Other annual compensation for Dr. McGuire includes company-provided
transportation of $67,667 in 2000, $50,839 in 1999 and $29,625 in 1998, and
an expense allowance of $21,600 in each of 2000, 1999 and 1998.
(3) For each of the named executive officers except Dr. McGuire and Mr.
Hemsley, the indicated amounts consist of contributions made pursuant to
UnitedHealth Group's 401(k) Savings Plan and Executive Savings Plan and
company-paid insurance premiums of $1,744 in each of 2000 and 1999 for Ms.
Rivet; $3,870 in 2000 and $3,731 in 1999 for Mr. Wheeler; and $4,701 in
2000 and $2,514 in 1999 for Mr. Kaplan. The amounts indicated for Dr.
McGuire and Mr. Hemsley include bonuses of $2,600,000 and $600,000,
respectively, received in early 2000 for services rendered to UnitedHealth
Group over the past several years, as well as company contributions made
pursuant to UnitedHealth Group's 401(k) Savings Plan and Executive Savings
Plan. The amounts indicated for Dr. McGuire also include company-paid
insurance premiums of $82,364 in 2000, $77,556 in 1999 and $72,774 in 1998,
and the amounts indicated for Mr. Hemsley include company-paid insurance
premiums of $1,516 in each of 2000 and 1999.
(4) Mr. Kaplan joined UnitedHealth Group on July 1, 1998 and served as
UnitedHealth Group's Chief Financial Officer from July 1, 1998 through
January 2, 2001.
40
<PAGE>
OPTION GRANTS IN 2000
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term(2)
----------------------- --------------------
Number of
Securities % of Total
Underlying Options Exercise
Options Granted to or Base
Granted Employees Price Expiration
Name (#) In 2000 ($/share) Date(1) 5%($) 10%($)
---- ---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
William W. McGuire,
M.D.................... 650,000(3) 8.1 23.8125 03/08/10 9,734,110 24,668,145
Stephen J. Hemsley...... 300,000(4) 3.8 23.8125 03/08/10 4,492,666 11,385,298
Jeannine M. Rivet....... 40,000(5) 0.5 23.8125 03/08/10 559,022 1,518,040
40,000(6) 0.5 39.0938 07/26/10 983,435 2,492,218
R. Channing Wheeler..... 60,000(5) 0.8 23.8125 03/08/10 898,533 2,277,060
40,000(6) 0.5 39.0938 07/26/10 983,435 2,492,218
Arnold H. Kaplan........ 30,000(7) 0.4 39.0938 07/26/10 737,576 1,869,163
</TABLE>
--------
(1) All options granted in 2000 expire ten years following the date of grant,
subject to earlier termination upon certain events related to termination
of employment. Options not yet exercisable generally become exercisable
upon a change in control of UnitedHealth Group. A change in control as
defined in UnitedHealth Group's Amended and Restated 1991 Stock and
Incentive Plan occurs upon the sale of all or substantially all of the
assets of UnitedHealth Group or any merger, reorganization or exchange or
tender offer that will result in a change in the power to elect 50% or more
of UnitedHealth Group's Board of Directors. The exercise price may be paid
in cash, in shares of stock or pursuant to a cashless exercise procedure
under which the optionee instructs a brokerage firm to sell the purchased
shares and remit to UnitedHealth Group out of the proceeds an amount equal
to the exercise price plus all applicable withholding taxes.
(2) The "potential realizable value" shown is the potential gain on the last
day the option remains exercisable. This value will be achieved only if the
options have been held for the full ten years and the stock price has
appreciated at the assumed rate. Potential realizable value is listed for
illustration only. The values disclosed are not intended to be, and should
not be interpreted as, representations or projections of future value of
UnitedHealth Group common stock or of the stock price.
(3) Options become exercisable at the rate of 25% per year over a period of
four years on the first day of each year, beginning on January 1, 2001.
(4) Options become exerciseable at the rate of 25% per year over a period of
four years on the eighth day of March of each year, beginning on March 8,
2001.
(5) Options become exerciseable at the rate of 33.3% per year over a period of
three years, subject to certain conditions.
(6) Options become exercisable at the rate of 25% per year over a period of
four years on the twenty-sixth day of July of each year, beginning on July
26, 2001.
(7) Options become exercisable at the rate of 25% per year over a period of
four years on the twenty-sixth day of July of each year, beginning July 26,
2001, subject to certain early vesting provisions.
41
<PAGE>
AGGREGATED OPTION EXERCISES IN 2000 AND OPTION VALUES AT DECEMBER 31, 2000
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Securities in-the-Money Options
Acquired Value Underlying Unexercised At 12/31/00
On Exercise Realized Options at 12/31/00 Exercisable/
Name (#) ($) Exercisable/Unexercisable* Unexercisable ($)(1)
---- ----------- ---------- -------------------------- -----------------------
<S> <C> <C> <C> <C>
William W. McGuire,
M.D.................... 1,000,000 46,448,512 5,906,791/2,555,833 247,819,400/100,312,136
Stephen J. Hemsley...... -0- -0- 2,151,666/1,328,334 88,354,019/52,082,201
Jeannine M. Rivet....... 199,638 4,117,785 612,056/343,672 25,113,728/12,754,210
R. Channing Wheeler..... 138,626 4,349,208 342,486/448,284 13,420,871/17,204,031
Arnold H. Kaplan........ -0- -0- 186,667/273,333 7,261,160/10,268,526
</TABLE>
--------
(1) Calculated as market price per share on December 29, 2000 (the last trading
day of the calendar year 2000) of $61.38, less the per share exercise
price, times the number of unexercised options.
LONG TERM INCENTIVE PLAN
The following table reflects awards made under the Company's Supplemental
Long Term Executive Compensation Plan (the "Plan") during the fiscal year ended
December 31, 2000 to the Chief Executive Officer and the executive officers
named in the Summary Compensation Table above. Any payments earned and made
under the Plan will be reported in the Summary Compensation Table in the year
paid. The amounts shown in the table are for illustration purposes only and
should not be construed as payouts for the executives listed. Performance
thresholds must be achieved before any payments are made under the Plan.
Long-Term Incentive Plans--Awards During Year Ended December 31, 2000
<TABLE>
<CAPTION>
Estimated Future Payouts
Under Non-Stock Price-Based
Plans($)(2)
---------------------------
Performance or Other
Period Until
Name Maturation or Payout(1) Threshold Target Maximum
---- ----------------------- --------- ------- ---------
<S> <C> <C> <C> <C>
William W. McGuire.......... 1999-2000 -0- 821,154 1,642,308
1999-2001 -0- 847,436 1,694,872
2000-2002 -0- 899,359 1,798,718
Stephen J. Hemsley.......... 1999-2000 -0- 404,568 809,135
1999-2001 -0- 419,712 839,423
2000-2002 -0- 472,875 945,750
Jeannine M. Rivet .......... 1999-2000 -0- 226,448 452,896
1999-2001 -0- 228,465 456,931
2000-2002 -0- 244,319 488,638
R. Channing Wheeler......... 1999-2000 -0- 219,375 438,750
1999-2001 -0- 223,750 447,500
2000-2002 -0- 244,319 488,638
Arnold H. Kaplan............ 1999-2000 -0- -0- -0-
1999-2001 -0- -0- -0-
2000-2002 -0- -0- -0-
</TABLE>
--------
(1) Each performance cycle ends on December 31 of its final year. Payouts, if
any, will be made within six months of the end of the applicable period,
provided, however, that a pro rata portion of such payouts may be made
earlier upon a change in control of UnitedHealth Group, and participants
may elect, if permitted by law, to defer the payment of any awards under
UnitedHealth Group's Executive Savings Plan.
(2) Performance goals are based on a number of criteria, including financial
factors, such as revenue, return on equity, and share price appreciation
and non-financial factors, such as diversity.
Executive Employment Agreements
UnitedHealth Group has entered into an employment agreement with each of the
executive officers named in the Summary Compensation Table.
42
<PAGE>
William W. McGuire, M.D. Dr. McGuire entered into a revised employment
agreement, effective October 13, 1999, to serve as Chief Executive Officer. The
initial term of this agreement is five years ending on October 13, 2004 and is
automatically extended for additional one-year periods on each anniversary of
the effective date unless either party delivers prior notice of intent not to
renew.
Pursuant to the agreement, Dr. McGuire currently receives a base annual
salary of $1,700,000 which is subject to a minimum increase of $100,000 each
year. During each calendar year of the initial five-year term of the agreement,
Dr. McGuire receives a nonqualified stock option to purchase a minimum of
650,000 shares of UnitedHealth Group common stock. These stock options vest
over a period of four years at the rate of 25% per year, subject to additional
vesting provisions if specified future events occur. Dr. McGuire is eligible to
participate in UnitedHealth Group's incentive bonus plan at prescribed levels
and in its other employee benefit programs. In addition, UnitedHealth Group
provides and pays for life and disability policies on Dr. McGuire that he owns.
The agreement provides Dr. McGuire with a supplemental retirement benefit equal
to a percentage of his cash compensation during the three calendar years
preceding his retirement.
The employment agreement provides severance benefits if Dr. McGuire's
employment by UnitedHealth Group ends under certain circumstances. If his
employment is terminated by UnitedHealth Group without cause or by Dr. McGuire
for good reason as those terms are defined in the agreement, UnitedHealth Group
will pay Dr. McGuire his salary and bonus for the 36 months following the
termination of his employment. In addition, Dr. McGuire will continue to
receive credited service under his supplemental retirement benefits for the
36-month period. Certain stock options and restricted stock awards granted to
Dr. McGuire will also vest and such stock options will remain exercisable for a
period of up to 72 months but not beyond the expiration date of the respective
option.
If Dr. McGuire's employment is terminated because of his death or permanent
disability, UnitedHealth Group will pay his beneficiaries or him his salary and
bonus for a period of 24 months. In addition, he or his beneficiaries will
receive the proceeds from his disability or life insurance policies, and
certain of his stock options will vest immediately and remain exercisable for
up to 36 months following his death or permanent disability but not beyond the
expiration date of the respective option.
If Dr. McGuire voluntarily terminates his employment without good reason,
UnitedHealth Group will pay his beneficiaries or him his salary and bonus for a
period of 24 months. Any vested stock options at the time of the termination of
his employment will remain exercisable for up to 36 months following
termination of his employment but not beyond the expiration date of the
respective option. In addition, in the event of any termination of Dr.
McGuire's employment other than a termination for cause, UnitedHealth Group
will continue to provide health coverage for Dr. McGuire and his spouse for the
remainder of their lives and his children until age 25.
Pursuant to the employment agreement, Dr. McGuire is subject to provisions
prohibiting his solicitation of UnitedHealth Group employees and competition
with UnitedHealth Group during the term of the agreement, for the period of the
severance payments and one year thereafter. In addition, he is prohibited at
all times from disclosing confidential information related to UnitedHealth
Group.
Stephen J. Hemsley. Mr. Hemsley entered into an employment agreement,
effective October 13, 1999, to serve as President. This agreement continues
until it is terminated in accordance with its terms as discussed below.
During each calendar year of the agreement, Mr. Hemsley receives a
nonqualified stock option to purchase a minimum of 300,000 shares of
UnitedHealth Group common stock. These stock options vest over a period of four
years at the rate of 25% per year based on the achievement of performance goals
established at the time of grant or upon the ninth anniversary of the date of
grant, subject to additional vesting provisions if specified
43
<PAGE>
future events occur. Mr. Hemsley is eligible to participate in UnitedHealth
Group's incentive bonus plan at prescribed levels and in its other employee
benefit programs. In addition, UnitedHealth Group provides and pays for life
and disability policies on Mr. Hemsley that he owns. Pursuant to the terms of
the agreement, UnitedHealth Group is in the process of establishing a
supplemental retirement benefit plan for Mr. Hemsley that will be reasonable
and customary for executives of a similar position in comparably sized
companies.
The employment agreement provides severance benefits if Mr. Hemsley's
employment by UnitedHealth Group ends under certain circumstances. If his
employment is terminated by UnitedHealth Group without cause or by Mr. Hemsley
for good reason other than in connection with a change in control as those
terms are defined in the agreement, UnitedHealth Group will pay Mr. Hemsley two
times his annual salary and bonus over the 12 months following the termination
of his employment. If such termination is in connection with a change in
control, Mr. Hemsley will receive three times his annual salary and bonus over
the 12 months following the termination of his employment. If the termination
is in connection with a change in control, any stock options or restricted
stock awards granted to Mr. Hemsley will also vest and the stock options will
remain exercisable for a period of 36 months but not longer than the expiration
date under the respective option. If the termination is not in connection with
a change in control, the Compensation and Human Resources Committee will give
consideration to the vesting of any unvested options and the period that the
vested options remain exercisable after termination of Mr. Hemsley's
employment.
If Mr. Hemsley's employment is terminated because of his death or permanent
disability, UnitedHealth Group will pay his beneficiaries or him his salary and
bonus for a period of 12 months. In addition, he or his beneficiaries will
receive the proceeds from his disability or life insurance policies, and
certain of his stock options will vest immediately and remain exercisable for
up to 36 months following his death or permanent disability but not beyond the
expiration date of the respective option. In addition, in the event of any
termination of Mr. Hemsley's employment other than a termination for cause,
UnitedHealth Group will continue to provide health coverage for Mr. Hemsley and
his spouse until age 65 and his children until age 25.
Pursuant to the employment agreement, Mr. Hemsley is subject to provisions
prohibiting his solicitation of UnitedHealth Group employees during the term of
the agreement, for the period of the severance payments and for one year
thereafter. Mr. Hemsley is also prevented from competing with UnitedHealth
Group during the term of his employment and the period that severance payments
are made to him under the employment agreement. In addition, he is prohibited
at all times from disclosing confidential information related to UnitedHealth
Group.
Jeannine M. Rivet. Ms. Rivet entered into an employment agreement, effective
October 16, 1998, to serve in an executive position. This agreement remains in
effect until it is terminated by either party under certain circumstances.
Under this agreement, Ms. Rivet is eligible to participate in UnitedHealth
Group's incentive bonus and stock plans and its other employee benefit plans.
R. Channing Wheeler. Mr. Wheeler entered into an employment agreement,
effective June 9, 1998, to serve in an executive position. The initial term of
this agreement is three years; after the initial term, this agreement
automatically renews for additional one year terms unless either party provides
prior notice of intent not to renew. Under this agreement, Mr. Wheeler is
eligible to participate in UnitedHealth Group's incentive bonus and stock plans
and its other employee benefit plans.
Arnold H. Kaplan. Mr. Kaplan entered into an employment agreement, effective
May 19, 1998, to serve as Chief Financial Officer of UnitedHealth Group. This
agreement remains in effect until it is terminated by either party under
certain circumstances. Under this agreement, Mr. Kaplan is eligible to
participate in UnitedHealth Group's incentive bonus and stock plans and its
other employee benefit plans. Mr. Kaplan retired as Chief Financial Officer
effective as of January 2, 2001.
Pursuant to their agreements, each of Ms. Rivet and Mr. Wheeler is entitled
to receive severance compensation for a 12-month period equal to the
executive's base salary and bonus (as determined by his or
44
<PAGE>
her agreement) if the executive's employment is terminated by UnitedHealth
Group without cause or if a change in employment occurs (as defined in his or
her agreement). This severance compensation is greater if these events occur
within two years following a change in control (as defined in his or her
agreement). During the term of these agreements and during certain periods of
time following termination of these agreements, each executive is subject to
non-solicitation and non-competition provisions.
Severance Arrangements and Change-in-Control Provisions
According to UnitedHealth Group's Severance Pay Plan, which applies to all
regular company employees, certain of the executive officers may be eligible to
receive severance pay following their termination in certain events. However,
any payments an executive officer receives in connection with a change in
control (as defined in and pursuant to an employment agreement with
UnitedHealth Group) will replace and be in lieu of payment and/or benefits
under any company severance program, including UnitedHealth Group's Severance
Pay Plan. Under UnitedHealth Group's Severance Pay Plan, the amount of
severance pay following termination depends upon the executive officer's length
of service, grade level within UnitedHealth Group, and the execution of a
company-approved release.
In the case of a change in control of UnitedHealth Group, certain of the
outstanding stock options granted under UnitedHealth Group's Amended and
Restated 1991 Stock and Incentive Plan will become exercisable in full. Change
in control is defined for this purpose as the sale of all or substantially all
of UnitedHealth Group's assets, or any merger, reorganization or exchange or
tender offer that will result in a change in the power to elect 50% or more of
the members of UnitedHealth Group's Board of Directors.
UnitedHealth Group Common Stock Ownership
The following table provides information about each shareholder known to
UnitedHealth Group to own beneficially more than 5% of the outstanding shares
of UnitedHealth Group common stock as of December 31, 2000.
<TABLE>
<CAPTION>
Name And Address Of Beneficial Amount And Nature Percent of
Owner Of Beneficial Ownership(1) Class(2)
------------------------------ -------------------------- ----------
<S> <C> <C>
Massachusetts Financial Services
Company
500 Boylston Street, 15th Floor
Boston, MA 02116................... 25,602,094 (3) 8.0%
FMR Corporation
82 Devonshire Street
Boston, MA 02109-3614.............. 23,410,034 (4) 7.3%
</TABLE>
--------
(1) Except as otherwise described, the shareholders in the table have sole
voting and investment powers with respect to the shares listed.
(2) Percent of class calculation is based on 319,821,652 shares of UnitedHealth
Group common stock outstanding as of December 31, 2000.
(3) This information is based on a Schedule 13G/A filed by Massachusetts
Financial Services Company ("MFS") with the Securities and Exchange
Commission (the "SEC") on February 11, 2000 reporting beneficial ownership
data as of February 11, 2000. MFS holds sole voting power with respect to
25,561,934 shares and sole investment power with respect to all 25,602,094
shares. The MFS Schedule 13G/A states that these shares are also
beneficially owned by certain other nonreporting entities.
(4) This information is based on a Schedule 13G/A filed by FMR Corporation
("FMR") with the SEC on February 14, 2000 reporting beneficial ownership
data as of December 31, 1999. FMR, through its control over Fidelity
Management and Research Company, a wholly-owned investment adviser
subsidiary of FMR, Fidelity Management Trust Company and Fidelity
International Limited, holds sole investment power with respect to all
23,410,034 shares.
45
<PAGE>
The following table provides information about the beneficial ownership of
UnitedHealth Group common stock as of December 31, 2000 by each director, each
named executive officer, and by all directors and all executive officers as a
group. The amounts set forth in the column entitled "Amount and Nature of
Beneficial Ownership" include shares set forth in the column entitled "Number
of Shares Beneficially Owned as a Result of Options Exercisable Within 60 Days
of December 31, 2000."
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned
as a Result of
Amount and Options
Nature of Exercisable
Name of Beneficial Owner or Identity Beneficial Within 60 Days of
of Group Ownership(1) December 31, 2000
------------------------------------ ------------ ------------------
<S> <C> <C>
William C. Ballard.................... 91,900 76,500
Richard T. Burke...................... 1,285,762(2) 396,500
Stephen J. Hemsley.................... 2,158,476(3) 2,151,666
James A. Johnson...................... 167,900(4) 140,500
Thomas H. Kean........................ 153,500(5) 140,500
Douglas W. Leatherdale................ 540,400(6) 332,500
William W. McGuire, M.D............... 6,744,554(3) 6,481,792
Walter F. Mondale..................... 51,840(7) 38,500
Mary O. Mundinger..................... 47,700 38,500
Robert L. Ryan........................ 49,500 38,500
William G. Spears..................... 220,724 204,500
Gail R. Wilensky...................... 87,500 78,500
Jeannine M. Rivet..................... 685,057(3) 625,389
R. Channing Wheeler................... 366,528(3) 362,486
Arnold H. Kaplan...................... 492,232(8) 460,000
All executive officers and directors
as a group (17 persons).............. 13,512,721(9) 11,929,835
</TABLE>
--------
(1) Unless otherwise noted, each person and group identified possesses sole
voting and investment power with respect to the shares shown opposite such
person's or group's name. Shares not outstanding but deemed beneficially
owned by virtue of the right of an individual to acquire them within 60
days of December 31, 2000 are treated as outstanding only when determining
the amount and percent owned by such individual or group. All amounts shown
for individuals reflect less than 1% of the shares outstanding, except for
Dr. McGuire who beneficially owns 2.1% of the shares outstanding. The group
total reflects 4.2% of the shares outstanding.
(2) Includes 33,062 shares held directly by Mr. Burke's spouse. Mr. Burke
disclaims beneficial ownership with respect to these shares.
(3) Includes the following number of shares held in account by the Trustee of
UnitedHealth Group's ESOP for each of the following, who have sole voting
power and no investment power: Dr. McGuire, 1,554 shares; Mr. Hemsley, 36
shares; Mr. Kaplan, 18 shares; Ms. Rivet, 408 shares; and Mr. Wheeler, 60
shares.
(4) Includes 400 shares held by Mr. Johnson in a family trust. Mr. Johnson
disclaims beneficial ownership with respect to these shares.
(5) Includes 2,000 shares held by Mr. Kean in a trust for the benefit of his
minor child.
(6) Includes 1,400 shares held by Mr. Leatherdale's one dependent child. Mr.
Leatherdale disclaims beneficial ownership with respect to these shares.
(7) Includes 1,140 shares held by Mr. Mondale in a revocable trust and 4,200
shares held in an Individual Retirement Account.
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(8) Includes 30,000 shares held by Mr. Kaplan in an Individual Retirement
Account.
(9) Includes 2,736 shares held by the Trustee of UnitedHealth Group's ESOP for
the accounts of executive officers of UnitedHealth Group, with respect to
which such persons have sole voting power and no investment power, the
indirect holdings included in footnotes (2), (4), (5), (6), (7) and (8)
above, and the holdings of spouses of executive officers.
Properties
As of December 31, 2000, the Company leased approximately 1.7 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, 2000, the Company leased
approximately 5.6 million aggregate square feet in the United States and
Europe. 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, 2025. As of December 31, 2000, the Company owned
approximately 121,500 aggregate square feet of space for administrative offices
in various states.
Employees
As of December 31, 2000, UnitedHealth Group employed approximately 28,700
individuals.
Certain Relationships and Transactions
During UnitedHealth Group's fiscal year ended December 31, 1999,
UnitedHealth Group paid insurance premiums, in an amount which was not material
to either The St. Paul Companies, Inc. or UnitedHealth Group, to The St. Paul
Companies, Inc., of which Mr. Leatherdale is a director and an executive
officer.
Dorsey & Whitney LLP is UnitedHealth Group's corporate legal counsel. Mr.
Mondale is a partner of Dorsey & Whitney LLP.
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THE MERGER AGREEMENT
The following is a summary of certain aspects of the merger agreement. This
summary does not purport to be complete and is qualified in its entirety by
reference to the complete text of the merger agreement, which is incorporated
by reference and attached to this proxy statement/prospectus as Annex A.
Structure of the Merger and Conversion of Lifemark Common Stock
In accordance with the merger agreement and Delaware law, Leo Acquisition
Corp., a newly formed, wholly owned subsidiary of UnitedHealth Group, will be
merged with and into Lifemark. As a result of the merger, the separate
corporate existence of Leo Acquisition Corp. will cease and Lifemark will
survive as a wholly owned subsidiary of UnitedHealth Group.
Upon completion of the merger, each outstanding share of Lifemark common
stock, other than shares held by Lifemark as treasury stock or by UnitedHealth
Group or their respective subsidiaries, will be canceled and converted into the
right to receive either UnitedHealth Group common stock or cash. Unless
UnitedHealth Group makes the cash payment election described below, for each
share of Lifemark common stock you own, you will receive a number of shares of
UnitedHealth Group common stock based on the average closing price per share of
UnitedHealth Group common stock on the New York Stock Exchange for the ten
consecutive trading days ending with and including the second business day
before the closing date of the merger. If the average closing price is:
. $47.50 or more, for each share of Lifemark common stock you own, you
will receive a number of shares of UnitedHealth Group common stock equal
to $10.55 divided by the average closing price or $56.50, whichever is
less;
. $44.00 or less, and UnitedHealth Group does not make the cash payment
election described below, for each share of Lifemark common stock you
own, you will receive a number of shares of UnitedHealth Group common
stock equal to $10.08 divided by the average closing price; and
. greater than $44.00, but less than $47.50, for each share of Lifemark
common stock you own, you will receive a number of shares of
UnitedHealth Group common stock equal to a fraction, the numerator of
which is $10.08 plus (1) the product of (a) $0.47 and (b) the difference
between the average closing price and $44.00, divided by (2) $3.50, and
the denominator of which is the average closing price. The numerator
derived above will be an amount between $10.08 and $10.55.
If the average closing price as described above is less than $44.00,
UnitedHealth Group may elect to pay cash rather than shares of its common stock
in the merger. If UnitedHealth Group makes this cash payment election, you will
receive $10.08 in cash per share of Lifemark common stock. UnitedHealth Group
common stock is traded on the New York Stock Exchange under the trading symbol
"UNH." On January 11, 2001, UnitedHealth Group common stock closed at $55.38
per share. We believe the merger offers significant value to our stockholders.
The number of shares of UnitedHealth Group common stock issuable in the
merger will be proportionately adjusted for any stock split, stock dividend or
similar event with respect to UnitedHealth Group common stock effected between
the date of the merger agreement and the completion of the merger. UnitedHealth
Group effected a two for one stock split on December 22, 2000. Because the
merger will be completed after the stock split, the exchange ratios used above
have been adjusted to reflect the stock split.
No fractional shares of UnitedHealth Group common stock will be issued in
connection with the merger. Instead, you will receive an amount of cash
(rounded to the nearest whole cent) in lieu of a fraction of a share of
UnitedHealth Group common stock equal to the product of such fraction
multiplied by the closing price for a share of UnitedHealth Group common stock
on the New York Stock Exchange on the last full trading day prior to the
effective time of the merger.
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The following examples illustrate how the number of shares of UnitedHealth
Group common stock to which a Lifemark stockholder will be entitled will vary
based on changes in the average closing price of UnitedHealth Group common
stock.
(1) If the average closing price were $57.50, a person holding 100
shares of Lifemark common stock would be entitled to receive 18 shares of
UnitedHealth Group common stock:
$10.55/$56.50* = 0.1867257 X 100 = 18.67257 = 18
* For purposes of calculating the exchange ratio, the average closing
price may not exceed $56.50.
Instead of a fraction of a share, the Lifemark stockholder would receive
an amount of cash equal to 0.67257 multiplied by the closing price of
UnitedHealth Group common stock on the New York Stock Exchange on the last
full trading day prior to the completion of the merger.
(2) If the average closing price were $45.00, a person holding 100
shares of Lifemark common stock would be entitled to receive 22 shares of
UnitedHealth Group common stock:
<TABLE>
<S> <C>
$10.08 + $0.47 [($45.00 - $44.00)/$3.50]
________________________________________ = 0.2269841 X 100 = 22.69841 = 22
$45.00
</TABLE>
Instead of a fraction of a share, the Lifemark stockholder would receive
an amount of cash equal to 0.69841 multiplied by the closing price of
UnitedHealth Group common stock on the New York Stock Exchange on the last
full trading day prior to the completion of the merger.
(3) If the average closing price were $43.00, a person holding 100
shares of Lifemark common stock would be entitled to receive 23 shares of
UnitedHealth Group common stock**:
$10.08/$43.00 = 0.2344186 X 100 = 23.44186 = 23
Instead of a fraction of a share, the Lifemark stockholder would receive
an amount of cash equal to 0.44186 multiplied by the closing price of
UnitedHealth Group common stock on the New York Stock Exchange on the last
full trading day prior to the completion of the merger.
** If the average closing price is below $44.00, UnitedHealth Group
may elect to pay the shareholder cash in the amount of $10.08 per share of
Lifemark stock, rather than shares of UnitedHealth Group common stock.
Treatment of Lifemark Stock Options
At the effective time, each outstanding option granted by Lifemark to
purchase shares of Lifemark common stock, whether vested or unvested, will be
assumed by UnitedHealth Group and converted into an option to acquire, on
substantially the same terms and conditions as applied to the Lifemark option
(except that each UnitedHealth Group option issued in exchange for a Lifemark
option will be exercisable for the entire
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<PAGE>
remaining term of the option, even if the option holder ceases to be an
employee or director of Lifemark or UnitedHealth Group and, pursuant to the
terms of the Lifemark options, each previously unvested Lifemark option will be
converted into a fully vested UnitedHealth Group option), a number of shares of
UnitedHealth Group common stock equal to the number of shares of Lifemark
common stock that were issuable upon exercise of such option immediately prior
to the effective time of the merger multiplied by the exchange ratio
(calculated, if the cash payment election is made, based on the greater of
$40.00 or the average closing price) and rounded down to the nearest whole
number of shares. The per share exercise price of such UnitedHealth Group stock
options will equal the exercise price per share at which the Lifemark stock
option was exercisable immediately prior to the effective time of the merger
divided by the exchange ratio (calculated, if the cash payment election is
made, as set forth above, and rounded up to the nearest whole cent).
UnitedHealth Group has agreed to cause the UnitedHealth Group common stock
issuable upon exercise of the UnitedHealth Group stock options to be listed on
the New York Stock Exchange. Within five business days following the effective
time, UnitedHealth Group will file a registration statement on Form S-8 with
the Securities and Exchange Commission with respect to the UnitedHealth Group
common stock underlying such UnitedHealth Group stock options.
Surrender of Lifemark Stock Certificates
Within ten business days after the merger is completed, Wells Fargo Bank
Minnesota, N.A., UnitedHealth Group's transfer agent and the exchange agent for
the merger, will mail to you a letter of transmittal and instructions for
surrendering your Lifemark stock certificates in exchange for UnitedHealth
Group common stock or cash, if the cash payment election is made. When you
deliver your Lifemark stock certificates to the exchange agent along with a
properly executed letter of transmittal and any other required documents, your
Lifemark stock certificates will be cancelled and you will receive an account
statement reflecting the number of whole shares of UnitedHealth Group common
stock and cash in lieu of fractional shares to which you are entitled under the
merger agreement or, if the cash payment election is made, cash as provided
under the merger agreement.
In lieu of delivering physical certificates representing shares of
UnitedHealth Group common stock, UnitedHealth Group will deliver uncertificated
shares. Instead of receiving stock certificates, you will receive an account
statement reflecting your ownership interest in shares of UnitedHealth Group
common stock. Ownership through the direct registration system is direct stock
ownership--just like holding a physical certificate--without the inconvenience
and risk associated with safeguarding physical certificates. Although your
shares will be held with the transfer agent, you will receive all dividends and
communications directly from UnitedHealth Group. UnitedHealth Group's transfer
agent will periodically mail a statement to you reflecting the number of shares
you own. If you want to receive a physical certificate evidencing your shares
of UnitedHealth Group common stock, you will be able to obtain a certificate at
no charge by contacting the transfer agent.
YOU SHOULD NOT SUBMIT YOUR STOCK CERTIFICATES FOR
EXCHANGE UNTIL YOU HAVE RECEIVED
THE LETTER OF TRANSMITTAL AND INSTRUCTIONS REFERRED TO ABOVE
If the cash payment election is not made, you will be entitled to receive
dividends or other distributions on UnitedHealth Group common stock with a
record date after the merger is completed, but only after you have surrendered
your Lifemark stock certificates. If there is any dividend or other
distribution on UnitedHealth Group common stock with a record date after the
merger, you will receive the dividend or distribution promptly after the later
of the date that your UnitedHealth Group shares are issued to you or the date
the dividend or other distribution is paid to all UnitedHealth Group
shareholders.
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UnitedHealth Group will issue a UnitedHealth Group stock certificate or a
check in lieu of a fractional share in a name other than the name in which a
surrendered Lifemark stock certificate is registered only if you present the
exchange agent with all documents required to show and effect the unrecorded
transfer of ownership and show that you paid any applicable stock transfer
taxes.
Representations and Warranties
Lifemark and UnitedHealth Group each made a number of representations and
warranties in the merger agreement regarding their authority to enter into the
merger agreement and to consummate the other transactions contemplated by the
merger agreement, and with regard to aspects of our business, financial
condition, structure and other facts pertinent to the merger. The
representations and warranties will have no legal force or effect after the
merger has been completed.
The representations given by Lifemark cover the following topics as they
relate to Lifemark and its subsidiaries:
. Lifemark's organization, qualification and power to do business;
. Lifemark's ownership of its subsidiaries;
. capitalization of Lifemark;
. no conflict with charter documents, certain contracts or applicable law;
. required filings and consents;
. Lifemark's filings and reports with the Securities and Exchange
Commission;
. Lifemark's financial statements;
. changes in Lifemark's business since May 31, 2000;
. litigation involving Lifemark;
. Lifemark's title to the properties it owns and leases;
. matters relating to material contracts;
. Lifemark's compliance with applicable laws;
. intellectual property used and owned by Lifemark;
. Lifemark's taxes;
. matters relating to Lifemark's employees;
. Lifemark's employee benefit plans;
. environmental laws that apply to Lifemark;
. Lifemark's insurance;
. Lifemark's compliance with the Foreign Corrupt Practices Act;
. finders or brokers for the merger;
. authorization and recommendation by the Lifemark board of directors of
the merger;
. the vote required of the Lifemark stockholders to approve the merger;
. opinion of Lifemark's financial advisor;
. ability to treat the merger as a tax-free reorganization;
. the inapplicability of state anti-takeover statutes to the merger; and
. information supplied by Lifemark in this proxy statement/prospectus and
the related registration statement of UnitedHealth Group.
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<PAGE>
The representations given by UnitedHealth Group and Leo Acquisition Corp.
cover the following topics as they relate to UnitedHealth Group, Leo
Acquisition Corp. and UnitedHealth Group's other subsidiaries:
. organization, qualification and power to do business;
. capitalization of UnitedHealth Group;
. no conflict with charter documents, certain contracts or applicable law;
. UnitedHealth Group's filings and reports with the Securities and
Exchange Commission;
. UnitedHealth Group's financial statements;
. changes in UnitedHealth Group's business since June 30, 2000;
. litigation involving UnitedHealth Group;
. finders or brokers for the merger;
. ability to treat the merger as a tax-free reorganization; and
. information supplied by UnitedHealth Group and Leo Acquisition Corp. in
this proxy statement/prospectus and the related registration statement
of UnitedHealth Group;
The representations and warranties in the merger agreement are complicated
and not easily summarized. You are urged to carefully read the sections in the
merger agreement under the headings "Representations and Warranties of the
Company" and "Representations and Warranties of Merger Sub and Parent."
Concept of Material Adverse Effect
Many of the representations and warranties contained in the merger agreement
are qualified by the concept of "material adverse effect." This concept also
applies to some of the covenants and conditions to the merger described under
"--Conditions to the Merger" below, as well as to termination of the merger
agreement for breaches of representations and warranties as described under "--
Termination of the Merger Agreement." For purposes of the merger agreement, the
concept of "material adverse effect" means any change, effect, event or
condition that has a material adverse effect on the assets, business, results
of operations or financial condition or prospects of Lifemark or UnitedHealth
Group, as the case may be, taken as a whole with their respective subsidiaries,
or would prevent or materially delay the ability of Lifemark or UnitedHealth
Group to complete the merger.
Lifemark's Conduct of Business before Completion of the Merger
Lifemark agreed that, until termination of the merger agreement or the
completion of the merger, or unless UnitedHealth Group consents in writing,
Lifemark and its subsidiaries will operate its businesses consistent with past
practices, and will use reasonable efforts to preserve its business
organization, keep available the services of its officers and employees and
maintain satisfactory relationships with suppliers, distributors and customers.
Further, Lifemark agreed not to take any action which would adversely affect
the ability of the parties to complete the merger. Lifemark also agreed that,
until the completion of the merger or unless UnitedHealth Group consents in
writing, Lifemark and its subsidiaries will conduct their businesses in
compliance with specific restrictions or prohibitions relating to the
following:
. modification of Lifemark's certificate of incorporation or bylaws;
. the issuance of securities, except for issuances in connection with
Lifemark's outstanding stock options, employee stock purchase plan,
warrants and convertible notes;
. modification of existing capital stock;
. the incurrence of indebtedness other than in the ordinary course;
. employee benefits and severance arrangements;
. entrance into or modification of material contracts;
. disposition of property or assets other than in the ordinary course of
business;
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. acquisition of substantial assets or equity in another business entity,
except as otherwise agreed;
. alteration of the corporate structure of Lifemark or its subsidiaries;
. authorization of any material capital expenditures not reflected in the
budget previously provided to UnitedHealth Group;
. change in accounting methods;
. elections under United States or foreign tax laws;
. settlement of any legal actions requiring payment in excess of $50,000;
and
. payment of any claims other than in the ordinary course of business.
The agreements related to the conduct of Lifemark's business in the merger
agreement are complicated and not easily summarized. You are urged to carefully
read the sections in the merger agreement under the heading "Covenants and
Agreements."
No Solicitation of Transactions
Until the merger is completed or the merger agreement is terminated,
Lifemark has agreed, subject to limited exceptions, that it will not, nor will
it permit any of its subsidiaries to, nor will it authorize or permit any of
its officers, directors or employees or any investment bankers, attorneys or
other agents or representatives retained by or acting on behalf of Lifemark to,
whether directly or indirectly:
. initiate, solicit or encourage, directly or indirectly, any inquiries or
acquisition proposals (as described below);
. engage or participate in negotiations or discussions with, or furnish
any information or data to, or facilitate any inquiries or proposals by,
a third party relating to an acquisition proposal; or
. enter into any agreement with respect to an acquisition proposal or
approve an acquisition proposal.
However, prior to the special meeting, Lifemark may engage in any of these
acts otherwise prohibited, other than solicitation, initiation or encouragement
of any acquisition proposal, if:
. a majority of Lifemark's board of directors who are disinterested with
respect to the unsolicited proposal determines in good faith, after
receiving advice from its independent financial advisor, that Lifemark
has received a superior proposal; and
. a majority of Lifemark's disinterested directors determines in good
faith, after receiving advice from its outside legal counsel, that if
Lifemark failed to participate in discussions or negotiations, or to
furnish information, there would be a substantial probability that the
board would violate its fiduciary duties under applicable law.
Additionally, Lifemark's board of directors is not prohibited from taking
and disclosing to Lifemark's stockholders a position with respect to a tender
offer, pursuant to Rules 14d-9 and 14e-2 promulgated under the Securities
Exchange Act, after receiving advice from its outside legal counsel that such
disclosure is required by applicable law. Lifemark has agreed to provide
UnitedHealth Group with detailed information about any acquisition proposal it
receives.
An acquisition proposal is any proposal made by a party other than
UnitedHealth Group to acquire 15% or more of the assets, or 15% or more of the
outstanding capital stock, of Lifemark or any of its subsidiaries. A superior
proposal is an acquisition proposal to acquire 50% or more of the outstanding
capital stock, or substantially all of the assets, of Lifemark or any of its
subsidiaries on terms that the Lifemark board determines, in good faith, with
advice from an independent financial advisor, to be more favorable to Lifemark
and its stockholders than the terms of the merger with UnitedHealth Group.
For purposes of the foregoing, any violation of the restrictions described
above by any director or officer of Lifemark or any of its subsidiaries, or any
financial advisor, attorney or other advisor or representative of Lifemark,
whether or not such person is purporting to act on behalf of Lifemark or any of
its subsidiaries, is deemed to be a breach of the relevant restriction by
Lifemark.
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Conditions to the Merger
The parties' respective obligations to complete the merger are subject to
the prior satisfaction or waiver of certain conditions. If either UnitedHealth
Group or Lifemark waives any conditions, Lifemark will consider the facts and
circumstances at that time and make a determination as to whether a
resolicitation of proxies from Lifemark stockholders is appropriate. The
following conditions, among others, must be satisfied or waived before the
completion of the merger:
. the merger agreement must be approved by Lifemark's stockholders;
. no action or proceeding by a governmental entity seeking to prevent the
merger or asserting its illegality may be in effect;
. the registration statement of which this proxy statement/prospectus is a
part must be effective under the Securities Act, and not be the subject
of any stop order or pending or threatened proceeding seeking a stop
order;
. all necessary governmental and other third party consents must be
obtained, including the consent of the Arizona Health Care Cost
Containment System Administration;
. the parties' respective representations and warranties in the merger
agreement must be true and correct, with certain exceptions;
. the parties must comply with their respective obligations in the merger
agreement;
. if the cash payment election is not made, Lifemark must receive an
opinion of its tax counsel to the effect that the merger will qualify as
a tax-free reorganization;
. The William Gardner Brown GST Trust, established by William G. Brown, a
director of Lifemark, must have exercised in full its warrants to
purchase Lifemark common stock and converted in full its notes
convertible into Lifemark common stock in exchange for a payment by
Lifemark of not more than $96,000;
. arrangements must have been made to repay Lifemark's outstanding
indebtedness to Imperial Bank and release the security interest of
Imperial Bank in assets of Lifemark;
. arrangements must have been made to release the security interest of
Wells Fargo Equipment Finance, Inc., in certain assets of Lifemark;
. if dissenters' rights apply, holders of no more than 10% of the shares
of Lifemark common stock must have exercised their dissenters' rights;
. certain employees of Lifemark must have entered into employment
agreements with UnitedHealth Group; and
. since the date of the merger agreement, there must not have been a
material adverse effect, or any change, event or condition that would
reasonably be expected to result in a material adverse effect, with
respect to UnitedHealth Group or Lifemark.
Termination of the Merger Agreement
The merger agreement may be terminated by mutual consent, or by either
UnitedHealth Group or Lifemark under certain circumstances, at any time before
the completion of the merger, as summarized below:
. if the merger is not completed by March 31, 2001 (without the fault of
the terminating party);
. if Lifemark's stockholders do not approve and adopt the merger agreement
at the special meeting;
. if a governmental restraint prohibiting the merger is issued and is not
appealable; or
. if Lifemark commits to or enters into an acquisition proposal from a
third party which Lifemark's board of directors determines in good faith
to be superior to the terms of the merger with UnitedHealth Group, and
UnitedHealth Group has not, within four business days of receiving
notice of such proposal, proposed comparable amendments to the merger
agreement.
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The merger agreement may be terminated by UnitedHealth Group:
. if Lifemark has materially breached any of its representations and
warranties or failed to perform any of its covenants and the breach or
failure to perform has not been cured within 30 days following receipt
of notice of the breach; or
. if Lifemark's board of directors or any of its committees withdraws or
modifies, in a manner adverse to UnitedHealth Group, its recommendation
of the merger to Lifemark's stockholders, or approves or recommends an
acquisition proposal other than the merger with UnitedHealth Group.
Furthermore, the merger agreement may be terminated by Lifemark if
UnitedHealth Group has materially breached any of its representations and
warranties or failed to perform any of its covenants and the breach or failure
to perform has not been cured within 30 days following receipt of notice of the
breach.
Payment of Fees and Expenses
Except as described below, whether the merger is consummated or the merger
agreement is terminated, all costs and expenses incurred in connection with the
merger agreement and the merger will be paid by the party incurring the
expense.
If the merger agreement is terminated by Lifemark or UnitedHealth Group
because Lifemark fails to obtain stockholder approval at the special meeting,
or if UnitedHealth Group terminates the merger agreement because:
. Lifemark commits to or enters into an acquisition proposal from a third
party which Lifemark's board of directors has determined in good faith
to be superior to the merger with UnitedHealth Group;
. Lifemark has materially breached any of its representations and
warranties or failed to perform in any material way any of its covenants
and the breach or failure to perform has not been cured within 30 days
following receipt of notice; or
. Lifemark's board of directors or any of its committees withdraws or
modifies, in a manner adverse to UnitedHealth Group, its recommendation
of the merger to the Lifemark stockholders, or approves or recommends an
acquisition proposal other than the merger with UnitedHealth Group,
then Lifemark will reimburse UnitedHealth Group for all out-of-pocket fees and
expenses incurred or paid by or on behalf of UnitedHealth Group in connection
with the merger agreement. Likewise, if Lifemark terminates the merger
agreement because UnitedHealth Group has materially breached any of its
representations and warranties or failed to perform any of its covenants in any
material way and the breach or failure to perform has not been cured within 30
days following receipt of notice, then UnitedHealth Group will reimburse
Lifemark for all out-of-pocket fees and expenses incurred or paid by or on
behalf of Lifemark in connection with the merger agreement.
Additionally, if the merger agreement is terminated by Lifemark or
UnitedHealth Group at a time when UnitedHealth Group is entitled to terminate
the merger agreement because Lifemark did not obtain stockholder approval at
the special meeting or Lifemark has materially breached any of its
representations and warranties or failed to perform in any material way any of
its covenants (excluding its covenant regarding no solicitation of other
transactions) and the breach or failure to perform has not been cured within 30
days following receipt of notice and, concurrently with or within twelve months
after termination, Lifemark enters into an acquisition proposal with a third
party (which can include the commencement of a tender offer by a third party
directly with Lifemark's stockholders), or if the merger agreement is
terminated because:
. Lifemark commits to or enters into an acquisition proposal from a third
party which Lifemark's board of directors has determined in good faith
to be superior to the merger with UnitedHealth Group;
. Lifemark has failed to perform its covenant regarding no solicitation of
other transactions; or
. Lifemark's board of directors or any of its committees withdraws or
modifies, in a manner adverse to UnitedHealth Group, its recommendation
of the merger to Lifemark's stockholders, or approves or recommends an
acquisition proposal other than the merger with UnitedHealth Group,
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then Lifemark will, in addition to reimbursing UnitedHealth Group for its
merger-related expenses, pay UnitedHealth Group a termination fee of
$2,000,000.
Failure to pay the foregoing amounts promptly will require the delinquent
party to pay interest on the payments due at the prime rate announced by U.S.
Bank National Association in Minneapolis.
If the merger agreement is terminated prior to the completion of the merger,
UnitedHealth Group and its affiliates will not solicit, for a period of one
year, the employment of certain employees without obtaining the consent of
Lifemark.
Amendments, Extension and Waivers
The merger agreement may be amended by action of the board of directors of
each of the parties at any time before or after the special meeting, provided
that any amendment made after the special meeting that would otherwise require
stockholder approval under applicable law must be submitted to the
stockholders. All amendments to the merger agreement must be in a writing
signed by each party. At any time before the effective time of the merger, any
party to the merger agreement may, to the extent legally allowed:
. extend the time for the performance of any of the obligations or other
acts of the other parties to the merger agreement;
. waive any inaccuracies in the representations and warranties of the
other parties contained in the merger agreement; and
. waive compliance by the other parties with any of the agreements or
conditions contained in the merger agreement.
All extensions and waivers must be in writing and signed by the party
against whom the waiver is to be effective.
APPRAISAL RIGHTS FOR LIFEMARK STOCKHOLDERS
Under Delaware law, you have the right to dissent from the merger and to
receive payment in cash for the fair value of your Lifemark common stock, as
determined by the Court of Chancery of the State of Delaware, only if the
merger is consummated and UnitedHealth Group elects to pay cash instead of
shares of its common stock in exchange for shares of common stock of Lifemark.
If UnitedHealth Group does not elect to pay cash instead of shares of its
common stock, you will not have appraisal rights. The availability of appraisal
rights will not be determined until following the special meeting. Accordingly,
Lifemark stockholders who do not want to receive cash in the amount provided
under the merger agreement in the merger should exercise their appraisal
rights. Lifemark stockholders electing to exercise appraisal rights must comply
with the provisions of Section 262 of the Delaware General Corporation Law in
order to perfect their rights. Lifemark will require strict compliance with the
statutory procedures. A copy of Section 262 is attached to this proxy
statement/prospectus as Annex D.
The following is intended as a brief summary of the material provisions of
the Delaware statutory procedures required to be followed by a stockholder in
order to dissent from the merger and perfect the stockholder's appraisal
rights. This summary, however, is not a complete statement of all applicable
requirements and is qualified in its entirety by reference to Section 262 of
the Delaware General Corporation Law.
Section 262 requires that stockholders be notified not less than 20 days
before the special meeting to vote on the merger that dissenters' appraisal
rights will be available. A copy of Section 262 must be included with such
notice. This proxy statement/prospectus constitutes Lifemark's notice to its
stockholders of the availability of appraisal rights in connection with the
merger in compliance with the requirements of Section 262. If you wish to
consider exercising your appraisal rights, you should carefully review the text
of Section 262 contained in Annex D because failure to timely and properly
comply with the requirements of Section 262 will result in the loss of your
appraisal rights under Delaware law.
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If you elect to demand appraisal of your shares, you must satisfy each of
the following conditions:
1. You must deliver to Lifemark a written demand for appraisal of your
shares before the vote is taken on the merger agreement at the special
meeting. This written demand for appraisal must be in addition to and
separate from any proxy or vote abstaining from or voting against the
merger. Voting against or failing to vote for the merger by itself does not
constitute a demand for appraisal under Section 262.
2. You must not vote in favor of the merger. A vote in favor of the
merger, by proxy or in person, will constitute a waiver of your appraisal
rights in respect of the shares so voted and will nullify any previously
filed written demands for appraisal.
If you fail to comply with either of these conditions, the merger is
completed, and UnitedHealth Group elects to pay cash instead of its common
stock in exchange for Lifemark common stock, you will be entitled to receive
the cash payment for your shares of Lifemark common stock as provided for in
the merger agreement, but will have no appraisal rights with respect to your
shares of Lifemark common stock.
All demands for appraisal should be addressed to Lifemark Corporation,
Investor Relations, 7600 North 16th Street, Suite 150, Phoenix, Arizona 85020,
should be delivered before the vote on the merger is taken at the special
meeting and should be executed by, or on behalf of, the record holder of the
shares of Lifemark common stock. The demand must reasonably inform Lifemark of
the identity of the stockholder and the intention of the stockholder to demand
appraisal of his or her shares.
To be effective, a demand for appraisal by a holder of Lifemark common stock
must be made by, or in the name of, such record stockholder, fully and
correctly, as the stockholder's name appears on his or her stock certificate(s)
and cannot be made by the beneficial owner if he or she does not also hold the
shares of record. The beneficial holder must, in such cases, have the record
owner submit the required demand in respect of such shares.
If shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of a demand for appraisal should be made in
such capacity; and if the shares are owned of record by more than one person,
as in a joint tenancy or tenancy in common, the demand should be executed by or
for all joint owners. An authorized agent, including an authorized agent for
two or more joint owners, may execute the demand for appraisal for a
stockholder of record; however, the agent must identify the record owner or
owners and expressly disclose the fact that, in executing the demand, he or she
is acting as agent for the record owner. A record owner, such as a broker, who
holds shares as a nominee for others, may exercise his or her right of
appraisal with respect to the shares held for one or more beneficial owners,
while not exercising this right for other beneficial owners. In such case, the
written demand should state the number of shares as to which appraisal is
sought. Where no number of shares is expressly mentioned, the demand will be
presumed to cover all shares held in the name of such record owner.
If you hold your shares of Lifemark common stock in a brokerage account or
in other nominee form and you wish to exercise appraisal rights, you should
consult with your broker or such other nominee to determine the appropriate
procedures for the making of a demand for appraisal by such nominee.
Within 10 days after the effective date of the merger, UnitedHealth Group
must give written notice of the date the merger became effective to each
Lifemark stockholder who has properly filed a written demand for appraisal and
who did not vote in favor of the merger. Within 120 days after the effective
date, either UnitedHealth Group or any stockholder who has complied with the
requirements of Section 262 may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of the shares held by all
stockholders entitled to appraisal. UnitedHealth Group has no obligation to
file such a petition in the event there are dissenting stockholders.
Accordingly, the failure of a stockholder to file such a petition within the
period specified could nullify such stockholder's previous written demand for
appraisal.
At any time within 60 days after the effective date, any stockholder who has
demanded an appraisal has the right to withdraw the demand and to accept the
cash payment specified by the merger agreement for his or her shares of
Lifemark common stock. Any attempt to withdraw an appraisal demand more than 60
days after
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the effective date will require the written approval of the surviving
corporation. Within 120 days after the effective date, any stockholder who has
complied with Section 262 will be entitled, upon written request, to receive a
statement setting forth the aggregate number of shares of Lifemark common stock
with respect to which demands for appraisal have been received and the
aggregate number of holders of such shares. If a petition for appraisal is duly
filed by a stockholder and a copy of the petition is delivered to UnitedHealth
Group, UnitedHealth Group will then be obligated within 20 days after receiving
service of a copy of the petition to provide the Chancery Court with a duly
verified list containing the names and addresses of all stockholders who have
demanded an appraisal of their shares. After notice to dissenting stockholders,
the Chancery Court is empowered to conduct a hearing upon the petition, to
determine those stockholders who have complied with Section 262 and who have
become entitled to the appraisal rights provided thereby. The Chancery Court
may require the stockholders who have demanded payment for their shares to
submit their stock certificates to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Chancery Court may dismiss the
proceedings as to such stockholder.
After determination of the stockholders entitled to appraisal of their
shares of Lifemark common stock, the Chancery Court will appraise the shares,
determining their fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if any, to be paid. When the value is determined, the Chancery Court
will direct the payment of such value, with interest thereon accrued during the
pendency of the proceeding, if the Chancery Court so determines, to the
stockholders entitled to receive the same, upon surrender by such holders of
the certificates representing such shares.
In determining fair value, the Chancery Court is required to take into
account all relevant factors. You should be aware that the fair value of your
shares as determined under Section 262 could be more, the same, or less than
the value that you are entitled to receive pursuant to the merger agreement.
Costs of the appraisal proceeding may be imposed upon UnitedHealth Group and
the stockholders participating in the appraisal proceeding by the Chancery
Court as the Chancery Court deems equitable in the circumstances. Upon the
application of a stockholder, the Chancery Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the value of all
shares entitled to appraisal. Any stockholder who had demanded appraisal rights
will not, after the effective date, be entitled to vote shares subject to such
demand for any purpose or to receive payments of dividends or any other
distribution with respect to such shares (other than with respect to payment as
of a record date prior to the effective date); however, if no petition for
appraisal is filed within 120 days after the effective date of the merger, or
if such stockholder delivers a written withdrawal of his or her demand for
appraisal and an acceptance of the merger within 60 days after the effective
date of the merger, then the right of such stockholder to appraisal will cease
and such stockholder will be entitled to receive the cash payment for shares of
his or her Lifemark common stock pursuant to the merger agreement. Any
withdrawal of a demand for appraisal made more than 60 days after the effective
date of the merger may only be made with the written approval of the surviving
corporation and must, to be effective, be made within 120 days after the
effective date.
In view of the complexity of Section 262, Lifemark stockholders who may wish
to dissent from the merger and pursue appraisal rights should consult their
legal advisors.
Failure to take any required step in connection with exercising appraisal
rights may result in the termination or waiver of such rights.
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COMPARISON OF RIGHTS OF SHAREHOLDERS OF UNITEDHEALTH GROUP AND LIFEMARK
This section of the proxy statement/prospectus describes certain differences
between the rights of holders of Lifemark common stock and the rights of
holders of UnitedHealth Group common stock. While we believe that the
description covers the material differences between the two, this summary may
not contain all of the information that is important to you. You should
carefully read this entire document and refer to the other documents discussed
below for a more complete understanding of the differences between being a
stockholder of Lifemark and being a shareholder of UnitedHealth Group.
As a stockholder of Lifemark, your rights are governed by Lifemark's
certificate of incorporation, as amended, and bylaws, as amended, each as
currently in effect. After completion of the merger, you will become a
shareholder of UnitedHealth Group. UnitedHealth Group's common stock is quoted
on the New York Stock Exchange under the symbol "UNH." As a UnitedHealth Group
shareholder, your rights will be governed by UnitedHealth Group's second
restated articles of incorporation, as amended, and UnitedHealth Group's
amended and restated bylaws. In addition, UnitedHealth Group is incorporated in
Minnesota while Lifemark is incorporated in Delaware. Although the rights and
privileges of stockholders of a Delaware corporation are in many instances
comparable to those of shareholders of a Minnesota corporation, there are also
differences.
MINNESOTA CORPORATION DELAWARE CORPORATION
Shareholder Meetings
Under the UnitedHealth Group Delaware law and the Lifemark
bylaws, holders of UnitedHealth bylaws require that stockholders be
Group common stock are entitled to provided prior written notice no
at least five days' prior written more than 60 days nor less than 10
notice for each regular meeting and days prior to the date of any
special meeting to consider any meeting of stockholders. Notice must
matter, except that Minnesota law be given at least 20 days prior to a
and the UnitedHealth Group bylaws meeting at which the stockholders
require that notice of a meeting at will be asked to approve and adopt
which an agreement of merger or an agreement relating to the merger
exchange is to be considered shall of the corporation.
be mailed to shareholders of record,
whether entitled to vote or not, at
least 14 days prior to such meeting.
Right to Call Special Meetings
Under Minnesota law and the Under Delaware law, a special
UnitedHealth Group bylaws, a special meeting of stockholders may be
meeting of shareholders may be called by the board of directors or
called by the chairman of the board, by such person or persons as may be
the chief executive officer, the authorized by the certificate of
chief financial officer, any two or incorporation or by the bylaws. The
more directors, a person authorized Lifemark bylaws authorize a special
in the articles or bylaws to call meeting of stockholders to be called
special meetings or a shareholder or by the president, a majority of the
shareholders holding 10% or more of board of directors, or at the
all shares entitled to vote, except request in writing of stockholders
that a special meeting called by a owning not less than 50%
shareholder for the purpose of of the entire voting stock of
considering any action to Lifemark.
facilitate, directly or indirectly,
or effect a business combination,
including any action to change or
otherwise affect the composition of
the board of directors for that
purpose, must be called by 25% or
more of the voting power of all
shares entitled to vote.
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Actions by Written Consent of Shareholders
Under Minnesota law and the Under Delaware law and the
UnitedHealth Group bylaws, any Lifemark bylaws, stockholders may
action required or permitted to be act by a written consent in lieu of
taken in a meeting of the a meeting provided the written
shareholders may be taken without a consent is signed by the holders of
meeting by a written action signed outstanding stock having at least
by all of the shareholders entitled the minimum number of votes that
to vote on that action. The would be necessary to authorize or
UnitedHealth Group articles do not take such action at a meeting at
restrict shareholder action by which all shares entitled to vote
written consent. thereon were present. The Lifemark
certificate does not contain any
provision restricting action of
stockholders by written consent.
Rights of Dissenting Shareholders
Under both Minnesota and Delaware Under Delaware law, appraisal
law, shareholders may exercise a rights are available in connection
right of dissent from certain with certain statutory mergers or
corporate actions and obtain payment consolidations in which the
of the fair value of their shares. corporation is a constituent
Generally, under Minnesota law, the corporation, or if such rights are
categories of transactions subject otherwise provided in the
to dissenter's rights are broader corporation's certificate of
than those under Delaware law. incorporation. Appraisal rights are
Shareholders of a Minnesota not available under Delaware law,
corporation may exercise dissenter's however, if the corporation's stock
rights in connection with: is (i) listed on a national
securities exchange or designated on
. an amendment of the articles the Nasdaq National Market, or
of incorporation that (ii) held of record by more than
materially and adversely 2,000 stockholders; provided, that
affects the rights and if the merger or consolidation
preferences of the shares of requires stockholders to exchange
the dissenting shareholder in their stock for anything other than:
certain respects; (a) shares of the surviving
corporation; (b) shares of another
. a sale or transfer of all or corporation that will be listed on a
substantially all of the national securities exchange; (c)
assets of the corporation; cash in lieu of fractional shares of
any such corporation; or (d) any
. a plan of merger to which the combination of such shares and cash
corporation is a party; in lieu of fractional shares, then
appraisal rights will be available.
. a plan of exchange of shares The Lifemark certificate does not
to which the corporation is a grant any other appraisal rights.
party; and Stockholders who desire to exercise
their appraisal rights must satisfy
. any other corporate action all of the conditions and
with respect to which the requirements as set forth in the
corporation's articles of Delaware General Corporation Law in
incorporation or bylaws give order to maintain such rights and
dissenting shareholders the obtain such payment.
right to obtain payment for
their shares.
Unless the articles, the bylaws,
or a resolution approved by the
board of directors otherwise
provide, such dissenters' rights do
not apply to a shareholder of the
surviving corporation in a merger if
the shares of the shareholder are
not entitled to be voted on the
merger. The UnitedHealth Group
articles do not grant any other
dissenters' rights. Shareholders who
desire to exercise their dissenters'
rights must satisfy all of the
conditions and requirements as set
forth in the Minnesota Business
Corporation Act in order to maintain
such rights and obtain such payment.
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Board of Directors
Minnesota law provides that the Delaware law states that the
board of directors of a Minnesota board of directors shall consist of
corporation shall consist of one or one or more members with the number
more directors as fixed by the of directors to be fixed as provided
articles of incorporation or bylaws. in the bylaws of the corporation,
The UnitedHealth Group board of unless the certificate of
directors currently consists of 12 incorporation fixes the number of
directors. The UnitedHealth Group directors, in which case a change in
articles provide that the board is the number of directors shall be
divided into three classes, as made only by amendment of the
nearly equal in number as possible, certificate. The Lifemark bylaws
with directors serving three year provide that the number of directors
terms. The UnitedHealth Group bylaws which shall constitute the board of
provide that in the case of any directors shall be six.
increase or decrease in the number
of directors, the increase or Except in the case of a
decrease shall be distributed among classified board, Delaware law
the several classes as nearly equal states that any director or the
as possible, as determined by the entire board of directors may be
affirmative vote of a majority of removed, with or without cause, by
the UnitedHealth Group board or by the holders of a majority of the
the affirmative vote of a majority shares then entitled to vote at an
of the holders of the voting stock election of directors.
of UnitedHealth Group. The number of
directors may be increased or
decreased from time to time by
resolution adopted by a majority of
the board of directors or by the
affirmative vote of the holders of a
majority of the voting stock of
UnitedHealth Group, considered as
one class.
Minnesota law provides that,
unless modified by the articles or
bylaws of the corporation or by
shareholder agreement, the directors
may be removed with or without cause
by the affirmative vote of that
proportion or number of the voting
power of the shares of the classes
or series the director represents
which would be sufficient to elect
such director (with an exception for
corporations with cumulative
voting). The UnitedHealth Group
articles require the affirmative
vote of the holders of 66 2/3% of
the outstanding shares of common
stock or the affirmative vote of 66
2/3% of the directors in office at
the time such vote is taken.
Shareholders of UnitedHealth Group
do not have the right to cumulative
voting in the election of directors.
Filling Vacancies on the Board of Directors
Under Minnesota law, unless Delaware law provides that,
different rules for filling unless otherwise provided in the
vacancies are provided for in the certificate of incorporation or
articles of incorporation or bylaws, bylaws, vacancies may be filled by a
vacancies resulting from the death, majority of the directors then in
resignation, removal or office, although less than a quorum,
disqualification of a director may or by a sole remaining director.
be filled by the affirmative vote of Further, if, at the time of filling
a majority of the remaining any vacancy, the directors then in
directors, even though less than a office shall constitute less than a
quorum, and vacancies resulting from majority of the whole board, the
a newly-created directorship may be Court of Chancery may, upon
filled by the affirmative vote of a application of any stockholder or
majority of the directors serving at stockholders holding at least 10% of
the time of the increase. The the total number of the
shareholders
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may also elect a new director to shares at the time outstanding
fill a vacancy that is created by having the right to vote for such
the removal of a director by the directors, summarily order an
shareholders. election to be held to fill any such
vacancies or newly created
The UnitedHealth Group bylaws directorships, or to replace the
provide that vacancies on the board directors chosen by the directors
of directors may be filled by the then in office.
affirmative vote of a majority of
the remaining members of the board,
though less than a quorum; newly
created directorships resulting from
an increase in the authorized number
of directors shall be filled by the
vote of a majority of the directors
present at a meeting at the time the
action is taken.
Amendments to Bylaws and Articles
Minnesota law and the Delaware law requires a vote of
UnitedHealth Group bylaws provide the corporation's board of directors
that the power to adopt, amend or followed by the affirmative vote of
repeal the bylaws is vested in the a majority of the outstanding stock
board (subject to certain notice entitled to vote for any amendment
requirements set forth in the to the certificate of incorporation,
UnitedHealth Group bylaws). unless a greater level of approval,
Minnesota law provides that the or a class vote, is required by the
authority in the board of directors certificate of incorporation.
is subject to the power of the Further, Delaware law states that if
shareholders to change or repeal an amendment would increase or
such bylaws by a majority vote of decrease the aggregate number of
the shareholders at a meeting of the authorized shares of such class,
shareholders called for such increase or decrease the par value
purpose, and the board of directors of shares of such class or alter or
shall not make or alter any bylaws change the powers, preferences or
fixing a quorum for meetings of special rights of a particular class
shareholders, prescribing procedures or series of stock so as to affect
for removing directors or filling them adversely, the class or series
vacancies in the board of directors, shall be given the power to vote as
or fixing the number of directors or a class notwithstanding the absence
their classifications, of any specifically enumerated power
qualifications or terms of office. in the certificate of incorporation.
Under Minnesota law, a shareholder Delaware law also states that the
or shareholders holding 3% or more power to adopt, amend or repeal the
of the voting power of all shares bylaws of a corporation shall be in
entitled to vote may propose a the stockholders entitled to vote,
resolution to amend or repeal bylaws provided that the corporation in its
adopted, amended or repealed by the certificate of incorporation may
board, in which event such confer such power on the board of
resolutions must be brought before directors in addition to the
the shareholders for their stockholders. The Lifemark
consideration pursuant to the certificate expressly authorizes the
procedures for amending the articles board of directors to make, adopt,
of incorporation. alter, or repeal any or all of the
bylaws of Lifemark.
Minnesota law provides that a
proposal to amend the articles of
incorporation may be presented to
the shareholders of a Minnesota
corporation by a resolution (i)
approved by the affirmative vote of
a majority of the directors present
or (ii) proposed by a shareholder or
shareholders holding 3% or more of
the voting shares entitled to vote
thereon. Under Minnesota law, any
such amendment must be approved by
the affirmative vote of a majority
of the shareholders entitled to vote
thereon, except that the articles
may provide for a specified
proportion or number larger than a
majority. The UnitedHealth Group
articles provide that the
affirmative vote of the holders of
at least 66 2/3% of the outstanding
shares of common stock is required
in order to
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amend provisions of the UnitedHealth
Group articles concerning the
election and removal of directors
and that the affirmative vote of the
holders of 66 2/3% of the
outstanding shares of voting stock
is required in order to amend
provisions concerning certain
mergers, consolidations and other
business combinations and
reorganizations.
Indemnification of Directors, Officers and Employees
Minnesota law and Delaware law Although indemnification is
both contain provisions setting permissive in Delaware, a
forth conditions under which a corporation may, through its
corporation may indemnify its certificate of incorporation, bylaws
directors, officers and employees. or other intracorporate agreements,
While indemnification is permitted make indemnification mandatory.
only if certain statutory standards Pursuant to this authority, the
of conduct are met, Minnesota law Lifemark certificate and bylaws
and Delaware law are substantially provide that Lifemark shall
similar in providing for indemnify its officers and directors
indemnification if the person acted to the fullest extent permitted
in good faith and in a manner the under Delaware law, unless an
person reasonably believed to be in officer or director has initiated a
or not opposed to the best interests proceeding, in which case approval
of the corporation and, with respect by the board of directors is
to any criminal action or required prior to indemnification.
proceeding, had no reasonable cause
to believe the conduct was unlawful.
The statutes differ, however, with
respect to whether indemnification
is permissive or mandatory, where
there is a distinction between
third-party actions and actions by
or in the right of the corporation,
and whether, and to what extent,
reimbursement of judgments, fines,
settlements, and expenses is
allowed. The major difference
between Minnesota law and Delaware
law is that while indemnification of
officers, directors and employees is
mandatory under Minnesota law,
indemnification is permissive under
Delaware law, except that a Delaware
corporation must indemnify a person
who is successful on the merits or
otherwise in the defense of certain
specified actions, suits or
proceedings for expenses and
attorney's fees actually and
reasonably incurred in connection
therewith.
Minnesota law requires a
corporation to indemnify any
director, officer or employee who is
made or threatened to be made party
to a proceeding by reason of the
former or present official capacity
of the director, officer or
employee, against judgments,
penalties, fines, settlements and
reasonable expenses. Minnesota law
permits a corporation to prohibit
indemnification by so providing in
its articles of incorporation or its
bylaws. UnitedHealth Group has not
limited the statutory
indemnification in its articles of
incorporation, however, and the
bylaws of UnitedHealth Group state
that UnitedHealth Group shall
indemnify such persons for such
expenses and liabilities to such
extent as permitted by statute.
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Liabilities of Directors
Under Minnesota law, a director Under Delaware law, a certificate
may be liable to the corporation for of incorporation may contain a
distributions made in violation of provision limiting or eliminating a
Minnesota law or a restriction director's personal liability to the
contained in the corporation's corporation or its stockholders for
articles or bylaws. The UnitedHealth monetary damages for a director's
Group articles provide that a breach of fiduciary duty subject to
director shall not be personally certain limitations. The Lifemark
liable to UnitedHealth Group or its certificate provides that the
shareholders for monetary liability corporation's directors shall not be
relating to breach of fiduciary duty personally liable to the corporation
as a director, unless the liability or its stockholders for monetary
relates to: damages for breach of fiduciary duty
as a director, except for liability:
. a breach of the director's
duty of loyalty to the . for any breach of the
corporation or its director's duty of loyalty to
shareholders; the corporation or its
stockholders;
. acts or omissions involving a
lack of good faith or which . for acts or omissions not in
involve intentional good faith or which involve
misconduct or a knowing intentional misconduct or
violation of law; knowing violation of law;
. liability for illegal . for unlawful payment of
distributions and unlawful dividend or unlawful stock
sales of UnitedHealth Group purchase or redemption as set
securities; forth in section 174 of the
Delaware General Corporation
. transactions where the Law; or
director gained an improper
personal benefit; or . for any transaction from
which the director derived an
. any acts or omissions improper personal benefit.
occurring prior to the date
on which the liability
limitation provisions of the
UnitedHealth Group articles
became effective.
The UnitedHealth Group articles
provide that any repeal or
modification of the foregoing
provisions shall not adversely
affect any right or protection of a
director of UnitedHealth Group
existing at the time of such repeal
or modification.
The UnitedHealth Group articles
also provide that if Minnesota law
is amended to authorize further
elimination of the personal
liability of directors, then the
liability of UnitedHealth Group
directors shall be limited to the
fullest extent permitted by
Minnesota law, as so amended.
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Shareholder Approval of Merger
Minnesota law provides that a In order to effect a merger under
resolution containing a plan of Delaware law, a corporation's board
merger or exchange must be approved of directors must adopt an agreement
by the affirmative vote of a of merger and recommend it to the
majority of the directors present at stockholders. The agreement must be
a meeting and submitted to the approved and adopted by holders of a
shareholders and approved by the majority of the outstanding shares
affirmative vote of the holders of a of the corporation entitled to vote
majority of the voting power of all thereon unless the certificate of
shares entitled to vote. Unlike incorporation requires a greater
Delaware law, Minnesota law requires vote.
that any class of shares of a
Minnesota corporation must be given
the right to approve the plan if it
contains a provision which, if
contained in a proposed amendment to
the corporation's articles of
incorporation, would entitle such a
class to vote as a class.
Business Combinations, Control Share Acquisitions and Anti-Takeover Provisions
Minnesota law prohibits certain Delaware law prohibits, in
"business combinations" (as defined certain circumstances, a "business
in the Minnesota Business combination" between the corporation
Corporations Act) between a and an "interested stockholder"
Minnesota corporation with at least within three years of the
100 shareholders, or a publicly held stockholder becoming an "interested
corporation that has at least 50 stockholder." An "interested
shareholders, and an "interested stockholder" is a holder who,
shareholder" for a four-year period directly or indirectly, controls 15%
following the share acquisition date or more of the outstanding voting
by the interested shareholder, stock or is an affiliate of the
unless certain conditions are corporation and was the owner of 15%
satisfied or an exemption is found. or more of the outstanding voting
An "interested shareholder" is stock at any time within the prior
generally defined to include a three-year period. A "business
person who beneficially owns at combination" includes a merger or
least 10% of the votes that all consolidation, a sale or other
shareholders would be entitled to disposition of assets having an
cast in an election of directors of aggregate market value equal to 10%
the corporation. Minnesota law also or more of the consolidated assets
limits the ability of a shareholder of the corporation or the aggregate
who acquires beneficial ownership of market value of the outstanding
more than certain thresholds of the stock of the corporation and certain
percentage voting power of a transactions that would increase the
Minnesota corporation (starting at interested stockholder's
20%) from voting those shares in proportionate share ownership in the
excess of the threshold unless such corporation. This provision does not
acquisition has been approved in apply where:
advance by a majority of the voting
power held by shareholders . either the business
unaffiliated with such shareholder. combination or the
However, as permitted by Minnesota transaction which resulted in
law, the UnitedHealth Group bylaws the stockholder becoming an
provide that this statutory interested stockholder is
provision shall not apply to approved by the corporation's
UnitedHealth Group. Minnesota law board of directors prior to
also includes a provision the date the interested
restricting certain "control share stockholder acquired such 15%
acquisitions" of Minnesota interest;
corporations. However, as permitted
by Minnesota law, the UnitedHealth . upon the consummation of the
Group articles provide that this transaction which resulted in
statutory provision shall not apply the stockholder becoming an
to UnitedHealth Group. interested stockholder, the
interested stockholder owned
The UnitedHealth Group articles at least 85% of the
require the affirmative vote of at outstanding voting stock of
least 66 2/3% of the outstanding the corporation excluding for
shares of UnitedHealth Group voting the purposes of determining
stock in order to effect certain the number of shares
business combinations, including a outstanding shares held by
merger, consolidation, persons who are directors and
also officers and by
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exchange of shares, sale of all or
substantially all of the assets of employee stock plans in which
UnitedHealth Group or other similar participants do not have the
transactions, with a person who, right to determine
together with its affiliates, owns confidentially whether the
20% or more of the outstanding shares held subject to the
voting stock of UnitedHealth Group plan will be tendered;
(a "Related Person"). However, the
66 2/3% voting requirement will not . the business combination is
be applicable if 66 2/3% of the approved by a majority of the
continuing directors approve the board of directors and the
business combination, the business affirmative vote of two-
combination is solely between thirds of the outstanding
UnitedHealth Group and a wholly votes entitled to be cast by
owned subsidiary, or the cash or disinterested stockholders at
fair market value of the property, an annual or special meeting;
securities or other consideration to
be received per share by holders of . the corporation does not have
UnitedHealth Group common stock a class of voting stock that
other than the Related Person is not is listed on a national
less than the highest per share securities exchange,
price paid by the Related Person in authorized for quotation on
acquiring any of its holdings of an inter-dealer quotation
UnitedHealth Group common stock. system of a registered
national securities
Minnesota law provides that association, or held of
during any tender offer, a publicly record by more than 2,000
held corporation may not enter into stockholders unless any of
or amend an agreement (whether or the foregoing results from
not subject to contingencies) that action taken, directly or
increases the current or future indirectly, by an interested
compensation of any officer or stockholder or from a
director. In addition, under transaction in which a person
Minnesota law, a publicly held becomes an interested
corporation is prohibited from stockholder;
purchasing any voting shares owned
for less than two years from a 5% . the stockholder acquires a
shareholder for more than the market 15% interest inadvertently
value unless the transaction has and divests itself of such
been approved by the affirmative ownership and would not have
vote of the holders of a majority of been a 15% stockholder in the
the voting power of all shares preceding 3 years but for the
entitled to vote or unless the inadvertent acquisition of
corporation makes a comparable offer ownership;
to all holders of shares of the
class or series of stock held by the . the stockholder acquired the
5% shareholder and to all holders of 15% interest when these
any class or series into which such restrictions did not apply;
securities may be converted. or
It should be noted that in . the corporation has opted out
addition to the anti-takeover of this provision. Lifemark
measures discussed above, the has not opted out of this
provisions of the UnitedHealth Group provision.
articles and bylaws (i) providing
for a staggered board of directors,
(ii) requiring a vote of 66 2/3% of
the outstanding voting stock to
amend certain provisions of the
UnitedHealth Group articles
concerning the election and removal
of directors and concerning certain
business combinations and (iii)
requiring the request of holders of
at least 25% of the outstanding
shares in order for shareholders to
call a special meeting of
shareholders involving a business
combination or any change in the
composition of the board of
directors as a result of such
business combination, may make it
more difficult to effect a change in
control of UnitedHealth Group and
may discourage or deter a third
party from attempting a takeover.
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The foregoing discussion of certain similarities and material differences
between the rights of UnitedHealth Group shareholders and the rights of
Lifemark stockholders under the respective articles/certificate of
incorporation and bylaws is only a summary of certain provisions and does not
purport to be a complete description of such similarities and differences, and
is qualified in its entirety by reference to Minnesota law and Delaware law,
the common law thereunder and the full text of the articles/certificate of
incorporation and bylaws of each of UnitedHealth Group and Lifemark.
EXPERTS
The consolidated balance sheets as of December 31, 1999 and 1998, and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999, of UnitedHealth
Group incorporated by reference in this proxy statement/prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are incorporated herein by reference in
reliance upon the authority of said firm as experts in giving said reports.
With respect to the unaudited condensed interim financial information for
the quarters ended September 30, 2000 and 1999 of UnitedHealth Group
incorporated by reference in this proxy statement/prospectus, Arthur Andersen
LLP has applied limited procedures in accordance with professional standards
for a review of that information. However, their separate reports thereon state
that they did not audit and they do not express an opinion on that condensed
interim financial information. Accordingly, the degree of reliance on their
reports on that information should be restricted in light of the limited nature
of the review procedures applied. In addition, the accountants are not subject
to the liability provisions of Section 11 of the Securities Act of 1933 for
their reports on the unaudited condensed interim financial information because
these reports are not "reports" or "parts" of the prospectus or elsewhere in
the registration statement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the Securities Act of 1933.
The consolidated financial statements as of May 31, 2000 and 1999 and for
each of the three years in the period ended May 31, 2000 of Lifemark
incorporated by reference in this proxy statement/prospectus have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
The validity of the shares of UnitedHealth Group common stock offered by
this proxy statement/prospectus will be passed upon for UnitedHealth Group by
Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal matters with
respect to federal income tax consequences in connection with the merger will
be passed upon for Lifemark by Bell, Boyd & Lloyd LLC, Chicago, Illinois.
FUTURE SHAREHOLDER PROPOSALS
UnitedHealth Group's 2000 annual meeting of shareholders took place on May
10, 2000. UnitedHealth Group shareholders wishing to present proposals to be
considered at the 2001 annual meeting of shareholders should have submitted
their proposals to UnitedHealth Group in accordance with all applicable rules
and regulations of the SEC by December 7, 2000. Lifemark will hold an annual
meeting in the year 2001 only if the merger is not completed. If such meeting
is held, the deadline for receipt of a proposal to be considered for inclusion
in Lifemark's proxy statement for the 2001 annual meeting is April 23, 2001.
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ANNEXES TO
PROXY STATEMENT/PROSPECTUS
WITH RESPECT TO THE
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 10, 2000,
BY AND AMONG
UNITEDHEALTH GROUP INCORPORATED,
LEO ACQUISITION CORP.,
AND
LIFEMARK CORPORATION,
AS AMENDED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
ANNEX A
AGREEMENT
AND PLAN OF MERGER
By and Among
UnitedHealth Group Incorporated
Leo Acquisition Corp.
and
Lifemark Corporation
----------------
October 10, 2000
----------------
As amended by
Amendment No. 1
dated October 25, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I. THE MERGER..................................................... 1
1.1. The Merger....................................................... 1
1.2. Effect of Merger................................................. 1
1.3. Effective Time................................................... 1
1.4. Certificate of Incorporation; Bylaws............................. 2
1.5. Directors and Officers........................................... 2
1.6. Taking of Necessary Action; Further Action....................... 2
1.7. The Closing...................................................... 2
ARTICLE II. CONVERSION OF SECURITIES...................................... 2
2.1. Conversion of Securities......................................... 2
2.2. Stock Options.................................................... 4
2.3. Exchange of Certificates......................................... 4
2.4. Dissenting Shares................................................ 6
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................ 6
3.1. Organization and Qualification................................... 6
3.2. Capital Stock of Subsidiaries.................................... 7
3.3. Capitalization................................................... 7
3.4. Authority Relative to this Agreement............................. 8
3.5. No Conflict; Required Filings and Consents....................... 8
3.6. SEC Filings; Financial Statements................................ 9
3.7. Absence of Changes or Events..................................... 9
3.8. Absence of Certain Developments.................................. 9
3.9. Litigation....................................................... 10
3.10. Title to Properties.............................................. 10
3.11. Certain Contracts................................................ 10
3.12. Compliance with Law.............................................. 11
3.13. Intellectual Property Rights..................................... 11
3.14. Taxes............................................................ 12
3.15. Employees........................................................ 13
3.16. Employee Benefit Plans........................................... 14
3.17. Environmental Matters............................................ 15
3.18. Insurance........................................................ 16
3.19. Foreign Corrupt Practices Act.................................... 16
3.20. Finders or Brokers............................................... 16
3.21. Board Recommendation............................................. 16
3.22. Vote Required.................................................... 16
3.23. Opinion of Financial Advisor..................................... 16
3.24. Tax Matters...................................................... 17
3.25. State Takeover Statutes.......................................... 17
3.26. Registration Statement; Proxy Statement/Prospectus............... 17
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF MERGER SUB AND PARENT....... 17
4.1. Organization and Qualification................................... 17
4.2. Capitalization................................................... 18
4.3. Authority Relative to this Agreement............................. 18
4.4. No Conflicts; Required Filings and Consents...................... 18
4.5. SEC Filings; Financial Statements................................ 19
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
4.6. Absence of Changes or Events.................................... 19
4.7. Litigation...................................................... 19
4.8. Finders or Brokers.............................................. 19
4.9. Tax Matters..................................................... 19
4.10. Registration Statement; Proxy Statement/Prospectus.............. 19
ARTICLE V. COVENANTS AND AGREEMENTS...................................... 20
5.1. Conduct of Business of the Company Pending the Merger........... 20
5.2. Preparation of Registration Statement; Proxy
Statement/Prospectus.................................................. 22
5.3. Meeting of Stockholders......................................... 22
5.4. Additional Agreements; Cooperation.............................. 22
5.5. Publicity....................................................... 22
5.6. No Solicitation................................................. 23
5.7. Access to Information........................................... 24
5.8. Notification of Certain Matters................................. 24
5.9. Resignation of Officers and Directors........................... 24
5.10. Indemnification................................................. 25
5.11. Stockholder Litigation.......................................... 25
5.12. Employee Benefit Plans.......................................... 25
5.13. Determination of Optionholders.................................. 26
5.14. Preparation of Tax Returns...................................... 27
5.15. Rule 145 Matters................................................ 27
5.16. Tax-Free Reorganization......................................... 27
5.17. SEC Filings; Compliance......................................... 27
5.18. Listing of Additional Shares.................................... 27
ARTICLE VI. CONDITIONS TO CLOSING........................................ 28
6.1. Conditions to Each Party's Obligation to Effect the Merger...... 28
6.2. Conditions to Obligations of Parent............................. 28
6.3. Conditions to Obligations of the Company........................ 29
ARTICLE VII. TERMINATION................................................. 30
7.1. Termination..................................................... 30
7.2. Effect of Termination........................................... 31
7.3. Fees and Expenses............................................... 31
7.4 on-solicitation................................................. 32
ARTICLE VIII. MISCELLANEOUS.............................................. 33
8.1. Nonsurvival of Representations and Warranties................... 33
8.2. Waiver.......................................................... 33
8.3. Notices......................................................... 33
8.4. Counterparts.................................................... 34
8.5. Interpretation.................................................. 34
8.6. Amendment....................................................... 34
8.7. No Third Party Beneficiaries.................................... 34
8.8. Governing Law................................................... 34
8.9. Entire Agreement................................................ 34
8.10. Validity........................................................ 34
SIGNATURES............................................................... 35
</TABLE>
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<TABLE>
<S> <C>
EXHIBITS
A Voting Agreement
B Certificate of Merger
C Form of Company Affiliate Letter
D Form of Employment Agreement of Rhonda E. Brede
E Form of Employment Agreement of Michael J. Kennedy
F Form of Employment Agreement of Richard M. Jelinek
G Form of Employment Agreement of Dave Decker
H Form of Employment Agreement of Mete Sahin
</TABLE>
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AGREEMENT AND PLAN OF MERGER
(As amended by Amendment No. 1 dated October 25, 2000)
This AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated October 10,
2000, is made and entered into by and among UnitedHealth Group Incorporated, a
Minnesota corporation ("Parent"), Leo Acquisition Corp., a Delaware corporation
and wholly owned subsidiary of Parent ("Merger Sub"), and Lifemark Corporation,
a Delaware corporation (the "Company"). Merger Sub and the Company are
sometimes collectively referred to as the "Constituent Corporations."
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the
Company have determined that it is advisable and in the best interests of the
respective corporations and their stockholders that Merger Sub be merged with
and into the Company in accordance with the General Corporation Law of the
State of Delaware (the "DGCL") and the terms of this Agreement, pursuant to
which the Company will be the surviving corporation and will be a wholly owned
subsidiary of Parent (the "Merger"); and
WHEREAS, unless the Election hereinafter referred to is made, for United
States federal income tax purposes the parties intend that the Merger shall
qualify as a "reorganization" under Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and that this Agreement constitute a "plan of
reorganization" within the meaning of the Code; and
WHEREAS, Parent, Merger Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with, and
establish various conditions precedent to, the Merger; and
WHEREAS, as an inducement to Parent to enter into this Agreement, certain
principal stockholders of the Company are concurrently herewith entering into a
Voting Agreement (the "Voting Agreement") in substantially the form attached
hereto as Exhibit A, whereby each such stockholder agrees to vote in favor of
the Merger and all other transactions contemplated by this Agreement.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth in this Agreement and in the Certificate of
Merger (as defined in Section 1.3 hereof), the parties hereto, intending to be
legally bound, agree as follows:
ARTICLE I
THE MERGER
1.1. The Merger. At the Effective Time (as defined in Section 1.3 hereof),
subject to the terms and conditions of this Agreement and the Certificate of
Merger (as defined in Section 1.3 hereof), Merger Sub shall be merged with and
into the Company, the separate existence of Merger Sub shall cease, and the
Company shall continue as the surviving corporation. The Company, in its
capacity as the corporation surviving the Merger, is hereinafter sometimes
referred to as the "Surviving Corporation."
1.2. Effect of Merger. At the Effective Time, the effect of the Merger shall
be as provided in this Agreement, the Certificate of Merger and the applicable
provisions of the DGCL. Without limiting the generality of the foregoing, the
Surviving Corporation shall succeed to and possess all the properties, rights,
privileges, immunities, powers, and franchises, and be subject to all the
duties, liabilities, debts, obligations, restrictions and disabilities, of the
Constituent Corporations, all without further act or deed.
1.3. Effective Time. Subject to the terms and conditions of this Agreement,
the parties hereto will cause a copy of the Certificate of Merger, attached
hereto as Exhibit B (the "Certificate of Merger") to be executed, delivered and
filed with the Secretary of State of the State of Delaware in accordance with
the applicable provisions of the DGCL at the time of the Closing (as defined in
Section 1.7 hereof). The Merger shall become effective upon filing of the
Certificate of Merger with the Secretary of State of the State of Delaware, or
at such later time as may be agreed to by the parties and set forth in the
Certificate of Merger. The time of effectiveness is herein referred to as the
"Effective Time." The day on which the Effective Time shall occur is herein
referred to as the "Effective Date."
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1.4. Certificate of Incorporation; Bylaws. From and after the Effective Time
and until further amended in accordance with applicable law, the Certificate of
Incorporation of Merger Sub, as in effect immediately prior to the Effective
Time, shall be the Certificate of Incorporation of the Surviving Corporation,
as amended in the Certificate of Merger to change the name of the Surviving
Corporation to that of the Company. From and after the Effective Time and until
further amended in accordance with law, the Bylaws of Merger Sub as in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation.
1.5. Directors and Officers. From and after the Effective Time, the
directors of the Surviving Corporation shall be the persons who were the
directors of Merger Sub immediately prior to the Effective Time, and the
officers of the Surviving Corporation shall be the persons who were the
officers of Merger Sub immediately prior to the Effective Time. Said directors
and officers of the Surviving Corporation shall hold office for the term
specified in, and subject to the provisions contained in, the Certificate of
Incorporation and Bylaws of the Surviving Corporation and applicable law. If,
at or after the Effective Time, a vacancy shall exist on the Board of Directors
or in any of the offices of the Surviving Corporation, such vacancy shall be
filled in the manner provided in the Certificate of Incorporation and Bylaws of
the Surviving Corporation.
1.6. Taking of Necessary Action; Further Action. Parent, Merger Sub and the
Company, respectively, shall each use its or their reasonable best efforts to
take all such action as may be necessary or appropriate to effectuate the
Merger under the DGCL at the time specified in Section 1.3 hereof. If, at any
time after the Effective Time, any further action is necessary or desirable to
carry out the purposes of this Agreement and to vest the Surviving Corporation
with full right, title and possession to all properties, rights, privileges,
immunities, powers and franchises of either of the Constituent Corporations,
the officers of the Surviving Corporation are fully authorized in the name of
each Constituent Corporation or otherwise to take, and shall take, all such
lawful and necessary action.
1.7. The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") will take place at the offices of the Company within
two business days after the date on which the last of the conditions set forth
in Article VI shall have been satisfied or waived, or at such other place and
on such other date as is mutually agreeable to Parent and the Company (the
"Closing Date"). The Closing will be effective as of the Effective Time.
ARTICLE II
CONVERSION OF SECURITIES
2.1. Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of Parent, Merger Sub, the Company,
the holder of any shares of Company Common Stock (defined below) or the holder
of any options, warrants or other rights to acquire or receive shares of
Company Common Stock, the following shall occur:
(a) Conversion of Company Common Stock. At the Effective Time, and
subject to the provisions of Section 2.1(b) below, each share of common
stock, par value $.01 per share, of the Company (the "Company Common
Stock") issued and outstanding immediately prior to the Effective Time
(other than any shares of Company Common Stock to be canceled pursuant to
Section 2.1(c)) will be canceled and extinguished and be converted
automatically into the right to receive that number of shares (the
"Exchange Ratio") of common stock, par value $.01 per share, of the Parent
(the "Parent Common Stock") which is equal to the Per Share Price, as
defined in (i) below, divided by the Parent Average Price, as defined in
(ii) below.
(i) The term "Per Share Price" means:
(A) If the Parent Average Price is $95.00 or more, $10.55;
(B) If the Parent Average Price is $88.00 or less, $10.08; and
2
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(C) If the Parent Average Price is more than $88.00 and less than
$95.00, the sum of $10.08 plus the product of
<TABLE>
<CAPTION>
Parent Average
Price - $88.00
<C> <S> <C>
$0.47 X ( )
$7.00
</TABLE>
(ii) The term "Parent Average Price" means the average closing price
per share of Parent Common Stock on the New York Stock Exchange for the
ten consecutive trading days ending with and including the second
business day preceding the Closing Date; provided, that if the amount
so calculated is more than $113.00, the term "Parent Average Price"
shall mean $113.00.
(b) Parent Election to Pay in Cash. Notwithstanding the provisions of
Section 2.1(a), if the Parent Average Price is $88.00 or less, Parent may
elect (the "Election"), by means of written notice delivered to the Company
prior to or at the Closing Date, that each share of Company Common Stock
issued and outstanding immediately prior to the Effective Time (other than
any shares of Company Common Stock to be canceled pursuant to Section
2.1(c) and other than any Dissenting Shares, as such term is defined in
Section 2.4) will be canceled and extinguished and be converted
automatically into the right to receive from Parent an amount of cash equal
to the Per Share Price. If Parent makes the Election, each such share of
Company Common Stock shall, at the Effective Time, be canceled and
extinguished and be converted automatically into the right to receive such
amount of cash.
(c) Cancellation of Company Common Stock Owned by Parent or the
Company. At the Effective Time, all shares of Company Common Stock that are
owned by Company as treasury stock and each share of Company Common Stock
owned by Parent or any direct or indirect wholly owned subsidiary of Parent
or of the Company immediately prior to the Effective Time shall be canceled
and extinguished without any conversion thereof.
(d) Company Stock Option Plans. At the Effective Time the 1995 Stock
Option Plan, the 1996 Stock Option Plan, the 1995 Directors' Stock Option
Plan, the 1996 Non-Employee Director Stock Option Plan, the 1998 CEO Stock
Option Plan, the 1999 Executive Stock Option and Ownership Plan, the 2000
Non-Employee Director Stock Plan, the Medicus 1989 Stock Option Plan, and
the Medicus 1991 Stock Option Plan (collectively, the "Company Stock Option
Plans") and all options to purchase Company Common Stock then outstanding
under the Company Stock Option Plans shall be assumed by Parent in
accordance with Section 2.2 hereof.
(e) Capital Stock of Merger Sub. At the Effective Time, each share of
common stock, $0.01 par value, of Merger Sub ("Merger Sub Common Stock")
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of common stock, $0.01 par value, of the Surviving
Corporation, and the Surviving Corporation shall be a wholly owned
subsidiary of Parent. Each stock certificate of Merger Sub evidencing
ownership of any such shares shall continue to evidence ownership of such
shares of capital stock of the Surviving Corporation.
(f) Adjustments to Exchange Ratio. The Exchange Ratio, and the dollar
amounts set forth in Sections 2.1(b) and 2.2(a), shall be adjusted in the
event of any stock split, reverse split, stock dividend (including any
dividend or distribution of securities convertible into Parent Common
Stock), reorganization, recapitalization or other like change with respect
to Parent Common Stock occurring after the execution of this Agreement and
prior to the Effective Time, so as to provide holders of Company Common
Stock and Company Options the same economic effect as contemplated by this
Agreement prior to such stock split, reverse split, stock dividend,
reorganization, recapitalization or other like change.
(g) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued, but in lieu thereof each holder of shares of Company Common
Stock who would otherwise be entitled to a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common
Stock to be received by such holder) shall receive from Parent an amount of
cash (rounded to the nearest whole cent)
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equal to the product of (i) such fraction, multiplied by (ii) the closing
price for a share of Parent Common Stock on the New York Stock Exchange on
the last full trading day prior to the Effective Time.
2.2. Stock Options.
(a) At the Effective Time, each outstanding option to purchase shares of
Company Common Stock under the Company Stock Option Plans (each, a "Company
Option"), whether vested or unvested, shall be assumed by Parent and converted
into an option (each, a "Parent Option") to acquire, on substantially the same
terms and conditions, including but not limited to any performance criteria set
forth in the applicable stock option agreements (provided, that notwithstanding
any termination of employment with Parent or any resignation as a director of
the Company, each optionee shall be deemed, solely for the purposes of such
Parent Option, to be an employee or director, as the case may be, for the
entire term of each such Parent Option), as were applicable under such Company
Option, the number of whole shares of Parent Common Stock equal to the number
of shares of Company Common Stock that were issuable upon exercise of such
Company Option immediately prior to the Effective Time multiplied by the
Exchange Ratio (calculated, if the Election is made, based on the greater of
the Parent Average Price determined as set forth in Section 2.1(a)(ii) or a
Parent Average Price of $80.00 per share, and in any event rounded down to the
nearest whole number of shares of Parent Common Stock), and the per share
exercise price of the shares of Parent Common Stock issuable upon exercise of
such Parent Option shall be equal to the exercise price per share of Company
Common Stock at which such Company Option was exercisable immediately prior to
the Effective Time divided by the Exchange Ratio (calculated, if the Election
is made, as set forth above, and in any event rounded up to the nearest whole
cent). The Company shall not, and shall cause any Company Stock Option Plan
administrator not to, take any action prior to the Effective Time that will
extend the exercise period of any Company Option or cause the vesting period of
any Company Option to accelerate under any circumstances (other than as may
already be provided by the terms of such Company Option or as is contemplated
by this Section 2.2(a)), regardless of whether such circumstances are to occur
before or after the Effective Time, or otherwise amend the terms of outstanding
Company Options.
(b) Parent shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of Parent Common Stock for delivery upon exercise
of the Parent Options and to file all documents required to be filed to cause
the shares of Parent Common Stock issuable upon exercise of the Parent Options
to be listed on the New York Stock Exchange. As soon as practicable after the
Effective Time, but no later than five business days after the Effective Time,
Parent shall file a registration statement with the U.S. Securities and
Exchange Commission (the "SEC") on Form S-8 (or any successor form) or another
appropriate form with respect to the Parent Common Stock subject to such Parent
Options, and shall use its best efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as such
Parent Options remain outstanding. As soon as practicable after the Effective
Time, Parent shall inform in writing the holders of Company Options of their
rights pursuant to the Company Stock Option Plans and the agreements evidencing
the grants of such Company Options shall continue in effect on the same terms
and conditions (subject to the adjustments required by Section 2.2(a) hereof),
after giving effect to the Merger and the assumption by Parent of the Company
Options as set forth herein.
2.3. Exchange of Certificates.
(a) Prior to the Effective Time, Parent shall designate a commercial bank,
trust company or other financial institution, which may include Parent's stock
transfer agent, to act as exchange agent ("Exchange Agent") in the Merger.
(b) If the Election is not made, promptly after the Effective Time Parent
shall make available to the Exchange Agent for exchange in accordance with this
Article II, (i) the aggregate number of shares of Parent Common Stock issuable
pursuant to Section 2.1 in exchange for outstanding shares of Company Common
Stock, and (ii) cash in an amount sufficient to permit payment of cash in lieu
of fractional shares pursuant to Section 2.1(g). If the Election is made,
promptly after the Effective Time Parent shall deposit with the Exchange Agent
the aggregate amount of cash payable pursuant to Section 2.1 with respect to
outstanding
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<PAGE>
shares of Company Common Stock. The shares, if any, and cash so made available
or deposited with the Exchange Agent are referred to herein as the "Exchange
Fund."
(c) Promptly, and in any event no later than ten business days after the
Effective Time, the Parent shall cause to be mailed to each holder of record of
a certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock (the "Certificates") (i)
a letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon proper
delivery of the Certificates to the Exchange Agent, and shall be in such form
and have such other provisions as Parent may reasonably specify and which shall
be reasonably acceptable to the Company) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of Parent Common Stock (and cash in lieu of fractional
shares) or, if the Election is made, in exchange for cash. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such letter
of transmittal, duly completed and validly executed, and such other documents
as may be reasonably required pursuant to such instructions, the holder of such
Certificate shall be entitled to receive in exchange a certificate representing
the number of whole shares of Parent Common Stock, plus cash in lieu of
fractional shares in accordance with Section 2.1(g), to which such holder is
entitled pursuant to Section 2.1, or, if the Election is made, cash as provided
in Section 2.1, and the Certificate so surrendered shall forthwith be canceled.
Until surrendered as contemplated by this Section 2.3, each Certificate that,
prior to the Effective Time, represented shares of Company Common Stock will be
deemed from and after the Effective Time, for all corporate purposes, other
than the payment of dividends, to evidence the right to receive the number of
full shares of Parent Common Stock into which such shares of Company Common
Stock shall have been so converted and the right to receive an amount of cash
in lieu of the issuance of any fractional shares in accordance with Section
2.1(g) or, if the Election is made, cash as provided in Section 2.1.
(d) If the Election is not made, no dividends or other distributions
declared or made after the Effective Time with respect to Parent Common Stock
with a record date after the Effective Time will be paid to the holder of any
unsurrendered Certificate with respect to the shares of Parent Common Stock
represented thereby until the holder of record of such Certificate shall
surrender such Certificate. In such event, subject to applicable law, following
surrender of any such Certificate, there shall be paid to the record holder of
the certificates representing whole shares of Parent Common Stock issued in
exchange therefor, without interest, at the time of such surrender, the amount
of dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(e) None of Parent, the Surviving Corporation or the Exchange Agent shall be
liable to any holder of shares of Company Common Stock for any amount properly
delivered to a public official in compliance with any abandoned property,
escheat or similar law.
(f) At the Effective Time, the stock transfer books of the Company shall be
closed and there shall be no further registration of transfers of shares of
Company Common Stock thereafter on the records of the Company. From and after
the Effective Time, the holders of certificates representing shares of Company
Common Stock outstanding immediately prior to the Effective Time shall cease to
have any rights with respect to such shares of Company Common Stock except as
otherwise provided in this Agreement or by law.
(g) Subject to any applicable escheat or similar laws, any portion of the
Exchange Fund that remains unclaimed by the former stockholders of the Company
for one year after the Effective Time shall be delivered by the Exchange Agent
to Parent, upon demand of Parent, and any former stockholders of the Company
shall thereafter look only to Parent for satisfaction of their claim for
certificates representing shares of Parent Common Stock (and cash in lieu of
fractional shares) or, if the Election is made, cash, in exchange for their
shares of Company Common Stock pursuant to the terms of Section 2.1 hereof.
(h) If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact, in form and substance acceptable to the
Exchange Agent, by the person claiming such Certificate to be lost, stolen or
destroyed, and complying with such other conditions as the Exchange Agent may
reasonably impose (including the execution of an indemnification undertaking or
the posting of an indemnity bond or other surety in favor of the Exchange Agent
and Parent with respect to the Certificate alleged to be lost, stolen or
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destroyed), the Exchange Agent will deliver to such person, such shares of
Parent Common Stock and cash in lieu of fractional shares, if any, or, if the
Election is made, cash, as may be required pursuant to Section 2.1.
2.4. Dissenting Shares. For purposes of this Agreement, the term "Dissenting
Shares" means any shares of Company Common Stock issued and outstanding
immediately prior to the Effective Time with respect to which appraisal rights
apply under Section 262 of the DGCL and held by a holder who has not voted in
favor of the Merger or consented thereto in writing and who has demanded
properly in writing appraisal for such shares in accordance with Section 262 of
the DGCL. Notwithstanding any provision of this Agreement to the contrary,
Dissenting Shares shall not be converted into the right to receive the
consideration provided for in Section 2.1(b), and holders of such Dissenting
Shares shall be entitled to receive payment of the appraised value of such
Dissenting Shares in accordance with the provisions of Section 262 of the DGCL
unless and until such holders fail to perfect or effectively withdraw or
otherwise lose their rights to appraisal and payment under the DGCL. If, after
the Effective Time, any such holder fails to perfect or effectively withdraws
or otherwise loses such right, such Dissenting Shares shall thereupon be
treated as if they had been converted into and become exchangeable for, at the
Effective Time, the right to receive the consideration provided for in Section
2.1(b), without any interest thereon. Notwithstanding anything to the contrary
contained in this Section 2.4, if (a) the Merger is rescinded or abandoned or
(b) the stockholders of the Company revoke the authority to effect the Merger,
then the right of any stockholder to be paid the fair value of such
stockholder's Dissenting Shares pursuant to Section 262 of the DGCL shall
cease. The Company shall give Parent prompt notice of any demands received by
the Company for appraisals of Dissenting Shares. The Company shall not, except
with the prior written consent of Parent, make any payment with respect to any
demands for appraisals or offer to settle or settle any such demands.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Merger Sub and Parent that the
statements contained in this Article III are true and correct, except as set
forth in the letter delivered by the Company to Merger Sub on the date hereof
(the "Company Disclosure Letter") (which Company Disclosure Letter sets forth
the exceptions to the representations and warranties contained in this Article
III under captions referencing the Sections to which such exceptions apply):
3.1. Organization and Qualification. Each of the Company and its
Subsidiaries (as defined below) is a company (including a corporation, a
limited liability company, a limited partnership or a similar entity with
corporate characteristics including limited liability of stockholders or other
owners) duly organized, validly existing, duly registered (if applicable) and,
if applicable, in good standing under the laws of the jurisdiction of its
organization and each such entity has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted. Each of the Company and its Subsidiaries is duly
qualified or licensed to carry on its business as it is now being conducted,
and is qualified to conduct business, in each jurisdiction where the character
of its properties owned or leased or the nature of its activities makes such
qualification necessary, except for failures to be so qualified that would not,
individually or in the aggregate, have, or would not reasonably be expected to
have, a Company Material Adverse Effect (as defined below). Neither the Company
nor any of its Subsidiaries is in violation of any of the provisions of its
Certificate of Incorporation or other applicable charter document (any such
document of any business entity hereinafter referred to as its "Charter
Document") or its Bylaws, or other applicable governing document (any such
documents of any business entity hereinafter referred to as its "Governing
Document"). As used in this Agreement, the term "Company Material Adverse
Effect" means any change, effect, event or condition that (i) has a material
adverse effect on the assets, business, results of operations, condition
(financial or other) or prospects of the Company and its Subsidiaries, taken as
a whole, or (ii) would prevent or materially delay the Company's ability to
consummate the transactions contemplated hereby. As used in this Agreement, the
term "Subsidiary" when used with respect to any party means any corporation or
other organization, whether
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incorporated or unincorporated, of which such party directly or indirectly owns
or controls at least a majority of the securities or other interests having by
their terms ordinary voting power to elect a majority of the board of directors
or others performing similar functions.
3.2. Capital Stock of Subsidiaries. Neither the Company nor any of its
Subsidiaries owns, controls or holds with the power to vote, directly or
indirectly, of record, beneficially or otherwise, any share capital, capital
stock or any equity or ownership interest in any company, corporation, limited
liability company, partnership, association, joint venture, business, trust or
other entity, except for the Subsidiaries described in the Company SEC Reports
(as defined in Section 3.6(a) hereof) or listed in Section 3.2 of the Company
Disclosure Letter, and except for ownership of securities in any publicly
traded company held for investment by the Company or any of its Subsidiaries
and comprising less than five percent of the outstanding stock of such company.
Except as set forth in Section 3.2 of the Company Disclosure Letter, the
Company is directly or indirectly the registered, record and beneficial owner
of all of the outstanding share capital or shares of capital stock (or other
ownership interests having by their terms ordinary voting power to elect a
majority of directors or others performing similar functions with respect to
such Subsidiary) of each of its Subsidiaries, there are no proxies with respect
to such shares, and no equity securities of any of such Subsidiaries are or may
be required to be issued by reason of any options, warrants, scrip, rights to
subscribe for, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for, share capital or
shares of any capital stock of any such Subsidiary, and there are no contracts,
commitments, understandings or arrangements by which the Company or any such
Subsidiary is bound to issue, transfer or sell any share capital or shares of
such capital stock or securities convertible into or exchangeable for such
shares. Other than as set forth in Section 3.2 of the Company Disclosure
Letter, all of such shares so owned by the Company are validly issued, fully
paid and nonassessable and are owned by it free and clear of any claim, lien,
pledge, security interest or other encumbrance of any kind (collectively
"Liens") with respect thereto other than restrictions on transfer pursuant to
applicable securities laws.
3.3. Capitalization. (a) The authorized capital stock of the Company
consists of 10,000,000 shares of Company Common Stock, 1,000,000 shares, par
value $.0l per share, of Preferred Stock; and 6.85 shares, par value $1,000 per
share, of Voting Preferred Stock (such Preferred Stock and Voting Preferred
Stock being referred to herein collectively as the "Company Preferred Stock").
As of the date hereof, (i) 5,157,694 shares of Company Common Stock were issued
and outstanding, (ii) no shares of Company Preferred Stock were issued and
outstanding, (iii) the Company had no shares of Company Common Stock held in
its treasury, (iv) 1,673,797 shares of Company Common Stock were reserved for
issuance under the Company Stock Option Plans and the Company's Employee Stock
Purchase Plan (the "ESPP"), (v) Company Options to purchase 1,067,627 shares of
Company Common Stock in the aggregate had been granted and remained outstanding
under the Company Stock Option Plans, (vi) warrants to purchase 10,000 shares
of Company Common Stock (the "Warrants") were outstanding, (vii) $300,000
principal amount of notes convertible into 77,922 shares of Company Common
Stock (the "Convertible Notes") were outstanding, and (viii) except for the
Company Options, the Warrants, the Convertible Notes, and rights to the
issuance of 208,281 shares of Company Common Stock in the aggregate under the
ESPP, there were no outstanding Rights (defined below). Except as set forth
above or in Section 3.3 of the Company Disclosure Letter, the Company has no
outstanding bonds, debentures, notes or other securities or obligations the
holders of which have the right to vote or which are convertible into or
exercisable for securities having the right to vote on any matter on which any
stockholder of the Company has a right to vote. All issued and outstanding
shares of Company Common Stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. There are not as of the date
hereof any existing options, warrants, stock appreciation rights, stock
issuance rights, calls, subscriptions, convertible securities or other rights
which obligate the Company or any of its Subsidiaries to issue, exchange,
transfer or sell any shares in the capital of the Company or any of its
Subsidiaries, other than Company Common Stock issuable under the Company Stock
Option Plans, the Warrants, the Convertible Notes and the ESPP, or awards
granted pursuant thereto (collectively, "Rights"). As of the date hereof, there
are no outstanding contractual obligations of the Company or any of its
Subsidiaries to repurchase, reprice, redeem or otherwise acquire any shares of
the capital of the Company or any of its Subsidiaries. As of the date hereof,
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there are no outstanding contractual obligations of the Company to vote or to
dispose of any shares in the capital of any of its Subsidiaries. The Company
does not hold any rights to repurchase any shares of Company Common Stock which
are subject to unvested Company Options or other Rights.
(b) Subsequent to May 31, 2000, the Company has not issued any shares of
Company Common Stock or Company Preferred Stock, or issued any Company Options
or other Rights, or amended the terms of any of the Company Stock Option Plans,
Company Options, or other Rights or the instruments or agreements under which
such Rights are outstanding, or waived any of the terms or conditions of any
such Company Stock Option Plans, Company Options, other Rights, instruments or
agreements, except as contemplated by Section 2.2(a) and except for (i) Company
Options to purchase an aggregate of 50,000 shares of Company Common Stock which
were granted on June 1, 2000 under the Company's 2000 Non-Employee Director
Stock Plan, (ii) an aggregate of 25,000 shares of restricted Company Common
Stock which were issued on June 1, 2000 under the Company's 2000 Non-Employee
Director Stock Plan, and (iii) an aggregate of 14,645 shares of Company Common
Stock issued subsequent to May 31, 2000 upon the exercise of Company Options
that were issued before such date.
3.4. Authority Relative to this Agreement. The Company has the requisite
corporate power and authority to execute and deliver, and perform its
obligations under, this Agreement and, subject to obtaining the necessary
approval of its stockholders, to consummate the Merger and the other
transactions contemplated hereby under applicable law. The execution and
delivery of this Agreement and the consummation of the Merger and other
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of the Company and no other corporate proceedings on the
part of the Company are necessary to authorize this Agreement or to consummate
the Merger or other transactions contemplated hereby (other than approval by
the Company's stockholders required by applicable law). This Agreement has been
duly and validly executed and delivered by the Company and, assuming the due
authorization, execution and delivery hereof by Parent and Merger Sub,
constitutes a valid and binding agreement of the Company, enforceable against
the Company in accordance with its terms, except to the extent that its
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors
rights generally or by general equitable principles.
3.5. No Conflict; Required Filings and Consents.
(a) Assuming that all filings, permits, authorizations, consents and
approvals or waivers thereof have been duly made or obtained as contemplated by
Section 3.5(b) hereof, neither the execution and delivery of this Agreement by
the Company nor the consummation of the Merger or other transactions
contemplated hereby nor compliance by the Company with any of the provisions
hereof will (i) violate, conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or
suspension of, or accelerate the performance required by, or result in a right
of termination or acceleration under, or result in the creation of any Lien
upon any of the properties or assets of the Company or any of its Subsidiaries
under, any of the terms, conditions or provisions of (x) their respective
Charter Documents or Governing Documents, (y) any note, bond, charge, lien,
pledge, mortgage, indenture or deed of trust to which the Company or any such
Subsidiary is a party or to which they or any of their respective properties or
assets may be subject, or (z) any license, lease, agreement or other instrument
or obligation to which the Company or any such Subsidiary is a party or to
which they or any of their respective properties or assets may be subject, or
(ii) violate any judgment, ruling, order, writ, injunction, decree, statute,
rule or regulation applicable to the Company or any of its Subsidiaries or any
of their respective properties or assets, except for, in the case of clauses
(i)(y), (i)(z) and (ii), such defaults or violations as are set forth in
Section 3.5 of the Company Disclosure Letter.
(b) No filing or registration with or notification to and no permit,
authorization, consent or approval of any court, commission, governmental body,
regulatory authority, agency or tribunal wherever located (a "Governmental
Entity") is required to be obtained, made or given by the Company in connection
with the execution and delivery of this Agreement or the consummation by the
Company of the Merger or other transactions contemplated hereby except (i) the
filing of the Certificate of Merger as provided in Section 1.3 hereof, (ii) in
connection with the applicable requirements of the Hart-Scott-Rodino Antitrust
Improvements
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Act of 1976, as amended (the "HSR Act"), (iii) the filing of the Proxy
Statement/Prospectus (as defined in Section 3.26 hereof) and such reports under
Sections 13(a), 13(d), 15(d) or 16(a) with the SEC in accordance with the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "Exchange Act") and the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder (the "Securities
Act"), as may be required in connection with this Agreement and the
transactions contemplated hereby, (iv) as shown on Section 3.5(b) of the
Company Disclosure Letter, or (v) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under applicable state securities laws and the laws of any country other than
the United States.
3.6. SEC Filings; Financial Statements.
(a) The Company has filed all forms, reports, schedules, statements and
other documents required to be filed by it since May 31, 1997 to the date
hereof (collectively, as supplemented and amended since the time of filing, the
"Company SEC Reports") with the SEC. The Company SEC Reports (i) were prepared
in all material respects in compliance with all applicable requirements of the
Securities Act and the Exchange Act, as the case may be and (ii) did not at the
time they were filed contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The representation in clause (ii) of the preceding
sentence does not apply to any misstatement or omission in any Company SEC
Report filed prior to the date of this Agreement which was superseded by a
subsequent Company SEC Report filed prior to the date of this Agreement. No
Subsidiary of the Company is required to file any report, form or other
document with the SEC.
(b) The audited consolidated financial statements and unaudited consolidated
interim financial statements of the Company and its Subsidiaries included or
incorporated by reference in such Company SEC Reports (collectively, the
"Financial Statements") have been prepared in accordance with United States
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be otherwise indicated in the notes
thereto) and present fairly, in all material respects, the financial position
and results of operations and cash flows of the Company and its Subsidiaries on
a consolidated basis at the respective dates and for the respective periods
indicated (except, in the case of all such Financial Statements that are
interim financial statements, for footnotes and normal year-end adjustments).
(c) Neither the Company nor any of its Subsidiaries has any liabilities or
obligations of any nature, whether absolute, accrued, unmatured, contingent or
otherwise whether due or to become due, known or unknown, or any unsatisfied
judgments or any leases of personalty or realty or unusual or extraordinary
commitments, in each such case, that are required to be disclosed under United
States generally accepted accounting principles, except (i) as set forth in the
Company SEC Reports or in Section 3.6(c) of the Company Disclosure Letter, (ii)
the liabilities recorded on the Company's consolidated balance sheet at May 31,
2000 (the "Balance Sheet") included in the financial statements referred in
Section 3.6(a) hereof and the notes thereto, or (iii) liabilities or
obligations incurred since May 31, 2000 in the ordinary course of business and
consistent with past practice.
3.7. Absence of Changes or Events. Except as set forth in Section 3.7 of the
Company Disclosure Letter or in the Company SEC Reports, since May 31, 2000,
through the date of this Agreement, neither the Company nor any of its
Subsidiaries have incurred any liability or obligation that has resulted or
would reasonably be expected to result in a Company Material Adverse Effect,
and there has not been any change in the business, financial condition or
results of operations of the Company or any of its Subsidiaries which has had,
or would reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect, and the Company and its Subsidiaries have
conducted their respective businesses in the ordinary course consistent with
their past practices.
3.8. Absence of Certain Developments. Except as disclosed in the Company SEC
Reports or as set forth in Section 3.8 of the Company Disclosure Letter, since
May 31, 2000, the Company has not taken any of the actions set forth in Section
5.1 hereof.
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3.9. Litigation. Except as disclosed in the Company SEC Reports or as set
forth in Section 3.9 of the Company Disclosure Letter, there is no (a) claim,
action, suit or proceeding pending or overtly threatened against or relating to
the Company or any of its Subsidiaries before any Governmental Entity,
(b) alternative dispute resolution proceeding pending or overtly threatened
against the Company or any of its Subsidiaries, or (c) outstanding judgment,
order, writ, injunction or decree (collectively, "Orders"), or application,
request or motion therefor, of any Governmental Entity in a proceeding to which
the Company, any Subsidiary of the Company or any of their respective assets
was or is a party, and neither the Company nor any Subsidiary is in default in
any material respect with respect to any such Order.
3.10. Title to Properties. The Company does not own any real property. The
Company has heretofore made available to Parent correct and complete copies of
all leases, subleases and other agreements (collectively, the "Real Property
Leases") under which the Company or any of its Subsidiaries uses or occupies or
has the right to use or occupy, now or in the future, any real property or
facility (the "Leased Real Property"), including without limitation all
modifications, amendments and supplements thereto. Except as otherwise set
forth in Section 3.10 of the Company Disclosure Letter, (i) the Company or one
of its Subsidiaries has a valid leasehold interest in each parcel of Leased
Real Property free and clear of all Liens except liens of record and liens for
taxes not yet due and payable, and such imperfections of title and
encumbrances, if any, as are not substantial in character, amount or extent and
do not materially detract from the value, or materially interfere with the
present use, of such properties or otherwise impair business operations in any
material respect ("permitted liens") and each Real Property Lease is in full
force and effect, (ii) all rent and other sums and charges due and payable by
the Company or its Subsidiaries as tenants thereunder are current in all
material respects, (iii) no termination event or condition or uncured default
of a material nature on the part of the Company or any such Subsidiary or, to
the knowledge of the Company, the landlord, exists under any Real Property
Lease, (iv) the Company or one of its Subsidiaries is in actual possession of
each Leased Real Property and is entitled to quiet enjoyment thereof in
accordance with the terms of the applicable Real Property Lease and applicable
law, and (v) the Company and its Subsidiaries own outright all of the real and
personal property (except for leased property or assets for which it has a
valid and enforceable right to use) which is reflected on the Balance Sheet,
except for property since sold or otherwise disposed of in the ordinary course
of business and consistent with past practice and except for liens of record
and other permitted liens. The plant, property and equipment of the Company and
its Subsidiaries that are used in the operations of their businesses are in
good operating condition and repair, subject to ordinary wear and tear, and,
subject to normal maintenance, are available for use.
3.11. Certain Contracts. Except as set forth in Section 3.11 of the Company
Disclosure Letter, neither the Company nor any of its Subsidiaries has
breached, or received in writing any claim or notice that it has breached, any
of the terms or conditions of (i) any agreement, contract or commitment
required to be filed as an exhibit to the Company SEC Reports (including any
agreements, contracts or commitments entered into since May 31, 2000, that will
be required to be filed by the Company with the SEC in any report), (ii) any
agreements, contracts or commitments with suppliers, sales representatives, or
customers of the Company or others with whom the Company does business pursuant
to which the Company recognized revenues or payments in excess of $1,000,000
for the twelve-month period ending May 31, 2000 or anticipates recognizing
revenues or payments in excess of $1,000,000 for the twelve-month period ended
May 31, 2001, or (iii) any agreements, contracts or commitments containing
covenants that limit the ability of the Company or any of its Subsidiaries to
compete in any line of business or with any Person (as defined in Section 8.5
hereof), or that include any exclusivity provision or involve any restriction
on the geographic area in which the Company or any of its Subsidiaries may
carry on its business (collectively, "Company Material Contracts"). Section
3.11 of the Company Disclosure Letter lists each Company Material Contract
described in clauses (ii) and (iii) of the preceding sentence. Each Company
Material Contract that has not expired by its terms is in full force and effect
and is the legal, valid and binding obligation of the Company and/or its
Subsidiaries, enforceable against them in accordance with its terms except as
set forth in Section 3.11 of the Company Disclosure Letter, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors rights and remedies generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity). Except as set forth
in Section 3.11 of the Company
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Disclosure Letter, no consent, approval, waiver or authorization of, or notice
to any Person is needed in order that each contract or other agreement to which
the Company or any of its Subsidiaries is a party shall continue in full force
and effect in accordance with its terms without penalty, acceleration or rights
of early termination by reason of the consummation of the Merger and the other
transactions contemplated by this Agreement.
3.12. Compliance with Law.
(a) All activities of the Company and its Subsidiaries have been, and are
currently being, conducted in compliance in all material respects with all
applicable United States federal, state, local and all provincial and other
foreign laws, ordinances, regulations, interpretations, judgments, decrees,
injunctions, permits, licenses, certificates, governmental requirements, Orders
and other similar items of any court or other Governmental Entity or any
nongovernmental self-regulatory agency, including without limitation all Health
Benefit Laws (as defined in (b) below), and no notice has been received by the
Company or any Subsidiary of any claims filed against the Company or any
Subsidiary alleging a violation of any such laws, regulations or other
requirements. The Company Stock Option Plans and the ESPP have been duly
authorized, approved and operated in compliance in all material respects with
all applicable securities, corporate and other laws of each jurisdiction in
which participants of such plans are located. The Company and its Subsidiaries
have all permits, licenses and franchises from Governmental Entities required
to conduct their businesses as now being conducted, including without
limitation those applicable to a long-term care plan, health maintenance
organization, third-party administrator or other managed care, insurance,
reinsurance or third-party administrator business ("Managed Care
Organization"), or to a Medicare or Medicaid (as such terms are defined in (b)
below) contractor.
(b) For purposes of this Agreement, (i) the term "Health Benefit Law" means
any laws relating to the licensure, certification, qualification or authority
to transact business relating to the provision of, or payment for, or both the
provision of and payment for, health benefits or insurance coverage, including
without limitation the Employee Retirement Income Security Act of 1974, the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, the Health
Insurance Portability and Accountability Act of 1996, and laws relating to the
regulation of Managed Care Organizations, utilization review, coordination of
benefits, fraud and abuse and patient referrals, and Medicare and Medicaid
participation; (ii) the term "Medicaid" means the applicable provision of Title
XIX of the Social Security Act and the regulations promulgated thereunder, and
the state laws and regulations implementing the Medicaid program; and (iii) the
term "Medicare" means the applicable provisions of Title XVIII of the Social
Security Act and the regulations promulgated thereunder.
3.13. Intellectual Property Rights; Year 2000.
(a) The Company and its Subsidiaries own, or are validly licensed or
otherwise possess legally enforceable rights to use, all patents, trademarks,
trade names, service marks, domain names and copyrights, any applications for
and registrations of such patents, trademarks, trade names, service marks,
domain names and copyrights, and all database rights, net lists, processes,
formulae, methods, schematics, technology, know-how, computer software programs
or applications and tangible or intangible proprietary information or material
that are necessary to conduct the business of the Company and its Subsidiaries
as currently conducted or, except as set forth in Section 3.13(a) of the
Company Disclosure Letter, as presently planned to be conducted as set forth in
writing by the Company (the "Company Intellectual Property Rights"). The
Company and its Subsidiaries have taken all action reasonably necessary to
protect the Company Intellectual Property Rights which is customary in the
industry, including, without limitation, use of reasonable secrecy measures to
protect the trade secrets included in the Company Intellectual Property Rights.
(b) All patents, registered trademarks, service marks, domain names and
copyrights held by the Company or any of its Subsidiaries, are valid and, with
respect to registrations of the foregoing, subsisting. The Company (i) has not
been sued in any suit, action or proceeding, or received in writing any claim
or notice, which involves a claim of infringement or misappropriation of any
patents, trademarks, service marks, domain names, copyrights or violation of
any trade secret or other proprietary right of any third party; and has no
reason to believe that the marketing, licensing or sale of its products or
services infringe upon, misappropriate or otherwise come into conflict with any
patent, trademark, service mark, copyright, trade secret or other
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proprietary right of any third party. To the knowledge of the Company, no other
Person has interfered with, infringed upon or otherwise come into conflict with
any Company Intellectual Property Rights or other proprietary information of
the Company or any of its Subsidiaries which has or would, individually or in
the aggregate, reasonably be expected to have a Company Material Adverse
Effect.
(c) Each employee, agent, consultant or contractor who has materially
contributed to or participated in the creation or development of any
copyrightable, patentable or trade secret material (including, without
limitation, computer software programs) on behalf of the Company, any of its
Subsidiaries or any predecessor in interest thereto either: (i) is a party to
an agreement under which the Company or such Subsidiary is deemed to be the
original owner/author of all property rights therein; or (ii) has executed an
assignment or an agreement to assign in favor of the Company, such Subsidiary
or such predecessor in interest, as applicable, all right, title and interest
in such material.
(d) Other than in the ordinary course of business, neither the Company nor
any of its Subsidiaries has granted any license or other right to any third
party with respect to any Company Intellectual Property Rights. The
consummation of the transactions contemplated by this Agreement will not result
in the termination or impairment of any of the Company Intellectual Property
Rights.
(e) With respect to each license or other agreement pursuant to which the
Company or any of its Subsidiaries has obtained the right to use Company
Intellectual Property Rights from others (each, a "License"): (i) such License
is valid and binding and in full force and effect and represents the entire
agreement between the respective licensor and licensee with respect to the
subject matter of such License; (ii) such License will not cease to be valid
and binding and in full force and effect on terms identical to those currently
in effect as a result of the consummation of the transactions contemplated by
this Agreement, nor will the consummation of the transactions contemplated by
this Agreement constitute a breach or default under such License or otherwise
give the licensor a right to terminate such License; (iii) neither the Company
nor any of its Subsidiaries has (A) received any notice of termination or
cancellation under such License, (B) received any notice of breach or default
under such License, which breach has not been cured, or (C) granted to any
other third party any rights, adverse or otherwise, under such License that
would constitute a breach of such License; and (iv) neither the Company or any
of its Subsidiaries nor, to the Company's knowledge, any other party to such
license is in breach or default thereof in any material respect, and no event
has occurred that, with notice or lapse of time, would constitute such a
material breach or default or permit termination, modification or acceleration
under such License.
(f) To the knowledge of the Company, the computer software programs owned,
licensed, or used by the Company and its Subsidiaries are free of all material
viruses, worms, trojan horses and other material contaminants and do not
contain any bugs, errors or problems of a material nature that disrupt their
operations in any material respect or have a materially adverse impact on the
operation of other software programs or operating systems. Neither the Company
nor any of its Subsidiaries exports or has exported any such computer software
programs outside the United States or imports or has imported any such computer
software programs into any country. No rights in such computer software
programs have been transferred to any third party except to the customers of
the Company and its Subsidiaries to whom such computer software programs have
been licensed in the ordinary course of business. None of such computer
software programs is licensed pursuant to an "open source" or "GNU" license, or
incorporates or is based on any computer software that is licensed pursuant to
an "open source" or "GNU" license. The Company and its Subsidiaries have the
right to use all software development tools, library functions, compilers, and
other computer software programs and elements thereof that are material to the
business of the Company or its Subsidiaries, or that are required to operate or
modify the computer software programs owned, licensed, or used by the Company
and its Subsidiaries.
3.14. Taxes.
(a) "Tax" or "Taxes" shall mean all United States federal, state,
provincial, local or foreign taxes and any other applicable duties, levies,
fees, charges and assessments that are in the nature of a tax, including
income, gross receipts, property, sales, use, license, excise, franchise, ad
valorem, value-added, transfer, social
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security payments, and health taxes and any deductibles relating to wages,
salaries and benefits and payments to subcontractors for any jurisdiction in
which the Company or any of its Subsidiaries does business (to the extent
required under applicable Tax law), together with all interest, penalties and
additions imposed with respect to such amounts.
(b) Except as set forth in (or resulting from matters set forth in) Section
3.14 of the Company Disclosure Letter:
(i) the Company and its Subsidiaries have prepared and timely filed with
the appropriate governmental agencies all franchise, income and all other
material Tax returns and reports required to be filed (collectively
"Returns"), taking into account any extension of time to file granted to or
obtained on behalf of the Company and/or its Subsidiaries;
(ii) all Taxes of the Company and its Subsidiaries shown on such Returns
or all Taxes otherwise known by the Company to be due or payable (including
the uncontested portion of any Taxes which are being contested) have been
timely paid in full to the proper authorities, other than such Taxes as are
being contested in good faith by appropriate proceedings or which are
adequately reserved for in accordance with generally accepted accounting
principles;
(iii) all deficiencies resulting from Tax examinations of income, sales
and franchise and all other material Returns filed by the Company and its
Subsidiaries in any jurisdiction in which such Returns are required to be
so filed have either been paid or are being contested in good faith by
appropriate proceedings;
(iv) no deficiency has been asserted or assessed against the Company or
any of its Subsidiaries which has not been satisfied or otherwise resolved,
and no examination of the Company or any of its Subsidiaries is pending or
overtly threatened for any amount of Tax by any taxing authority;
(v) no extension of the period for assessment or collection of any
material Tax is currently in effect and no extension of time within which
to file any Return has been requested, which Return has not since been
filed;
(vi) all Returns filed by the Company and its Subsidiaries are correct
and complete or adequate reserves have been established with respect to any
additional Taxes that may be due (or may become due) as a result of such
Returns not being correct or complete;
(vii) there are no Tax liens on any assets of the Company or any of its
Subsidiaries other than liens for Taxes not yet due or payable;
(viii) neither the Company nor any of its Subsidiaries have made since
May 31, 1997, and none will make, any voluntary adjustment by reason of a
change in their accounting methods for any pre-Merger period;
(ix) the Company and its Subsidiaries have made timely payments of the
Taxes required to be deducted and withheld from the wages paid to their
employees; and
(x) the Company and its Subsidiaries are not parties to any Tax sharing
or Tax matters agreement.
(c) The Company and its Subsidiaries are not parties to any agreement,
contract, or arrangement that would, as a result of the transactions
contemplated hereby, result, separately or in the aggregate, in (i) the
payment of any "excess parachute payments" within the meaning of Section 280G
of the Code by reason of the Merger or (ii) the payment of any form of
compensation or reimbursement for any Tax incurred by any Person arising under
Section 280G of the Code.
3.15. Employees.
(a) Neither the Company nor any of its Subsidiaries is a party to any
collective bargaining agreement, arrangement or labor contract with a labor
union or labor organization, whether formal or otherwise. Section 3.15 of the
Company Disclosure Letter lists all employment, severance and change of
control agreements (or
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any other agreements that may result in the acceleration of outstanding
options) of the Company or its Subsidiaries. Each of the Company and its
Subsidiaries is in material compliance with all applicable laws (including,
without limitation, all applicable extension orders) respecting employment and
employment practices, terms and conditions of employment, equal opportunity,
anti-discrimination laws, and wages and hours. To the knowledge of the Company,
there is no labor strike, slowdown or stoppage, unfair labor practice
complaint, labor disturbance, discrimination charge or other employment-related
legal or administrative proceeding, governmental review, compliance audit, or
enforcement proceeding of any kind either pending or threatened against the
Company or any of its Subsidiaries.
(b) (i) Each current employee of the Company and its Subsidiaries and, to
the knowledge of the Company, each other employee of the Company and its
Subsidiaries hired after November 6, 1986, has completed, and the Company and
its subsidiaries have retained, an Immigration and Naturalization Service Form
I-9 in accordance with applicable rules and regulations (and the Company and
its Subsidiaries have not undergone any compliance review or inspection by the
Immigration and Naturalization Service with respect thereto); (ii) the Company
and its Subsidiaries have no non-immigrant employees whose status would
terminate or be otherwise affected by the transactions contemplated by this
Agreement; and (iii) Section 3.15 of the Company Disclosure Letter sets forth
the name and non-immigrant status of each employee of the Company who is an
alien who is authorized to work in the United States in non-immigrant status.
Upon the request of Parent, the Company will promptly provide to Parent or
Parent's attorneys copies of all immigration-related documents related to the
Company's non-immigrant employees which are in the possession of the Company or
its agents or attorneys.
3.16. Employee Benefit Plans.
(a) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and "Plan" means every plan, fund, contract, program and arrangement
(whether written or not) which is sponsored, maintained or contributed to by
the Company or its Subsidiaries for the benefit of present or former employees,
including those intended to provide: (i) medical, surgical, health care,
hospitalization, dental, vision, life insurance, death, disability, legal
services, severance, sickness or accident benefits (whether or not defined in
Section 3(1) of ERISA), (ii) pension, profit sharing, stock bonus, retirement,
supplemental retirement or deferred compensation benefits (whether or not tax
qualified and whether or not defined in Section 3(2) of ERISA), (iii) bonus,
incentive compensation, option, stock appreciation right, phantom stock or
stock purchase benefits, or (iv) salary continuation, supplemental
unemployment, termination pay, vacation or holiday benefits (whether or not
defined in Section 3(3) of ERISA).
(b) Section 3.16 of the Company Disclosure Letter sets forth each Plan by
name, and the funding arrangement for the Plan.
(c) There are no Plans subject to Title IV of ERISA or Code Section 412.
(d) No employer other than the Company and its Subsidiaries is permitted to
participate or participates in the Plans. No leased employees (as defined in
Section 414(n) of the Code) or independent contractors are eligible for, or
participate in, any Plan.
(e) The only entities which are members of a controlled group, under common
control with a trade or business, or part of an affiliated service group,
within the meaning of Code Section 414(b), (c), (m) or (o), which contains the
Company and its Subsidiaries are the Company and its Subsidiaries. The Company
and its Subsidiaries have no liability resulting from past memberships in any
Section 414 controlled group of corporations.
(f) There are no Plans which promise or provide health or life benefits to
retirees or former employees of the Company, or which provide severance
benefits to employees of the Company other than those identified in Section
3.16 of the Company Disclosure Letter, except as otherwise required by Code
Section 4980(B) or comparable state statute which provides for continuing
health care coverage.
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(g) No Plan that is intended to be qualified under Section 401(a) of the
Code has received or committed to receive a transfer of assets and/or
liabilities or spin-off from another plan, except transfers which qualify as
transfers from eligible rollover distributions within the meaning of Code
Section 402(c)(4).
(h) With respect to all Plans, to the extent that the following documents
exist, the Company has furnished Parent with true and complete copies of: (i)
the most recent determination letter, if any, received by the Company from the
IRS, (ii) all pending applications for rulings, determinations, opinions, no
action letters and the like filed with any governmental agency (including the
Department of Labor and the IRS), (iii) the Annual Report/Return (Form Series
5500) with financial statements, if any, and attachments for the three (3) most
recent plan years, and (iv) Plan documents (including any amendments thereto),
summary Plan descriptions, trust agreements, funding agreements/arrangements,
insurance contracts, service agreements and all related contracts and documents
(including any employee summaries and material employee communications).
(i) Each Plan has at all times been operated in substantial compliance with
ERISA, the Code, any other applicable law (including all reporting and
disclosure requirements thereunder) and the terms of the Plan. With respect to
each Plan that is intended to be qualified under Section 401(a) of the Code,
each such Plan has been determined by the IRS to be so qualified, and each
trust forming a part thereof has been determined by the IRS to be exempt from
tax pursuant to Section 501(a) of the Code. No reason exists which would cause
such qualified status to be revoked.
(j) No state of facts or conditions exist which reasonably could be expected
to subject the Company to any material liability (other than routine claims for
benefits) under the terms of any Plan or applicable law.
(k) All contributions, premiums, fees or charges due and owing to or in
respect of any Plan have been paid in full by the Company prior to the Closing,
in accordance with the terms of the Plan and all applicable laws, and no taxes,
penalties or fees are owing as a result of any Plan.
(l) The Company has not made or committed to make any material increase in
contributions or benefits under any Plan which would become effective either on
or after the Closing Date.
(m) No Plan is currently under audit or examination by the IRS or the United
States Department of Labor.
(n) The events contemplated in this Agreement will not trigger, or entitle
any current or former employee of the Company or its Subsidiaries to,
severance, termination or change in control payments under any Plan or
employment agreement.
(o) Benefits provided to participants under each Plan (other than a tax
qualified plan under Code Section 401(a)) are provided exclusively from the
general assets of the Company and/or through an insurance contract or welfare
benefit trust. The values of all assets associated with each Plan are readily
determinable on an established market or pursuant to an insurance contract.
(p) The Company can terminate each Plan, and withdraw from participation in
each group policy, without further liability to the Company, Merger Sub,
Parent, the Plan(s) or participants in such Plan(s).
3.17. Environmental Matters.
(a) The Company and its Subsidiaries (i) have been in material compliance
and are presently complying in all material respects with all applicable
health, safety and Environmental Laws (defined below), and (ii) have obtained
all material permits, licenses and authorizations which are required under all
applicable health, safety and Environmental Laws and are in compliance in all
material respects with such permits, licenses and authorizations. Except as
disclosed in the Company SEC Reports (i) to the Company's knowledge, none of
the Leased Real Property (including without limitation soils and surface and
ground waters) are contaminated with any Hazardous Materials in quantities
which require investigation or remediation under Environmental Laws, (ii)
neither the Company nor any of its Subsidiaries is liable for any off-site
contamination, and (iii) there is no
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environmental matter which could reasonably be expected to expose the Company
or any of its Subsidiaries to a claim to clean-up any Hazardous Materials or
otherwise to remedy any pollution or damage at any of the properties utilized
in the Company's business under any Environmental Laws.
(b) For purposes of this Agreement, the term (i) "Environmental Laws" means
all applicable United States federal, state, provincial, local and other
foreign laws, rules, regulations, codes, ordinances, orders, decrees,
directives, permits, licenses and judgments relating to pollution,
contamination or protection of the environment (including, without limitation,
all applicable United States federal, state, provincial, local and other
foreign laws, rules, regulations, codes, ordinances, orders, decrees,
directives, permits, licenses and judgments relating to Hazardous Materials in
effect as of the date of this Agreement), and (ii) "Hazardous Materials" means
any dangerous, toxic or hazardous pollutant, contaminant, chemical, waste,
material or substance as defined in or governed by any United States federal,
state, provincial, local or other foreign law, statute, code, ordinance,
regulation, rule or other requirement relating to such substance or otherwise
relating to the environment or human health or safety, including without
limitation any waste, material, substance, pollutant or contaminant that might
cause any injury to human health or safety or to the environment or might
subject the Company or any of its Subsidiaries to any imposition of costs or
liability under any Environmental Law.
3.18. Insurance. The Company has made available to Parent copies of all
material policies of insurance and bonds in force on the date hereof covering
the businesses, properties and assets of the Company and its Subsidiaries, and
all such policies are currently in effect and all premiums with respect thereto
have been duly paid to date. Except as disclosed in Section 3.18 of the Company
Disclosure Letter, there are no material claims outstanding under any insurance
policy, and neither the Company nor any of its Subsidiaries has failed to give
any notice or to present any such claim with respect to its business under any
such policy in due and timely fashion.
3.19. Foreign Corrupt Practices Act. Neither the Company nor any of its
Subsidiaries (nor any person representing the Company or any of its
Subsidiaries) has at any time during the last five years (a) made any payment
in violation of the Foreign Corrupt Practices Act or similar laws of other
countries where the Company engages in business, or (b) made any payment to any
foreign, federal, state or local governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
3.20. Finders or Brokers. Except for such Persons as set forth in Section
3.20 of the Company Disclosure Letter, whose fees will be paid by the Company,
none of the Company, the Subsidiaries of the Company, the Board of Directors of
the Company (the "Company Board") or any member of the Company Board has
employed any agent, investment banker, broker, finder or intermediary in
connection with the transactions contemplated hereby who might be entitled to a
fee or any commission in connection with the Merger or the other transactions
contemplated hereby. Section 3.20 of the Company Disclosure Letter sets forth
the Company's fee and expense arrangements with each Person identified therein.
3.21. Board Recommendation. The Company Board has, at a meeting of such
Company Board duly held on October 10, 2000, approved and adopted this
Agreement and the Merger and the other transactions contemplated hereby,
declared the advisability of the Merger and recommended that the stockholders
of the Company approve the Merger and the other transactions contemplated
hereby, and has not as of the date hereof rescinded or modified in any respect
any of such actions.
3.22. Vote Required. The affirmative vote of the holders of a majority of
the shares of Company Common Stock outstanding on the record date set for the
Company Stockholders Meeting (as defined in Section 3.26 hereof) is the only
vote of the holders of any of the Company's capital stock necessary to approve
this Agreement and the transactions contemplated hereby.
3.23. Opinion of Financial Advisor. The Company has received the opinion of
Stephens Inc. dated the date of the meeting of the Company Board referenced in
Section 3.21 above, to the effect that, as of such date, the consideration to
be received by the holders of Company Common Stock pursuant to Section 2.1 is
fair, from a financial point of view, to the holders of Company Common Stock.
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3.24. Tax Matters. Neither the Company nor any of its affiliates has taken
or agreed to take any action, or knows of any circumstances, that (without
regard to any action taken or agreed to be taken by Parent or any of its
affiliates) would prevent the business combination to be effected by the Merger
from constituting a transaction qualifying as a reorganization within the
meaning of Section 368 of the Code if the Election is not made.
3.25. State Takeover Statute. The Company Board has taken all actions so
that the restrictions contained in Section 203 of the DGCL applicable to a
"business combination" (as defined in Section 203 of the DGCL) will not apply
to the execution, delivery of performance of this Agreement or the consummation
of the Merger or the other transactions contemplated by this Agreement.
3.26. Registration Statement; Proxy Statement/Prospectus. The information
supplied by the Company for inclusion in the registration statement on Form S-4
(or such other or successor form as shall be appropriate) pursuant to which the
shares of Parent Common Stock to be issued in the Merger will be registered
with the SEC (the "Registration Statement") shall not at the time the
Registration Statement (including any amendments or supplements thereto) is
declared effective by the SEC contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The information supplied by the Company
for inclusion in the proxy statement/prospectus to be sent to the stockholders
of Company in connection with the meeting of Company's stockholders to consider
the Merger (the "Company Stockholders Meeting") (such proxy
statement/prospectus as amended or supplemented is referred to herein as the
"Proxy Statement/Prospectus") shall not, on the date the Proxy
Statement/Prospectus is first mailed to Company's stockholders, at the time of
the Company Stockholders Meeting and at the Effective Time, contain any
statement which, at such time, is false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make
the statements made therein, in light of the circumstances under which they are
made, not false or misleading; or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Company Stockholders Meeting which has become
false or misleading. If at any time prior to the Effective Time any event or
information should be discovered by the Company which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy
Statement/Prospectus, the Company shall promptly inform Parent. Notwithstanding
the foregoing, the Company makes no representation, warranty or covenant with
respect to any information supplied by Parent or Merger Sub in writing
specifically for use in any of the foregoing documents.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MERGER SUB AND PARENT
Merger Sub and Parent represent and warrant to the Company that the
statements contained in this Article IV are true and correct, except as set
forth in the letter delivered by Parent to the Company on the date hereof (the
"Parent Disclosure Letter") (which Parent Disclosure Letter sets forth the
exceptions to the representations and warranties contained in this Article IV
under captions referencing the Sections to which such exceptions apply):
4.1. Organization and Qualification. Parent is a corporation duly organized,
validly existing and in good standing under the laws of the State of Minnesota,
with the corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. Merger Sub is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. Each of Merger Sub and Parent is duly qualified
or licensed to carry on its business as it is now being conducted, and is
qualified to conduct business, in each jurisdiction where the character of its
properties owned or leased or the nature of its activities makes such
qualification necessary, except for failures to be so qualified that would not,
individually or in the aggregate, have, or would not reasonably be expected to
have, a Parent Material Adverse Effect (as defined below). Neither Parent nor
Merger Sub is in violation of any of the provisions of its Charter
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Document or its Governing Document. As used in this Agreement, the term "Parent
Material Adverse Effect" means any change, effect, event or condition that (i)
has a material adverse effect on the assets, business, results of operations,
condition (financial or other) or prospects of Parent and its Subsidiaries,
taken as a whole, or (ii) would prevent or materially delay Merger Sub's or
Parent's ability to consummate the transactions contemplated hereby.
4.2. Capitalization. All issued and outstanding shares of Parent Common
Stock are duly authorized, validly issued, fully paid, nonassessable and free
of preemptive rights.
4.3. Authority Relative to this Agreement. Each of Parent and Merger Sub has
the requisite corporate power and authority to execute and deliver, and to
perform its obligations under, this Agreement under applicable law. The
execution and delivery by Parent and Merger Sub of this Agreement, and the
consummation of the Merger and the transactions contemplated hereby, have been
duly and validly authorized by all necessary corporate action on the part of
Parent and Merger Sub. This Agreement has been duly and validly executed and
delivered by Parent and Merger Sub and, assuming the due authorization,
execution and delivery of this Agreement by the Company, is a valid and binding
obligation of Parent and Merger Sub, enforceable against them in accordance
with its terms, except to the extent that its enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforcement of creditors rights generally or by general equitable
principles. The shares of Parent Common Stock to be issued by Parent pursuant
to the Merger if the Election is not made, as well as the Parent Options and
the shares of Parent Common Stock to be issued upon exercise thereof in such
event: (i) have been duly authorized, and, when issued in accordance with the
terms of the Merger and this Agreement (or the applicable option agreements),
will be validly issued, fully paid and nonassessable and will not be subject to
preemptive rights, (ii) will, when issued in accordance with the terms of the
Merger and this Agreement (or the applicable option agreements), be registered
under the Securities Act, and registered or exempt from registration under
applicable United States "Blue Sky" laws and (iii) will, when issued in
accordance with the terms of the Merger and this Agreement (or the applicable
option agreements), be listed on the New York Stock Exchange.
4.4. No Conflicts; Required Filings and Consents.
(a) Neither the execution, delivery or performance of this Agreement by
Merger Sub or Parent, nor the consummation of the transactions contemplated
hereby, nor compliance by Merger Sub or Parent with any provision hereof will
(i) conflict with or result in a breach of any provision of the Charter
Documents or Governing Documents of Merger Sub or Parent, (ii) cause a default
or give rise to any right of termination, cancellation or acceleration or loss
of a material benefit under, or result in the creation of any lien, charge or
other encumbrance upon any of the properties of Merger Sub or Parent under any
of the terms, conditions or provisions of any note, bond, mortgage or
indenture, or any other material instrument, obligation or agreement to which
Merger Sub or Parent is a party or by which its properties or assets may be
bound or (iii) violate any law applicable to Merger Sub or Parent or binding
upon any of its properties, except for, in the case of clauses (ii) and (iii),
such defaults or violations which would not, individually or in the aggregate,
reasonably be expected to have a Parent Material Adverse Effect.
(b) No filing or registration with or notification to and no permit,
authorization, consent or approval of any Governmental Entity is required to be
obtained, made or given by Merger Sub or Parent in connection with the
execution and delivery of this Agreement or the consummation by Merger Sub of
the Merger or other transactions contemplated hereby except (i) in connection
with the applicable requirements of the HSR Act, (ii) the filing of the
Registration Statement with the SEC in accordance with the Securities Act, as
further described in Section 5.3 hereof, (iii) as shown on Section 4.4(b) of
the Parent Disclosure Letter, (iv) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under applicable state securities laws and the laws of any country other than
the United States, or (v) the filing of the Certificate of Merger as provided
in Section 1.3 hereof.
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4.5. SEC Filings; Financial Statements.
(a) Parent has filed all forms, reports, schedules, statements and other
documents required to be filed by it since December 31, 1997 to the date hereof
(collectively, as supplemented and amended since the time of filing, the
"Parent SEC Reports") with the SEC. The Parent SEC Reports (i) were prepared in
all material respects in compliance with all applicable requirements of the
Securities Act and the Exchange Act, as the case may be, and (ii) did not at
the time they were filed contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The representation in clause (ii) of the
preceding sentence does not apply to any misstatement or omission in any Parent
SEC Report filed prior to the date of this Agreement which was superseded by a
subsequent Parent SEC Report filed prior to the date of this Agreement.
(b) The audited consolidated financial statements and unaudited consolidated
interim financial statements of Parent and its Subsidiaries included or
incorporated by reference in such Parent SEC Reports have been prepared in
accordance with United States generally accepted accounting principles applied
on a consistent basis during the periods involved (except as may otherwise be
indicated in the notes thereto) and present fairly, in all material respects,
the financial position and results of operations and cash flows of Parent and
its Subsidiaries on a consolidated basis at the respective dates and for the
respective periods indicated (except, in the case of all such financial
statements that are interim Financial Statements, for normal year-end
adjustments).
4.6. Absence of Changes or Events. Except as set forth in the Parent SEC
Reports, since June 30, 2000, through the date of this Agreement, Parent and
its Subsidiaries have not incurred any liability or obligation that has
resulted or would reasonably be expected to result in a Parent Material Adverse
Effect, and there has not been any change in the business, financial condition
or results of operations of Parent or any of its Subsidiaries which has had, or
would reasonably be expected to have, individually or in the aggregate, a
Parent Material Adverse Effect, and Parent and its Subsidiaries have conducted
their respective businesses in the ordinary course consistent with their past
practices.
4.7. Litigation. Except as disclosed in the Parent SEC Reports, there is no
(a) claim, action, suit or proceeding pending or overtly threatened against or
relating to Parent or any of its Subsidiaries before any Governmental Entity,
(b) alternative dispute resolution proceeding pending or overtly threatened
against Parent or any of its Subsidiaries, or (c) outstanding Orders, or
application, request or motion therefor, of any Governmental Entity in a
proceeding to which Parent, any Subsidiary of Parent or any of their respective
assets was or is a party except actions, suits, proceedings or Orders that,
individually or in the aggregate, have not had or would not reasonably be
expected to have a Parent Material Adverse Effect, and neither Parent nor any
Subsidiary is in default in any material respect with respect to any such
Order.
4.8. Finders or Brokers. None of Parent, Merger Sub, the other Subsidiaries
of Parent, the Boards of Directors of Parent and Merger Sub or any member of
such Boards of Directors has employed any agent, investment banker, broker,
finder or intermediary in connection with the transactions contemplated hereby
who might be entitled to a fee or any commission in connection with the Merger
or the other transactions contemplated hereby.
4.9. Tax Matters. Neither Parent nor any of its affiliates has taken or
agreed to take any action, or knows of any circumstances, that (without regard
to any action taken or agreed to be taken by the Company or any of its
affiliates) would prevent the business combination to be effected by the Merger
from constituting a transaction qualifying as a reorganization within the
meaning of Section 368 of the Code if the Election is not made.
4.10. Registration Statement; Proxy Statement/Prospectus. The information
supplied by Parent and Merger Sub for inclusion in the Registration Statement
shall not, at the time the Registration Statement (including any amendments or
supplements thereto) is declared effective by the SEC, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The information supplied by Parent
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for inclusion in the Proxy Statement/Prospectus shall not, on the date the
Proxy Statement/Prospectus is first mailed to the Company's stockholders, at
the time of the Company Stockholders Meeting and at the Effective Time, contain
any statement which, at such time, is false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not false or misleading; or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Company Stockholders Meeting which has become
false or misleading. If at any time prior to the Effective Time any event or
information should be discovered by Parent or Merger Sub which should be set
forth in an amendment to the Registration Statement or a supplement to the
Proxy Statement/Prospectus, Parent or Merger Sub will promptly inform the
Company. Notwithstanding the foregoing, Parent and Merger Sub make no
representation, warranty or covenant with respect to any information supplied
by the Company in writing specifically for use in any of the foregoing
documents.
ARTICLE V
COVENANTS AND AGREEMENTS
5.1. Conduct of Business of the Company Pending the Merger. Except as
contemplated by this Agreement or as expressly agreed to in writing by Parent,
during the period from the date of this Agreement to the earlier of (i) the
termination of this Agreement or (ii) the Effective Time, each of the Company
and its Subsidiaries will conduct their respective operations according to its
ordinary course of business consistent with past practice, and will use its
reasonable best efforts consistent with past practice and policies to preserve
intact its business organization, to keep available the services of its
officers and employees and to maintain satisfactory relationships with
suppliers, distributors, customers and others having business relationships
with it and will take no action which would adversely affect the ability of the
parties to consummate the transactions contemplated by this Agreement, or the
timing thereof. Without limiting the generality of the foregoing, and except as
otherwise expressly provided in this Agreement, prior to the Effective Time,
the Company will not nor will it permit any of its Subsidiaries to, without the
prior written consent of Parent:
(a) amend any of its Charter Documents or Governing Documents;
(b) authorize for issuance, issue, sell, deliver, grant any options,
warrants, stock appreciation rights, or stock issuance rights for, or
otherwise agree or commit to issue, sell, deliver, pledge, dispose of or
otherwise encumber any shares of any class of its share capital or any
securities convertible into shares of any class of its share capital,
except (i) pursuant to and in accordance with the terms of Company Options
outstanding on the date hereof, (ii) up to 26,000 shares of Company Common
Stock issued pursuant to the ESPP (to the extent shares of Company Common
Stock have been paid for with payroll deductions), (iii) up to 10,000
shares of Company Common Stock issued upon exercise of the Warrants, and
(iv) up to 77,922 shares of Company Common Stock issued upon conversion of
the Convertible Notes;
(c) subdivide, cancel, consolidate or reclassify any shares of its share
capital, issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its share capital, declare,
set aside or pay any dividend or other distribution (whether in cash,
shares or property or any combination thereof) in respect of its share
capital or purchase, redeem or otherwise acquire any shares of its own
share capital or of any of its Subsidiaries, except as otherwise expressly
provided in this Agreement;
(d) (i) incur or assume any long-term or short-term debt or issue any
debt securities except for borrowings under existing lines of credit in the
ordinary course of business consistent with past practice; (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the material obligations of any
other person (other than Subsidiaries of the Company); or (iii) make any
material loans, advances or capital contributions to, or investments in,
any other person (other than to Subsidiaries of the Company), except as set
forth in Section 5.1(d) of the Company Disclosure Letter or pursuant to
existing commitment, all of which commitments are disclosed in Section
5.1(d) of the Company Disclosure Letter;
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(e) except as otherwise expressly contemplated by this Agreement, (i)
increase in any manner the compensation of (A) any employee who is not an
officer of the Company or any Subsidiary (a "NonExecutive Employee"),
except in the ordinary course of business consistent with past practice or
(B) any of its directors or officers, (ii) pay or agree to pay any pension,
retirement allowance or other employee benefit not required, or enter into,
amend or agree to enter into or amend any agreement or arrangement with any
such director or officer or employee, whether past or present, relating to
any such pension, retirement allowance or other employee benefit, except as
required to comply with law or under currently existing agreements, plans
or arrangements or with respect to NonExecutive Employees, in the ordinary
course of business consistent with past practice; (iii) grant any rights to
receive any severance or termination pay to, or enter into or amend any
employment or severance agreement with, any employee or any of its
directors or officers, except as required by applicable law; or (iv) except
as may be required to comply with applicable law, become obligated (other
than pursuant to any new or renewed collective bargaining agreement) under
any new pension plan, welfare plan, multiemployer plan, employee benefit
plan, benefit arrangement, or similar plan or arrangement, which was not in
existence on the date hereof, including any bonus, incentive, deferred
compensation, share purchase, share option, share appreciation right, group
insurance, severance pay, retirement or other benefit plan, agreement or
arrangement, or employment or consulting agreement with or for the benefit
of any person, or amend any of such plans or any of such agreements in
existence on the date hereof; provided, however, that this clause (iv)
shall not prohibit the Company from renewing any such plan, agreement or
arrangement already in existence on terms no more favorable to the parties
to such plan, agreement or arrangement;
(f) except as otherwise expressly contemplated by this Agreement, enter
into, amend in any material respect or terminate any Company Material
Contracts other than in the ordinary course of business consistent with
past practice;
(g) sell, lease, license, mortgage or dispose of any of its properties
or assets, other than (i) transactions in the ordinary course of business
consistent with past practice, (ii) as may be required or contemplated by
this Agreement or (iii) as set forth in Section 5.1(g) of the Company
Disclosure Letter;
(h) except for the Merger, acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets of
or equity in, or by any other manner, any business or any corporation,
limited liability company, partnership, association or other business
organization or division thereof or otherwise acquire or agree to acquire
any assets, other than transactions in the ordinary course of business
consistent with past practice;
(i) alter (through merger, liquidation, reorganization, restructuring or
in any fashion) the corporate structure or ownership of the Company or any
Subsidiary;
(j) authorize or commit to make any material capital expenditures not
reflected in the budget previously provided in writing by the Company to
Parent without the prior written consent of Parent;
(k) make any change in the accounting methods or accounting practices
followed by the Company, except as required by United States generally
accepted accounting principles or applicable law;
(l) make any election under any Tax law;
(m) settle any action, suit, claim, investigation or proceeding (legal,
administrative or arbitrative) requiring a payment by the Company or its
Subsidiaries in excess of $50,000 without the consent of Parent;
(n) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of
business consistent with past practice or in accordance with their terms,
of claims, liabilities or obligations reflected or reserved against in, or
contemplated by, the most recent financial statements (or the notes
thereto) of the Company included in the Company SEC Reports or incurred in
the ordinary course of business consistent with past practice; or
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(o) authorize, recommend, propose, agree or announce an intention to do
any of the foregoing or enter into any contract, agreement, commitment or
arrangement to do any of the foregoing.
5.2. Preparation of Registration Statement; Proxy Statement/Prospectus; Blue
Sky Laws. As promptly as practicable and no later than 20 business days after
the date hereof, Parent and the Company shall prepare, and Parent shall file
with the SEC, the Registration Statement, in which the Proxy
Statement/Prospectus will be included as part thereof. Parent and the Company
shall each use its reasonable best efforts to have such Registration Statement
declared effective under the Securities Act as promptly as practicable after
filing. The Proxy Statement/Prospectus will, when prepared pursuant to this
Section 5.2 and mailed to the Company's stockholders, comply in all material
respects with the applicable requirements of the Exchange Act and the
Securities Act. The Proxy Statement/Prospectus shall include the declaration of
the Company Board of the advisability of the Merger and its recommendation that
the Company's stockholders approve the Merger. Parent shall also take any
action required to be taken under any applicable provincial or state securities
laws (including "Blue Sky" laws) in connection with the issuance of the Parent
Common Stock in the Merger if the Election is not made; provided, however, that
neither Parent nor the Company shall be required to register or qualify as a
foreign corporation or to take any action that would subject it to service of
process in any jurisdiction where any such entity is not now so subject, except
as to matters and transactions arising solely from the offer and sale of Parent
Common Stock or the Parent Options.
5.3 Meeting of Stockholders. The Company shall, promptly after the date
hereof, take all action necessary in accordance with the DGCL and its
Certificate of Incorporation and Bylaws to convene the Company Stockholders
Meeting within 30 days of the Registration Statement being declared effective
by the SEC, whether or not the Company Board determines at any time after the
date hereof that the Merger is no longer advisable. The Company shall consult
with Parent regarding the date of the Company Stockholders Meeting. Subject to
Section 5.2 and Section 5.6 hereof, the Company shall use its best efforts to
solicit from stockholders of the Company proxies in favor of the Merger and
shall take all other action necessary or advisable to secure the vote or
consent of stockholders required to effect the Merger.
5.4. Additional Agreements, Cooperation.
(a) Subject to the terms and conditions herein provided, each of the parties
hereto agrees to use its reasonable best efforts to take, or cause to be taken,
all action and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement, and to cooperate, subject to
compliance with applicable law, with each other in connection with the
foregoing, including using its reasonable best efforts (i) to obtain all
necessary waivers, consents and approvals from other parties to loan
agreements, material leases and other material contracts, (ii) to obtain all
necessary consents, approvals and authorizations as are required to be obtained
under any federal, state or foreign law or regulations, (iii) to defend all
lawsuits or other legal proceedings challenging this Agreement or the
consummation of the transactions contemplated hereby or thereby, (iv) to lift
or rescind any injunction or restraining order or other order adversely
affecting the ability of the parties to consummate the transactions
contemplated hereby, (v) to effect all necessary registrations and filings and
submissions of information requested by Governmental Entities and (vi) to
fulfill all conditions to this Agreement.
(b) Each of the parties hereto agrees, subject to compliance with applicable
law, to furnish to each other party hereto such necessary information and
reasonable assistance as such other party may request in connection with its
preparation of necessary filings or submissions to any regulatory or
governmental agency or authority, including, without limitation, any filing
necessary under the provisions of the HSR Act, the Exchange Act, the Securities
Act or any other United States federal or state, or foreign statute or
regulation. Each party hereto shall promptly inform each other party of any
material communication from the U.S. Federal Trade Commission or any other
government or governmental authority regarding any of the transactions
contemplated thereby.
5.5. Publicity. Except as otherwise required by applicable law, rule,
regulation, or stock exchange rule, so long as this Agreement is in effect,
Parent and the Company will not, and will not permit any of their respective
affiliates or representatives to, issue or cause the publication of any press
release or make any other
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public announcement with respect to the transactions contemplated by this
Agreement without the consent of the other party, which consent shall not be
unreasonably withheld or delayed. Parent and the Company will cooperate with
each other in the development and distribution of all press releases and other
public announcements with respect to this Agreement and the transactions
contemplated hereby, and will furnish the other with drafts of any such
releases and announcements as far in advance as possible.
5.6. No Solicitation.
(a) Immediately upon execution of this Agreement, the Company shall (and
shall cause its officers, directors, employees, investment bankers, attorneys
and other agents or representatives to) cease all discussions, negotiations,
responses to inquiries and other communications relating to any potential
transaction with all third parties who, prior to the date hereof, may have
expressed or otherwise indicated any interest in pursuing an Acquisition
Proposal (as hereinafter defined) with the Company.
(b) Prior to termination of this Agreement pursuant to Article VII hereof,
the Company and its Subsidiaries shall not, and the Company shall not authorize
or permit any officers, directors, employees, investment bankers, attorneys or
other agents or representatives to, (i) initiate, solicit or encourage,
directly or indirectly, any inquiries or the making of any proposal that
constitutes an Acquisition Proposal, (ii) engage or participate in negotiations
or discussions with, or furnish any information to, or take any other action
to, facilitate any inquiries or making any proposal by, any third party
relating to an Acquisition Proposal or (iii) enter into any agreement with
respect to any Acquisition Proposal or approve an Acquisition Proposal.
Notwithstanding anything to the contrary contained in this Section 5.6, prior
to the Company Stockholders Meeting, the Company Board may engage or
participate in negotiations or discussions with and furnish information to any
third party making an unsolicited Acquisition Proposal (a "Potential Acquiror")
if both (A) a majority of the directors of the Company Board, without including
directors who may be considered Affiliates (as defined in Rule 405 under the
Securities Act) of any person making an Acquisition Proposal ("disinterested
directors") determines in good faith, after consultation with its independent
financial advisor, that a Potential Acquiror has submitted to the Company an
Acquisition Proposal that is a Superior Proposal (as hereinafter defined), and
(B) a majority of the disinterested directors of the Company Board determines
in good faith, after receiving the advice of Bell, Boyd & Lloyd LLC or other
reputable outside legal counsel experienced in such matters, that if the
Company fails to engage or participate in such negotiations or discussions or
to furnish such information, there is a substantial probability that the
Company Board will be in violation of its fiduciary duties under applicable
law. In the event that the Company shall receive any Acquisition Proposal, it
shall promptly (and in no event later than 24 hours after receipt thereof)
furnish to Parent the identity of the recipient of the Acquisition Proposal and
of the Potential Acquiror, the terms of such Acquisition Proposal and copies of
all information requested by the Potential Acquiror.
(c) Except as set forth in this Section 5.6(c), neither the Company Board
nor any committee thereof shall withdraw or modify, or propose to withdraw or
modify, in a manner adverse to Parent or Merger Sub, the approval or
recommendation by the Company Board or any such committee of this Agreement and
the Merger. Notwithstanding the foregoing, prior to the Company Stockholders
Meeting the Company Board or such committee may withdraw or modify their
approval of this Agreement and the Merger if both (A) a majority of the
disinterested directors of the Company Board determines in good faith, after
consultation with its independent financial advisor, that a Potential Acquiror
has submitted to the Company an Acquisition Proposal that is a Superior
Proposal, and (B) a majority of the disinterested directors of the Company
Board determines in good faith, after receiving the advice of Bell, Boyd &
Lloyd LLC or other reputable outside legal counsel experienced in such matters,
that if the Company fails to take such action, there is a substantial
probability that the Company Board will be in violation of its fiduciary duties
under applicable law.
(d) Nothing contained in (b) or (c) above shall prevent the Company from
complying with Rules 14d-9 and 14e-2 promulgated under the Exchange Act with
regard to an Acquisition Proposal or making any disclosure to the Company's
stockholders if, in the good faith judgment of the Company Board, after
receiving the advice of Bell, Boyd & Lloyd LLC or other reputable outside legal
counsel experienced in such matters, such disclosure is required by applicable
law. Without limiting the foregoing, the Company agrees that any violation of
(b) or (c) above by the Company or any of its Subsidiaries, or by any officer,
director, employee,
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investment banker, attorney or other agent or representative, whether or not
such person is purporting to act on behalf of the Company or any of its
Subsidiaries or otherwise, shall be deemed to be a breach of this Section 5.6
and shall enable Parent to terminate this Agreement pursuant to Section
7.1(d)(i) hereof.
(e) For the purposes of this Agreement, "Acquisition Proposal" shall mean
any proposal, whether in writing or otherwise, made by any person other than
Parent and its Subsidiaries to acquire "beneficial ownership" (as defined under
Rule 13(d) of the Exchange Act) of 15% or more of the assets of, or 15% or more
of the outstanding capital stock of any of the Company or its Subsidiaries
pursuant to a merger, consolidation, exchange of shares or other business
combination, sale of shares of capital stock, sales of assets, tender offer or
exchange offer or similar transaction involving the Company or its
Subsidiaries.
(f) The term "Superior Proposal" means any bona fide Acquisition Proposal to
acquire, directly or indirectly, for consideration consisting of cash and/or
securities, more than 50% of the Company Common Stock then outstanding or all
or substantially all the assets of the Company, and otherwise on terms that a
majority of the disinterested directors determines, in good faith, to be more
favorable to the Company and its stockholders than the Merger (after receiving
a written opinion from the Company's independent financial advisor, a copy of
which shall be delivered contemporaneously to Parent, that the Acquisition
Proposal is more favorable to the Company's stockholders, from a financial
point of view, than the Merger) and for which financing, to the extent
required, is then committed.
5.7. Access to Information. From the date of this Agreement until the
Effective Time, and upon reasonable notice, the Company will give Parent and
its authorized representatives (including counsel, other consultants,
accountants and auditors) reasonable access during normal business hours to all
facilities, personnel, operations of the Company or any of its Subsidiaries and
to the customers, suppliers and other third parties with which the Company or
any of its Subsidiaries do business and to all books and records of it and its
Subsidiaries, will permit Parent to make such inspections as it may reasonably
require, will cause its officers and those of its Subsidiaries to furnish
Parent with such financial and operating data and other information with
respect to its business and properties as Parent may from time to time
reasonably request and confer with Parent to keep it reasonably informed with
respect to operational and other business matters relating to the Company and
its Subsidiaries and the status of satisfaction of conditions to the Closing.
All information obtained by Parent pursuant to this Section 5.7 shall be kept
confidential in accordance with the Confidentiality Agreement, dated October
28, 1999, between Parent and the Company (the "Confidentiality Agreement").
5.8. Notification of Certain Matters. The Company or Parent, as the case may
be, shall promptly notify the other of the occurrence, or failure to occur, of
any event, which occurrence or failure to occur would be likely to cause, (i)
any representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Effective Time, (ii) any material failure of the Company or Parent, as the case
may be, or of any officer, director, employee or agent thereof, to comply with
or satisfy any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement or (iii) the institution of any claim,
suit, action or proceeding arising out of or related to the Merger or the
transactions contemplated hereby; provided, however, that no such notification
shall affect the representations or warranties of the parties or the conditions
to the obligations of the parties hereunder.
5.9. Resignation of Officers and Directors. At or prior to the Effective
Time, the Company shall deliver to Parent the resignations of such officers and
directors of the Company and shall use its best efforts to deliver to Parent
the resignations of such officers and directors of its Subsidiaries (in each
case, in their capacities as officers and directors, but not as employees if
any of such persons are employees of the Company or any Subsidiary) as Parent
shall specify, which resignations shall be effective at the Effective Time and
shall contain an acknowledgment that the relevant individual has no outstanding
claims for compensation for loss of office, redundancy, unfair dismissal or
otherwise, other than those claims specified on Section 5.9 of the Company
Disclosure Letter.
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5.10. Indemnification.
(a) As of the Effective Time and for a period of six years following the
Effective Time, Parent will cause the Surviving Corporation to indemnify and
hold harmless from and against all claims, damages, losses, obligations or
liabilities ("Losses") any persons who were directors or officers of the
Company prior to the Effective Time (the "Indemnified Persons") to the fullest
extent such person could have been indemnified for such Losses under applicable
law, under the Governing Documents of the Company or under any indemnification
agreements listed in Section 5.10 of the Company Disclosure Letter in effect
immediately prior to the date hereof, with respect to any act or failure to act
by any such Indemnified Person prior to the Effective Time. The Company shall
cause each of the indemnification agreements listed or required to be listed in
Section 5.10 of the Company Disclosure Letter to be terminated as of the
Effective Time, except for such agreements as are specifically noted in Section
5.10 of the Company Disclosure Letter as not being required to be terminated.
(b) Any determination required to be made with respect to whether an
Indemnified Person's conduct complies with the standards set forth under the
DGCL or other applicable law shall be made by independent counsel selected by
Parent and reasonably acceptable to the Indemnified Persons. Parent shall cause
the Surviving Corporation to pay such counsel's fees and expenses so long as
the Indemnified Persons do not challenge any such determination by such
independent counsel.
(c) In the event that Parent, the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any other
person, and Parent, the Surviving Corporation or such successor or assign is
not the continuing or surviving corporation or entity of such consolidation or
merger, or (ii) transfers all or substantially all of its properties and assets
to any person, then, and in each case, proper provision shall be made so that
such person or the continuing or surviving corporation assumes the obligations
set forth in this Section 5.10 and none of the actions described in clauses (i)
and (ii) above shall be taken until such provision is made.
(d) Parent shall maintain or cause the Surviving Corporation to maintain in
effect for not less than six years from the Effective Time the current policies
of directors' and officers' liability insurance maintained by the Company
(provided that they may substitute therefor policies of at least comparable
coverage containing terms and conditions which are no less advantageous to the
Indemnified Parties in all material respects so long as no lapse in coverage
occurs as a result of such substitution) with respect to all matters, including
the transactions contemplated hereby, occurring prior to, and including the
Effective Time; provided that, in the event that any Claim is asserted or made
within such six-year period, such insurance shall be continued in respect of
any such Claim until final disposition of any and all such Claims; and
provided, further, that Parent and the Surviving Corporation shall not be
obligated to make annual premium payments for such insurance to the extent such
premiums exceed 200% of the premiums paid as of the date hereof by the Company
or any Subsidiary for such insurance. In such case, Parent shall purchase or
cause the Surviving Corporation to purchase as much coverage as possible for
200% of the premiums paid as of the date hereof for such insurance.
5.11. Stockholder Litigation. The Company shall give Parent the reasonable
opportunity to participate in the defense of any stockholder litigation against
or in the name of the Company and/or its respective directors relating to the
transactions contemplated by this Agreement.
5.12. Employee Benefit Plans.
(a) Parent reserves the right to request in writing prior to the Closing
that the Company, contingent upon the Closing, cease contributions to and/or
terminate one or more of the Company's Plans prior to the Closing.
(b) Pursuant to (a) above, Parent requests and the Company agrees that the
Company Board or its delegate shall cause the Company to cease contributions to
and terminate each plan qualified under Code Section 401(k) (the "Company
401(k) Plan"), and shall cause the Company, prior to the Closing Date, to
(i) adopt written resolutions, the form and substance of which shall be
satisfactory to Parent, to terminate such Company 401(k) Plan and to fully
(100%) vest all participants under said Company 401(k) Plan; provided,
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however, that such Company 401(k) Plan termination shall be made contingent
upon the consummation of the Merger, and (ii) deliver notice of the Company
401(k) Plan termination (which shall be contingent upon the consummation of the
Merger) to any trustees and custodians of the Company 401(k) Plan and/or its
assets. As soon as practicable after the Closing Date, Parent shall cause the
Company to prepare IRS Form 5310, with full disclosure of the Merger and the
existence of Parent's 401(k) Savings Plan (the "Parent 401(k) Plan") and the
fact that Company employees participating in the Company 401(k) Plan as of the
Closing shall become participants in the Parent 401(k) Plan as soon as
administratively feasible following the Closing. Parent reserves the right to
suspend the distribution of benefits from the Company 401(k) Plan until the
later of the receipt of a favorable determination letter from the IRS with
respect to the termination of such Plan and the completion of final testing and
recordkeeping for such Plan.
(c) Parent shall recognize past employment service with the Company and its
Subsidiaries (based upon the Company's service records which are provided to
Parent) only for employees of the Company and its Subsidiaries who are employed
by them on the Closing Date (including employees who are, at the Closing Date,
on disability, pregnancy or family leave or other leave granted in accordance
with pre-existing written policies of the Company, provided in each case that
the employee returns to active employment by the Company or its Subsidiaries
for at least 30 continuous days following the Closing Date) (the "Eligible
Employees") for all purposes under the Parent plans which are similar to and
become successors to the Plans. To the extent that Eligible Employees have
covered expenses that are credited against the Company's group health plan's
deductibles or out of pocket maximums for plan year 2001, those expenses will
be credited against deductibles or out of pocket maximums of Parent's group
health plan for Eligible Employees who elect health coverage under Parent's
group health plan. The Eligible Employees shall enter the Parent 401(k) Plan
pursuant to the terms of such plan.
(d) The Eligible Employees shall leave the employee benefit plans of the
Company and its Subsidiaries and enter Parent's employee benefit plans pursuant
to the terms of such plans on such date as Parent deems appropriate.
(e) The Company shall accrue on its balance sheet as of the Closing Date or
shall pay prior to the Closing Date any costs, adjustments, or charges
associated with any termination, discontinuance, cancellation or liquidation of
the Company's portion of or interest in any funding medium arising in
connection with the actions described in (b) above including, but not limited
to, the discontinuance of any group annuity contract issued by an insurance
company with respect to the Company 401(k) Plan. The Company shall also
reasonably compensate each affected participant of the Company, prior to the
Closing Date, to the extent that such participant or his/her account balance is
impacted by such costs, adjustments or charges.
(f) The parties acknowledge that the ESPP shall continue to operate in
accordance with its terms following the execution of this Agreement, except as
provided below. Effective as of one business day prior to the Effective Time,
the Company shall cause each outstanding purchase right to be automatically
exercised, the Company shall cause the ESPP to terminate and no purchase rights
shall be subsequently granted or exercised under the ESPP. The Company shall
take all actions necessary to ensure that the ESPP will not be amended or
modified in any respect after the date hereof, except to effect the terms of
this Section 5.12(f).
(g) Section 5.12(g) of the Company Disclosure Letter sets forth the number
of hours of personal time accrued by employees of the Company and its
Subsidiaries as of the date hereof and the amount required to be paid with
respect thereto pursuant to the following sentence. As of the earlier of
December 31, 2000 or the Closing Date, employees of the Company and its
Subsidiaries shall be paid in accordance with past practice for all hours of
personal time. In lieu of being paid for personal time, employees may choose to
carry-over to Parent up to 40 hours of available personal time for employees
with less than five years of service, or up to 80 hours for employees with five
or more years of service. All personal time carried over to Parent will be
considered sick leave and will be treated consistent with Parent's policy
regarding sick leave time.
5.13. Determination of Optionholders. At least ten business days before the
Effective Time, the Company shall provide Parent with a true and complete list
of (a) the holders of Company Options, (b) the number of shares of Company
Common Stock subject to Company Options held by each such optionholder and
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(c) the address of each such optionholder as set forth in the books and records
of the Company or any Subsidiary, following upon which there shall be no
additional grants of Company Options without Parent's prior consent. From the
date such list is provided to Parent until the Effective Time, the Company
shall provide a daily option activity report to Parent containing such
information as Parent shall reasonably request.
5.14. Preparation of Tax Returns. The Company shall file (or cause to be
filed) at its own expense, on or prior to the due date thereof (as the same may
be extended), all Returns required to be filed on or before the Closing Date.
The Company shall provide Parent with a copy of appropriate workpapers,
schedules, drafts and final copies of each foreign and domestic, federal,
provincial and state income Tax return or election of the Company (including
returns of all Employee Benefit Plans) at least ten days before filing such
return or election and shall consult with Parent with respect thereto prior to
such filing.
5.15. Rule 145 Matters.
(a) Promptly following the date of this Agreement, the Company shall deliver
to Parent a list of names and addresses of those persons who are affiliates
within the meaning of Rule 145 of the rules and regulations promulgated under
the Securities Act (the "Company Affiliates"). The Company shall provide Parent
such information and documents as Parent shall reasonably request for purposes
of reviewing such list. If the Election is not made, the Company shall deliver
to Parent, on or prior to the Closing, an affiliate letter in the form attached
hereto as Exhibit C, executed by each of the Company Affiliates identified in
the foregoing list. In such event, Parent shall be entitled to place legends as
specified in such affiliate letters on the certificates evidencing any of the
Parent Common Stock to be received by such Company Affiliates pursuant to the
terms of this Agreement, and to issue appropriate stop transfer instructions to
the transfer agent for the Parent Common Stock, consistent with the terms of
such letters.
(b) For so long as resales of shares of Parent Common Stock issued pursuant
to the Merger are subject to the resale restrictions set forth in Rule 145
under the Securities Act, Parent will use good faith efforts to comply with
Rule 144(c)(1) under the Securities Act.
5.16. Tax-Free Reorganization. If the Election is not made, Parent and the
Company shall each use all commercially reasonable efforts to cause the Merger
to qualify as a reorganization within the meaning of Section 368(a) of the
Code. In such event, neither Parent nor the Company shall take or fail to take,
or cause any third party to take or fail to take, any action that would cause
the Merger to fail to qualify as a "reorganization" within the meaning of
Section 368(a) of the Code.
5.17. SEC Filings; Compliance. The Company and Parent shall each cause the
forms, reports, schedules, statements and other documents required to be filed
with the SEC by the Company and Parent, respectively, between the date of this
Agreement and the Effective Time to be prepared in all material respects in
compliance with all applicable requirements of the Securities Act and the
Exchange Act, as the case may be, and such reports, schedules, statements, and
other documents will not at the time they are filed contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading.
5.18. Listing of Additional Shares. If the Election is not made, prior to
the Effective Time Parent shall list the shares of Parent Common Stock to be
issued in the Merger on the New York Stock Exchange, subject to official notice
of issuance.
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ARTICLE VI
CONDITIONS TO CLOSING
6.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Effective Date of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the requisite vote of the stockholders of the
Company under the DGCL and the Company's Charter Document and Governing
Documents.
(b) Governmental Action; No Injunction or Restraints. No action or
proceeding by any Governmental Entity seeking to prevent consummation of
the Merger, asserting the illegality of the Merger or this Agreement or
seeking material damages directly arising out of the transactions
contemplated hereby which continues to be outstanding shall be pending or
threatened.
(c) Governmental Consents. All necessary authorizations, consents,
orders or approvals of, or declarations or filings with, or expiration or
waiver of waiting periods imposed by, any Governmental Entity of any
applicable jurisdiction required for the consummation of the transactions
contemplated by this Agreement shall have been, as applicable, filed,
expired or obtained.
(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act, no stop order suspending such
effectiveness shall have been issued, and no proceedings seeking such a
stop order shall be pending before or, to the knowledge of Parent,
threatened by the SEC.
6.2. Conditions to Obligations of Parent. The obligation of Parent to effect
the Merger is further subject to satisfaction or waiver of the following
conditions:
(a) Representations and Warranties. The representations and warranties
of the Company set forth herein which are subject to materiality or Company
Material Adverse Effect qualifications shall be true and correct in all
respects both when made and at and as of the Effective Date, as if made at
and as of such time (except to the extent expressly made as of an earlier
date, in which case as of such date), and the representations and
warranties of the Company set forth herein which are not subject to
materiality or Company Material Adverse Effect qualifications shall be true
and correct in all material respects both when made and at and as of the
Effective Date, as if made at and as of such time (except to the extent
expressly made as of an earlier date, in which case as of such date).
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Effective Date.
(c) No Material Adverse Effect. Since the date of this Agreement, there
shall not have been a Company Material Adverse Effect nor shall there have
been any change, event or condition that, with the passage of time, would
reasonably be expected to result in a Company Material Adverse Effect.
(d) No Injunctions or Restraints. No judgment, order, decree, statute,
law, ordinance, rule or regulation entered, enacted, promulgated, enforced
or issued by any court or other Governmental Entity of competent
jurisdiction or other legal restraint or prohibition shall be in effect (i)
imposing or seeking to impose material limitations on the ability of Parent
to acquire or hold or to exercise full rights of ownership of any
securities of the Company; (ii) imposing or seeking to impose material
limitations on the ability of Parent or its Affiliates to combine and
operate the business and assets of the Company; (iii) imposing or seeking
to impose other material sanctions, damages, or liabilities directly
arising out of the Merger on Parent or any of its officers or directors; or
(iv) requiring or seeking to require divestiture by Parent of any
significant portion of the business, assets or property of the Company or
of Parent.
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(e) Delivery of Closing Documents. At or prior to the Effective Time,
the Company shall have delivered to Parent all of the following:
(i) a certificate of the President and the Chief Financial Officer
of the Company, dated as of the Effective Date, stating that the
conditions precedent set forth in Sections 6.2(a), (b) and (c) hereof
have been satisfied; and
(ii) a copy of (A) the Certificate of Incorporation of the Company,
dated as of a recent date, certified by the Secretary of State of the
State of Delaware, and (B) the Bylaws of the Company and the
resolutions of the Company Board and stockholders authorizing the
Merger and the other transactions contemplated by this Agreement,
certified by the Secretary of the Company.
(f) Director and Officer Resignations. Merger Sub shall have received
the resignation of the directors and officers of the Company as are
described in Section 5.9 hereof.
(g) Key Employee Agreements. Rhonda E. Brede, Michael J. Kennedy,
Richard M. Jelinek, Dave Decker, and Mete Sahin shall have entered into
employment agreements in the respective forms set forth as Exhibits D
through H to this Agreement, and none of such employees shall have
indicated any intention of not fulfilling his or her obligations
thereunder; the predecessor employment agreements between the Company and
such employees, and all other arrangements or understandings between the
Company and such employees (including, without limitation, any agreement or
understanding pursuant to which such employees may exercise those Company
Options granted to them on October 14, 1999 by means of the delivery of
promissory notes), shall have been terminated; and subsequent to the
execution of this Agreement, such employees shall not have exercised any
Company Options referred to in the preceding clause by means of the
delivery of promissory notes.
(h) Consents, etc. Parent shall have received evidence, in form and
substance reasonably satisfactory to it, that all licenses, permits,
consents, waivers, approvals, contract extensions, authorizations,
qualifications, and orders of all Governmental Entities and any other third
parties contemplated by Sections 3.5 and 3.11 hereof and of all parties set
forth in the Company Disclosure Letter in reference to such sections have
been obtained, and that all of the steps specified in Schedule 6.2(h) to
this Agreement have been completed.
(i) Company Affiliate Letters. If the Election is not made, Parent shall
have received all of the letters described in Section 5.15(a) hereof
executed by each of the Company Affiliates.
(j) Exercise of Warrants and Conversion of Convertible Notes. The
Warrants shall have been exercised in full and the Convertible Notes shall
have been converted in full, in each case pursuant to their respective
terms, effective prior to the Closing Date; and the Company shall not have
paid more than $96,000 in the aggregate to the holders of such Warrants and
Convertible Notes in consideration of their early exercise or conversion
thereof.
(k) Lien Releases and Repayments. Arrangements shall have been made to
take the following actions effective as of the Effective Time: (i) repay
the Company's outstanding indebtedness to Imperial Bank and release the
security interest of Imperial Bank in assets of the Company, and (ii)
release the security interest of Wells Fargo Equipment Finance, Inc. in
assets of the Company, which actions, in the case of (ii), shall not
require the payment by the Company of an amount in excess of $50,000.
(l) Exercises of Dissenters Rights. If appraisal rights apply under
Section 262 of the DGCL to any outstanding shares of Company Common Stock,
holders of no more than 10% of the shares of Company Common Stock
outstanding at the Closing Date shall have delivered to the Company and not
withdrawn written demands for appraisal of the shares held by them pursuant
to Section 262(d)(1) of the DGCL.
6.3. Conditions to Obligations of the Company. The obligation of the Company
to effect the Merger is further subject to satisfaction or waiver of the
following conditions:
(a) Representations and Warranties. The representations and warranties
of Parent and Merger Sub set forth herein which are subject to materiality
or Parent Material Adverse Effect qualifications shall be
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true and correct in all respects both when made and at and as of the
Effective Date, as if made at and as of such time (except to the extent
expressly made as of an earlier date, in which case as of such date), and
the representations and warranties of Parent and Merger Sub set forth
herein which are not subject to materiality or Parent Material Adverse
Effect qualifications shall be true and correct in all material respects
both when made and at and as of the Effective Date, as if made at and as of
such time (except to the extent expressly made as of an earlier date, in
which case as of such date).
(b) Performance of Obligations of Parent. Parent shall have performed in
all material respects all obligations required to be performed by it under
this Agreement at or prior to the Effective Date.
(c) Delivery of Closing Documents. At or prior to the Effective Time,
the Parent shall have delivered to the Company a certificate of a Senior
Vice President and the Chief Financial Officer of Parent, dated as of the
Effective Date, stating that the conditions precedent set forth in Sections
6.3(a), (b) and (e) hereof have been satisfied.
(d) Tax Opinion. If the Election is not made, the Company shall have
received the opinion of Bell, Boyd & Lloyd LLC, counsel to the Company, in
form and substance satisfactory to the Company and Parent, to the effect
that the Merger will be treated for U.S. federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code; provided
that, if Bell, Boyd & Lloyd LLC does not render such opinion, this
condition shall nonetheless be deemed satisfied if Dorsey & Whitney LLP
renders such opinion to the Company (it being agreed that Parent and the
Company shall each provide reasonable cooperation, including making
reasonable representations, to Bell, Boyd & Lloyd LLC or Dorsey & Whitney
LLP, as the case may be, to enable them to render such opinion).
(e) No Parent Material Adverse Effect. Since the date of this Agreement,
there has not been a Parent Material Adverse Effect nor shall there have
been any change, event or condition that, with the passage of time, would
reasonably be expected to result in a Parent Material Adverse Effect.
ARTICLE VII
TERMINATION
7.1. Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the Merger by the
Company's stockholders:
(a) by mutual written consent of the Company and Parent (on behalf of
Parent and Merger Sub);
(b) by either the Company or Parent (on behalf of Parent and Merger
Sub):
(i) if the Merger shall not have been completed by March 31, 2001;
provided, however, that the right to terminate this Agreement pursuant
to this Section 7.1(b)(i) shall not be available to any party whose
failure to perform any of its obligations under this Agreement results
in the failure of the Merger to be consummated by such time;
(ii) if stockholder approval shall not have been obtained at the
Company Stockholders Meeting duly convened therefor or at any
adjournment or postponement thereof; provided, however, that the right
to terminate this Agreement pursuant to this Section 7.1(b)(ii) shall
not be available to any party whose failure to perform any of its
obligations under this Agreement results in the failure to obtain
stockholder approval;
(iii) if any restraint having any of the effects set forth in Section
6.1(b) or Section 6.2(d) hereof shall be in effect and shall have become
final and nonappealable; provided, however, that the right to terminate
this Agreement pursuant to this Section 7.1(b)(iii) shall not be
available to any party whose failure to perform any of its obligations
under this Agreement results in such restraint to continue in effect; or
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(iv) if the Company enters into a merger, acquisition or other
agreement (including an agreement in principle) or understanding to
effect a Superior Proposal or the Company Board or a committee thereof
resolves to do so; provided, however, that the Company may not
terminate this Agreement pursuant to this Section 7.1(b)(iv) unless (a)
the Company has delivered to Parent and Merger Sub a written notice of
the Company's intent to enter into such an agreement to effect such
Acquisition Proposal, which notice shall include, without limitation,
the material terms and conditions of the Acquisition Proposal and the
identity of the Person making the Acquisition Proposal, (b) four
business days have elapsed following delivery to Parent and Merger Sub
of such written notice by the Company and (c) during such four-
business-day period, the Company has fully cooperated with Parent and
Merger Sub to allow Parent and Merger Sub within such four-business-day
period to propose amendments to the terms of this Agreement to be at
least as favorable as the Superior Proposal; provided, further, that
the Company may not terminate this Agreement pursuant to this Section
7.1(b)(iv) unless, at the end of such four-business-day-period, the
Company Board continues reasonably to believe that the Acquisition
Proposal constitutes a Superior Proposal;
(c) by the Company, if Parent or Merger Sub shall have breached in any
respect any of its representations and warranties contained in Article IV
hereof which are subject to materiality or Parent Material Adverse Effect
qualifications, or Parent or Merger Sub shall have breached in any material
respect any of its representations and warranties contained in Article IV
hereof which are not subject to materiality or Parent Material Adverse
Effect qualifications, or Parent or Merger Sub shall have breached or
failed to perform in any material respect any of its covenants or other
agreements contained in this Agreement, in each case, which breach or
failure to perform has not been cured by Parent or Merger Sub within thirty
days following receipt of notice thereof from the Company; or
(d) by Parent (on behalf of Parent and Merger Sub):
(i) if the Company shall have breached in any respect any of its
representations and warranties contained in Article III hereof which
are subject to materiality or Company Material Adverse Effect
qualifications, or the Company shall have breached in any material
respect any of its representations and warranties contained in Article
III hereof which are not subject to materiality or Company Material
Adverse Effect qualifications, or the Company shall have breached or
failed to perform in any material respect any of its covenants or other
agreements contained in this Agreement, in each case (other than a
breach of Section 5.6(b) or (c) hereof, as to which no cure period
shall apply), which breach or failure to perform has not been cured by
the Company within thirty days following receipt of notice thereof from
Parent; or
(ii) if (a) the Company Board or any committee thereof shall have
withdrawn or modified in a manner adverse to Parent its approval or
recommendation of the Merger or this Agreement, or approved or
recommended an Acquisition Proposal (including a Superior Proposal), or
(b) the Company Board or any committee thereof shall have resolved to
take any of the foregoing actions
7.2. Effect of Termination. The termination of this Agreement pursuant to
the terms of Section 7.1 hereof shall become effective upon delivery to the
other party of written notice thereof. In the event of the termination of this
Agreement pursuant to the foregoing provisions of this Article VII, there shall
be no obligation or liability on the part of any party hereto (except as
provided in Section 7.3 hereof) or its stockholders or directors or officers in
respect thereof, except (i) for agreements which survive the termination of
this Agreement and (ii) for liability that Parent or Merger Sub or the Company
might have to the other party or parties arising from a breach of this
Agreement due to termination of this Agreement in accordance with Sections
7.1(c) or 7.1(d) or due to the fraudulent or willful misconduct of such party.
7.3. Fees and Expenses.
(a) Except as provided in this Section 7.3, whether or not the Merger is
consummated or this Agreement terminated, the Company, on the one hand, and
Parent and Merger Sub, on the other, shall bear their respective expenses
incurred in connection with the Merger, including, without limitation, the
preparation, execution and
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performance of this Agreement and the transactions contemplated hereby, and all
fees and expenses of investment bankers, finders, brokers, agents,
representatives, counsel and accountants.
(b) Notwithstanding any provision in this Agreement to the contrary, if this
Agreement is terminated (x) by the Company or Parent pursuant to Section
7.1(b)(ii) or (y) by Parent pursuant to Section 7.1(b)(iv), 7.1(d)(i) or
7.1(d)(ii) hereof, then, in each case, the Company shall (without prejudice to
any other rights Parent may have against the Company for breach of this
Agreement), reimburse Parent upon demand for all out-of-pocket fees and
expenses incurred or paid by or on behalf of Parent or any Affiliate of Parent
in connection with this Agreement, the Merger and transactions contemplated
herein, including all fees and expenses of counsel, investment banking firm,
accountants and consultants.
(c) Notwithstanding any other provision in this Agreement to the contrary,
if (x) this Agreement is terminated by the Company or Parent at a time when
Parent is entitled to terminate this Agreement pursuant to Section 7.1(b)(ii)
(except if, immediately prior to the Company Stockholder Meeting, an event or
condition exists that would result in a Parent Material Adverse Effect) or
7.1(d)(i) (other than due to a breach of Section 5.6(b) or (c) hereof) and,
concurrently with or within twelve months after such a termination, the Company
shall enter into an agreement, arrangement or binding understanding with
respect to an Acquisition Proposal (which shall include, for this purpose, the
commencement by a third party of a tender offer or exchange offer or similar
transaction directly with the Company's stockholders) with a third party
(collectively, a "Third Party Deal") or (y) this Agreement is terminated
pursuant to Section 7.1(b)(iv), Section 7.1(d)(i) (if such termination results
from a breach of Section 5.6(b) or (c) hereof) or 7.1(d)(ii) (except, in the
case of 7.1(d)(ii) only, if the Company Board's withdrawal or modification of
its approval or recommendation of this Agreement or the Merger occurs after the
occurrence of a Parent Material Adverse Effect), then, in each case, the
Company shall (in addition to any obligation under Section 7.3(b) hereof and as
liquidated damages and not as a penalty or forfeiture) pay to Parent U.S.
$2,000,000 (the "Termination Fee") in cash, such payment to be made promptly,
but in no event later than the second business day following, in the case of
clause (x), the later to occur of such termination and the entry into of such
Third Party Deal, or, in the case of clause (y), such termination.
(d) If this Agreement is terminated by the Company pursuant to Section
7.1(c) hereof, Parent shall (without prejudice to any other rights the Company
may have against Parent for breach of this Agreement), reimburse the Company
upon demand for all out-of-pocket fees and expenses incurred or paid by or on
behalf of the Company or any Affiliate of the Company in connection with this
Agreement, the Merger and the transactions contemplated herein, including all
fees and expenses of counsel, investment banking firm, accountants and
consultants.
(e) The parties acknowledge that the agreements contained in Sections
7.3(b), (c) and (d) hereof are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements, Parent and
Merger Sub on the one hand, and the Company on the other, would not enter into
this Agreement. Accordingly, if the Company fails promptly to pay the amounts
due pursuant to Sections 7.3(b) and/or (c) hereof, or if Parent fails promptly
to pay the amounts due pursuant to Section 7.3(d) hereof, (i) the party failing
to so pay shall pay interest on such amounts at the prime rate announced by
U.S. Bank National Association, Minneapolis office, in effect on the date the
Termination Fee (or fees and expenses) were required to be paid, and (ii) if,
in order to obtain such payment, a party commences a suit or takes other action
which results in a judgment or other binding determination against the
nonpaying party for the fees and expenses in Sections 7.3(b) or 7.3(d) hereof
or the Termination Fee, the nonpaying party shall also pay to the party
entitled to receive payment its costs and expenses (including reasonable
attorneys' fees) in connection with such suit, together with interest payable
under the preceding clause (i).
7.4. Non-solicitation. If this Agreement is terminated pursuant to this
Article VII, Parent hereby agrees that for a period of one year from the date
of such termination, neither Parent nor any of its affiliates will directly
solicit the employment of any of the employees of the Company or its
Subsidiaries who are named in Section 7.4 of the Company Disclosure Letter or
any of the employees who are named in Section 6.2(g) of this Agreement without
obtaining the prior written consent of the Company.
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ARTICLE VIII
MISCELLANEOUS
8.1. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 8.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
8.2. Waiver. At any time prior to the Effective Date, either Parent of
Merger Sub, on the one hand, or the Company, on the other hand, may (a) extend
the time for the performance of any of the obligations or other acts of the
other party hereto, (b) waive any inaccuracies in the representations and
warranties of the other party contained herein or in any document delivered
pursuant hereto, and (c) waive compliance with any of the agreements of the
other party or with any conditions to its own obligations contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in an instrument in writing duly authorized by and
signed on behalf of such party.
8.3. Notices.
(a) Any notice or communication to any party hereto shall be duly given if
in writing and delivered in person or mailed by first class mail and airmail,
if overseas (registered or return receipt requested), facsimile (with receipt
electronically acknowledged) or overnight air courier guaranteeing next day
delivery, to such other party's address.
If to Parent:
UnitedHealth Group Incorporated
9900 Bren Road East
Minnetonka, Minnesota 55343
Attention: General Counsel
Facsimile No.: (952) 936-0044
with a copy to:
James D. Alt
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
Facsimile No.: (612) 340-8738
If to the Company:
Lifemark Corporation
7600 North 16th Street
Suite 150
Phoenix, Arizona 85020
Attention: President
Facsimile No.: (602) 944-7325
with a copy to:
J. Craig Walker
Bell, Boyd & Lloyd LLC
Three First National Plaza
70 West Madison Street
Chicago, Illinois 60602
Facsimile No.: (312) 372-2098
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(b) All notices and communications will be deemed to have been duly given at
the time delivered by hand, if personally delivered; three business days after
being deposited in the mail, if mailed; when sent, if sent by facsimile; and
one business day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery.
8.4. Counterparts. This Agreement may be executed via facsimile in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.5. Interpretation. The language used in this Agreement and the other
agreements contemplated hereby shall be deemed to be the language chosen by the
parties to express their mutual intent, and no rule of strict construction
shall be applied against any party. The headings of articles and sections
herein are for convenience of reference, do not constitute a part of this
Agreement, and shall not be deemed to limit or affect any of the provisions
hereof. As used in this Agreement, "Person" means any individual, corporation,
limited liability company, limited or general partnership, joint venture,
association, joint stock company, trust, unincorporated organization or other
entity; all amounts shall be deemed to be stated in U.S. dollars, unless
specifically referenced otherwise.
8.6. Amendment. This Agreement may be amended by the parties at any time
before or after any required approval of matters presented in connection with
the Merger by the stockholders of the Company; provided, however, that after
any such approval, there shall not be made any amendment that by law requires
further approval by such stockholders without obtaining such further approval.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties.
8.7. No Third Party Beneficiaries. Except for the provisions of Section 5.10
hereof (which is intended to be for the benefit of the persons referred to
therein, and may be enforced by such persons) nothing in this Agreement shall
confer any rights upon any person or entity which is not a party or permitted
assignee of a party to this Agreement.
8.8. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
8.9. Entire Agreement. This Agreement (together with the Exhibits and the
Company Disclosure Letter, the Parent Disclosure Letter, and the other
documents delivered pursuant hereto or contemplated hereby) constitutes the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof, in each
case other than the Confidentiality Agreement.
8.10. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that transactions
contemplated hereby are fulfilled to the extent possible.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers all as of the day and year first
above written.
UNITEDHEALTH GROUP INCORPORATED
/s/ David J. Lubben
By: _________________________________
Name: David J. Lubben
Title: General Counsel
LEO ACQUISITION CORP.
/s/ David J. Lubben
By: _________________________________
Name: David J. Lubben
Title: Secretary
LIFEMARK CORPORATION
/s/ Rhonda E. Brede
By: _________________________________
Name: Rhonda E. Brede
Title: President and Chief Executive
Officer
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Amendment No. 2 To
Agreement and Plan of Merger Dated October 10, 2000
By and Among
UnitedHealth Group Incorporated,
Leo Acquisition Corp.,
And Lifemark Corporation
WHEREAS, UnitedHealth Group Incorporated, a Minnesota corporation
("Parent"), Leo Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), and Lifemark Corporation, a Delaware
corporation (the "Company"), previously entered into that Agreement and Plan of
Merger Dated October 10, 2000, and Amendment No. 1 thereto dated October 25,
2000 (such agreement, as so amended, the "Merger Agreement"); and
WHEREAS, Parent, Merger Sub and the Company wish to amend Sections 2.3 and
5.12(g) of the Merger Agreement.
NOW, THEREFORE, Parent, Merger Sub and the Company hereby agree as follows:
1. Amendment to Section 2.3. Section 2.3 of the Merger Agreement is hereby
amended to add the following paragraph at the end thereof:
"(i) In lieu of delivering physical certificates representing shares of
Parent Common Stock pursuant to Sections 2.3(c) or 2.3(g) of this Agreement
or any other applicable provision of this Agreement, Parent may, at its
option, deliver uncertificated shares of Parent Common Stock in accordance
with the provisions of Section 302A.417, Subd. 7 of the Minnesota Business
Corporation Act and the direct registration system maintained by the
registrar and transfer agent for Parent Common Stock."
2. Amendment to Section 5.12(g). Section 5.12(g) of the Merger Agreement is
hereby amended to read in its entirety as follows:
"(g) Section 5.12(g) of the Company Disclosure Letter sets forth the
number of hours of personal time accrued by employees of the Company and
its Subsidiaries as of the date hereof and the amount required to be paid
with respect thereto pursuant to the following sentence. As of the Closing
Date, employees of the Company and its Subsidiaries shall be paid for all
accrued but unused hours of personal time. In lieu of being paid for
personal time, employees may choose to carry-over to Parent up to 40 hours
of available personal time for employees with less than five years of
service, or up to 80 hours for employees with five or more years of
service. All personal time carried over to Parent will be considered sick
leave and will be treated consistent with Parent's policy regarding sick
leave time."
3. Ratification of Merger Agreement. Parent, Merger Sub and the Company
hereby confirm and ratify the Merger Agreement as amended by this Amendment No.
2.
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IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Amendment No. 2 to be duly executed on November 22, 2000.
UNITEDHEALTH GROUP INCORPORATED LEO ACQUISITION CORP.
/s/ David J. Lubben /s/ David J. Lubben
By: ____________________________ By: ____________________________
Name: David J. Lubben Name: David J. Lubben
Title: General Counsel Title: Secretary
LIFEMARK CORPORATION
/s/ Michael J. Kennedy
By: ____________________________
Name: Michael J. Kennedy
Title: Vice President and Chief
Financial Officer
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<PAGE>
ANNEX B
VOTING AGREEMENT
VOTING AGREEMENT, dated as of October 10, 2000 (the "Agreement"), by and
among UnitedHealth Group Incorporated, a Minnesota corporation ("Buyer"), each
record and beneficial stockholder of Lifemark Corporation, a Delaware
corporation (the "Company"), whose signature is set forth on the signature
pages to this Agreement (each a "Stockholder," and collectively the
"Stockholders"), and, as to Section 3(b) below, the Company. Capitalized terms
which are used but not defined herein shall have the meanings ascribed to them
in the Merger Agreement (as defined below).
WITNESSETH:
WHEREAS, simultaneously with the execution and delivery of this Agreement,
Buyer and the Company are entering into an Agreement and Plan of Merger, dated
as of the date hereof (the "Merger Agreement"), which provides for a wholly
owned subsidiary of Buyer to be merged with and into the Company in accordance
with the General Corporation Law of the State of Delaware and the terms of the
Merger Agreement, as a result of which the Company will be the surviving
corporation and will be a wholly owned subsidiary of Buyer;
WHEREAS, the Stockholders own in the aggregate approximately 39.1% of the
Company Common Stock issued and outstanding; and
WHEREAS, the Stockholders desire that the Company and Buyer consummate the
Merger contemplated by the Merger Agreement and are willing to enter into this
Agreement to induce Buyer to enter into the Merger Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
and agreements set forth herein, the parties hereto, intending to be legally
bound, agree as follows:
1. Agreement to Vote; Waiver.
(a) At such time as the Company convenes a meeting of, solicits written
consents from or otherwise seeks a vote of, the Company's stockholders for the
purpose of considering and approving the Merger and the other transactions
contemplated by the Merger Agreement, each of the Stockholders hereby
irrevocably and unconditionally agrees to vote all shares of Company Common
Stock owned by such Stockholder (whether held directly or beneficially) (the
"Shares") in favor of the Merger and the other transactions contemplated by the
Merger Agreement and all other actions necessary or desirable for the
consummation of the Merger.
(b) Each Stockholder hereby agrees that it will not vote any Shares in favor
of the approval of any (i) Acquisition Proposal (as defined in Section 4(c)),
(ii) reorganization, recapitalization, liquidation or winding up of the Company
or any other extraordinary transaction involving the Company, other than as
contemplated by the Merger Agreement, (iii) corporate action the consummation
of which would frustrate the purposes, or prevent or delay the consummation, of
the transactions contemplated by the Merger Agreement or (iv) other matter
relating to, or in connection with, any of the foregoing matters.
(c) Each Stockholder hereby revokes any and all previous proxies granted
with respect to all shares of Company Common Stock held of record or
beneficially owned by such Stockholder. By entering into this Agreement, each
Stockholder hereby grants a proxy appointing Parent and each of its designees
as the Stockholder's attorney-in-fact and proxy, with full power of
substitution, for and in the Stockholder's name, to vote, express, consent or
dissent, or otherwise to utilize such voting power in the manner contemplated
by (a) and (b) above as Parent or its proxy or substitute shall, in Parent's
sole discretion, deem proper with respect to all such shares. The proxy granted
by each Stockholder pursuant to this Section 1 is irrevocable and is granted in
consideration of Parent entering into this Agreement and the Merger Agreement
and incurring certain related
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fees and expenses. The proxy granted by each Stockholder shall be revoked upon
termination of this Agreement in accordance with its terms.
(d) Each of the undersigned William G. Brown, Malcolm M. Brown, and Richard
C. Jelinek hereby waives any and all rights which he may have to require the
Warrants held by him individually or as trustee, the shares of Company Common
Stock issuable upon exercise of such Warrants, the Notes held by him
individually or as trustee, or the shares of Company Common Stock issuable upon
conversion of such Notes, to be registered under the Securities Act of 1933, as
amended, or under any state securities laws; provided that this waiver shall
only be effective upon, and shall be subject to, consummation of the merger
contemplated by the Merger Agreement.
2. Limitation. Each Stockholder shall retain at all times the right to vote
such Stockholder's shares of Company Common Stock in that Stockholder's sole
discretion on all matters, other than those set forth in Section 1, that are at
any time or from time to time presented for consideration by the Company's
stockholders generally.
3. Street Name Shares, Etc.
(a) With respect to any Shares listed on the signature page of this
Agreement as being held in "street name" by a broker-dealer for a Stockholder,
each Stockholder hereby irrevocably agrees to instruct and direct such broker-
dealer to vote such Shares in accordance with such Stockholder's agreements set
forth in Section 1. With respect to any such Shares, each Stockholder further
irrevocably agrees to complete and submit any proxy voting cards received by
such Stockholder from such broker-dealer in accordance with such Stockholder's
agreements set forth in Section 1.
(b) With respect to any Shares listed on the signature page of this
Agreement as being pledged to the Company, the Company acknowledges that it
does not presently have any voting rights with respect to such Shares and
agrees that it will not take any action to prevent the applicable Stockholders
from voting such Shares in accordance with such Stockholders' agreements set
forth in Section 1.
(c) With respect to any Shares listed on the signature page of this
Agreement as being beneficially owned by a Stockholder through an individual
retirement account, trust, partnership, or other legal entity, such Stockholder
agrees to take and to cause to be taken all actions which are necessary or
appropriate in order to cause such Shares to be voted in accordance with such
Stockholder's agreements set forth in Section 1.
4. No Solicitation.
(a) Immediately upon execution of this Agreement, the Stockholders shall
(and shall use best efforts to cause the Company and its officers, directors,
employees, investment bankers, attorneys and other agents or representatives
to) cease all discussions, negotiations, responses to inquiries and other
communications with all third parties who, prior to the date hereof, may have
expressed or otherwise indicated any interest in pursuing an Acquisition
Proposal with the Company.
(b) Prior to termination of this Agreement pursuant to Section 8 hereof,
each Stockholder hereby covenants and agrees that he or she will not, and each
Stockholder shall use best efforts to cause the Company and its officers,
directors, employees, investment bankers, attorneys and other agents or
representatives not to, directly or indirectly, (i) initiate, solicit or
encourage, directly or indirectly, any inquiries or the making of any proposal
that constitutes an Acquisition Proposal, (ii) engage or participate in
negotiations or discussions with, or furnish any information or data to, or
take any other action to, facilitate any inquiries or making any proposal by,
any third party relating to an Acquisition Proposal, or (iii) enter into any
agreement with respect to any Acquisition Proposal or approve an Acquisition
Proposal; provided, that if a Stockholder is a director of the Company, such
Stockholder may, as such a director (but not as a stockholder), engage in the
activities specified in (ii) and (iii), but only if and to the extent that the
Company Board may do so pursuant to Section
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5.6(b) of the Merger Agreement, and only subject to the conditions and
limitations set forth in said Section 5.6(b). In the event that any Stockholder
shall receive any Acquisition Proposal, he or she shall promptly (and in no
event later than 24 hours after receipt thereof) furnish to Buyer the identity
of the Potential Acquiror, the terms of such Acquisition Proposal, copies of
all information requested by the Potential Acquiror, and shall further promptly
inform Buyer in writing as to the fact such information is to be provided after
compliance with the terms of the preceding sentence. Without limiting the
foregoing, each of the Stockholders understands and agrees that any violation
of the restrictions set forth in this Section 4 by any Stockholder who is a
director or officer of the Company, whether or not such Stockholder is
purporting to act on behalf of the Company or any of its Subsidiaries or
otherwise, shall be deemed to be a breach of Section 5.6(b) of the Merger
Agreement sufficient to enable Buyer to terminate the Merger Agreement pursuant
to Section 7.1(d)(i) thereof. Nothing set forth in this Section 4 shall be
deemed to limit or qualify in any way the Stockholders' agreements and
obligations set forth in Section 1.
(c) For the purposes of this Agreement, "Acquisition Proposal" shall mean
any proposal, whether in writing or otherwise, made by any person other than
Parent and its Subsidiaries to acquire "beneficial ownership" (as defined under
Rule 13(d) of the Exchange Act) of 15% or more of the assets of, or 15% or more
of the outstanding capital stock of any of the Company or its Subsidiaries
pursuant to a merger, consolidation, exchange of shares or other business
combination, sale of shares of capital stock, sales of assets, tender offer or
exchange offer or similar transaction involving the Company or its
Subsidiaries.
5. Representations and Warranties of the Stockholders. The Stockholders
severally, but not jointly, hereby represent and warrant to Buyer that:
(a) Each Stockholder has the requisite legal capacity and authority to
execute and deliver this Agreement, to perform the obligations of the
Stockholder under this Agreement and to consummate the transactions
contemplated by this Agreement. This Agreement has been duly executed and
delivered by such Stockholder and constitutes a valid and legally binding
obligation of such Stockholder enforceable in accordance with its terms, except
to the extent that enforceability thereof may be limited by bankruptcy and
other similar laws and general principles of equity;
(b) Each Stockholder's execution, delivery and performance of this Agreement
will not result in the creation of any Lien upon any of the shares of Company
Common Stock held by such Stockholder under any of the terms, conditions or
provisions of any contract to which such Stockholder is a party;
(c) No filing or registration with or notification to and no permit,
authorization, consent or approval of, any Governmental Entity is required to
be obtained, made or given by any Stockholder in connection with the execution,
delivery and performance by any Stockholder of this Agreement; and
(d) The signature page of this Agreement correctly sets forth the number of
shares of Company Common Stock held of record and/or beneficially owned by each
Stockholder as of the date of this Agreement. With respect to shares of Company
Common Stock beneficially owned by each Stockholder and held by a broker in
street name, the signature page of this Agreement correctly sets forth the name
of such broker and the number of shares of Company Common Stock held by such
broker. With respect to shares of Company Common Stock beneficially owned by
each Stockholder through an individual retirement account, trust, partnership,
or other legal entity, the signature page of this Agreement correctly sets
forth the identity of such entity and the number of shares of Company Common
Stock so held. Each Stockholder has good title to all of the shares of Company
Common Stock set forth below his or her name on the signature page hereto free
and clear of all liens, security interests and encumbrances or any restrictions
on transfer, except for such Shares as are listed on such signature page as
being pledged to the Company to secure the payment of the purchase price of
such Shares.
(e) Each Stockholder, in his or her capacity as record owner, beneficial
owner, partner or trustee, either acting alone or together with another
Stockholder, has the sole power (or shares such power only with such other
Stockholder) to direct the voting and disposition of the Shares and to prevent
the amendment of any custodial, trust, partnership or other operative agreement
under which the Shares are held.
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<PAGE>
6. Capacity. The parties hereby agree that the Stockholders are executing
this Agreement solely in their capacity as Stockholders of the Company. Nothing
contained in this Agreement shall limit or otherwise affect the conduct or
exercise of the Stockholders' fiduciary duties as officers or directors of the
Company.
7. Covenants.
(a) Each Stockholder will, and will cause any broker-dealer, individual
retirement account trustee or custodian, trustee, trust, partnership, or other
legal entity through which such Stockholder holds Shares to, execute and
deliver such documents and take such action reasonably requested by Buyer to
effectuate the purposes of this Agreement and to consummate the transactions
contemplated by the Merger Agreement.
(b) Each Stockholder, either acting alone or together with another
Stockholder, has the power to, and will, and will cause any broker-dealer,
individual retirement account trustee or custodian, trustee, trust,
partnership, or other legal entity through which such Stockholder holds Shares
to, during the term hereof, prevent (i) the amendment of any custodial, trust,
partnership or other operative agreement under which the Shares are held and
(ii) except as a result of a pledge of the Shares to the Company in connection
with the exercise of options to purchase shares of the Company's common stock,
the existence of any lien, security interest, or other encumbrance on the
Shares resulting from outstanding indebtedness or any other outstanding
obligation secured by the Shares.
8. Termination. This Agreement shall terminate upon the earlier of (i) the
Effective Time and (ii) the termination of the Merger Agreement in accordance
with its terms. In the event this Agreement is terminated, this Agreement shall
immediately become void, there shall be no liability under this Agreement on
the part of Buyer, its officers or directors or the Stockholders, and all
rights and obligations of the parties to this Agreement shall cease.
9. Expenses. Each party hereto shall pay its own expenses incurred in
connection with this Agreement, except as otherwise specified in the Merger
Agreement.
10. Specific Performance. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement, without the necessity of
proving damages or posting any bond, and to enforce specifically the terms and
provisions hereof in any court of the United States or any state thereof having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
11. Notice. All notices, requests, demands and other communications
hereunder shall be deemed to have been duly given and made if in writing and if
served by personal delivery upon the party for whom it is intended or if sent
by telex or facsimile (with receipt electronically confirmed) to the person at
the address set forth below, or such other address as may be designated in
writing hereafter, in the same manner, by such person:
(a) if to a Stockholder: To the address set forth on the signature page(s)
hereto
(b) if to Buyer:
UnitedHealth Group Incorporated
9900 Bren Road East
Minnetonka, Minnesota 55343
Attention: General Counsel
Facsimile No.: (952) 936-0044
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with a copy to:
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
Attention: James D. Alt
Facsimile No.: (612) 340-8738
12. Parties in Interest. This Agreement shall inure to the benefit of and be
binding upon the parties named herein and their respective successors and
assigns. Nothing in this Agreement, expressed or implied, is intended to confer
upon any Person other than the Stockholders or Buyer, or their permitted
successors or assigns, any rights or remedies under or by reason of this
Agreement.
13. Entire Agreement; Amendments. This Agreement, together with the Merger
Agreement and the other documents referred to therein, constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous agreements and understandings, both
written or oral, between the parties with respect to the subject matter hereof.
This Agreement may not be changed, amended or modified orally, but only by an
agreement in writing signed by the party against whom any waiver, change,
amendment, modification or discharge may be sought.
14. Assignment. No party to this Agreement may assign any of its rights or
delegate any of its obligations under this Agreement (whether by operation of
law or otherwise) without the prior written consent of the other party hereto.
15. Interpretation. The language used in this Agreement shall be deemed to
be the language chosen by the parties to express their mutual intent, and no
rule of strict construction shall be applied against any party. The headings of
articles and sections herein are for convenience of reference, do not
constitute a part of this Agreement, and shall not be deemed to limit or affect
any of the provisions hereof.
16. Counterparts. This Agreement may be executed via facsimile in two or
more counterparts, each of which, when executed, shall be deemed to be an
original and all of which together shall constitute one and the same document.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of laws thereof.
18. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that transactions
contemplated hereby are fulfilled to the extent possible.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have caused this Voting Agreement to
be executed as of the day and year first written above.
UNITEDHEALTH GROUP INCORPORATED
/s/ David J. Lubben
By:__________________________________
David J. Lubben
Name:________________________________
General Counsel
Title:_______________________________
LIFEMARK CORPORATION (as to Section
3(b))
/s/ Rhonda E. Brede
By:__________________________________
Rhonda E. Brede
Name:________________________________
President and Chief Executive
Officer
Title:_______________________________
STOCKHOLDERS
/s/ Rhonda E. Brede
_____________________________________
Name: Rhonda E. Brede
Address: 19870 N. 68th Drive,
Glendale, AZ 85308
Number of Shares Held Directly:
123,089 (of which 90,000 are
pledged to the Company)
Number of Shares Held in Street
Name: 1,121 (Stephens Inc.)
/s/ Michael J. Kennedy
_____________________________________
Name: Michael J. Kennedy
Address: 5226 E. Anderson Drive,
Scottsdale, AZ 85254
Number of Shares Held Directly:
79,497 (of which 60,000 are pledged
to the Company)
Number of Shares Held in Individual
Retirement Account: 8,500 (Stephens
Inc., custodian)
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<PAGE>
/s/ Richard M. Jelinek
_____________________________________
Name: Richard M. Jelinek
Address: 8120 N. Dreamy Dr.,
Phoenix, AZ 85020
Number of Shares Held Directly:
60,000 (of which 60,000 are pledged
to the Company)
Number of Shares Held in Street
Name: 7,325 (Stephens Inc.)
/s/ Dave Decker
_____________________________________
Name: Dave Decker
Address: 10833 E. Raintree Dr.,
Scottsdale, AZ 85259
Number of Shares Held Directly:
26,877 (of which 25,000 are pledged
to the Company)
Number of Shares Held in Street
Name: 3,500 (Charles Schwab)
/s/ Henry H. Kaldenbaugh
_____________________________________
Name: Henry H. Kaldenbaugh
Individually and in his capacity as
General Partner of the Hemarco
Investments Limited Partnership
Address: 214 South Main Street,
Cottonwood, AZ 86326
Number of Shares Held Directly:
5,000
Number of Shares Held in Street
Name: 8,000 (Ameritrade)
Number of Shares Held Through
Hemarco Investments Limited
Partnership: 497,453
/s/ Martha E. Kaldenbaugh
_____________________________________
Name: Martha E. Kaldenbaugh
As General Partner of the Hemarco
Investments Limited Partnership
Address: 214 South Main Street,
Cottonwood, AZ 86326
Number of Shares Held Through
Hemarco Investments Limited
Partnership: 497,453
7
<PAGE>
/s/ John G. Lingenfelter
_____________________________________
Name: John G. Lingenfelter
Individually and in his capacity as
Trustee under the Lingenfelter
Family Trust U/T/A dated January 31,
1992, and as General Partner of the
Lingenfelter Investments Limited
Partnership
Address: 1080 Riata Valley Rd.,
Kingman, AZ 86401
Number of Shares Held Directly:
5,000
Number of Shares Held in Individual
Retirement Account: 7,781
Number of Shares Held Through
Lingenfelter Family Trust: 400,878
Number of Shares Held Through
Lingenfelter Investments Limited
Partnership: 11,000
/s/ Diana R. Lingenfelter
_____________________________________
Name: Diana R. Lingenfelter
In her capacity as Trustee under the
Lingenfelter Family Trust U/T/A
dated January 31, 1992, and as
General Partner of the Lingenfelter
Investments Limited Partnership
Address: 1080 Riata Valley Rd.,
Kingman, AZ 86401
Number of Shares Held Through
Lingenfelter Family Trust: 400,878
Number of Shares Held Through
Lingenfelter Investments Limited
Partnership: 11,000
/s/ Richard C. Jelinek
_____________________________________
Name: Richard C. Jelinek
Individually and in his capacity as
Trustee under the William Gardner
Brown GST Trust U/T/A dated 12/1/91
Address: 0312 Ridge Road, Aspen, CO
81611
Number of Shares Held Directly:
612,500
Number of Shares Held in Street
Name: 3,315 (Stephens Inc.); 1,200
(E Trade); 3,000 (William Blair)
Number of Shares Held Under Trust
Agreement Dated December 1, 1991:
70,000
8
<PAGE>
/s/ William G. Brown
_____________________________________
Name: William G. Brown
Individually and in his capacity as
Trustee under the William Gardner
Brown Grantor Revocable Trust U/T/A
9/15/91
Address: 207 South Beach Rd., Hobe
Sound, FL 33455
Number of Shares Held Directly:
5,000
Number of Shares Held Under Trust
Agreement Dated September 15, 1991:
38,670
Number of Shares Held Under Trust
Agreement Dated December 1, 1991:
70,000
/s/ Malcolm M. Brown
_____________________________________
Name: Malcolm M. Brown
As Trustee under the William Gardner
Brown GST Trust U/T/A dated 12/1/91
Address: 1110 Arbor Road, Winston-
Salem, NC 27104
Number of Shares Held Under Trust
Agreement Dated December 1, 1991:
70,000
/s/ Risa J. Lavizzo-Mourey
_____________________________________
Name: Risa J. Lavizzo-Mourey
Address: 711 Papermill Road,
Erdenheim, PA 19038
Number of Shares Held Directly:
5,000
Number of Shares Held in Individual
Retirement Account: 4,200 (Fidelity
Investments, custodian)
Number of Shares Held in Street
Name: 28,880 (Fidelity Investments)
9
<PAGE>
ANNEX C
[Stephens Inc. Letterhead]
October 10, 2000
Members of the Board of Directors of
Lifemark Corporation
7600 North 16th Street, Suite 150
Phoenix, AZ 85020
Members of the Board:
We have acted as your financial advisor in connection with the proposed
merger (the "Transaction") pursuant to which Lifemark Corporation (the
"Company") will become a subsidiary of UnitedHealth Group, Inc.
("UnitedHealth") pursuant to the terms and conditions set forth in the
Agreement and Plan of Merger.
You have requested our opinion as to the fairness to the shareholders of the
Company from a financial point of view of the consideration to be received by
such shareholders for each outstanding share of the Company's common stock, par
value $0.01 per share (the "Company Shares") pursuant to the Agreement and Plan
of Merger.
In connection with rendering our opinion we have:
(i) analyzed certain publicly available financial statements and reports
regarding the Company and UnitedHealth;
(ii) analyzed certain internal financial statements and other financial and
operating data (including financial projections) concerning the
Company prepared by management of the Company;
(iii) analyzed, on a pro forma basis, the effect of the transaction;
(iv) reviewed the reported prices and trading activity for the Company
Shares and the outstanding shares of UnitedHealth's common stock, par
value $0.01 per share (the "UnitedHealth Shares");
(v) compared the financial performance of the Company and UnitedHealth and
the prices and trading activity of the Company Shares and UnitedHealth
Shares with that of certain other comparable publicly-traded companies
and their securities;
(vi) reviewed the financial terms, to the extent publicly available, of
certain comparable transactions;
(vii) reviewed the Agreement and Plan of Merger and related documents;
(viii) discussed with management of the Company the operations of and
future business prospects for the Company and the anticipated
financial consequences of the Transaction to the Company;
(ix) assisted in your deliberations regarding the material terms of the
Transaction and your negotiations with UnitedHealth;
(x) performed such other analyses and provided such other services as we
have deemed appropriate.
We have relied on the accuracy and completeness of the information and
financial data provided to us by the Company, and our opinion is based upon
such information. We have inquired into the reliability of such information and
financial data only to the limited extent necessary to provide a reasonable
basis for our opinion, recognizing that we are rendering only an informed
opinion and not an appraisal or certification of value. With respect to the
financial projections prepared by management of the Company, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company.
<PAGE>
October 10, 2000
Page 2
As part of our investment banking business, we regularly issue fairness
opinions and are continually engaged in the valuation of companies and their
securities in connection with business reorganizations, private placements,
negotiated underwritings, mergers and acquisitions and valuations for estate,
corporate and other purposes. We are familiar with the Company and issue
periodic research reports regarding its business activities and prospects. In
the ordinary course of business, Stephens Inc. and its affiliates at any time
may hold long or short positions, and may trade or otherwise effect
transactions as principal or for the accounts of customers, in debt or equity
securities or options on securities of the Company or UnitedHealth. Stephens is
acting as financial advisor to the Company in connection with the Transaction
and will receive a fee from the Company for our services, a significant
position of which is contingent upon the consummation of the Transaction.
Based on the foregoing and our general experience as investment bankers, and
subject to the qualifications stated herein, we are of the opinion on the date
hereof that the consideration to be received by the shareholders of the Company
for the Company Shares in the Transaction is fair to them from a financial
point of view.
This opinion and a summary discussion of our underlying analyses and role as
your financial advisor may be included in communications to the Company's
shareholders provided that we approve of such disclosures prior to publication.
Very truly yours,
/s/ STEPHENS INC.
STEPHENS INC.
<PAGE>
ANNEX D
DELAWARE GENERAL CORPORATION LAW
SECTION 262 APPRAISAL RIGHTS--(a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S) 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this section.
As used in this section, the word "stockholder" means a holder of record of
stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of
a nonstock corporation; and the words "depository receipt" mean a receipt or
other instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to (S)
251(g) of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or (S) 264
of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to (S)(S) 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228
or (S) 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
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(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after such stockholder's written request for such a statement is received
by the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as
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the Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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ANNEX E
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2000
COMMISSION FILE NUMBER 0-19393
LIFEMARK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3338328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7600 NORTH 16TH STREET
SUITE 150
PHOENIX, ARIZONA 85020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 602-331-5100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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 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 check mark 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. _________
Based on the closing sale price of $6.63 on the Nasdaq National Market, as of
August 2, 2000 the aggregate market value of the registrant's common stock held
by nonaffiliates was approximately $15,620,393.
As of August 2, 2000 the number of shares outstanding of the registrant's common
stock, $.01 par value, was 5,131,444 shares.
Documents Incorporated by Reference. Portions of the Company's Proxy Statement
for its Annual Meeting of Stockholders (the "2000 Proxy Statement") are
incorporated by reference into Part III of this Form 10-K.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Item 1. Business............................................................................ 1
Item 2. Properties.......................................................................... 9
Item 3. Legal Proceedings................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders................................. 10
Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........... 10
Item 6. Selected Financial Data............................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.......................... 15
Item 8. Financial Statements and Supplementary Data......................................... 15
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 15
Part III Item 10. Directors and Executive Officers.................................................... 15
Item 11. Executive Compensation.............................................................. 15
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 16
Item 13. Certain Relationships and Related Transactions...................................... 16
Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 16
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Lifemark Corporation ("Lifemark" or the "Company") (Nasdaq: LMRK) is a
national, diversified health care management organization serving vulnerable,
frail, elderly and chronically ill individuals. Within its health plan
operations, Lifemark manages the care of more than 200,000 individuals
nationally, who consume in excess of $400 million in annual health care
expenses. Additionally, over 2,500,000 individuals have access to the Company's
eldercare consultation and referral center, and over 380,000 people are served
through its diversified services division.
The Company's customers include commercial health maintenance
organizations ("HMOs"); county, state, and federal agencies; associations of
health care providers; large employer groups; area agencies on aging; long term
care insurance plans; and individuals. Lifemark seeks to achieve substantial
cost savings through implementing innovative, proactive care management
strategies customized for each program's unique characteristics.
HISTORY
Lifemark Corporation, as it presently exists, is the result of a
spin-off and subsequent merger transactions, which occurred on March 1, 1996.
Prior to March 1, 1996, the Company was named Medicus Systems Corporation (the
"Predecessor Corporation"). On March 1, 1996, all of the assets of the
Predecessor Corporation, other than those related to its managed care business,
were transferred to a wholly-owned subsidiary of the Predecessor Corporation,
and all of the shares of that company were distributed on a share-for-share
basis to stockholders of the Predecessor Corporation. The Company, consisting of
the managed care business of the Predecessor Corporation, then effected a
one-for-three reverse stock split and immediately acquired through merger
transactions three Arizona corporations engaged in the managed care business,
Ventana Health Systems, Arizona Health Concepts, and Managed Care Solutions.
Following those mergers, the Company's name was changed to Managed Care
Solutions, Inc. On July 12, 1999, the Company changed its name from Managed Care
Solutions, Inc. to Lifemark Corporation.
Significant events from fiscal year 1995 through fiscal year 2000
follow. For specific information about each of Lifemark's business segments,
please see the Description of Products and Services section below.
December 1995. Lifemark was awarded a contract to manage all aspects, including
start-up activities, of Community Choice Michigan ("CCM"), a Michigan based HMO.
CCM is a non-profit entity owned by a consortium of 17 Michigan community health
centers. CCM HMO enrollment operations began in August 1996.
November 1996. Lifemark formed Community Health USA ("CHUSA"), a wholly-owned
subsidiary, to provide non-medical, home-based services. Subsequently, in July
1999, CHUSA's name was changed to Lifemark at Home, Inc.
June 1997. The Company began its management services of Lovelace Community
Health Plan ("LCHP"), which is part of Lovelace Health Systems, Inc., in
Albuquerque, New Mexico, a subsidiary of CIGNA Corporation.
January 1998. Under Lifemark's full management, HMO Blue STAR+PLUS began
operations in Harris County, Texas. Lifemark entered into an administrative
services contract with Rio Grande HMO, Inc. ("RGHMO") (d.b.a. HMO Blue,
Southeast Texas) of BlueCross and BlueShield of Texas ("BCBSTX"), a division of
Health Care Service Corporation ("HCSC"), an independent licensee of the
BlueCross and BlueShield Association, and initiated start-up services for this
Plan in March 1997. STAR+PLUS is the State of Texas' managed long term care
demonstration project designed to provide integrated acute and long term health
care services to eligible individuals.
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March 1999. The Company acquired AdviNet, Inc., an eldercare information,
consultation and referral business which owns a national databank of long term
care and aftercare providers now known as the AdviNet Extended Care Network. In
February 2000, this wholly-owned subsidiary of Lifemark was renamed Lifemark
Care Connection, Inc.
April 1999. The Company was awarded a one-year contract with the County of San
Diego, Health and Human Services Agency, Aging and Independent Services for
consulting services for the County's Long Term Care Integration Planning Grant.
This contract includes providing technical assistance, facilitating consensus
building among key stakeholders participating in the workgroups, planning
committee and advisory group, and assisting in the design of the plan for acute
and long term care integration in San Diego, California.
July 1999. On July 27, 1999, Rhonda Brede was named President and Chief
Operating Officer of the Company and was appointed to serve as a member of the
Board of Directors. On November 1, 1999, Ms. Brede was named President and Chief
Executive Officer.
August 1999. Lifemark renegotiated its administrative service agreement with
AlohaCare, which had been in place since 1994. This one-year agreement called
for assisting AlohaCare with transitioning its administrative services to a self
administered basis by August 1, 2000. During the transition period, the Company
assisted AlohaCare with preparation of financial reports and financial
management, and provided information systems and technology. At AlohaCare's
request, the transition contract has been extended through November 2000, with a
significantly reduced scope effective August 1, 2000.
November 1999. Lifemark's wholly-owned subsidiary, Ventana Health Systems, Inc.
("Ventana"), was awarded a contract from the Arizona Health Care Cost
Containment System Administration's ("AHCCCSA") Arizona Long Term Care System
("ALTCS") to provide services to members residing in Coconino and Yuma Counties
in Arizona, starting December 1, 1999. The expansion increased Ventana's
membership by approximately 30 percent.
December 1999. Lifemark purchased the assets of MJB Capital Corporation, d.b.a
ValleyWide Attendant Care ("VWAC"), an Arizona based provider of in-home
personal care services. VWAC was founded in 1993 to provide non-medical
attendant care, personal care and homemaking services to clients in need of long
term care services who reside in the east metropolitan area of Phoenix, Arizona.
Lifemark combined the operations of VWAC with its own non-medical home care
provider subsidiary, Lifemark at Home, Inc.
December 1999. Lifemark entered a risk-sharing agreement with HCSC. This new
agreement replaced the administrative services agreement for managing the care
of approximately 21,000 STAR+PLUS members for RGHMO in Houston, Texas. Lifemark
also replaced its outstanding $3,000,000 convertible debt held by HCSC with a
bank term loan.
January 2000. Lifemark Care Connection, Inc. was awarded a two-year contract
with the State of New Mexico's Human Services Department to develop, implement
and manage a statewide, centralized intake, screening and referral service for
State residents needing long term care services. The contract, which includes
two optional one-year renewal periods, began in June 2000.
April 2000. The Company created Lifemark Care Management, Inc. This wholly-owned
subsidiary performs research, development, marketing and technical support for
the Company's health management technology tools, including its proprietary care
management software product called CareOne.
April 2000. The Company was awarded a one-year contract extension with the
County of San Diego, Health and Human Services Agency, Aging and Independent
Services for consulting services for the County's Long Term Care Integration
Planning Grant.
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May 2000. Lifemark's subsidiary, Lifemark at Home, Inc., was awarded a contract
with the Arizona Area Agency on Aging, Region One to provide non-medical in-home
services to residents of Maricopa County, which includes the Phoenix
metropolitan area. Services under this contract started on July 1, 2000.
June 2000. Lifemark at Home, Inc., was awarded a contract with the Pinal-Gila
Council for Senior Citizens, Area Agency on Aging, Region Five in Arizona to
provide non-medical in-home services to residents of Pinal and Gila Counties in
Arizona. Services under this contract started on July 1, 2000.
June 2000. Ventana was awarded a contract from AHCCCSA to provide services to
members throughout Maricopa County, Arizona (Phoenix). Ventana is one of three
awardees under this $300 million program. Services under this contract will
start on October 1, 2000.
June 2000. Lifemark Care Connection, Inc. signed a multi-year agreement with
CaregiverZone, a provider of integrated online/offline eldercare information,
products and services. The agreement to provide offline eldercare consultation
and referral services to CaregiverZone clients began in July 2000.
July 2000. Lifemark signed a contract extension agreement with Community Choice
Michigan to provide management services through 2005. Lifemark has provided
administrative services to this 63,000 member HMO since 1996.
DESCRIPTION OF PRODUCTS AND SERVICES
Lifemark's business includes managing risk through its health plan
operations segment, developing health management technology-based tools through
its software and technology segment, and owning and/or managing services through
its diversified services segment.
HEALTH PLAN OPERATIONS
Full or Shared Risk
Arizona
Ventana Health Systems, Inc. Ventana, a wholly-owned subsidiary of the
Company, is a long term care health plan in Arizona. As the Company's flagship
health plan since its inception in 1989, Ventana has been the largest private
contractor providing long term care services under a contract with AHCCCSA.
Currently Ventana serves nine Arizona counties; however, this service area will
expand to add Maricopa County, including the metropolitan Phoenix area,
beginning October 1, 2000. The Company was named one of three providers in
Maricopa County for a new $300 million ALTCS program. In all of its service
areas, Ventana uses comprehensive care management to support members living in
the least restrictive, safest environment by incorporating this philosophy,
Ventana increased its home and community based services' ratio from seven
percent of all of its members in 1989 to 46 percent in 1999. Ventana currently
serves approximately 2,000 elderly and physically disabled members.
Arizona Health Concepts, Inc. Arizona Health Concepts ("AHC"), a
wholly-owned subsidiary of Lifemark, is a health plan currently operating in two
Arizona counties. AHC has been a contracted health plan with AHCCCS since 1992.
Enrollees served by AHC include persons qualifying for the following programs:
Temporary Assistance for Needy Families ("TANF," formerly Aid to Families with
Dependent Children); Aged, Blind and Disabled; and the Medically
Indigent/Medically Needy, which is comprised of an indigent population not
eligible for federal Medicaid matching funds. AHC has approximately 10,000
members.
In the summer of 2000, Ventana and AHC began operations under the
product name Lifemark Health Plans to underscore their role as part of
Lifemark's family of services.
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Texas
HMO Blue STAR+PLUS. Lifemark has provided full health plan start-up and
management services for RGHMO in Houston, Texas. Lifemark began providing
services in March 1997 and began member enrollment in January 1998. Current
membership is approximately 21,000 persons. RGHMO is the largest of three
contractors for the State's managed long term care demonstration project in
Harris County. The STAR+PLUS Program provides comprehensive managed health care
services to nursing home eligible individuals and Aged, Blind and Disabled
Medicaid beneficiaries, including those needing long term care services. In
December 1999, the Company's role expanded into a 50/50 risk sharing partnership
with HCSC through Lifemark of Texas, Inc., a wholly-owned subsidiary of the
Company.
Management Services
Michigan
Community Choice Michigan. Since 1996, Lifemark has provided health
plan management services for CCM, a not-for-profit 501(c)(3) HMO. CCM was formed
by 19 Michigan-based Community and Migrant Federally Qualified Community Health
Centers ("FQHC") and serves the traditional Medicaid and the Aged, Blind and
Disabled populations in 42 counties throughout Michigan. This health plan
provides health care coverage to approximately 63,000 members. As part of its
management services, Lifemark developed and supports a comprehensive network of
approximately 3,500 physicians and specialists and over 50 hospitals.
New Mexico
Lovelace Community Health Plan. Since 1997, Lifemark has provided
management services for LCHP. LCHP serves nearly 48,000 members, all of whom are
recipients of the State of New Mexico's innovative managed care Medicaid program
called SALUD! LCHP was one of three organizations awarded a contract for
participation in SALUD! LCHP, under Lifemark's management, received the State of
New Mexico's highest rating of all program contractors in the 1999 and 2000
SALUD! audits.
Hawaii
AlohaCare. From 1994 to 1999, Lifemark was the full-service
administrative contractor for AlohaCare, a not for profit 501(c)(4) health plan.
AlohaCare was formed through the efforts of Hawaii-based FQHC and other local
provider organizations. The plan serves approximately 53,000 members. In 1999,
Lifemark entered into a one-year transition agreement to continue to provide
certain services to AlohaCare, while assisting AlohaCare to transition to self
administration. The transition contract expires in November 2000.
SOFTWARE AND TECHNOLOGY SERVICES
The Company has supported the development and enhancement of CareOne, a
proprietary state-of-the-art disease and care management software program that
has been used internally at Lifemark since 1994. In April 2000, the Company
formed a wholly-owned subsidiary, Lifemark Care Management, Inc. and transferred
the assets of CareOne into this subsidiary. In keeping with its focus of
researching and developing health management technology tools, Lifemark Care
Management's initial project involves creating an expanded version of CareOne
for both internal and external customer use. Through initial market studies,
Lifemark Care Management identified commercial insurers, state and county
agencies, HMOs and risk-bearing providers as potential external users.
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DIVERSIFIED SERVICES
National
Lifemark Care Connection. Lifemark Care Connection, a wholly-owned
subsidiary of the Company, is a nationwide eldercare and long term care client
intake, assessment, consultation, referral, and telephonic case management
service. Its clients are insurance companies, employee assistance programs, long
term care insurance companies, fraternal organizations, state agencies, affinity
and discount card programs, internet companies and private pay clients. Lifemark
Care Connection also operates the AdviNet(R) Extended Care Network, a national
network and databank of LTC and other post-acute providers and supportive
resources. Over 2.5 million individuals nationwide have access to Lifemark Care
Connection services.
In January 2000, Lifemark Care Connection was awarded a contract with
the State of New Mexico, Human Services Division to develop and manage the New
Mexico Intake and Screening System. Through this program, which began start-up
services in June 2000, Lifemark Care Connection will provide telephonic
eligibility screening, assessment, and referral information for New Mexico
residents requiring long term care services.
Lifemark Care Connection also entered into an agreement to provide a
suite of offline eldercare consultation and referral services designed to assist
clients of CaregiverZone. CaregiverZone is a provider of integrated
internet-based and offline eldercare information, products and services. Clients
of CaregiverZone include family caregivers, eldercare professionals and seniors.
Services under this multi-year agreement started in July 2000.
Arizona
Lifemark at Home. Lifemark at Home, a wholly-owned subsidiary of the
Company, offers services to health plans, area agencies on aging, and private
pay clients needing non-medical in-home assistance and care. Since 1996, this
subsidiary has offered personal care, homemaking/housekeeping and respite
services to persons recovering from an illness or operation, living with a
chronic condition, or facing the limitations imposed by aging. Lifemark at Home
caregivers provide services to approximately 1,200 clients throughout Arizona.
Approximately 40 percent of these services are delivered to members of Lifemark
Health Plans (Ventana and AHC). The percentage of services to non-Lifemark
entities has increased from zero to 60 percent since 1998. In June 2000,
Lifemark at Home was awarded contracts with Arizona's Area Agencies on Aging,
Region One (including the greater Phoenix area), and with the Pinal-Gila Council
for Senior Citizens Services/Area Agency on Aging, Region Five. Services under
both of these contracts began on July 1, 2000 and together are expected to add
over 300 clients to Lifemark at Home.
California
County Medical Services Program. Since 1983, Lifemark has managed the
San Diego County Medical Services Program ("CMS") which provides necessary
health care services to medically indigent adult residents. Included in the CMS
program are: the Ryan White Comprehensive AIDS Resources Emergency Act
Supplemental Program, a federally funded and County administered program
offering preventive and primary care clinic services to HIV+ patients; the
California Healthcare for Indigents Program ("CHIP") AB-75 Hospital Formula
Fund, a program which distributes payment to hospitals for uncompensated
emergency and acute care services; and the Physician Emergency Services Program,
which distributes payment to physicians for uncompensated emergency services.
California Healthcare for Indigents Program. Since 1991, Lifemark has
served as a fiscal intermediary for CHIP through a contract with the City and
County of San Francisco. CHIP offers medical services to persons who cannot
afford to pay for their own healthcare and who are not recipients of any state
or federally funded program.
5
<PAGE>
Access for Infants and Mothers Program. Since 1992, the Company has
performed marketing and outreach services for the Access for Infants and Mothers
Program ("AIM") through a contract with internal agencies of San Diego and
Imperial Counties. The AIM program provides prenatal and infant care for
uninsured moderate-income women.
California Work Opportunities and Responsibility to Kids and Personal
Assistance Employment Service. In 1999, Lifemark became the fiscal intermediary
for the California Work Opportunities and Responsibility to Kids program,
through a contract with San Francisco County. This program assists low-income
families after their TANF benefits are exhausted. Additionally in 1999, the
Company began fiscal intermediary services for the vision and dental services'
components of the Personal Assistance Employment Service ("PAES"), also through
a contract with San Francisco County. PAES is designed to reduce barriers to
employment and increase the job readiness skills of single, low-income persons.
County of San Diego, Long Term Care Integration Project. In 1999,
Lifemark was awarded a contract to provide consulting services, including long
term care planning services, technical and design assistance, and group
facilitation, for San Diego's Long Term Care Integration Project Planning Grant.
This contract was extended in April 2000 for one year. This project's focus is
to develop a system of care that integrates acute and long term care services
for frail, elderly and disabled residents.
Perinatal Care Network. Since 1990, Lifemark has operated a telephone
referral and care coordination service for low-income pregnant women
participating in the Perinatal Care Network ("PCN"), a program of the County of
San Diego's Health and Human Services Agency. Specifically, the Company has
managed this program's referral service; data management, reporting and
analysis; and provider recruitment and provider relations functions. As a result
of a County directive realigning PCN with an existing County-managed telephone
service, the Company's contract for this program ended on June 30, 2000.
Indiana
Hoosier Healthwise. Since 1994, the Company has been under a contract
with the State of Indiana to provide a variety of administrative services for
Hoosier Healthwise, the statewide managed care Medicaid program serving pregnant
women, children and low-income families. This contract, which continues through
December 2001, includes the services of enrollment broker services, provider
network development for Primary Care Case Management ("PCCM"), member outreach,
education and enrollment, statewide helpline development and operation, database
development and management, and quality improvement activities for both PCCM and
Risk Based Managed Care delivery systems.
SIGNIFICANT CUSTOMERS; PERCENTAGE OF REVENUES
In fiscal year 2000, revenues from the health plan operations accounted
for approximately 90 percent of total revenues. The Lifemark Health Plans'
contract with AHCCCSA represented 40 percent, and the Lifemark of Texas contract
with HCSC represented 33 percent of total revenues, respectively.
RECURRING REVENUE
Lifemark's recurring revenue (defined as revenue generated pursuant to
a multi-year contract or pursuant to an ongoing contract whose nature
contemplates continued renewals) for the three fiscal years ended May 31, 2000,
1999, and 1998 was $145,023,000, $79,582,000, and $65,548,000, respectively, or
97 percent, 93 percent, and 99 percent of total revenues, respectively.
6
<PAGE>
INDUSTRY BACKGROUND
Twelve million people in the United States need some form of long term
care services. Addressing the medical and social needs of this population has
grown to be an estimated $150 billion business annually. The government, through
Medicaid and Medicare, pays 56 percent of these long term care costs, with out
of pocket expenditures (including private long term care insurance) accounting
for 40 percent of these same costs. The Veterans' Administration, philanthropic
organizations and other commercial insurance organizations absorb the remaining
costs associated with long term care. The Company views long term care as a
subset of a larger chronic care segment, with similar skills in care
coordination and health care management being necessary to address the unique
needs of this population. The annual cost of addressing the needs of persons who
are chronically ill is approximately $650 billion. Considering the aging baby
boomers, the prevalence of persons with chronic illness is expected to rise to
over 95 million people and cost $807 billion by 2005.
Historically, addressing long term care and chronic care needs of
adults and children has been based on a fee-for-service model. This model has
been regarded by some as both failing to spend health care dollars efficiently
and failing to meet the needs of the target populations. To address these
shortcomings, many insurance companies, states, counties, and other governing
bodies have begun evaluating alternatives, including turning to cost- and
quality-conscious managed care or coordinated care delivery models for these
special populations. Lifemark has implemented integrated care coordination
strategies to address the needs of its members and to more efficiently spend
limited health funds.
COMPETITION
The movement of nearly every state Medicaid program in the country away
from traditional fee-for-service insurance programs to managed care has
threatened the traditional third party administrator, fiscal intermediary and
state/government contractor companies who stand to lose significant business to
managed care companies. This philosophical and corresponding structural shift
will force current and new contractors to adapt themselves to the managed care
environment by expanding into business segments that Lifemark historically has
served.
Changes in health care also are likely to accelerate the creation of
provider-based delivery systems consisting of providers who traditionally have
served the Medicaid population through fee-for-service programs. As the movement
to managed care continues in the provider community, a large number of physician
practices and groups have turned to management organizations to assist with
their business functions. These management organizations will likely enter the
Medicaid managed care niche. All of the entities discussed by business segment
below will compete to varying degrees with the services offered by Lifemark.
HMOs and Insurance Companies. HMOs and insurance companies, which now
have a significant presence in the states sought by Lifemark, are expected to be
strong competitors. These entities currently may be processing claims for a
State Medicaid agency, or for Medicare as a third-party administrator. In some
cases they may already be participating in regionalized Medicaid or Medicare
managed care programs. These organizations may include major publicly traded
managed care organizations which may have the requisite capital, underwriting
expertise, and provider networks to develop and implement a Medicaid/Medicare
health plan.
7
<PAGE>
Provider Service Organizations. Physician organizations often
collaborate with a strong hospital partner to form managed care entities. Both
hospitals and physicians wish to increase their prospective patient base and to
protect their existing market positions. Physician organizations are attractive
partners for hospitals due to their strength in the provider network area,
influence on contractual issues, and ongoing relationships and experience with
the member and with managed care entities.
Health Care Management Companies. A variety of management and third
party administrator companies have emerged and are expected to continue to
emerge to administer Medicaid and Medicare health plans established by provider
organizations. Although Lifemark is currently one of only a few companies to
have succeeded in multiple states in which all of the state's acute care and
long term care Medicaid recipients are placed in managed care plans, several
other companies have had success in states where some managed care
experimentation and development has occurred.
Care Management Companies. There are a significant number of companies
whose market niche is the intense focus on certain high volume and/or high cost
diseases, and on developing expertise in the management of these populations.
The number of organizations with the ability to accurately identify these
individuals, design and deliver appropriate care management interventions, and
provide improved outcomes has grown significantly in the marketplace.
Specialty Service Companies. There are a growing number of long term
care niche companies and companies that specialize in the provision of specialty
services to vulnerable populations. These companies provide one or more of the
following: national or regional home health care services, including care
management services; eldercare and/or specialty information and referral
services, including those using the Internet as an educational/informational
tool, personal care/attendant care services; enrollment broker services; and
long term care insurance. Potential competitors for these services include EDS,
Maximus, and Birch & Davis, a wholly-owned subsidiary of Affiliated Computer
Services, Inc. (ACS).
Health Care Software and Technology Companies. Computerization of
health management tasks is a relatively new and growing industry. Although there
are companies that develop software with care management as a component, many of
these companies may not emphasize the long term care continuum. Lifemark
believes that companies with experience in developing health management software
programs or case management tools will compete vigorously for clients needing
specialized care management software.
Lifemark believes that the principal factors affecting competition in
all of its lines of business are customer service, customer focus, performance
track record, employee expertise, competitive pricing, and corporate reputation.
Strength in these areas is gained over time by seasoned companies which have
refined their services to meet the needs of their clients and have been
sensitive to the changing needs of a dynamic market. Lifemark has eleven years
of dedicated service to persons who need long term care or who are chronically
ill and has had consistently steady growth in its total enrollment statistics.
Through its ownership and/or management of health plans and diversified
services, and its software and technology initiatives, the Company believes it
is advancing towards its goal of being a leader in the long term care service
industry.
EMPLOYEES
On May 31, 2000, the Company employed 607 full-time employees and 333
part-time employees. Of the part-time employees, 331 provided direct services
for Lifemark's subsidiary, Lifemark at Home, Inc. None of the Company's
employees is represented by a union.
8
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company is set
forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
---- --- ----------------
<S> <C> <C>
Rhonda E. Brede 43 President, Chief Executive Officer and Director
David G. Decker 39 Chief Information Officer
Richard M. Jelinek 34 Executive Vice President
Michael J. Kennedy 44 Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
</TABLE>
Rhonda E. Brede, age 43, has been president, chief executive officer
and director of the Company since November 1999. She had been president and
chief operating officer since July 1999. She also has been the chief executive
officer of Ventana and AHC since 1998. Ms. Brede was a senior vice president of
the Company from 1996 through 1999. She was the executive director for Ventana
from 1993 through 1996. From 1989 through 1993, she held several positions with
Ventana.
David G. Decker, age 39, has been chief information officer since May
1997. He was previously employed by Samaritan Health System in Phoenix, Arizona,
where he was the director of application development from 1993 to 1997, the
manager of patient accounting systems from 1991 to 1993, and a
programmer/analyst from 1990 to 1991.
Richard M. Jelinek, age 34, has been executive vice president since
September 1999. From 1997 to 1999 he served as the Company's senior vice
president. From 1996 to 1997 he was regional vice president, from 1995 to 1996
vice president of managed care and division head, and from 1994 to 1995 program
director for the Company's Indiana project. From 1992 to 1994 he was the
administrator for new product development at the Henry Ford Health System and
Health Alliance Plan in Detroit, Michigan.
Michael J. Kennedy, age 44, has been chief financial officer since
April 1996. He was vice president and treasurer of In Home Health, Inc. from
1993 to 1996, vice president and controller of In Home Health, Inc. from 1991 to
1993, and controller from 1989 to 1991. From 1978 to 1989, he was with Deloitte
and Touche as a certified public accountant.
ITEM 2. PROPERTIES
The Company's executive offices are located in Phoenix, Arizona, in
approximately 54,000 square feet of leased space. The Company leases 20 other
offices in various locations in Arizona, Arkansas, California, Indiana,
Michigan, New Mexico and Texas. The Company's leased properties are suitable and
adequate for its current needs and additional space is expected to be available
as needed at prevailing rates.
ITEM 3. LEGAL PROCEEDINGS
The Company has been notified by RGHMO that it will pursue a claim
against the Company arising out of the following circumstances. Prior to
December 1999, the Company had a non-risk sharing administrative services
agreement with RGHMO, a wholly-owned subsidiary of HCSC. Under the agreement,
the Company administered RGHMO's STAR+PLUS operations in Texas and was
responsible, among other things, for developing and maintaining RGHMO's provider
network and for administering the claims adjudication and payment functions. On
July 5, 1997, RGHMO entered into an agreement for medical services with
Universal Healthplan, Inc. ("Universal"), a Texas health maintenance
organization. The agreement provided for Universal to provide hospitalization
services to RGHMO members through Universal's contract with Tenet Health Care
Ltd. ("Tenet"), a hospital chain. Tenet asserts that RGHMO owes it approximately
$6,500,000 for claims allegedly improperly denied or paid at incorrect rates. On
July 1, 1999, Tenet filed a demand for arbitration against RGHMO to recover such
amounts.
9
<PAGE>
On March 23, 2000, RGHMO filed a demand for arbitration against the
Company in the same arbitration alleging that because the Company is responsible
for claim adjudication, the Company should be responsible for any amount
determined by the arbitrators to be due to Tenet. The Company moved to be
severed from the arbitration and the arbitration panel granted the motion. The
arbitration continues to be litigated and no decision has yet been rendered.
RGHMO has notified the Company that if there is an adverse result in the
arbitration, it will commence an arbitration action to recover from the Company
the amount of the judgement rendered in favor of Tenet. The Company believes its
adjudication of the Tenet claims on RGHMO's behalf was appropriate and Tenet was
paid what it was owed. Accordingly, if an arbitration is commenced by RGHMO, the
Company intends to vigorously assert its position in this manner.
The Company is a party to various claims and legal proceedings which
management believes are in the normal course of business and will not involve
any material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is registered under Section 12(g) of the
Securities Exchange Act of 1934 and is traded on the Nasdaq National Market
under the symbol "LMRK". As of, July 25, 2000, there were 376 record holders of
the common stock.
The high and low closing sale prices for the common stock as reported
by the Nasdaq National Market during fiscal years 2000 and 1999 are set forth
below.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year 1999
First Quarter $ 8.00 $ 3.38
Second Quarter 5.88 3.88
Third Quarter 6.00 4.00
Fourth Quarter 5.00 3.38
Fiscal Year 2000
First Quarter $ 5.00 $ 2.75
Second Quarter 3.50 2.12
Third Quarter 3.75 2.94
Fourth Quarter 5.88 3.25
</TABLE>
These prices do not include retail markups, markdowns, or commissions
and may not represent actual transactions. The Company did not pay any dividends
in fiscal years 2000 or 1999. The Company intends to reinvest any earnings in
continued expansion and does not expect to pay cash dividends in the foreseeable
future.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(Dollars and Shares in Thousands, except per share amounts)
STATEMENT OF INCOME DATA
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $149,604 $ 85,392 $ 65,994 $ 63,790 $ 23,192
Operating income (loss) 2,791 2,066 818 (1,582) (2,799)
Income (loss) from continuing operations 2,433 1,953 832 (911) (2,214)
Income (loss) from continuing operations
per share - basic 0.50 0.41 0.19 (0.21) (0.82)
Income (loss) from continuing operations
per share - assuming dilution 0.47 0.36 0.18 (0.21) (0.82)
Cash dividends per share -- -- -- -- 0.14
Weighted average common shares outstanding 4,829 4,737 4,476 4,365 2,702
Weighted average common and common
equivalent shares outstanding 5,356 5,867 5,639 4,365 2,702
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
May 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ 3,381 $ 7,163 $ 4,972 $ 2,811 $ (2,350)
Total assets 58,903 34,820 31,723 28,017 27,816
Long-term debt, excluding current portion 3,241 3,651 3,961 3,710 516
Stockholders' equity 18,533 15,903 13,503 11,470 12,194
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table indicates the percentage relationship of income
and expense items to revenue as set forth in the Company's consolidated
statements of operations and the percentage changes from year to year.
<TABLE>
<CAPTION>
Percent of Revenues Percent Change
------------------- --------------
2000 1999 1998 1999 to 2000 1998 to 1999
------ ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 75.2% 29.4%
----- ----- -----
Direct cost of operations 84.6 75.2 79.6 97.0 22.4
Marketing, sales and administrative 13.5 22.4 19.2 6.2 50.6
----- ----- -----
Total costs and expenses 98.1 97.6 98.8 76.2 27.8
----- ----- -----
Operating income 1.9 2.4 1.2 35.1 152.6
</TABLE>
11
<PAGE>
Consolidated revenues increased 75 percent and 29 percent to
$149,604,000 and $85,392,000 for fiscal years 2000 and 1999, respectively.
Direct cost of operations increased 97 percent and 22 percent to $126,542,000
and $64,239,000 in fiscal years 2000 and 1999, respectively. The direct cost of
operations as a percentage of revenue was 85 percent, 75 percent and 80 percent
in fiscal years 2000, 1999 and 1998, respectively. The increase in both revenues
and direct costs of operations in fiscal year 2000 was primarily due to the
financial risk-sharing agreement signed with RGHMO and growth in enrollment in
all health plans. The increase in both revenues and direct costs in fiscal year
1999 was attributable to growth in enrollment in certain plans covered by
management contracts, coupled with growth in membership of Ventana and AHC.
Health Plan Operations-Risk Contracts. Health plan operations-risk
contracts, which consists of the operations of Ventana, AHC and Lifemark of
Texas, generated combined revenues of $113,986,000, $46,041,000 and $39,772,000
for fiscal years 2000, 1999 and 1998, respectively. The increase in fiscal year
2000 is primarily a result of entering into a financial risk-sharing
relationship with RGHMO, which accounted for $53,423,000. Also contributing to
the increase, was the growth in VHS membership mainly due to expansion of
services into Yuma and Coconino counties, which accounts for approximately
$8,000,000 of the revenue increase. The increase in fiscal year 1999 was
primarily due to the increase in membership in Ventana and AHC, along with an
increase in the capitation rate received from the State of Arizona.
Direct costs of operations related to health plan operations-risk
contracts were $107,040,000, $42,295,000, and $35,619,000 for fiscal years 2000,
1999 and 1998, respectively. The increase in fiscal year 2000 was a result of
the financial risk-sharing agreement with RGHMO, which accounted for
$50,661,000, and growth in enrollment in both Ventana and AHC. The aggregated
membership of Ventana and AHC increased by 22 percent and 13 percent, for fiscal
years 2000 and 1999, respectively. The direct costs of health plan
operations-risk contracts as a percentage of related revenue for fiscal years
2000, 1999 and 1998 was 94 percent, 92 percent, and 90 percent, respectively.
The increase in this percentage was due to the start up costs of Lifemark of
Texas.
Health Plan Operations-Management Contracts. Health plan
operations-management contracts, which consists of the operations of Lovelace,
Community Choice Michigan and AlohaCare, generated revenues of $21,113,000,
$26,911,000 and $16,751,000 for fiscal years 2000, 1999 and 1998, respectively.
The decrease in revenues from 1999 to 2000 was primarily due to the new
transitional administrative service agreement with AlohaCare, as well as the
modification of the contract with RGHMO under which those revenues became part
of health plan operations-risk contracts. The increase in revenues from 1998 to
1999 was due to increased enrollment in RGHMO, Community Choice Michigan and
Lovelace.
Direct cost of operations related to health plan operations-management
contracts was $9,808,000, $13,640,000 and $11,093,000 for fiscal years 2000,
1999 and 1998, respectively. The decrease in fiscal year 2000 was largely due to
the reduced costs of the new transitional administrative service agreement with
AlohaCare and entering into a financial risk sharing relationship with RGHMO,
under which those direct costs became part of health plan operations-risk
contracts. The increase in 1999 was due to the completion of a full year under
the RGHMO management contract. The direct costs of health plan
operations-management contracts as a percentage of revenue for fiscal years
2000, 1999 and 1998 was 46 percent, 51 percent, and 66 percent, respectively.
Diversified Services. Diversified services, which consist of the
operations of Lifemark at Home, Lifemark Care Connection (formerly AdviNet), the
California programs, and Indiana PCCM, generated revenues of $14,505,000,
$12,440,000 and $9,471,000 for fiscal years 2000, 1999 and 1998, respectively.
The growth in fiscal year 2000 is due to continued expansion of Lifemark at Home
through the purchase of Valleywide Attendant Care and the acquisition of
Lifemark Care Connection in March 1999. The increase in fiscal year 1999 was due
to the expansion of Lifemark at Home and growth in revenues from the Indiana
program.
12
<PAGE>
Direct costs of operations related to diversified services was
$9,694,000, $8,304,000 and $5,788,000 for fiscal year 2000, 1999 and 1998,
respectively. The increase in all fiscal years was due to growth in the
diversified programs as well as the acquisition of Lifemark Care Connection. The
direct costs of diversified services as a percentage of revenue for fiscal year
2000, 1999 and 1998 were 67 percent, 67 percent, and 61 percent, respectively.
Interest Income. Interest income for fiscal years 2000, 1999 and 1998
was $1,868,000, $957,000 and $856,000, respectively. The increase from 1999 to
2000 is a result of increased levels of cash and investments and the recognition
of interest income associated with the RGHMO risk-sharing agreement. The
increase from 1998 to 1999 primarily relates to increased levels of cash and
investments held by the Company.
Interest Expense. Interest expense of $418,000, $365,000 and $377,000
during fiscal years 2000, 1999 and 1998, respectively, is primarily attributable
to outstanding debt maintained by the Company which consists of notes
outstanding initially with HCSC and refinanced with a bank, and the Brown GST
Trust for principal amounts of $3,000,000 and $300,000, respectively.
Income Taxes. The income tax expense was $1,808,000, $705,000, and
$465,000 for fiscal years 2000, 1999, and 1998, respectively. The effective tax
rate for fiscal year 2000 was 43 percent. The increase over the statutory rate
is primarily the result of non-deductible goodwill expense. The effective tax
rate for 1999 and 1998 was 27 percent and 36 percent, respectively, and for both
years reflected a reduction in the deferred tax asset valuation allowance
partially offset by amortization of non-deductible expenses, including $365,000
of goodwill expense. See Note 10 to Consolidated Financial Statements for
additional information.
Net Income. Net income was $2,433,000, $1,953,000 and $832,000 in
fiscal years 2000, 1999 and 1998, respectively. The increase in net income in
fiscal year 2000 is primarily due to increased profitability from the AlohaCare
contract and a reduction in administrative costs as a percentage of related
revenue offset by losses attributable to the financial risk-sharing agreement
with RGHMO. The increase in net income for fiscal year 1999 is primarily due to
completion of a full year of the contract with RGHMO and significant increases
in membership in the Community Choice Michigan and Lovelace contracts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $5,413,000 to
$19,205,000, and $1,028,000 to $13,792,000 at May 31, 2000 and 1999,
respectively. Restricted cash increased $1,922,000 to $11,635,000 at May 31,
2000 and $706,000 to $9,713,000 at May 31, 1999. Operating activities generated
$12,902,000, $1,360,000 and $6,560,000 during fiscal years 2000, 1999 and 1998,
respectively. The change from fiscal year 1999 to fiscal year 2000 is a result
of earnings of $2,433,000, an increase in accrued medical claims primarily
related to Lifemark of Texas operations of $19,119,000, and an increase in
accrued expenses of $1,860,000 due primarily to a refundable deposit of $650,000
obtained from AlohaCare pursuant to the terms of the administrative services
agreement. The growth in cash was partially offset by an increase in accounts
receivable of $13,390,000 related in part to the financial risk-sharing
agreement with RGHMO and a payment of $710,000 in accrued interest associated
with the $3,000,000 convertible debt with HCSC. The significant reasons for the
change from fiscal year 1998 to fiscal year 1999 were income from operations and
increases in accrued medical claims and accrued compensation offset by decreases
in risk pool payables and accrued expenses and the increase in accounts
receivable. The change during fiscal year 1998 was due to income from
operations, decreases in risk pool receivables and prepaid expenses including
approximately $1,500,000 of prepaid income taxes and an increase in accrued
compensation of $679,000.
13
<PAGE>
Investing activities used $6,854,000, $687,000, and $2,002,000 in
fiscal years 2000, 1999 and 1998, respectively. The primary use of funds during
fiscal year 2000 was the purchase of property and equipment of $2,709,000 and
the increase in assets securing performance bonds of $5,537,000. The purchases
of property and equipment was mostly a result of capitalized costs related to
the implementation of new claims processing software. The increase in
performance bonds was due to the expansion of Ventana into Yuma and Coconino
counties and the purchase of a certificate of deposit pursuant to the terms of
the financial risk-sharing agreement with RGHMO. The primary sources of funds
were the receipt of payments on notes receivable of $568,000, primarily from
related parties, proceeds received from the maturity of short-term investments
and proceeds from the sale of property and equipment. The primary uses of funds
during 1999 were purchases of property and equipment of $1,577,000 and an
increase in assets securing performance bonds of $409,000, offset by the
maturity of short-term investments of $1,009,000. The principal use of funds
during fiscal year 1998 was the purchase of fixed assets of $2,509,000.
Financing activities used $635,000 during fiscal year 2000 and
generated $355,000 and $994,000 during fiscal years 1999 and 1998, respectively.
The principal use of funds in fiscal year 2000 was the Company's repayment of
its $3,000,000 convertible loan to HCSC and additional payments on other
outstanding debt of approximately $1,000,000. The issuance of common stock
provided $215,000 during fiscal year 2000. The principal source of funds in
fiscal year 1999 was the issuance of common stock through the stock option and
employee stock purchase plans, along with borrowings under an interim funding
agreement with Wells Fargo Bank, for the purchase and implementation of software
necessary to improve operational efficiencies. The primary source of funds in
fiscal year 1998 was the sale of 200,000 shares of common stock at $5.00 per
share to Beverly Enterprises, Inc. On December 22, 1999, the Company signed an
agreement with Imperial Bank to refinance the existing debt with HCSC. The loan
has an original term of four years and bears interest at a rate of prime plus
0.375 percent per annum. The loan is secured by certain assets of Lifemark
Corporation. The agreement includes several financial covenants with which the
Company was in compliance as of May 31, 2000.
Ventana and AHC are subject to state regulations, which require
compliance with certain net worth, reserve and deposit requirements. To the
extent Ventana and AHC must comply with these regulations, they may not have the
financial flexibility to transfer funds to Lifemark. Additionally, Lifemark has
pledged a certificate of deposit to secure its obligations under the contract to
share financial risk with RGHMO in the STAR+PLUS program in Harris County,
Texas. Lifemark's proportionate share of net assets (after inter-company
eliminations) which, at May 31, 2000 and 1999, may not be transferred to
Lifemark by subsidiaries in the form of loans, advances or cash dividends
without the consent of a third party is referred to as "Restricted Net Assets".
Total Restricted Net Assets of these operating subsidiaries were $8,632,000 and
$10,378,000 at May 31, 2000 and 1999, respectively, with deposit and reserve
requirements (performance bonds) representing $6,823,000 and $4,203,000,
respectively, of the Restricted Net Assets and net worth requirements, in excess
of deposit and reserve requirements, representing the remaining $1,809,000 and
$6,175,000, respectively. In 1994, Ventana provided funds to the Company under
two separate loans. The remaining principal outstanding under these loans was
repaid during fiscal year 2000. All such loan agreements were pre-approved as
required by AHCCCSA.
The Company believes that its existing capital resources and cash flow
generated from future operations will enable it to maintain its current level of
operations and its planned operations, including capital expenditures, in fiscal
year 2001.
YEAR 2000 ISSUES
There were no significant disruptions to Company operations as a result
of year 2000 issues.
IMPACT OF INFLATION
To date, the rate of inflation has not had a material impact on the
Company's results of operations.
14
<PAGE>
FORWARD-LOOKING INFORMATION
This report contains both historical and forward-looking information.
Forward-looking statements include, but are not limited to, discussion of the
Company's strategic goals, new contracts, possible expansion of existing plans,
expected increase in certain expenses, and cash flow. These statements speak of
the Company's plans, goals or expectations and refer to estimates. The
forward-looking statements may be significantly impacted by risks and
uncertainties, and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). There can
be no assurance that anticipated future results will be achieved because actual
results may differ materially from those projected in the forward-looking
statements. Readers are cautioned that a number of factors, which are described
herein, could adversely affect the Company's ability to obtain these results.
These include the effects of either federal or state health care reform or other
legislation; changes in reimbursement system trends; the ability of care
providers (including physician practice management groups) to comply with
current contract terms; and renewal of the Company's contracts with various
state and other governmental entities. Such factors also include the effects of
other general business conditions, including but not limited to, government
regulation, competition and general economic conditions. The cautionary
statements made pursuant to the Reform Act herein and elsewhere by the Company
should not be construed as exhaustive or as any admission regarding the adequacy
of disclosures made by the Company prior to the effective date of the Reform
Act. The Company cannot always predict what factors could cause actual results
to differ materially from those indicated by the forward-looking statements. In
addition, readers are urged to consider statements that include the terms
"believes", "belief", "expects", "plans", "objectives", "anticipates",
"intends", or the like, to be uncertain and forward-looking.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the
ordinary course of business on certain assets and liabilities including cash and
cash equivalents, short-term investments and long-term debt. The Company's
variable rate debt relates to the bank note as well as borrowings under their
software financing arrangement, which are primarily vulnerable to movements in
the prime rate. The Company does not expect changes in interest rates to have a
significant effect on the Company's operations, cash flow or financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is attached as referenced under
item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information required under this item with respect to directors is
contained in the sections entitled "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's 2000 Proxy
Statement, which are incorporated herein by reference.
Information concerning executive officers is set forth in the section
entitled "Executive Officers of the Registrant" in Part I of this Form 10-K
pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item will be contained in the section
entitled "Compensation" in the Company's 2000 Proxy Statement, which is
incorporated herein by reference.
15
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the section
entitled "Common Stock Ownership by Management" in the Company's 2000 Proxy
Statement, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is contained in the sections
entitled "Compensation - Employment Agreements" and "Compensation and Stock
Option Committee Interlocks and Insider Participation" in the Company's 2000
Proxy Statement, which are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report
The Consolidated Financial Statements and Financial Statement Schedules
filed with this Form 10-K are listed below with their location in this
report and are included in Item 8 above.
1. Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants............................... 22
Consolidated Balance Sheet - May 31, 2000 and 1999.............. 23
Consolidated Statement of Income -
Years Ended May 31, 2000, 1999 and 1998.................... 24
Consolidated Statement of Changes in Stockholders Equity -
Years Ended May 31, 2000, 1999 and 1998.................... 25
Consolidated Statement of Cash Flows -
Years Ended May 31, 2000, 1999 and 1998.................... 26
Notes to Consolidated Financial Statements...................... 27
</TABLE>
2. Financial Statement Schedules
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule I. Condensed Financial Information of the Registrant.. 45
Schedule II. Valuation and Qualifying Accounts.................. 49
</TABLE>
All schedules, other than those indicated above, are omitted because of
the absence of the conditions under which they are required or because
the information required is shown in the consolidated financial
statements or notes thereto.
16
<PAGE>
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger by and among Ventana
Health Systems, Inc., Arizona Health Concepts, Inc.,
Managed Care Solutions, Inc., VHS Managed Care Merger
Sub, Inc., AHC Managed Care Merger Sub, Inc., MCS
Managed Care Merger Sub, Inc. and the registrant (1)
</TABLE>
<TABLE>
<S> <C>
3.1 (a) Conformed Certificate of Incorporation of the
registrant, as amended (2)
(b) Conformed Certificate of Ownership and Merger of
Lifemark Incorporated into Managed Care Solutions,
Inc.(3)
3.2 (a) Restated Bylaws (4)
(b) Conformed Bylaws (5)
10.1 Administrative Services Agreement between the registrant
and the County of San Diego, California (6)
10.2 (a) Contract between Ventana Health Systems and Arizona
Health Care Cost Containment System (7)
(b) Contract Amendment 1 to the contract between
Ventana Health Systems and Arizona Health Care Cost
Containment System (8)
(c) Solicitation Amendment 1 between Ventana Health
Systems and Arizona Health Care Cost Containment
System (9)
(d) Solicitation Amendment 2 to contract between
Ventana Health Systems and Arizona Health Care Cost
Containment System (10)
(e) Solicitation Amendment 3 to contract between
Ventana Health Systems and Arizona Health Care Cost
Containment System (11)
10.3 Administrative contract between Arizona Health Concepts,
Inc. and Arizona Health Care Cost Containment System (12)
10.4 Agreement between the registrant and the State of Indiana
(13)
10.5 (a) Administrative Services contract between registrant
and Community Choice Michigan (14)
(b) First Amendment to Administrative Services contract
between registrant and Community Choice Michigan
(15)
(c) Second Amendment to Administrative Services
contract between registrant and Community Choice
Michigan (16)
10.6 (a) Health Services Agreement between Rio Grande HMO,
Inc. and Lifemark of Texas, Inc. (17)
(b) Amended and Restated Administrative Services
Agreement between RioGrande HMO, Inc. and the
Registrant. (18)
(c) Administrative Services Agreement between
registrant and Rio Grande HMO, Inc. (a subsidiary
of Blue Cross Blue Shield of Texas, Inc.) (19)
(d) Amendment to Administrative Services Agreement
between registrant and Rio Grande HMO, Inc. (a
subsidiary of Blue Cross Blue Shield of Texas,
Inc.) (20)
10.7 (a) Administrative Services Agreement between
registrant and Lovelace Community Health Systems,
Inc. (21)
(b) Amendment to the Administrative Services Agreement
between the registrant and Lovelace Health Systems
Inc. (22)
10.8 Loan Agreement between the registrant and Blue Cross Blue
Shield of Texas, Inc. (23)
10.9 Loan Agreement between the registrant and William Gardner
Brown Trust (24)
10.10 (a) Lease Agreement between registrant and Pivotal
Simon Office XVI, LLC (25)
(b) First Amendment to Lease Agreement between
registrant and Pivotal Simon Office XVI, LLC (26)
(c) Amended and Restated Second Amendment to Lease
Agreement between registrant and Pivotal Simon
Office XVI, LLC (27)
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
10.11 Employment Agreement between the registrant and Michael
D. Hernandez* (28)
10.12 (a) Administrative Services Agreement between
AlohaCare, Inc. and the registrant (29)
10.13 (b) Administrative Services Agreement between
registrant and AlohaCare (30)
(c) Second Amendment to contract between registrant and
AlohaCare (31)
(d) Fourth Amendment to contract between registrant and
AlohaCare (32)
10.14 Contract between registrant and State of California
Managed Risk Medical Insurance Board (33)
10.15 Form of Indemnification Contract between the registrant
and its officers and directors* (34)
10.16 Purchase Agreement between the registrant and Beverly
Enterprises, Inc. (35)
10.17 The Company's 1996 Stock Option Plan* (36)
10.18 The Company's 1995 Stock Option Plan, as amended* (37)
10.19 The Company's 1995 Directors' Stock Option Plan* (38)
10.20 The Company's 1996 Non-Employee Director Stock Option
Plan* (39)
10.21 The Company's 1998 CEO Stock Option Plan* (40)
10.22 (a) The Company's Employee Stock Purchase Plan* (41)
(b) Amendment to the registrant's Employee Stock
Purchase Plan* (42)
(c) Second Amendment to the Employee Stock Purchase
Plan*
(d) Third Amendment to the Employee Stock Purchase
Plan*
10.23 Pledge Agreement and Promissory Note between Rhonda E.
Brede and the registrant. (43)
10.24 Pledge Agreement and Promissory Note between Michael J.
Kennedy and the registrant. (44)
10.25 Pledge Agreement and Promissory Note between Richard M.
Jelinek and the registrant. (45)
10.26 Pledge Agreement and Promissory Note between David G.
Decker and the registrant. (46)
10.27 (a) Employment and Severance Agreement between Rhonda
E. Brede and the registrant.* (47)
(b) Amendment to the Employment and Severance Agreement
between Rhonda E. Brede and the Registrant.*
10.28 (a) Employment Agreement between Richard M. Jelinek and
the registrant.* (48)
(b) Amendment to the Employment Agreement between
Richard M. Jelinek and the Registrant.*
10.29 (a) Employment Agreement between David G. Decker and
the registrant.* (49)
(b) Amendment to the Employment Agreement between David
G. Decker and the Registrant.*
10.30 (a) Employment Agreement between Michael J. Kennedy and
the registrant.* (50)
(b) Amendment to the Employment Agreement between
Michael J. Kennedy and the Registrant.*
10.31 Severance Agreement between Richard M. Jelinek and the
registrant. * (51)
10.32 Severance Agreement between David G. Decker and the
registrant. * (52)
10.33 Severance Agreement between Michael J. Kennedy and the
registrant.* (53)
21 Subsidiaries of the registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
* Indicates exhibits which constitute management contracts or
compensatory plans or agreements.
(1) Incorporated by reference to Exhibit 2 to the registrant's Registration
Statement Number 333-558 on Form S-4.
(2) Incorporated by reference to Exhibit 4(a)(5) to the registrant's
Registration Statement Number 333-04981 on Form S-8.
18
<PAGE>
(3) Incorporated by reference to Exhibit 3.1(b) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1999.
(4) Incorporated by reference to Exhibit 4(b)(3) to the registrant's
Registration Statement Number 333-04981 on Form S-8.
(5) Incorporated by reference to Exhibit 3.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(6) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1997.
(7) Incorporated by reference to Exhibit 10.9(a) filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1996.
(8) Incorporated by reference to Exhibit 10.9(a)(1) filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1996.
(9) Incorporated by reference to Exhibit 10.9(a)(2) filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1996.
(10) Incorporated by reference to Exhibit 10.9(a)(3) filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1996.
(11) Incorporated by reference to Exhibit 10.9(a)(4) filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1996.
(12) Incorporated by reference to Exhibit 10.2 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1997.
(13) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended February 28, 1998.
(14) Incorporated by reference to Exhibit 10.12(a) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(15) Incorporated by reference to Exhibit 10.12(a)(1) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(16) Incorporated by reference to Exhibit 10.12(a)(2) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(17) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended February 29, 2000.
(18) Incorporated by reference to Exhibit 10.2 files as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended February 29, 2000.
(19) Incorporated by reference to Exhibit 10.6 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1997.
(20) Incorporated by reference to Exhibit 10.6(b) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1998.
(21) Incorporated by reference to Exhibit 10.7 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1997.
(22) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1998.
(23) Incorporated by reference to Exhibit 10.2 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.
(24) Incorporated by reference to Exhibit 10.3 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.
(25) Incorporated by reference to Exhibit 10.4 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.
(26) Incorporated by reference to Exhibit 10.10(b) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1998.
(27) Incorporated by reference to Exhibit 10.10(c) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1998.
(28) Incorporated by reference to Exhibit 10.12 filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1998.
(29) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
19
<PAGE>
(30) Incorporated by reference to Exhibit 10.16 filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(31) Incorporated by reference to Exhibit 10.12(b) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1997.
(32) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended August 31, 1997.
(33) Incorporated by reference to Exhibit 10.13 filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1997.
(34) Incorporated by reference to Exhibit 10.24 to the registrant's
Registration Statement Number 33-41253.
(35) Incorporated by reference to Exhibit 10.2 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended February 28, 1998.
(36) Incorporated by reference to Exhibit 10.4 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
(37) Incorporated by reference to Exhibit 10.5 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
(38) Incorporated by reference to Exhibit 10.6 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
(39) Incorporated by reference to Exhibit 10.20 filed as part of
registrant's Annual Report on Form 10-K for the year ended May 31,
1998.
(40) Incorporated by reference to Exhibit 10.3 filed as part of registrant's
Quarterly Report on Form 10-Q/A for the quarter ended February 28,
1998.
(41) Incorporated by reference to Exhibit 10.7 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
(42) Incorporated by reference to Exhibit 10.3 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended August 31, 1997.
(43) Incorporated by reference to Exhibit 10.2 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(44) Incorporated by reference to Exhibit 10.3 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(45) Incorporated by reference to Exhibit 10.4 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(46) Incorporated by reference to Exhibit 10.5 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(47) Incorporated by reference to Exhibit 10.6 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(48) Incorporated by reference to Exhibit 10.7 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(49) Incorporated by reference to Exhibit 10.8 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(50) Incorporated by reference to Exhibit 10.9 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(51) Incorporated by reference to Exhibit 10.10 filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1999.
(52) Incorporated by reference to Exhibit 10.11 filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1999.
(53) Incorporated by reference to Exhibit 10.12 filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1999.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Phoenix, Arizona.
LIFEMARK CORPORATION
By: /s/ Rhonda E. Brede
-----------------------------------------
Rhonda E. Brede
President, Chief Executive Officer and
Director
(Principal Executive Officer)
Dated: August 18, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date set forth above.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Rhonda E. Brede President, Chief Executive Officer August 18, 2000
------------------------------------ and Director
Rhonda E. Brede (Principal Executive Officer)
/s/ Michael J. Kennedy Vice President and Chief Financial August 18, 2000
------------------------------------ Officer (Principal Financial and
Michael J. Kennedy Accounting Officer)
/s/ Richard C. Jelinek Chairman of the Board and Director August 18, 2000
------------------------------------
Richard C. Jelinek
/s/ John G. Lingenfelter Vice Chairman and Director August 18, 2000
------------------------------------
John G. Lingenfelter, M.D.
/s/ William G. Brown Director August 18, 2000
------------------------------------
William G. Brown
/s/ Henry H. Kaldenbaugh Director August 18, 2000
------------------------------------
Henry H. Kaldenbaugh, M.D.
/s/ Risa J. Lavizzo-Mourey Director August 18, 2000
------------------------------------
Risa J. Lavizzo-Mourey, M.D.
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Lifemark Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1) on page 16 present fairly, in all material
respects, the financial position of Lifemark Corporation and its subsidiaries at
May 31, 2000 and 1999, and the results of their operations and their cash flows
for each of the three years in the period ended May 31, 2000, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedules listed in the index appearing
under Item 14 (a) (2) on page 16 present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Phoenix, Arizona
July 24, 2000
22
<PAGE>
LIFEMARK CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MAY 31,
-------
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash
of $11,635,000 and $9,713,000, respectively $ 19,205,000 $ 13,792,000
Short-term investments -- 501,000
Accounts and notes receivable and unbilled services, net 19,276,000 5,886,000
Deferred income taxes 1,245,000 1,213,000
Prepaid expenses and other current assets 729,000 882,000
------------ ------------
Total current assets 40,455,000 22,274,000
Related party notes receivable -- 568,000
Property and equipment, net 6,331,000 4,205,000
Performance bonds 9,740,000 4,203,000
Goodwill, net 2,097,000 2,462,000
Other assets 280,000 1,108,000
------------ ------------
Total assets $ 58,903,000 $ 34,820,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 912,000 $ 659,000
Accrued medical claims 27,781,000 8,662,000
Risk pool payables 455,000 691,000
Related party risk pool payables 154,000 152,000
Accrued compensation 2,889,000 2,464,000
Other accrued expenses 3,610,000 1,750,000
Related party interest payable -- 710,000
Current portion of long-term debt 1,273,000 23,000
------------ ------------
Total current liabilities 37,074,000 15,111,000
Long-term debt 2,941,000 211,000
Related party long-term debt 300,000 3,440,000
Deferred income taxes 55,000 155,000
------------ ------------
Total liabilities 40,370,000 18,917,000
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - 5,118,000 and 4,808,000 shares,
respectively 51,000 48,000
Capital in excess of par value 17,050,000 16,148,000
Stockholder notes receivable (708,000) --
Retained earnings (accumulated deficit) 2,140,000 (293,000)
------------ ------------
Total stockholders' equity 18,533,000 15,903,000
------------ ------------
$ 58,903,000 $ 34,820,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
LIFEMARK CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
---------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenues $ 149,604,000 $ 85,392,000 $ 65,994,000
------------- ------------- -------------
Direct cost of operations 126,542,000 64,239,000 52,500,000
Marketing, sales and administrative 20,271,000 19,087,000 12,676,000
------------- ------------- -------------
Total costs and expenses 146,813,000 83,326,000 65,176,000
------------- ------------- -------------
Operating income 2,791,000 2,066,000 818,000
------------- ------------- -------------
Interest income 1,868,000 957,000 856,000
Interest expense (418,000) (365,000) (377,000)
------------- ------------- -------------
Net interest income 1,450,000 592,000 479,000
------------- ------------- -------------
Income before income taxes 4,241,000 2,658,000 1,297,000
Provision for income taxes 1,808,000 705,000 465,000
------------- ------------- -------------
Net income $ 2,433,000 $ 1,953,000 $ 832,000
============= ============= =============
Net income per share - basic $ 0.50 $ 0.41 $ 0.19
============= ============= =============
Weighted average common
shares outstanding 4,829,000 4,737,000 4,476,000
============= ============= =============
Net income per share - assuming
dilution $ 0.47 $ 0.36 $ 0.18
============= ============= =============
Weighted average common and
common equivalent shares outstanding 5,356,000 5,867,000 5,639,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
LIFEMARK CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Capital in
--------------- ------------ Excess
Shares Par Value Shares Par Value of Par Value
------ --------- ------ --------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1997 7 $ 7,000 4,394,000 $ 44,000 $ 14,497,000
Net income -- -- -- -- --
Redemption of preferred stock (7) (7,000) -- -- --
Issuance of common stock:
Employee stock purchase plan -- -- 62,000 1,000 161,000
Employee stock option plan -- -- 15,000 -- 50,000
Stock issued to Beverly Enterprises -- -- 200,000 2,000 994,000
-------- -------- --------- --------- ------------
BALANCE, MAY 31, 1998 -- -- 4,671,000 47,000 15,702,000
Net income -- -- -- -- --
Issuance of common stock:
Employee stock purchase plan -- -- 80,000 1,000 278,000
Employee stock option plan -- -- 132,000 1,000 432,000
Repurchase of common stock -- -- (75,000) (1,000) (375,000)
Tax benefit from exercise of stock options -- -- -- -- 111,000
-------- -------- --------- --------- ------------
BALANCE, MAY 31, 1999 -- -- 4,808,000 48,000 16,148,000
Net income -- -- -- -- --
Issuance of common stock:
Employee stock purchase plan -- -- 75,000 1,000 214,000
Employee stock option plan -- -- 235,000 2,000 688,000
Interest accrued on stockholder notes
receivables -- -- -- -- --
-------- -------- --------- --------- ------------
BALANCE, MAY 31, 2000 -- $ -- 5,118,000 $ 51,000 $ 17,050,000
======== ======== ========= ========= ============
</TABLE>
<TABLE>
<CAPTION>
Retained
Stockholder Earnings
Notes (Accumulated
Receivables Deficit) Total
----------- -------- -----
<S> <C> <C> <C>
BALANCE, MAY 31, 1997 $ -- $ (3,078,000) $ 11,470,000
Net income -- 832,000 832,000
Redemption of preferred stock -- -- (7,000)
Issuance of common stock:
Employee stock purchase plan -- -- 162,000
Employee stock option plan -- -- 50,000
Stock issued to Beverly Enterprises -- -- 996,000
--------- ------------ ------------
BALANCE, MAY 31, 1998 -- (2,246,000) 13,503,000
Net income -- 1,953,000 1,953,000
Issuance of common stock:
Employee stock purchase plan -- -- 279,000
Employee stock option plan -- -- 433,000
Repurchase of common stock -- -- (376,000)
Tax benefit from exercise of stock options -- -- 111,000
--------- ------------ ------------
BALANCE, MAY 31, 1999 -- (293,000) 15,903,000
Net income -- 2,433,000 2,433,000
Issuance of common stock:
Employee stock purchase plan -- -- 215,000
Employee stock option plan (690,000) -- --
Interest accrued on stockholder notes
receivables (18,000) -- (18,000)
--------- ------------ ------------
BALANCE, MAY 31, 2000 $(708,000) $ 2,140,000 $ 18,533,000
========= ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
LIFEMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
---------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,433,000 $ 1,953,000 $ 832,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense -- -- 23,000
Depreciation and amortization 2,293,000 2,231,000 1,988,000
(Gain) loss on sale of property and equipment 22,000 (10,000) 31,000
Deferred income taxes (132,000) (231,000) (59,000)
Interest on long term debt -- 297,000 285,000
Tax benefit from exercise of stock options -- 111,000 --
Interest on stockholder notes receivable (18,000) -- --
Changes in assets and liabilities:
Accounts receivable and unbilled services (13,390,000) (2,717,000) 832,000
Prepaid expenses and other current assets 153,000 (399,000) 1,252,000
Other assets 828,000 (300,000) (143,000)
Accounts payable 253,000 212,000 97,000
Accrued medical claims 19,119,000 863,000 719,000
Risk pool payable (236,000) (849,000) (495,000)
Related party risk pool payable 2,000 -- (149,000)
Accrued compensation 425,000 602,000 679,000
Accrued expenses 1,860,000 (403,000) 668,000
Related party interest payable (710,000) -- --
------------ ------------ ------------
Net cash provided by operating activities 12,902,000 1,360,000 6,560,000
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (2,709,000) (1,577,000) (2,509,000)
Proceeds from sale of property and equipment 323,000 164,000 9,000
Purchase of short-term investments -- -- (508,000)
Maturity/sale of short-term investments 501,000 1,009,000 501,000
Increase in assets securing performance bond (5,537,000) (409,000) (57,000)
Issuance of notes receivable -- (12,000) (47,000)
Payments received on notes receivable 568,000 138,000 609,000
------------ ------------ ------------
Net cash used in investing activities (6,854,000) (687,000) (2,002,000)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of long-term debt 3,154,000 234,000 --
Principal payment on long-term debt (4,004,000) (215,000) (207,000)
Redemption of voting preferred stock -- -- (7,000)
Issuance of common stock 215,000 712,000 1,208,000
Repurchase of common stock -- (376,000) --
------------ ------------ ------------
Net cash provided by (used in) financing activities (635,000) 355,000 994,000
------------ ------------ ------------
Net increase in cash and cash equivalents 5,413,000 1,028,000 5,552,000
Cash and cash equivalents, beginning of period 13,792,000 12,764,000 7,212,000
------------ ------------ ------------
Cash and cash equivalents, end of period $ 19,205,000 $ 13,792,000 $ 12,764,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS:
Lifemark Corporation ("Lifemark" or the "Company"), formerly Managed Care
Solutions, Inc., is a provider of health plan and care management service to
high risk populations, including vulnerable, frail, elderly and chronically ill
individuals on a national basis. Based in Phoenix, Arizona, Lifemark has
regional offices in Arkansas, California, Indiana, Michigan, New Mexico and
Texas.
Two subsidiaries of the Company, Ventana Health Systems, Inc. ("Ventana") and
Arizona Health Concepts, Inc. ("AHC"), derive substantially all of their
revenues through contracts with the Arizona Health Care Cost Containment System
Administration ("AHCCCSA") to provide specified long-term and primary care
health services, respectively, to qualified members. The contract periods expire
September 30, 2001 and September 30, 2002 for Ventana and AHC, respectively. In
June 2000, Ventana was awarded a contract for Maricopa County which begins on
October 1, 2000 and expires September 30, 2003. Each contract provides for fixed
monthly premiums, based on negotiated per capita enrollee rates. Ventana and AHC
subcontract with nursing homes, hospitals, physicians, and other medical
providers within Arizona to care for Arizona Health Care Cost Containment System
("AHCCCS") members. Effective July 17, 2000, Ventana and AHC began conducting
business as Lifemark Health Plans.
Lifemark of Texas, Inc., another subsidiary of the Company, derives
substantially all of its revenue through a contract with Rio Grande HMO, Inc.
("RGHMO"), a subsidiary of Health Care Service Corporation ("HCSC"), to share
financial risk in the State of Texas' STAR+PLUS program contract in Harris
County, Texas.
The Company purchased AdviNet, Inc., an eldercare information, consultation and
referral business, which owns a national databank of long term care and
aftercare providers, from Beverly Enterprises, Inc. in March 1999 for an
immaterial amount. During February 2000, this wholly-owned subsidiary of
Lifemark was renamed Lifemark Care Connection, Inc.
In December 1999, the Company purchased Valley Wide Attendant Care for an
immaterial amount and merged it into the Company's subsidiary, Lifemark at Home,
Inc. Lifemark at Home, Inc. provides attendant, personal, homemaking and respite
care services throughout Arizona.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue recognition
Revenue from contract services is recognized as the service is performed.
Capitation premiums are recognized as revenue in the month that enrollees are
entitled to health care services.
27
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sixth Omnibus Budget Reconciliation Act ("SOBRA") supplemental premiums are
payments intended by AHCCCSA to cover the costs of maternity care for pregnant
women qualified under SOBRA. Such premiums are recognized in the month the
delivery occurs.
Health care expenses
Monthly capitation payments to primary care physicians and other health care
providers are expensed as incurred. Hospital services are paid based on tiered
per diem rates or outpatient cost-to-charge ratios, as defined by AHCCCSA, less
any applicable discounts. Physician and other medical services are paid on a
capitated or discounted fee-for-service basis. All medical expenses are reported
net of Medicare reimbursements.
The Company receives reinsurance recoveries, which are recorded as estimated
amounts due pursuant to the AHCCCSA contract. Reinsurance recoveries are
recognized as a percentage of expenses incurred by members whose medical costs
exceed a stated deductible per member per contract year. Recoveries are recorded
as a reduction of medical expenses.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Restricted cash
includes funds restricted by AHCCCSA for utilization in the current operations
of the individual subsidiaries. (See "Restrictions on Fund Transfers")
Short-term investments
The Company's short-term investments consist of municipal bonds, which are held
by Ventana and AHC. Short-term investments are classified as available for sale
and carried at fair market value (see Note 4).
Property and equipment
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the useful lives of
the related assets estimated as follows: machinery and equipment, three to five
years; furniture and fixtures, seven years; and software, three to five years.
Leasehold improvements are amortized over the shorter of the lease term or their
estimated useful life. Maintenance and repairs are charged to expense as
incurred.
Performance bonds
Pursuant to the contracts with AHCCCSA, the Company's subsidiaries, Ventana and
AHC, are required to provide either a performance bond or designated substitute
to guarantee performance of the Company's obligations under the contracts. The
Company's guarantee of performance consists of treasury bills pledged as
collateral for bank letters of credit. The Company must maintain such guarantees
at amounts which approximate the total monthly capitation revenues. These
investments are considered to be held to maturity and are thus carried at
amortized cost which approximates fair market value. All investments are
expected to mature within the next fiscal year.
Under the agreement between Lifemark of Texas, Inc. and RGHMO to share financial
risk in the State of Texas' STAR+PLUS program contract in Harris County, Texas,
Lifemark pledged a certificate of deposit to secure its obligations under the
contract.
28
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts securing performance consist of the following:
<TABLE>
<CAPTION>
May 31,
----------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Ventana Health Systems, Inc. $ 4,951,000 $ 2,553,000
Arizona Health Concepts, Inc. 1,872,000 1,650,000
Lifemark Corporation 2,917,000 -
-------------- -------------
$ 9,740,000 $ 4,203,000
============== =============
</TABLE>
Goodwill
The excess of the acquisition cost over the fair value of the net assets of the
Lifemark companies acquired in a purchase transaction on March 1, 1996 has been
included in goodwill and is amortized on a straight-line basis over the period
of expected benefit of ten years. The reported balances as of May 31, 2000 and
1999 are net of accumulated amortization of $1,551,000 and $1,186,000,
respectively.
The carrying value of goodwill is assessed for any permanent impairment by
evaluating the operating performance and future undiscounted cash flows of the
underlying business. Adjustments are made if the sum of the expected future net
cash flows is less than the carrying value.
Accrued medical claims
Accrued medical claims include amounts billed and not paid and an estimate of
costs incurred for unbilled services provided through the date of the balance
sheet.
Risk pool payable
The Company contracts with certain provider networks based on utilization
control incentive clauses. Incentives, which are based on annual performance,
are estimated monthly and recorded as either a risk pool payable or risk pool
receivable. The risk pool contracts are based on a September 30 year-end, which
coincides with the AHCCCSA contract period.
Income taxes
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." The statement requires an
asset and liability approach for financial accounting and reporting for income
taxes. The Company files a consolidated income tax return with its subsidiaries.
Deferred income taxes have been provided for all significant temporary
differences. These temporary differences arise principally from accrued medical
claims, compensation not yet deductible for tax purposes and the use of
accelerated depreciation methods.
29
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restrictions on fund transfers
Ventana and AHC are subject to AHCCCSA regulations, which require compliance
with certain net worth, reserve and deposit requirements. To the extent Ventana
and AHC must comply with these regulations, they may not have the financial
flexibility to transfer funds to Lifemark. Lifemark's proportionate share of net
assets (after inter-company eliminations) which, at May 31, 2000 and 1999, may
not be transferred to Lifemark by subsidiaries in the form of loans, advances or
cash dividends without the consent of AHCCCSA, is referred to as "Restricted Net
Assets". Total Restricted Net Assets of these operating subsidiaries were
$8,632,000 and $10,378,000 at May 31, 2000 and 1999, respectively, with deposit
and reserve requirements (performance bonds) representing $6,823,000 and
$4,203,000, respectively, of the Restricted Net Assets and net worth
requirements, in excess of deposit and reserve requirements, representing the
remaining $1,809,000 and $6,175,000, respectively.
Concentration of credit risk and significant clients
The Company's revenues are generated from contracts with RGHMO, AHCCCSA and
healthcare provider organizations. Accordingly, as of May 31, 2000 and 1999, all
of the Company's trade receivables were from RGHMO, AHCCCSA or entities in the
healthcare industry. See Note 5 - Accounts and Notes Receivable.
Approximately 40 percent, 54 percent and 60 percent of the Company's revenues
for fiscal 2000, 1999 and 1998, respectively, were generated from Ventana and
AHC through the contracts with AHCCCSA. Approximately 33 percent, 10 percent and
4 percent of the Company's revenues for fiscal 2000, 1999 and 1998,
respectively, were generated by the Company through contracts with RGHMO.
In addition, as of May 31, 2000, the Company had cash and cash equivalents on
deposit with major financial institutions that were in excess of FDIC insured
limits. Historically, the Company has not experienced any loss of its cash and
cash equivalents due to such concentration of credit risk.
Fair value of financial instruments
The Company's financial instruments consist primarily of cash, investments,
accounts and notes receivable, accounts payable, accrued medical claims, risk
pool payables, accrued compensation, other accrued expenses, and debt. These
balances are carried in the financial statements at amounts that approximate
fair value based upon their comparison to similar instruments of comparable
materials.
Recently issued accounting pronouncements
Effective June 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131 "Disclosures about Segments of an Enterprise and
Related Information", which establishes standards for reporting information
about operating segments in annual financial statements and requires that
selected information about operating segments be reported in interim financial
statements. See Note 15 - Business Segments.
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
The Company adopted SOP 98-1 effective for its fiscal 2000 financial statements.
Under the provisions of SOP 98-1, software development is divided into three
phases: the preliminary project stage, which includes conceptual formulation and
selection of alternatives; the application development stage, which includes
design of chosen path, coding, installation of hardware and testing; and the
post-implementation/operation stage, which includes training and application
maintenance. Generally, only internal and
30
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
external costs incurred during the second phase, the application development
stage, should be capitalized with the exception of data conversion and training
costs, which, when incurred during this phase, should be expensed. During fiscal
2000, the Company capitalized $2,604,000 of software development costs,
including $868,000 of internal development costs.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). The Company adopted SOP 98-5 in June
1999. Under the provisions of SOP 98-5, start-up activities and organizational
costs are required to be expensed as incurred. The adoption of SOP 98-5 did not
materially impact the Company's financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities in their statement of financial
position and measure those instruments at fair value. In September 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," which
delayed the effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company is analyzing the implementation requirements and currently
does not anticipate there will be a material impact on its financial position or
the results of its operations.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes some of the staff's interpretations of the
application of generally accepted accounting principles to revenue recognition.
In June 2000, the SEC staff issued SAB 101B which delays the implementation date
of SAB 101 until no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. The company does not anticipate that the
pronouncement will have a material impact on its financial position or the
results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation: An Interpretation of APB
Opinion No. 25." The interpretation became effective July 1, 2000. The Company
is analyzing the implementation requirements and currently does not anticipate
there will be a material impact on its financial position or the results of
operations.
NOTE 3 - NET INCOME PER COMMON SHARE:
Net income per share - basic is computed by dividing net income by the weighted
average of common shares outstanding during each period. Net income per share -
assuming dilution is computed by dividing net income by the weighted average
number of common shares outstanding during the period after giving effect to
dilutive stock options and warrants and adjusted for dilutive common shares
assumed to be issued on conversion of the Company's convertible loans.
31
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is the computation of the reconciliation of the numerators and
denominators of net income per share - basic and net income per share - assuming
dilution in accordance with SFAS No. 128, "Earnings Per Share".
<TABLE>
<CAPTION>
Year Ended May 31,
------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income per common share:
Income available to common stockholders $ 2,433,000 $ 1,953,000 $ 832,000
Interest associated with stockholder notes
receivable (11,000) -- --
----------- ----------- -----------
Net income - basic 2,422,000 1,953,000 832,000
Interest associated with convertible notes 83,000 158,000 158,000
----------- ----------- -----------
Net income - assuming
dilution $ 2,505,000 $ 2,111,000 $ 990,000
=========== =========== ===========
Applicable common shares:
Average shares outstanding during year 4,977,000 4,737,000 4,476,000
Reduction in shares associated with stockholder
notes receivable (148,000) -- --
----------- ----------- -----------
Weighted average shares outstanding - basic 4,829,000 4,737,000 4,476,000
Stock options and warrants 66,000 273,000 306,000
Convertible notes 461,000 857,000 857,000
----------- ----------- -----------
Weighted average shares outstanding - assuming
dilution 5,356,000 5,867,000 5,639,000
=========== =========== ===========
Net income per share - basic $ 0.50 $ 0.41 $ 0.19
Net income per share - assuming dilution $ 0.47 $ 0.36 $ 0.18
</TABLE>
At May 31, 2000, 1999 and 1998, no shares of common stock had been issued upon
conversion of the convertible notes issued in October 1996. These notes were
convertible into an aggregate of 78,000, 857,000 and 857,000 shares of common
stock, respectively. These shares were included in the calculation of diluted
earnings per share for the years ended May 31, 2000, 1999 and 1998.
On October 14, 1999, promissory notes were issued in the amount of $690,000 to
officers of the Company in connection with the purchase of 235,000 shares of
common stock. Interest is computed on the basis of the actual number of days
elapsed over a 365-day year at a rate of 6.02 percent per annum. All outstanding
principal, plus all accrued but unpaid interest, will be due on October 14,
2008. The impact of this transaction has been reflected in the net income per
share table above.
NOTE 4 - SHORT-TERM INVESTMENTS:
As of May 31, 1999, the Company's investments consisted primarily of municipal
bonds with stated maturities within one year. The fair value of these
investments is based upon quoted market prices and approximated cost. As of May
31, 1999, the fair value of such securities approximated cost. These securities
matured during the year ended May 31, 2000.
32
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - ACCOUNTS AND NOTES RECEIVABLE:
Third party accounts and notes receivable and unbilled services consist of the
following:
<TABLE>
<CAPTION>
May 31,
-------
2000 1999
---- ----
<S> <C> <C>
Due from RGHMO $14,691,000 $ --
Contract management receivables 2,239,000 3,869,000
Due from AHCCCSA 2,098,000 1,810,000
Interest receivable 208,000 147,000
Other receivables 75,000 95,000
----------- -----------
19,311,000 5,921,000
Less allowance for doubtful accounts 35,000 35,000
----------- -----------
Net current portion of accounts and notes receivable $19,276,000 $ 5,886,000
=========== ===========
</TABLE>
The amounts due from AHCCCSA primarily include billed and unbilled reinsurance,
SOBRA and capitation receivables.
The amounts due from RGHMO primarily represents revenue earned by the Company
under its contract with RGHMO. See Note 1 - Nature of Business for additional
discussion.
Related party notes receivable of $568,000 at May 31, 1999 were due from
stockholders and consisted of loans taken against the cash surrender value of
life insurance policies, on which no interest was charged, and other loans to
stockholders. At May 31, 2000, there were no amounts due pursuant to these
loans. During fiscal year 2000, life insurance policies were cancelled, related
parties paid $385,000 to the Company and $183,000 was written off pursuant to
these notes.
NOTE 6 - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
May 31,
-------
2000 1999
---- ----
<S> <C> <C>
Machinery and equipment $ 5,719,000 $ 4,862,000
Furniture and fixtures 1,982,000 1,863,000
Software 4,191,000 1,588,000
Leasehold improvements 621,000 622,000
----------- -----------
12,513,000 8,935,000
Less - accumulated depreciation and amortization 6,182,000 4,730,000
----------- -----------
$ 6,331,000 $ 4,205,000
=========== ===========
</TABLE>
During fiscal years 2000 and 1999, the Company sold property and equipment with
a net book value of $345,000 and $154,000, respectively, and was paid $323,000
and $164,000, respectively.
33
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT:
Third party long-term debt consists of the following:
<TABLE>
<CAPTION>
May 31,
-------
2000 1999
---- ----
<S> <C> <C>
Long-term debt payable to a bank,
interest at prime (9.24% at May 31, 2000) plus 0.5%,
principal and interest due monthly on outstanding balance,
secured by computer software, due January 2003 $1,443,000 $ 234,000
Note payable to a bank, interest at prime (9.24% at May 31,
2000) plus 0.375%, principal of $62,500 and interest
due monthly secured by various assets, due December 2003 2,771,000 --
---------- ----------
4,214,000 234,000
Less - current portion 1,273,000 23,000
---------- ----------
$2,941,000 $ 211,000
========== ==========
</TABLE>
Related party long-term debt consists of the following:
<TABLE>
<CAPTION>
May 31,
-------
2000 1999
---- ----
<S> <C> <C>
Due to Health Care Services Corporation (net of $14,000
discount) $ -- $3,697,000
Due to stockholders 300,000 453,000
---------- ----------
300,000 4,150,000
Less - current portion -- 710,000
---------- ----------
$ 300,000 $3,440,000
========== ==========
</TABLE>
On December 22, 1999, the Company signed an agreement with Imperial Bank to
refinance the existing debt with HCSC for $3,000,000. The loan has an original
term of four years and bears interest at a rate of prime plus 0.375 percent per
annum. The loan is secured by all of the assets of Lifemark Corporation. The
agreement also includes several financial covenants with which the Company was
in compliance as of May 31, 2000.
On October 2, 1996, the Company signed an agreement with Blue Cross and Blue
Shield of Texas, Inc. (now a division of HCSC) whereby HCSC invested $3,000,000
in the Company in the form of a convertible secured loan. The loan had an
original term of three years with a renewal option for two additional one-year
periods if certain conditions were met. The loan was secured by all of the
assets of the Company. The loan bore interest at a rate of 8 percent per annum.
Principal and interest were payable at the end of the initial three-year term
and, thereafter, at the end of each annual extension. The loan was convertible
into the Company's common stock at a conversion price of $3.85 per share. HCSC
also received a warrant to purchase 100,000 shares of the Company's common stock
at an exercise price of $4.45 per share and had the right of first refusal to
participate as an equity partner in future Lifemark funding requirements. On
December 22, 1999, the HCSC debt was paid in full with proceeds from the
Imperial Bank loan. Pursuant to the termination of the loan agreement with HCSC,
the warrant was terminated.
34
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In a separate transaction, a trust created by William G. Brown, a director of
the Company, for the benefit of members of his family, and of which Richard C.
Jelinek, Chairman and Director, is one of the co-trustees, (the "Brown GST
Trust") invested $300,000 in the Company through a convertible unsecured loan
and received a warrant to purchase 10,000 shares of Lifemark common stock. The
interest rate, term, conversion price, and warrant exercise price are the same
for the Brown GST Trust as for HCSC, except that interest on the loan is payable
monthly. The Company determined that the warrants issued in conjunction with the
loan to the Brown GST Trust had a value of $13,000. The value assigned to the
warrant was recorded as a discount on the loan and amortized over the life of
the loan. During fiscal 2000, the term of the note and the life of the warrant
were extended through September 30, 2004.
In October 1995, Lifemark borrowed $155,000 from a trust established by Dr.
Lingenfelter, $51,000 from a trust established by Dr. Kaldenbaugh, and $43,000
from a trust established by Geralde Curtis, who was then a director and officer
of Lifemark. The notes due December 31, 2000 provide for interest income to
accrue at 8 percent per annum. Lifemark then loaned from these funds $118,000
each to Dr. Kaldenbaugh and Ms. Curtis pursuant to promissory notes due December
31, 2000 also providing for interest to accrue at 8 percent per annum. In July
1997, Ms. Curtis paid the promissory note and accrued interest in full. During
fiscal year 2000, all notes between the Company and Drs. Lingenfelter and
Kaldenbaugh were repaid. The Company also had risk pool agreements with Dr.
Lingenfelter and Dr. Kaldenbaugh during fiscal year 2000 and 1999. The Company
made payments to them under such agreements totaling $132,000 and $150,000
during the fiscal years 2000 and 1999, respectively.
Scheduled principal payments on related and third party long-term debt are as
follows:
2001 $ 1,273,000
2002 1,279,000
2003 1,176,000
2004 786,000
---------------
$ 4,514,000
===============
35
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
The Company has various lease agreements for real and personal property. These
obligations extend through 2003 and in some cases contain renewal options. As of
May 31, 2000, future minimum lease payments for noncancellable operating leases
in excess of one year are as follows:
2001 $ 2,392,000
2002 1,483,000
2003 33,000
---------------
$ 3,908,000
===============
Rental expense on all operating leases totaled $2,708,000, $2,213,000 and
$1,761,000 during fiscal years 2000, 1999 and 1998, respectively.
The Company has been notified by RGHMO that it will pursue a claim against the
Company arising out of the following circumstances. Prior to December 1999, the
Company had a non-risk sharing, administrative services agreement with RGHMO, a
wholly-owned subsidiary of HCSC. Under the agreement, the Company administered
RGHMO's STAR+PLUS operations in Texas and was responsible, among other things,
for developing and maintaining RGHMO's provider network and for administering
the claims adjudication and payment functions. On July 5, 1997, RGHMO entered
into an agreement for medical services with Universal Healthplan, Inc.
("Universal"), a Texas health maintenance organization. The agreement provided
for Universal to provide hospitalization services to RGHMO members through
Universal's contract with Tenet Health Care Ltd. ("Tenet"), a hospital chain.
Tenet asserts that RGHMO owes it approximately $6,500,000 for claims allegedly
improperly denied or paid at incorrect rates. On July 1, 1999, Tenet filed a
demand for arbitration against RGHMO to recover such amounts.
On March 23, 2000, RGHMO filed a demand for arbitration against the Company in
the same arbitration alleging that because the Company is responsible for claim
adjudication, the Company should be responsible for any amount determined by the
arbitrators to be due to Tenet. The Company moved to be severed from the
arbitration and the arbitration panel granted the motion. The arbitration
continues to be litigated and no decision has yet been rendered. RGHMO has
notified the Company that if there is an adverse result in the arbitration, it
will commence an arbitration action to recover from the Company the amount of
the judgement rendered in favor of Tenet. The Company believes its adjudication
of the Tenet claims on RGHMO's behalf was appropriate and Tenet was paid what it
was owed. Accordingly, if an arbitration is commenced by RGHMO, the Company
intends to vigorously assert its position in this manner.
The Company is a party to various claims and legal proceedings which management
believes are in the normal course of business and will not involve any material
loss.
36
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - EMPLOYEE AND DIRECTOR BENEFIT PLANS:
The Company provides various health, welfare and disability benefits to its
full-time salaried employees, which are funded primarily by contributions. The
Company does not provide post-employment or post-retirement health care and life
insurance benefits to its employees.
Stock Option Plans
The Company adopted various stock option plans beginning in 1989. The plans
provide for the issuance of shares of common stock to key personnel and
directors. Options granted under all plans become exercisable at various times
and under certain conditions as determined by the Board of Directors, or its
committee, and expire no later than ten years from the date of grant.
The Company has adopted a 1995 Stock Option Plan, a 1996 Stock Option Plan and a
1998 CEO Stock Option Plan, which provide for the issuance of up to an aggregate
of 1,150,000 shares of common stock to key employees and directors of the
Company.
The Company adopted a 1995 Director Stock Option Plan and a 1996 Non-Employee
Director Stock Option Plan, which provide for the issuance of up to an aggregate
of 230,000 shares of common stock to directors of the Company. Options granted
under all Company option plans have 10-year terms and become exercisable with
respect to 25 percent of the shares 12 months after the date of grant and with
respect to an additional 25 percent at the end of each 12-month period
thereafter during the succeeding three years.
On July 18, 1996, the Stock Option Committee of the Board of Directors
determined that stock options issued to certain employees had an exercise price
higher than the market price of the Company's common stock. In light of the
Committee's conclusion that such options were not providing the desired
incentive, it replaced options with exercise prices of $7.38 per share with new
stock options to purchase an identical number of shares of Company common stock
at the then current market price of $3.25.
Effective October 14, 1999, the Company adopted the 1999 Executive Stock Option
and Ownership Plan. The plan provides for the issuance of up to an aggregate of
200,000 shares of common stock to key personnel.
Effective April 20, 2000, the Company adopted its 2000 Non-Employee Director
Stock Option Plan. The total number of shares available for awards, including
grants of options, under the plan may not exceed 250,000. Under the terms of the
plan, each non-employee director shall receive an award of 5,000 shares of
restricted stock on June 1 of each year. The restrictions shall lapse over a
period of five years. In addition to the restricted stock, an option under which
a total of 10,000 shares of common stock may be purchased from the Company shall
be automatically granted to each non-employee director on June 1 of each year.
The option price shall be the fair market value of the shares subject to the
option on the grant dates. The options shall be for a term of ten years and
become exercisable with respect to 25 percent of the shares 12 months after the
date of grant and with respect to an additional 25 percent at the end of each 12
month period thereafter during the following three years.
37
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's stock option activity and related information for the
years ended May 31 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- --------------- -------- --------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning
of year 1,046,000 $3.63 1,217,000 $3.51 747,000 $3.26
Granted 650,000 $3.08 45,000 $5.17 485,000 $3.96
Exercised (235,000) $2.94 (133,000) $3.26 (15,000) $3.25
Forfeited (428,000) $3.95 (83,000) $3.27 - $ -
--------- --------- ---------
Outstanding - end of year 1,033,000 $3.31 1,046,000 $3.63 1,217,000 $3.51
========= ========= =========
Exercisable - end of year 655,000 $3.25 492,000 $3.34 359,000 $3.13
</TABLE>
Company options outstanding and options exercisable are as follows at May 31,
2000:
<TABLE>
<CAPTION>
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
(yrs)
--------------- ----------- ----------------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.21 $ 0.21 13,000 0.84 $0.21 13,000 $0.21
$ 2.88 - $ 4.00 975,000 7.45 $3.26 631,000 $3.28
$ 5.00 - $ 5.50 45,000 8.31 $5.17 11,000 $5.17
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 123"), but continues to apply Accounting Principles' Board Opinion No. 25
and related interpretations in the accounting for its stock option plans. If the
Company had adopted the expense recognition provisions of SFAS No. 123 for
purposes of determining compensation expense related to stock options granted
during the years ended May 31, 2000, 1999 and 1998, net income and net income
per common share would have been changed to the pro forma amounts shown below:
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income
As reported $2,433,000 $1,953,000 $832,000
Pro forma $2,040,000 $1,491,000 $504,000
Net income per common share -
assuming dilution
As reported $ 0.47 $ 0.36 $ 0.18
Pro forma $ 0.39 $ 0.28 $ 0.11
</TABLE>
38
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option granted during fiscal year 2000, 1999 and 1998 was
estimated on the date of grant using an option-pricing model (Black-Scholes)
with the following weighted average assumptions: (i) no dividend yield, (ii) an
expected volatility of 76 percent, 80 percent and 84 percent for fiscal years
2000, 1999 and 1998, respectively, (iii) a risk-free interest rate of 5.90
percent, 5.18 percent and 5.55 percent for fiscal years 2000, 1999 and 1998,
respectively, and (iv) an expected option life of five years. Based upon the
above assumptions, the weighted average fair value at grant date of options
granted during fiscal years 2000, 1999 and 1998 were $2.04, $3.49 and $2.76,
respectively. The effects of applying SFAS No. 123 in the pro forma disclosures
are not likely to be representative of the effects on pro forma net income for
future years because variables such as option grants, exercises, and stock price
volatility included in the disclosures may not be indicative of future activity.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan providing for the sale of shares
of common stock to eligible employees. Employees can designate up to 10 percent
of their compensation for the purchase of stock. The purchase price is the
lesser of 85 percent of the fair market value of the stock on either the date of
grant of a six-month purchase option or the date the purchase option is
exercised. The plan was effective June 1, 1996 and amended August 11, 2000 and
provides for the sale of 450,000 shares of common stock to eligible employees
over an eight-year period. During the years ended May 31, 2000, 1999 and 1998,
75,000, 80,000 and 62,000 shares of common stock were issued under the plan for
an aggregate purchase price of $215,000, $279,000 and $162,000, respectively.
Retirement savings plan
The Company has a contributory retirement savings plan (401(k) Plan) which
covers eligible employees who qualify as to age and length of service. The plan,
effective March 1, 1996, allows participants to contribute up to 15 percent of
their eligible wages, subject to maximum contribution limitations imposed by the
IRS. The expense of the plan, consisting of discretionary Company contributions,
was $330,000, $269,000 and $158,000 for the years ended May 31, 2000, 1999 and
1998, respectively.
NOTE 10 - INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------------------------
2000 1999 1998
------------------- ------------------- ------------------
<S> <C> <C> <C>
Current:
Federal $ 1,806,000 $ 950,000 $ 417,000
State 372,000 184,000 87,000
------------------ ------------------ -----------------
2,178,000 1,134,000 504,000
------------------ ------------------ -----------------
Deferred:
Federal (307,000) (359,000) (32,000)
State (63,000) (70,000) (7,000)
------------------ ------------------ -----------------
(370,000) (429,000) (39,000)
------------------ ------------------ -----------------
$ 1,808,000 $ 705,000 $ 465,000
================== ================== =================
</TABLE>
39
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of income tax provision based on the federal statutory rate and
the Company's actual income tax provision is as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Income tax at the federal statutory rate of 34% $ 1,442,000 $ 904,000 $ 441,000
State taxes, net of federal benefit 213,000 106,000 58,000
Nondeductible goodwill amortization 124,000 124,000 124,000
Other permanent items 35,000 49,000 11,000
Valuation allowance -- (397,000) (351,000)
Other, net (6,000) (81,000) 182,000
----------- ----------- -----------
$ 1,808,000 $ 705,000 $ 465,000
=========== =========== ===========
</TABLE>
Deferred income tax assets and liabilities were comprised of the following:
<TABLE>
<CAPTION>
May 31,
---------------------------------------
2000 1999
------------------- -----------------
<S> <C> <C>
Gross deferred tax assets:
Accrued medical claims $ 896,000 $ 854,000
Compensation not yet deductible
for tax purposes 314,000 294,000
Other 35,000 65,000
------------------ -----------------
Total deferred tax assets 1,245,000 1,213,000
------------------ -----------------
Gross deferred tax liabilities:
Depreciation 55,000 155,000
------------------ -----------------
Total gross deferred tax liabilities 55,000 155,000
------------------ -----------------
Net deferred tax assets $ 1,190,000 $ 1,058,000
================== =================
</TABLE>
In assessing the realizability of its deferred tax assets, the Company considers
whether it is more likely than not that some or all of such assets will be
realized. The Company has determined, as of May 31, 2000, that all of its
deferred tax assets are more likely than not to be realized.
40
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCKHOLDERS' EQUITY:
On January 7, 1998 the Company entered into a purchase agreement with Beverly
Enterprises, Inc., pursuant to which the Company received $1,000,000 and issued
200,000 shares of the Company's common stock at $5.00 per share. This
transaction was effected pursuant to the exemption contained in section 4(2) of
the Securities Act of 1933.
On September 28, 1998, the Company entered into an agreement to purchase
approximately 15,000 shares of the Company's common stock at $5.00 per share
from former Chief Executive Officer, James Burns. Also on that date, Mr. Burns
exercised his option to purchase 75,000 shares of the Company's common stock at
a price of $3.25 per share. Consideration for the 75,000 shares consisted of
approximately 60,000 mature shares of the Company's common stock owned by Mr.
Burns valued at $5.00 per share.
The Company has reserved an aggregate of 88,000 shares of common stock for
issuance upon conversion of the note and exercise of the warrants held by the
Brown GST Trust.
The authorized capital stock of the Company also includes 1,000,000 shares of
Preferred Stock, $1,000 par value. No shares of Preferred Stock are currently
outstanding. The Board of Directors has the authority to determine the rights
and preferences of this preferred stock upon its issuance. On May 31, 1998, the
Company redeemed and canceled all 6.85 shares of Voting Preferred Stock at par
value plus accrued dividends.
NOTE 12 - RELATED PARTY TRANSACTIONS:
For the fiscal years ended May 31, 2000, 1999 and 1998, the Company generated
management fees of $10,107,000, $7,772,000 and $2,820,000 from Rio Grande HMO,
of which Rogers Coleman, former Director of the Company, was Chairman of its
parent organization.
For the fiscal years ended May 31, 2000, 1999 and 1998, the Company incurred
legal fees for general legal services of $54,000, $49,000 and $74,000,
respectively, from the law firm of Bell, Boyd and Lloyd, of which William G.
Brown, Director and former Secretary of the Company, is a member.
For the fiscal years ended May 31, 2000 and 1999, the Company made service
payments of $1,136,000 and $379,000, respectively, to the Gardens Care Center, a
nursing facility owned by Dr. Lingenfelter, a Director of the Company.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes $1,896,000 $1,417,000 $ 281,000
Interest $1,119,000 $ 99,000 $ 99,000
</TABLE>
The Company acquired software under financing arrangements totaling $1,690,000
in fiscal 2000. The Company issued common shares to certain executives in
exchange for notes receivable totaling $690,000 in fiscal 2000.
41
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
In the opinion of management, all adjustments necessary for a fair presentation
of the financial results for interim periods have been included in the unaudited
financial information presented below. These adjustments are only of a normal
and recurring nature. These interim results of operations are not necessarily
indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
May 31, February 29, November 30, August 31,
2000 2000 1999 1999
----------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 51,771,000 $ 49,650,000 $ 24,574,000 $23,609,000
Total costs and expenses 51,065,000 48,526,000 23,837,000 23,385,000
Operating income 706,000 1,124,000 737,000 224,000
Net income 895,000 809,000 515,000 214,000
Net income per share:
Basic 0.18 0.17 0.11 0.04
Assuming dilution 0.17 0.16 0.10 0.04
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
May 31, February 28, November 30, August 31,
1999 1999 1998 1998
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 23,936,000 $ 21,573,000 $ 20,639,000 $19,244,000
Total costs and expenses 23,391,000 21,209,000 20,039,000 18,687,000
Operating income 545,000 364,000 600,000 557,000
Net income 421,000 618,000 492,000 422,000
Net income per share:
Basic 0.09 0.13 0.10 0.09
Assuming dilution 0.08 0.11 0.09 0.08
</TABLE>
42
<PAGE>
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - BUSINESS SEGMENTS:
The Company's principal business segments are:
- Health plan operations - risk contracts, is engaged in the
business of administering risk-based managed care plans and
programs in two states. The segment is comprised of the operations
of Ventana, AHC and Lifemark of Texas.
- Health plan operations - management contracts, is engaged in the
management of managed care plans and programs in three states. The
segment is comprised of the contracts with AlohaCare, Community
Choice Michigan and Lovelace Community Health Plan.
The Company has accumulated all other services within the diversified services
category. This category consists of the operations in California and Indiana, as
well as the operations of Lifemark at Home and Lifemark Care Connection.
During fiscal year 2000, the Company modified the structure of its internal
organization in a manner that caused the composition of its reportable segments
to change. As such, segment information for previously reported periods has been
restated to reflect this change. Following is a tabulation of business segment
information for each of the past three years. Corporate allocations have been
provided on a consistent basis.
<TABLE>
<CAPTION>
As of and for the Year Ended May 31, 2000
-------------------------------------------------------------------------
Health Plan Operations
---------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 113,986,000 $ 21,113,000 $ 16,047,000 $ 151,146,000
Intersegment revenues -- -- (1,542,000) (1,542,000)
------------- ------------- ------------- -------------
Total consolidated revenues $ 113,986,000 $ 21,113,000 $ 14,505,000 $ 149,604,000
============= ============= ============= =============
Interest income $ 1,642,000 $ 127,000 $ 99,000 $ 1,868,000
Interest expense 157,000 149,000 112,000 418,000
------------- ------------- ------------- -------------
Net interest income (expense) $ 1,485,000 $ (22,000) $ (13,000) $ 1,450,000
============= ============= ============= =============
Depreciation and amortization $ 821,000 $ 812,000 $ 660,000 $ 2,293,000
============= ============= ============= =============
Segment income (loss) before taxes $ (652,000) $ 4,579,000 $ 314,000 $ 4,241,000
Income tax expense (benefit) (278,000) 1,952,000 134,000 1,808,000
------------- ------------- ------------- -------------
Net income (loss) $ (374,000) $ 2,627,000 $ 180,000 $ 2,433,000
============= ============= ============= =============
Expenditures for capital assets $ 970,000 $ 959,000 $ 780,000 $ 2,709,000
============= ============= ============= =============
Total segment assets $ 52,536,000 $ 6,282,000 $ 8,022,000 $ 66,840,000
Intersegment assets (6,874,000) -- (1,063,000) (7,937,000)
------------- ------------- ------------- -------------
Total assets $ 45,662,000 $ 6,282,000 $ 6,959,000 $ 58,903,000
============= ============= ============= =============
</TABLE>
43
<PAGE>
46
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
As of and for the Year Ended May 31, 1999
---------------------------------------------------------------------
Health Plan Operations
-------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
--------- --------- -------- ------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 46,041,000 $ 26,911,000 $ 13,611,000 $ 86,563,000
Intersegment revenues -- -- (1,171,000) (1,171,000)
------------ ------------ ------------ ------------
Total consolidated revenues $ 46,041,000 $ 26,911,000 $ 12,440,000 $ 85,392,000
============ ============ ============ ============
Interest income $ 802,000 $ 105,000 $ 50,000 $ 957,000
Interest expense 55,000 210,000 100,000 365,000
------------ ------------ ------------ ------------
Net interest income (expense) $ 747,000 $ (105,000) $ (50,000) $ 592,000
============ ============ ============ ============
Depreciation and amortization $ 447,000 $ 1,183,000 $ 601,000 $ 2,231,000
============ ============ ============ ============
Segment income before taxes $ 976,000 $ 749,000 $ 933,000 $ 2,658,000
Income tax expense 259,000 199,000 247,000 705,000
------------ ------------ ------------ ------------
Net income $ 717,000 $ 550,000 $ 686,000 $ 1,953,000
============ ============ ============ ============
Expenditures for capital assets $ 346,000 $ 853,000 $ 378,000 $ 1,577,000
============ ============ ============ ============
Total segment assets $ 31,929,000 $ 6,934,000 $ 5,307,000 $ 44,170,000
Intersegment assets (8,941,000) -- (409,000) (9,350,000)
------------ ------------ ------------ ------------
Total assets $ 22,988,000 $ 6,934,000 $ 4,898,000 $ 34,820,000
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
As of and for the Year Ended May 31, 1998
-----------------------------------------------------------------------
Health Plan Operations
-------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
--------- --------- -------- ------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 39,772,000 $ 17,831,000 $ 10,397,000 $ 68,000,000
Intersegment revenues -- (1,080,000) (926,000) (2,006,000)
------------ ------------ ------------ ------------
Total consolidated revenues $ 39,772,000 $ 16,751,000 $ 9,471,000 $ 65,994,000
============ ============ ============ ============
Interest income $ 772,000 $ 57,000 $ 27,000 $ 856,000
Interest expense 56,000 217,000 104,000 377,000
------------ ------------ ------------ ------------
Net interest income (expense) $ 716,000 $ (160,000) $ (77,000) $ 479,000
============ ============ ============ ============
Depreciation and amortization $ 503,000 $ 1,012,000 $ 473,000 $ 1,988,000
============ ============ ============ ============
Segment income (loss) before taxes $ 880,000 $ (1,144,000) $ 1,561,000 $ 1,297,000
Income tax expense (benefit) 315,000 (410,000) 560,000 465,000
------------ ------------ ------------ ------------
Net income (loss) $ 565,000 $ (734,000) $ 1,001,000 $ 832,000
============ ============ ============ ============
Expenditures for capital assets $ 813,000 $ 1,237,000 $ 459,000 $ 2,509,000
============ ============ ============ ============
Total segment assets $ 28,863,000 $ 6,587,000 $ 4,207,000 $ 39,657,000
Intersegment assets (7,624,000) -- (310,000) (7,934,000)
------------ ------------ ------------ ------------
Total assets $ 21,239,000 $ 6,587,000 $ 3,897,000 $ 31,723,000
============ ============ ============ ============
</TABLE>
44
<PAGE>
LIFEMARK CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
<TABLE>
<CAPTION>
MAY 31,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,579,000 $ 3,908,000
Accounts and notes receivable and unbilled services, net 1,940,000 3,800,000
Due from subsidiaries 1,107,000 974,000
Prepaid expenses and other current assets 663,000 847,000
Deferred income taxes 329,000 333,000
------------ ------------
Total current assets 11,618,000 9,862,000
Related party notes receivable -- 169,000
Property and equipment, net 6,331,000 4,205,000
Goodwill, net 2,097,000 2,462,000
Investment in subsidiaries 6,297,000 7,879,000
Performance bonds 2,917,000 --
Other assets 155,000 276,000
------------ ------------
Total assets $ 29,415,000 $ 24,853,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,027,000 $ 744,000
Accrued expenses 5,286,000 3,501,000
Current portion of related party long-term debt -- 876,000
Current portion of long-term debt 1,273,000 23,000
------------ ------------
Total current liabilities 7,586,000 5,144,000
Long-term debt 2,941,000 211,000
Related party long-term debt 300,000 3,440,000
Deferred income taxes 55,000 155,000
------------ ------------
Total liabilities 10,882,000 8,950,000
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - 5,118,000 and 4,808,000 shares,
respectively 51,000 48,000
Capital in excess of par value 17,050,000 16,148,000
Interest in earnings of subsidiaries 3,093,000 2,925,000
Stockholder notes receivable (708,000) --
Accumulated deficit (953,000) (3,218,000)
------------ ------------
Total stockholders' equity 18,533,000 15,903,000
------------ ------------
$ 29,415,000 $ 24,853,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
45
<PAGE>
LIFEMARK CORPORATION
--------------------------------------------------------------------------------
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
----------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 51,671,000 $ 44,214,000 $ 30,951,000
------------ ------------ ------------
Direct cost of operations 27,828,000 24,031,000 18,443,000
Marketing, sales and administrative 19,864,000 18,994,000 12,694,000
------------ ------------ ------------
Total costs and expenses 47,692,000 43,025,000 31,137,000
------------ ------------ ------------
Operating income (loss) 3,979,000 1,189,000 (186,000)
------------ ------------ ------------
Interest income 361,000 183,000 154,000
Interest expense (421,000) (393,000) (432,000)
------------ ------------ ------------
Net interest expense (60,000) (210,000) (278,000)
------------ ------------ ------------
Income (loss)
before income taxes 3,919,000 979,000 (464,000)
Provision for income taxes 1,654,000 471,000 13,000
------------ ------------ ------------
Net income (loss)
before earnings of subsidiaries 2,265,000 508,000 (477,000)
Income in subsidiaries 168,000 1,445,000 1,309,000
------------ ------------ ------------
Net income $ 2,433,000 $ 1,953,000 $ 832,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
46
<PAGE>
LIFEMARK CORPORATION
--------------------------------------------------------------------------------
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,433,000 $ 1,953,000 $ 832,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,293,000 2,231,000 1,941,000
(Gain) loss on sale of property and equipment 22,000 (10,000) 31,000
Deferred income taxes (96,000) 46,000 (118,000)
Interest on long term debt -- 297,000 285,000
Tax benefit from exercise of stock options -- 111,000 --
Income in subsidiaries (168,000) (1,445,000) (1,309,000)
Interest on stockholder note receivable (18,000) -- --
Dividends received from subsidiaries 2,000,000 -- 1,700,000
Changes in assets and liabilities:
Accounts receivable and unbilled services 1,860,000 (1,398,000) 236,000
Due from subsidiaries (133,000) (139,000) (579,000)
Prepaid expenses and other current assets 184,000 (474,000) 770,000
Other assets 121,000 (104,000) (27,000)
Accounts payable 283,000 165,000 179,000
Accrued expenses 1,785,000 318,000 918,000
Related party interest (710,000) -- --
----------- ----------- -----------
Net cash provided by operating activities 9,856,000 1,551,000 4,859,000
----------- ----------- -----------
Cash flows from investing activities:
Investment in subsidiary (250,000) -- (1,700,000)
Purchase of property and equipment (2,709,000) (1,577,000) (2,509,000)
Proceeds from sale of property and equipment 323,000 164,000 9,000
Increase in assets securing performance bond (2,917,000) -- --
Related party note receivable 169,000 11,000 492,000
----------- ----------- -----------
Net cash used in investing activities (5,384,000) (1,402,000) (3,708,000)
----------- ----------- -----------
Cash flows from financing activities:
Cash received from related parties -- -- 5,000
Issuance of long-term debt 3,154,000 234,000 --
Payment of long-term debt (4,170,000) (555,000) (473,000)
Redemption of voting preferred stock -- -- (7,000)
Issuance of common stock 215,000 712,000 1,208,000
Repurchase of common stock -- (376,000) --
----------- ----------- -----------
Net cash provided by (used in) financing activities (801,000) 15,000 733,000
----------- ----------- -----------
Net increase in cash and cash equivalents 3,671,000 164,000 1,884,000
Cash and cash equivalents, beginning of period 3,908,000 3,744,000 1,860,000
----------- ----------- -----------
Cash and cash equivalents, end of period $ 7,579,000 $ 3,908,000 $ 3,744,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
47
<PAGE>
LIFEMARK CORPORATION
--------------------------------------------------------------------------------
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
NOTE 1 - BASIS OF PRESENTATION:
The condensed financial statements of the registrant ("Lifemark") should be read
in conjunction with the consolidated financial statements, which are included
elsewhere herein. On June 1, 1997, the operations of Managed Care Solutions of
Arizona, Inc., an Arizona Corporation, were merged with those of Managed Care
Solutions of Arizona, Inc., a Delaware Corporation. The increase in total assets
of $3,242,000 and total liabilities of $3,611,000 has been treated as a non-cash
transaction for the purpose of the Statement of Cash Flows.
NOTE 2 - DIVIDENDS:
In June 2000, Lifemark made capital contributions of $1,250,000 in Ventana, a
wholly owned subsidiary. In June 1997, Lifemark invested $1,700,000 in AHC, a
wholly owned subsidiary.
Ventana declared and paid out two separate cash dividends to Lifemark,
$1,000,000 each in January 2000 and March 2000, respectively. Ventana declared
and paid out a cash dividend to Lifemark of $1,700,000 in June 1997.
NOTE 3 - RELATED PARTY TRANSACTIONS:
The following is a list of transactions with related parties. All accounts below
have been eliminated in consolidation.
<TABLE>
<CAPTION>
For the years ended May 31,
--------------------------------------------------------
2000 1999 1998
---------------- ------------------ -----------------
<S> <C> <C> <C>
Management fee revenues - Ventana $ 4,428,000 $ 3,177,000 $ 2,728,000
Management fee revenues - AHC 2,044,000 1,703,000 1,444,000
Management fee revenues - Lifemark at Home 365,000 211,000 -
Management fee revenues - Lifemark of Texas 5,486,000 - -
</TABLE>
<TABLE>
<CAPTION>
May 31,
-------------------------------------
2000 1999
------------------ ---------------
<S> <C> <C>
Intercompany receivable - Lifemark at Home $ 548,000 $ 323,000
Intercompany receivable - Ventana 672,000 846,000
Intercompany payable - AHC 49,000 195,000
Intercompany payable - Lifemark of Texas 67,000 -
Current portion of long-term debt - Ventana - 166,000
</TABLE>
48
<PAGE>
LIFEMARK CORPORATION
--------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End
Description Period Expenses Accounts Deductions (1) of Period
----------- ------ -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MAY 31, 1998
Allowance for doubtful accounts $1,464,000 $ 23,000 $ - $ (874,000) $ 613,000
Tax valuation allowance 748,000 - - (351,000) 397,000
YEAR ENDED MAY 31, 1999
Allowance for doubtful accounts $ 613,000 $ - $ - $ (578,000) $ 35,000
Tax valuation allowance 397,000 - - (397,000) -
YEAR ENDED MAY 31, 2000
Allowance for doubtful accounts $ 35,000 $ - $ - $ - $ 35,000
</TABLE>
(1) Deductions from allowance for doubtful accounts represents changes in
estimated collectible balances.
49
<PAGE>
ANNEX F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2000
Commission File Number 0-19393
LIFEMARK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3338328
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7600 North 16th Street
Suite 150
Phoenix, Arizona 85020
(Address of principal executive offices)
(Zip Code)
602-331-5100
(Registrant's telephone number, including area code)
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
----- -----
There were 5,198,076 shares of common stock outstanding as of December 31, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets.........................................................3
Consolidated Statements of Income...................................................4
Consolidated Statements of Cash Flows...............................................5
Notes to Unaudited Consolidated Financial Statements.............................6-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.........................................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................15
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................15
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIFEMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Nov. 30, 2000 May 31, 2000
------------------ ----------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents, including restricted cash of $15,583,000
and $11,635,000, respectively $ 19,965,000 $ 19,205,000
Accounts and notes receivable and unbilled services, net 25,014,000 19,276,000
Deferred income taxes 1,221,000 1,245,000
Prepaid expenses and other current assets 782,000 729,000
------------------ ----------------
Total current assets 46,982,000 40,455,000
Property and equipment, net 6,763,000 6,331,000
Performance bonds 10,878,000 9,740,000
Goodwill, net 1,915,000 2,097,000
Other assets 362,000 280,000
------------------ ----------------
Total assets $ 66,900,000 $ 58,903,000
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 559,000 $ 912,000
Accrued medical claims 33,250,000 27,781,000
Risk pool payable 1,254,000 455,000
Related party risk pool payable 107,000 154,000
Accrued compensation 2,831,000 2,889,000
Other accrued expenses 4,353,000 3,610,000
Current portion of long-term debt 1,300,000 1,273,000
------------------ ----------------
Total current liabilities 43,654,000 37,074,000
Long-term debt 2,309,000 2,941,000
Related party long-term debt 300,000 300,000
Deferred income taxes 26,000 55,000
------------------ ----------------
Total liabilities 46,289,000 40,370,000
------------------ ----------------
Commitments and Contingencies - -
Stockholders' Equity:
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - 5,159,000 and 5,118,000 shares, respectively 52,000 51,000
Capital in excess of par value 17,259,000 17,050,000
Stockholder notes receivable (728,000) (708,000)
Unearned compensation (146,000) -
Retained earnings 4,174,000 2,140,000
------------------ ----------------
Total stockholders' equity 20,611,000 18,533,000
------------------ ----------------
$ 66,900,000 $ 58,903,000
================== ================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
LIFEMARK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
November 30, November 30, November 30, November 30,
2000 1999 2000 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 52,225,000 $ 24,574,000 $ 105,708,000 $ 48,183,000
--------------- -------------- -------------- --------------
Direct cost of operations 45,058,000 18,764,000 91,520,000 36,614,000
Marketing, sales and administrative 5,930,000 5,073,000 11,751,000 10,608,000
--------------- -------------- -------------- --------------
Total costs and expenses 50,988,000 23,837,000 103,271,000 47,222,000
--------------- -------------- -------------- --------------
Operating income 1,237,000 737,000 2,437,000 961,000
--------------- -------------- -------------- --------------
Interest income 856,000 266,000 1,699,000 521,000
Interest expense (94,000) (93,000) (215,000) (193,000)
--------------- -------------- -------------- --------------
Net interest income 762,000 173,000 1,484,000 328,000
--------------- -------------- -------------- --------------
Income before income taxes 1,999,000 910,000 3,921,000 1,289,000
Provision for income taxes 1,061,000 395,000 1,887,000 560,000
--------------- -------------- -------------- --------------
Net income $ 938,000 $ 515,000 $ 2,034,000 $ 729,000
=============== ============== ============== ==============
Net income per share--basic $ 0.19 $ 0.11 $ 0.40 $ 0.15
=============== ============== ============== ==============
Weighted average common
shares outstanding--basic 5,060,000 4,808,000 5,047,000 4,808,000
=============== ============== ============== ==============
Net income per share--assuming dilution $ 0.16 $ 0.10 $ 0.35 $ 0.14
=============== ============== ============== ==============
Weighted average common shares
outstanding--assuming dilution 5,808,000 5,683,000 5,728,000 5,700,000
=============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
LIFEMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------------
November 30, November 30,
2000 1999
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,034,000 $ 729,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense - 8,000
Depreciation and amortization 1,502,000 1,075,000
(Gain) loss on sale of property and equipment (11,000) 5,000
Deferred income taxes (5,000) 197,000
Interest on long-term debt - 125,000
Interest on stockholder note receivable (20,000) -
Stock based compensation 16,000 -
Changes in assets and liabilities:
Accounts receivable and unbilled services (5,738,000) 516,000
Prepaid expenses and other current assets (53,000) (332,000)
Accounts payable (353,000) (191,000)
Accrued medical claims 5,469,000 588,000
Risk pool payable 799,000 149,000
Related party risk pool payable (47,000) 9,000
Accrued compensation (58,000) (191,000)
Accrued expenses 743,000 705,000
Other assets (82,000) 94,000
------------------ ------------------
Net cash provided by operating activities 4,196,000 3,486,000
------------------ ------------------
Cash flows from investing activities:
Purchase of property and equipment (1,786,000) (1,855,000)
Proceeds from sale of property and equipment 45,000 285,000
Proceeds from maturity/sale of short-term investments - 501,000
Proceeds from related party notes receivable - 181,000
Proceeds from maturity of assets securing performance
bond - 1,233,000
Increase in assets securing performance bond (1,138,000) (3,631,000)
------------------ ------------------
Net cash used in investing activities (2,879,000) (3,286,000)
------------------ ------------------
Cash flows from financing activities:
Issuance of long-term debt 94,000 562,000
Principal payment on long-term debt (699,000) (784,000)
Proceeds from common stock issuance 48,000 114,000
------------------ ------------------
Net cash used in financing activities (557,000) (108,000)
------------------ ------------------
Net increase in cash and cash equivalents 760,000 92,000
Cash and cash equivalents, beginning of period 19,205,000 13,792,000
------------------ ------------------
Cash and cash equivalents, end of period $ 19,965,000 $ 13,884,000
================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
LIFEMARK CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
---------------------------
Lifemark Corporation ("Lifemark" or the "Company"), formerly Managed Care
Solutions, Inc., is a provider of health plan and care management service to
high risk populations, including vulnerable, frail, elderly and chronically ill
individuals on a national basis. Based in Phoenix, Arizona, Lifemark has
regional offices in Arkansas, California, Indiana, Michigan, New Mexico and
Texas.
Two subsidiaries of the Company, Ventana Health Systems, Inc. ("Ventana") and
Arizona Health Concepts, Inc. ("AHC"), derive substantially all of their
revenues through contracts with the Arizona Health Care Cost Containment System
Administration ("AHCCCSA") to provide specified long-term and primary care
health services, respectively, to qualified members. The contract periods expire
September 30, 2001 and September 30, 2002 for Ventana and AHC, respectively. In
June 2000, Ventana was awarded a contract for Maricopa County which began on
October 1, 2000 and expires September 30, 2003. Each contract provides for fixed
monthly premiums, based on negotiated per capita enrollee rates. Ventana and AHC
subcontract with nursing homes, hospitals, physicians, and other medical
providers within Arizona to care for Arizona Health Care Cost Containment System
("AHCCCS") members. Effective July 17, 2000, Ventana and AHC began conducting
business as Lifemark Health Plans.
In October 2000, the Company decided to terminate the operations of AHC.
Pursuant to the Company's contract with AHCCCSA, a notification and transition
will take place with the cessation of operations expected to occur on February
28, 2001. AHC contributed revenues of $5,728,000 and $4,895,000 for the three
month periods ended November 30, 2000 and 1999, respectively, and incurred
direct costs of operations of $5,893,000 and $5,217,000, respectively. For the
six months ended November 30, 2000 and 1999, AHC contributed revenues of
$11,324,000 and $9,659,000, respectively, and incurred direct costs of
operations of $11,706,000 and $10,079,000, respectively.
Lifemark of Texas, Inc., another subsidiary of the Company, derives
substantially all of its revenue through a contract with Rio Grande HMO, Inc.
("RGHMO"), a subsidiary of Health Care Service Corporation ("HCSC"), to share
financial risk in the State of Texas' STAR+PLUS program contract in Harris
County, Texas.
NOTE 2 - NET INCOME PER SHARE
-----------------------------
Net income per share - basic is computed by dividing net income by the weighted
average number of common shares outstanding during each period. Net income per
share assuming dilution is computed by dividing net income by the weighted
average number of common shares outstanding during the period after giving
effect to dilutive stock options and warrants and adjusted for dilutive common
shares assumed to be issued on conversion of the Company's convertible loans.
6
<PAGE>
The following is the computation of the reconciliation of the numerators and
denominators of net income per common share - basic and net income per common
share - assuming dilution in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share".
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
November 30, 2000 November 30, 1999
------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------- ----------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income per common share, basic:
Income available to common
stockholders $ 938,000 5,158,000 $ 515,000 4,932,000
Reduction in shares outstanding
in connection with stockholder
notes receivable and unvested
restricted stock (6,000) (98,000) (3,000) (124,000)
---------- ------------ ---------- ------------
Adjusted income available to
common stockholders 932,000 5,060,000 $ 0.19 512,000 4,808,000 $ 0.11
Effect of dilutive securities:
Stock options, warrants and
restricted shares - 670,000 - 18,000
Convertible notes 3,000 78,000 40,000 857,000
---------- ------------ ---------- -----------
Net income per common share,
assuming dilution:
Income available to common
stockholders and assumed
conversions $ 935,000 5,808,000 $ 0.16 $ 552,000 5,683,000 $ 0.10
========== ============ ========= ========== ============ =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------------------------------------------------
November 30, 2000 November 30, 1999
------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------- ----------- -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income per common share, basic:
Income available to common
stockholders $2,034,000 5,157,000 $ 729,000 4,870,000
Reduction in shares outstanding
in connection with stockholder
notes receivable and unvested
restricted stock (12,000) (110,000) (3,000) (62,000)
---------- ------------ ---------- ------------
Adjusted income available to
common shareholders 2,022,000 5,047,000 $ 0.40 726,000 4,808,000 $ 0.15
Effect of dilutive securities:
Stock options, warrants and
restricted shares - 603,000 - 35,000
Convertible notes 7,000 78,000 79,000 857,000
---------- ------------ ---------- ------------
Net income per common share,
assuming dilution:
Income available to common
stockholders and assumed
conversions $2,029,000 5,728,000 $ 0.35 $ 805,000 5,700,000 $ 0.14
========== =========== ========= ========== ============ =========
</TABLE>
7
<PAGE>
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
--------------------------------------
Third party accounts and notes receivable and unbilled services consist of the
following:
Nov. 30, 2000 May 31, 2000
------------------ -----------------
Due from Rio Grande HMO, Inc. $ 20,267,000 $ 14,691,000
Contract management receivables 2,918,000 2,239,000
Due from AHCCCSA 1,843,000 2,098,000
Interest receivable 15,000 208,000
Other 5,000 75,000
------------------ -----------------
25,048,000 19,311,000
Less allowance for doubtful accounts 34,000 35,000
------------------ -----------------
Net accounts and notes receivable $ 25,014,000 $ 19,276,000
================== =================
The amount due from RGHMO primarily represents revenue earned by Lifemark of
Texas, Inc., which has contracted with RGHMO, a subsidiary of Health Care
Services Corporation, as successor to Blue Cross Blue Shield of Texas.
The amounts due from AHCCCSA primarily include billed and unbilled reinsurance,
SOBRA and capitation receivables.
NOTE 4 - Restrictions on Fund Transfers
---------------------------------------
Certain of the Company's operating subsidiaries are subject to state
regulations, which require compliance with certain net worth, reserve and
deposit requirements. To the extent the operating subsidiaries must comply with
these regulations, they may not have the financial flexibility to transfer funds
to the parent organization, Lifemark. Net assets of subsidiaries (after
inter-company eliminations) which, at November 30, 2000, may not be transferred
to Lifemark by subsidiaries in the form of loans, advances or cash dividends
without the consent of a third party are referred to as "Restricted Net Assets".
Total Restricted Net Assets of these operating subsidiaries were $10,552,000 at
November 30, 2000, with deposit and reserve requirements (performance bonds)
representing $7,872,000 of the Restricted Net Assets and net worth requirements,
in excess of deposit and reserve requirements, representing the remaining
$2,680,000.
NOTE 5 - BUSINESS SEGMENTS
--------------------------
The Company's principal business segments are:
o Health Plan Operations - Risk Contracts, which is engaged in the
business of administering risk-based managed care plans and programs
in two states. The segment is comprised of the operations of Ventana,
AHC and Lifemark of Texas.
o Health Plan Operations - Management Contracts, which is engaged in the
management of managed care plans and programs in three states. The
segment is comprised of the contracts with AlohaCare, Community Choice
Michigan and Lovelace Community Health Plan.
The Company has grouped all other services within the Diversified Services
segment. This category consists of the operations in California and Indiana, as
well as the operations of Lifemark at Home and Lifemark Care Connection.
During fiscal year 2000, the Company modified the structure of its internal
organization in a manner that caused the composition of its reportable segments
to change. As such, segment information for previously reported periods has been
restated to reflect this change. Following is a tabulation of business segment
information for the three and six month periods ended November 30, 2000 and
1999. Corporate allocations have been provided on a consistent basis.
8
<PAGE>
Information concerning operations by business segment follows:
<TABLE>
<CAPTION>
For the Three Months Ended November 30, 2000
-----------------------------------------------------------------
Health Plan Operations
--------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 42,293,000 $ 10,926,000 $ 4,683,000 $ 57,902,000
Intersegment revenues - (5,128,000) (549,000) (5,677,000)
------------- -------------- ------------ -------------
Total consolidated revenues $ 42,293,000 $ 5,798,000 $ 4,134,000 $ 52,225,000
============= ============== ============ =============
Interest income $ 778,000 $ 42,000 $ 36,000 $ 856,000
Interest expense 35,000 33,000 26,000 94,000
------------- -------------- ----------- -------------
Net interest income $ 743,000 $ 9,000 $ 10,000 $ 762,000
============= ============== ============ =============
Depreciation and amortization $ 226,000 $ 353,000 $ 185,000 $ 764,000
============= ============== ============ =============
Segment income before taxes $ 672,000 $ 1,006,000 $ 321,000 $ 1,999,000
Income tax expense 322,000 560,000 179,000 1,061,000
------------- -------------- ------------ -------------
Net income $ 350,000 $ 446,000 $ 142,000 $ 938,000
============= ============== ============ =============
Expenditures for capital assets $ 254,000 $ 397,000 $ 209,000 $ 860,000
============= ============== ============ =============
Segment total assets $ 64,876,000 $ 6,435,000 $ 8,293,000 $ 79,604,000
Intersegment assets (10,526,000) - (2,178,000) (12,704,000)
------------- -------------- ------------ -------------
Total assets $ 54,350,000 $ 6,435,000 $ 6,115,000 $ 66,900,000
============= ============== ============ =============
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended November 30, 1999
-----------------------------------------------------------------
Health Plan Operations
--------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 12,935,000 $ 9,430,000 $ 4,011,000 $ 26,376,000
Intersegment revenues - (1,442,000) (360,000) (1,802,000)
------------- -------------- ------------ -------------
Total consolidated revenues $ 12,935,000 $ 7,988,000 $ 3,651,000 $ 24,574,000
============= ============== ============ =============
Interest income $ 212,000 $ 34,000 $ 20,000 $ 266,000
Interest expense 14,000 50,000 29,000 93,000
------------- -------------- ----------- -------------
Net interest income (expense) $ 198,000 $ (16,000) $ (9,000) $ 173,000
============= ============== ============ =============
Depreciation and amortization $ 99,000 $ 284,000 $ 155,000 $ 538,000
============= ============== ============ =============
Segment income (loss) before taxes $ (266,000) $ 1,137,000 $ 39,000 $ 910,000
Income tax expense (benefit) (115,000) 493,000 17,000 395,000
------------- -------------- ------------ -------------
Net income (loss) $ (151,000) $ 644,000 $ 22,000 $ 515,000
============= ============== ============ =============
Expenditures for capital assets $ 200,000 $ 574,000 $ 314,000 $ 1,088,000
============= ============== ============ =============
Segment total assets $ 33,168,000 $ 8,400,000 $ 4,614,000 $ 46,182,000
Intersegment assets (8,981,000) - (466,000) (9,447,000)
------------- -------------- ------------ -------------
Total assets $ 24,187,000 $ 8,400,000 $ 4,148,000 $ 36,735,000
============= ============== ============ =============
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended November 30, 2000
-----------------------------------------------------------------
Health Plan Operations
--------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 86,709,000 $ 21,482,000 $ 9,066,000 $ 117,257,000
Intersegment revenues - (10,512,000) (1,037,000) (11,549,000)
------------- -------------- ------------ -------------
Total consolidated revenues $ 86,709,000 $ 10,970,000 $ 8,029,000 $ 105,708,000
============= ============== ============ =============
Interest income $ 1,527,000 $ 93,000 $ 79,000 $ 1,699,000
Interest expense 80,000 75,000 60,000 215,000
------------- -------------- ----------- -------------
Net interest income $ 1,447,000 $ 18,000 $ 19,000 $ 1,484,000
============= ============== ============ =============
Depreciation and amortization $ 444,000 $ 688,000 $ 370,000 $ 1,502,000
============= ============== ============ =============
Segment income before taxes $ 1,606,000 $ 1,664,000 $ 651,000 $ 3,921,000
Income tax expense 773,000 801,000 313,000 1,887,000
------------- -------------- ------------ -------------
Net income $ 833,000 $ 863,000 $ 338,000 $ 2,034,000
============= ============== ============ =============
Expenditures for capital assets $ 528,000 $ 818,000 $ 440,000 $ 1,786,000
============= ============== ============ =============
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended November 30, 1999
-----------------------------------------------------------------
Health Plan Operations
--------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 25,305,000 $ 18,615,000 $ 7,818,000 $ 51,738,000
Intersegment revenues - (2,843,000) (712,000) (3,555,000)
------------- -------------- ------------ -------------
Total consolidated revenues $ 25,305,000 $ 15,772,000 $ 7,106,000 $ 48,183,000
============= ============== ============ =============
Interest income $ 416,000 $ 66,000 $ 39,000 $ 521,000
Interest expense 30,000 103,000 60,000 193,000
------------- -------------- ----------- -------------
Net interest income (expense) $ 386,000 $ (37,000) $ (21,000) $ 328,000
============= ============== ============ =============
Depreciation and amortization $ 205,000 $ 576,000 $ 294,000 $ 1,075,000
============= ============== ============ =============
Segment income (loss) before taxes $ (216,000) $ 1,622,000 $ (117,000) $ 1,289,000
Income tax expense (benefit) (94,000) 705,000 (51,000) 560,000
------------- -------------- ------------ -------------
Net income (loss) $ (122,000) $ 917,000 $ (66,000) $ 729,000
============= ============== ============ =============
Expenditures for capital assets $ 339,000 $ 1,004,000 $ 512,000 $ 1,855,000
============= ============== ============ =============
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Lifemark Corporation ("Lifemark" or the "Company"), formerly Managed Care
Solutions, Inc., is involved in a variety of health care programs, many of which
serve indigent and Medicaid populations. Two subsidiaries of the Company,
Ventana Health Systems, Inc. ("Ventana") and Arizona Health Concepts, Inc.
("AHC"), derive substantially all of their revenues through contracts with the
Arizona Health Care Cost Containment System Administration ("AHCCCSA") to
provide specified long-term and primary care health services, respectively, to
qualified members. The contract periods expire September 30, 2001 and September
30, 2002 for Ventana and AHC, respectively. In June 2000, Ventana was awarded a
contract for Maricopa County which began on October 1, 2000 and expires
September 30, 2003. Each contract provides for fixed monthly premiums, based on
negotiated per capita enrollee rates. Ventana and AHC subcontract with nursing
homes, hospitals, physicians, and other medical providers within Arizona to care
for members.
In October 2000, the Company decided to terminate the operations of AHC.
Pursuant to the company's contract with AHCCCSA, a notification and transition
will take place with the cessation of operations expected to occur on February
28, 2001. AHC contributed revenues of $5,728,000 and $4,895,000 for the three
month periods ended November 30, 2000 and 1999, respectively, and incurred
direct costs of operations of $5,893,000 and $5,217,000, respectively. For the
six months ended November 30, 2000 and 1999, AHC contributed revenues of
$11,324,000 and $9,659,000, respectively, and incurred direct costs of
operations of $11,706,000 and $10,079,000, respectively.
Lifemark of Texas, Inc., another subsidiary of the Company, derives
substantially all of its revenue through a contract with Rio Grande HMO, Inc.
("RGHMO"), a subsidiary of Health Care Service Corporation ("HCSC"), to share
financial risk in the State of Texas' STAR+PLUS program contract in Harris
County, Texas.
The Company also provides contract management services to county and state
governmental units and other health care organizations. The Company has nine
contracts for services, with multi-year terms that contemplate continued
renewals, which expire at various dates through the year 2005.
On October 10, 2000, the Company announced that it has agreed to merge with
EverCare, an operating unit of Ovations, which is a subsidiary of UnitedHealth
Group. Lifemark shareholders will be entitled to receive shares of UnitedHealth
Group Common Stock having a value of $63 million or $10.55 per Lifemark share on
a fully diluted basis, so long as the average ten-day closing price of
UnitedHealth Group stock immediately preceding the transaction close is at or
between $47.50 and $56.50 per share. In the event the average ten-day closing
price of UnitedHealth Group stock immediately preceding the transaction close is
above $56.50 per share, Lifemark shareholders will receive a total of
approximately 1,115,000 UnitedHealth Group shares and the merger consideration
may thereby increase based on UnitedHealth Group's stock appreciation above
$56.50. If the average ten-day closing price of UnitedHealth Group stock
immediately preceding the transaction is at or between $44.00 and $47.50 per
share, the value Lifemark shareholders will receive will decrease
proportionately from $63 million or $10.55 per share to $60 million or $10.08
per share. If the average ten-day closing price of UnitedHealth Group Common
Stock preceding the transaction close is below $44 per share, UnitedHealth Group
has the option to pay $10.08 per share of merger consideration in either cash or
shares of UnitedHealth Group Common Stock. The transaction is subject to
approval by Lifemark's shareholders.
The proposed merger is described in the proxy statement/prospectus which will be
sent to Lifemark shareholders in connection with the upcoming meeting of
shareholders to vote on the merger. The proxy statement/prospectus is included
in the registration statement on Form S-4 filed by UnitedHealth Group with the
Securities and Exchange Commission. Shareholders are urged to read the proxy
statement/prospectus carefully.
11
<PAGE>
Results of Operations
Consolidated revenues for the three and six-month periods ended November 30,
2000 increased 113% and 119%, respectively, over the comparable periods of the
previous fiscal year. For the three and six-month periods ended November 30,
2000, direct costs of operations increased 140% and 150%, respectively, over the
same periods of the previous fiscal year. The increase in both revenues and
expenses is primarily due to the financial risk-sharing agreement with RGHMO, as
well as growth in enrollment in certain plans covered by management contracts
and increases in membership for both Ventana and AHC.
Health Plan Operations-Risk Contracts. Revenues for the three and six-month
periods ended November 30, 2000, related to health plan operations-risk
contracts increased 227% to $42,293,000 from $12,935,000 and 243% to $86,709,000
from $25,305,000, respectively, over the same periods of the previous fiscal
year. The increases are primarily a result of the financial risk-sharing
agreement with RGHMO, which accounted for $22,000,000 and $48,246,000,
respectively, of the increases. Also contributing to the increases was the
expansion of Ventana into Maricopa, Yuma and Coconino counties, which resulted
in increases of $4,381,000 and $9,723,000, respectively.
Direct costs of operations for the three and six-month periods ended November
30, 2000 included $39,285,000 and $80,504,000 respectively, related to revenues
generated from risk contracts of health plans and programs, compared to
$12,534,000 and $24,221,000 from the comparable periods of the previous fiscal
year. The primary contributor to the increases was the financial risk sharing
agreement with RGHMO, which accounted for $20,374,000 and $44,576,000 of the
increases, respectively. The direct cost of operations for risk contracts as a
percentage of related revenues for the three and six-month periods ended
November 30, 2000 was 93%, compared to 97% and 96%, respectively, from the
comparable periods of the previous fiscal year. The decreases primarily
represent the change in a contractual relationship with RGHMO from a management
services agreement to a financial risk-sharing agreement. Another contributor to
the increase was growth in enrollment in Ventana and AHC of 87% and 10%,
respectively from November 30, 1999, to November 30, 2000.
Health Plan Operations-Management Contracts. Revenues for the three and
six-month periods ended November 30, 2000 related to health plan
operations-management contracts were $5,798,000 and $10,970,000, respectively,
compared to $7,988,000 and $15,772,000 from the comparable periods of the
previous fiscal year. The revenues from health plan operations-management
contracts decreased 27% and 30%, respectively, from the comparable periods of
the previous fiscal year. The decreases were primarily due to the cessation of
the administrative services agreement with AlohaCare, as well as the
modification of the contract with RGHMO under which such revenues became part of
health plan operations-risk contracts.
Direct costs of operations related to health plan operations-management
contracts for the three and six-month periods ended November 30, 2000 were
$2,720,000 and $5,202,000, respectively, versus $3,685,000 and $7,336,000 for
the same periods of last fiscal year. As a percentage of related revenues,
direct cost of operations related to health plan operations-management contracts
was 47% for the three and six-month periods ended November 30, 2000, versus 46%
and 47%, respectively, for the comparable periods of the previous fiscal year.
The decrease in expenses was largely due to the financial risk-sharing agreement
with RGHMO, under which those direct costs became a part of health plan
operations-risk contracts, and the cessation of the administrative services
agreement with AlohaCare.
Diversified Services. Diversified Services, which consists of the operations of
Lifemark at Home, Lifemark Care Connection (formerly Advinet), and the contracts
in California and Indiana, generated revenues of $4,134,000 and $8,029,000, for
the three and six-month periods ended November 30, 2000, respectively, compared
to $3,651,000 and $7,106,000, from the corresponding periods of the previous
fiscal year. The increases of 13% over the comparable periods from the previous
fiscal year are primarily due to the expansion of Lifemark at Home into Pinal
County.
Direct cost of operations related to diversified services for the three and six-
month periods ended November 30, 2000 were $3,053,000 and $5,814,000,
respectively, compared to $2,544,000 and $5,057,000 from the corresponding
periods of the previous fiscal year. As a percentage of related revenues, direct
cost of operations related to diversified services was 74% and 72%,
respectively, for the three and six-month periods ended November 30, 2000, and
70% and 71%, respectively, for the comparable periods of the previous fiscal
year. The increase is due to the growth in Lifemark at Home, which has a higher
direct cost of operations when compared to the other diversified services.
12
<PAGE>
Marketing, Sales and Administrative. Marketing, sales and administrative
expenses as a percentage of consolidated revenue was 11% for both the three and
six-month periods ended November 30, 2000 versus 21% and 22%, respectively, for
the corresponding periods of the previous year. The decrease in marketing, sales
and administrative expenses for the three and six-month periods ended November
30, 2000, compared with the same periods of the previous year is primarily a
result of Lifemark of Texas entering into the financial risk-sharing agreement
with RGHMO. Lifemark of Texas, similar to other health plan operations,
typically experiences significantly less marketing, sales and administrative
expenses as a percentage of related revenue in comparison to an administrative
services contract. For the three and six-month periods ended November 30, 2000,
approximately $300,000 and $700,000, respectively, of legal and advisory costs
relating to the proposed merger with UnitedHealth Group are included in
marketing, sales and administrative.
Interest Income. Interest income for the three and six month periods ended
November 30, 2000 was $856,000 and $1,699,000 versus $266,000 and $521,000 for
the same periods of the prior fiscal year. The additional income is due to the
growth of interest bearing cash and cash equivalents.
Interest Expense. Interest expense was $94,000 and $215,000 for the three and
six-month periods ended November 30, 2000, respectively, as compared to $93,000
and $193,000 for the same periods of the last fiscal year. Interest expense is
primarily attributable to outstanding debt maintained by the Company, which
consists of notes and capital leases with two banks and the William Brown Trust
in principal amounts of $3,609,000 and $300,000, respectively.
Income Taxes. Income tax expense was $1,061,000 and $1,887,000 for the three and
six-month periods ended November 30, 2000. The effective tax rates were 53% and
48%, respectively, for both periods. These rates were higher than the statutory
rates for the respective periods primarily due to the amortization of
non-deductible goodwill expenses and the impact of non-deductible expenses
relating to the proposed merger with UnitedHealth Group. During the three and
six-month periods ended November 30, 1999, the effective tax rate was 43%. The
rate was higher than the statutory rates for the respective periods, primarily
due to the amortization of non-deductible goodwill expenses.
Net Income. Net income for the three and six-month periods ended November 30,
2000 and 1999 was $938,000 and $2,034,000, respectively, compared to $515,000
and $729,000, for the corresponding periods from the previous fiscal year. The
primary reasons for the increase in profitability are the financial risk-sharing
agreement with RGHMO, under which terms it moved from a management agreement to
a risk-sharing agreement, and increases in membership across certain health
plans, offset by approximately $300,000 and $700,000, respectively, of costs
relating to the proposed merger with UnitedHealth Group.
Liquidity and Capital Resources
The Company's cash and cash equivalents increased to $19,965,000 at November 30,
2000 from $19,205,000 at May 31, 2000. Operating activities generated $4,196,000
for the six-month period ended November 30, 2000 versus $3,486,000 during the
same period of the previous fiscal year. The primary reasons for the change in
cash are earnings before non-cash charges, an increase in accrued expenses
related to accrued merger costs, the RGHMO contract performance incentive and an
increase in accrued medical claims offset by an increase in accounts receivable
and unbilled services. The increase in accrued medical claims and the increase
in accounts receivable and unbilled services both relate in part to the
financial risk-sharing agreement with RGHMO.
Investing activities used $2,879,000 for the six-month period ended November 30,
2000 as compared to $3,286,000 during the corresponding period of the prior
fiscal year. Cash of $1,786,000 was used to purchase fixed assets during the
six-month period ended November 30, 2000. Additional cash of $1,138,000 was used
to increase the amount of performance bonds held by Ventana. The required level
of performance bonds has increased due to the expansion of Ventana into three
additional counties in Arizona, along with an increase in enrollment in existing
counties. During the six-month period ended November 30, 1999, cash was used to
purchase $1,855,000 of fixed assets and $3,631,000 was utilized to increase
performance bonds related to the expansion of Ventana into additional counties.
Financing activities used $557,000 and $108,000 for the six-month periods ended
November 30, 2000 and 1999, respectively. The primary use of cash for the
current period was a payment of $699,000 relating to outstanding convertible
debt offset by the issuance of $94,000 of long-term debt and $48,000 received
for
13
<PAGE>
common stock pursuant to the Company's employee stock purchase plan. The primary
use of cash for the six months ended November 30, 1999 was the principal
payments on long-term debt of $784,000 offset by issuance of common stock which
provided $114,000 and the issuance of $562,000 of long-term debt.
Certain of the Company's operating subsidiaries are subject to state regulations
which require compliance with net worth, reserve and deposit requirements. To
the extent the operating subsidiaries must comply with these regulations, they
may not have the financial flexibility to transfer funds to Lifemark. Net assets
of subsidiaries (after inter-company eliminations) which, at November 30, 2000,
may not be transferred to Lifemark by subsidiaries in the form of loans,
advances or cash dividends without the consent of a third party are referred to
as "Restricted Net Assets". Total Restricted Net Assets of these operating
subsidiaries was $10,552,000 at November 30, 2000, with deposit and reserve
requirements (performance bonds) representing $7,872,000 of the Restricted Net
Assets and net worth requirements, in excess of deposit and reserve
requirements, representing the remaining $2,680,000.
The Company believes that its existing capital resources and cash flow generated
from future operations will enable it to maintain its current level of
operations and its planned operations, including capital expenditures, in fiscal
year 2001.
Forward-Looking Information
This report contains both historical and forward-looking information.
Forward-looking statements include, but are not limited to, discussion of the
Company's strategic goals, new contracts, possible expansion of existing plans,
expected increase in certain expenses, and cash flow. These statements speak of
the Company's plans, goals or expectations and refer to estimates. The
forward-looking statements may be significantly impacted by risks and
uncertainties, and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). There can
be no assurance that anticipated future results will be achieved because actual
results may differ materially from those projected in the forward-looking
statements. Readers are cautioned that a number of factors, which are described
herein and in the Company's Annual Report in Form 10-K for the year ended May
31, 2000, could adversely affect the Company's ability to obtain these results.
These include the effects of either federal or state health care reform or other
legislation; changes in reimbursement system trends, the ability of care
providers (including physician practice management groups) to comply with
current contract terms; and renewal of the Company's contracts with various
state and other governmental entities. Such factors also include the effects of
other general business conditions, including but not limited to, government
regulation, competition and general economic conditions. The cautionary
statements made pursuant to the Reform Act herein and elsewhere by the Company
should not be construed as exhaustive or as any admission regarding the adequacy
of disclosures made by the Company prior to the effective date of the Reform
Act. The Company cannot always predict what factors would cause actual results
to differ materially from those indicated by the forward-looking statements. In
addition, readers are urged to consider statements that include the terms
"believes", "belief", "expects", "plans", "objectives", "anticipates", "intends"
or the like to be uncertain and forward-looking.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the ordinary
course of business on certain assets and liabilities including cash and cash
equivalents, short-term investments and long-term debt. The Company's variable
rate debt relates to the bank note as well as borrowings under their software
financing arrangement, which are primarily vulnerable to movements in the prime
rate. The Company does not expect changes in interest rates to have a
significant effect on the Company's operations, cash flow or financial position.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
15
<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.
LIFEMARK CORPORATION
By: /s/ Rhonda E. Brede
------------------------------------
Rhonda E. Brede, President and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ Michael J. Kennedy
------------------------------------
Michael J. Kennedy, Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: January 12, 2001
16
<PAGE>
ANNEX G
UnitedHealth Group 1999 Annual Report
[PHOTO OF GIRL]
It's all
about them
[PHOTO OF MAN]
<PAGE>
3 Letter from the Chairman
7 Overview of UnitedHealth Group Businesses
18 UnitedHealth Group At A Glance
21 Results of Operations
28 Consolidated Statements of Operations
29 Consolidated Balance Sheets
30 Consolidated Statements of Changes in Shareholders' Equity
31 Consolidated Statements of Cash Flows
32 Notes to Consolidated Financial Statements
43 Report of Independent Public Accountants
43 Report of Management
44 Corporate and Business Leaders
45 Board of Directors
46 Investor Information
<PAGE>
[PHOTO OF MAN]
It's about those we serve.
Individuals and families. Employers and their employees. Care providers and
their patients. Health insurers and payers. Researchers and manufacturers.
[PHOTO OF MAN]
It's about understanding.
When we view the world from the perspective of those we serve, we gain insight
necessary to bring about substantive change. And we provide services that offer
value.
[PHOTO OF WOMAN AND GIRL]
It's about results.
Solutions that redefine the marketplace. The latest technology. Improved health
and well-being.
1
<PAGE>
[PHOTO OF GIRL]
2
<PAGE>
Letter from the Chairman
1999 was an outstanding year for UnitedHealth Group.
. Revenues rose nearly 13 percent, reflecting strong and balanced growth in
all business segments.
. Earnings per share grew by 22 percent, with more than 40 percent of
operating income coming from outside of our health plan business.
. Cash flows from operations well exceeded $1 billion for the second
consecutive year.
. Return on equity rose to 14.1 percent for the year, a significant advance
over 11.9 percent in 1998, and on track to reach 16 percent or more by year-end
2000.
. For the full year, our stock price increased 23 percent.
This strong and broad-based performance suggests the emerging potential of
strategies put in place more than two years ago, when we realigned our company
into five independent, market-defined operating businesses. UnitedHealthcare,
Ovations, Uniprise, Specialized Care Services and Ingenix today constitute a
powerful portfolio of leading businesses that establish UnitedHealth Group as
the preeminent and most diversified health and well-being company in America.
The formation of our separate businesses reignited an entrepreneurial
spirit that dates back to when UnitedHealth Group was a start-up company working
with physicians to create local health plans. We continue to harness the
creativity and innovation that established our long-standing leadership. In
today's dynamic marketplace, those qualities, coupled with a customer-defined
commitment to operational excellence, provide a competitive advantage and should
accelerate our growth.
As we enter the next century, we intend to continue our leadership by
investing intellect, energy and dollars in research and development to create
better, more informed consumer-oriented offerings for the broad health services
market. Our actions will be characterized by three key principles: market-driven
focus, consumer-defined value and operating excellence.
3
<PAGE>
Market-Driven Focus
With revenues of nearly $20 billion and more than 40 percent of operating
income contributed from outside of our health plan business, UnitedHealth Group
operates far beyond the bounds and traditions of either insurance or managed
care.
We are committed to being the best at forming and operating orderly,
efficient markets for the exchange of high quality health and well-being
services. This is possible because of UnitedHealth Group's proven competencies
in network creation and coordination, sophisticated and complex large-scale
transaction processing, and data and knowledge analysis and application. These
are three core competencies we can apply to improve virtually any market within
the vast health and well-being landscape.
These competencies transcend organizational boundaries and create building
blocks for our current businesses and future ventures. Today, UnitedHealth Group
is a diverse, market-focused enterprise composed of five distinct, yet
strategically aligned businesses:
. UnitedHealthcare, which organizes health markets serving the needs of
individuals and employers in local geographic regions;
. Ovations, which offers health and well-being services for Americans in the
second half of life;
. Uniprise, which provides leading-edge support services and health and
benefit solutions to large corporations and employers, other payers and health
plans;
. Specialized Care Services, which organizes highly specialized markets for
services to meet the needs of individuals and businesses of all sizes; and,
. Ingenix, which provides health information and research to virtually all
participants in the health care system.
[PHOTO OF WILLIAM W. MCGUIRE, M.D.]
Each of these businesses is focused on responding to important basic human
needs that aggregate into major market segments within a health and wellness
economy that today exceeds $1 trillion. These businesses are now separated, so
as to be market-focused and independently branded and managed, but are fully
able to draw on each other's strengths to better -- and often uniquely -- meet
the needs of their respective customers. This means ongoing change and evolution
that is more dedicated and better focused on meeting market needs. It also is a
modular structure, designed to react quickly to emerging and changing markets,
along with changes in the health care environment itself.
Consumer-Defined Value
UnitedHealth Group has consistently sought ways to provide tangible value
to its customers -- whether individual consumers, businesses, governments or
other health care institutions. In that pursuit, our view of value in the
marketplace has included not just the measurement of the price of services, but
also their convenience, quality and consistency with the underlying values of
the customer. Innovations such as direct access to medical specialists, health
plan report cards, broad and open physician networks, and multi-tiered
prescription drug formularies were introduced to the market by UnitedHealthcare.
In our society, access to basic health care is placed above the economic
dynamics of its supply. Personal control over one's individual health and
well-being has become increasingly important, and we expect that private sector
systems will continue to evolve, giving individual consumers greater
accountability -- intellectually, financially and otherwise. In that
environment, each consumer will require -- and demand -- more
4
<PAGE>
information along with better performance and accountability from purchasers
as well as providers of care.
In 1999 we moved dramatically toward bringing these concepts of consumerism
and value closer to reality. Most notable was the launch of the Care
Coordination concept, a major step in rethinking the evolving role of health
care systems. Care Coordination helps define a new standard for advancing health
and well-being. It directs resources into patient education, coordination of
efforts for specific complex cases, support services to help people understand
and comply with treatment plans and medications, and help in obtaining timely
access to needed resources and services.
Similar advances were brought forth in other businesses -- all consistently
focused on delivering tangible value to better-defined customer segments.
Uniprise emerged as a preeminent coordinator of health care services to large,
multi-site employers and other organizations in need of technology and unique
transactional solutions to complex health care service needs. And Ovations
translated its administrative efficiencies and creative product designs for the
AARP Medicare Supplement program into bottom line value for AARP members --
specifically, the lowest premium rate increases in a decade. This in turn
translated into stronger customer retention for AARP.
Health care costs remain a major challenge to our nation, its employers and
individual consumers. In 1999 we were successful in helping balance cost trends
and customer demand for access, choice and critical benefit needs. For example,
we again achieved particularly positive results in the area of pharmaceutical
costs, continuing a tradition of one of the lowest cost trends in the industry
while offering customers access to a broad array of drugs. And, in the face of
tremendous advances in medical technology, an aging population and strong
consumer demand for elective medical interventions, we were able to moderate, on
a comparative basis, health care costs for our customers in virtually all market
segments.
What will shape health and well-being services in the next decade? Clearly,
demand for information will increase dramatically, paralleling the expansion in
medical advances and services. New technologies will continue to provide us with
wondrous ways to anticipate and diagnose disease, fight illness and correct
heretofore untreatable medical problems. Our population will continue to age,
and access to desired services will be at a premium. With new capabilities,
changing demographics and our society's commitment to health and well-being,
costs associated with health care will continue to grow at a rate above that of
other economic sectors. This will intensify the challenges for all of us -- with
particular pressure on those unable to afford or even access all of our nation's
health care capabilities. Cost, access and quality will continue as challenging
issues for our society.
UnitedHealth Group has positioned itself to be an increasingly important
participant in this new environment. It is a position achieved because of the
combined clinical expertise and technology capabilities we direct toward
improving service and facilitating care; because of critical information we
report to users, providers and payers of health care services; and because of
our unrelenting focus on helping people get what they need at the right time and
the right place at a fair price. It is a strong position because our business
model enables us to focus on specific needs of different market segments at
different times -- all while leveraging the expertise and capabilities of other
companies within our family.
Operating Excellence
Our vision for the future can be fulfilled only through excellence in
execution. Sound business practices and discipline set the foundation for how we
work, and we are committed to operating at a level demonstrated by our nation's
greatest enterprises. Our clients should expect nothing less.
5
<PAGE>
Meeting this goal demands proper organization and a focus on accountability
and performance. Our independent but strategically linked business model has
pointed the way to that end. More essential -- and highlighted by our
diversification -- are our people. Even as we continue to foster growth among
our core employees, we have made conscious efforts to add people, particularly
senior management, with deep operating experience outside the health and
insurance worlds. We are using their skills and experience to move us quickly
into management approaches and service levels that, when viewed by our customers
and the broad business community, establish us at the same level as any
well-built, well-managed company, regardless of market.
The intent of such actions is to continuously enhance service levels --
particularly to improve key interactions between providers of care and patients.
In 1999, we achieved fundamental improvements in response time and problem
resolution across all of our businesses. These gains were rewarded by strong
customer retention, business expansion to existing customers, and record new
business sales in UnitedHealthcare, Uniprise, United Resource Networks and
United Behavioral Health.
Looking Ahead
In 1999, for the first time, we were listed as one of the Fortune 100
companies. And while we are proud that we have built this company into such a
significant force, we also are aware that the challenge is to continue to
advance and be willing to change and reshape even our most recent efforts. When
measured against the scope of the market opportunity that stands before us, our
work has just begun.
The strength and breadth of our organization offers significant advantages
we will exploit. Yet the new millennium's fast-paced, global marketplace values
speed more than size, flexibility and adaptability more than stability.
Recognition of that fact is at the crux of the changes we sketched in 1997,
applied in 1998, refined in 1999, and will accelerate in 2000.
From the start, we have had confidence in our broad focus. We are convinced
that creating distinct market-facing businesses allows us to serve the aggregate
needs of people -- the essence of any market -- with greater effectiveness
through support of an agile and energetic culture. In so doing, UnitedHealth
Group will become an even stronger performer.
Last year, we made tremendous strides and achieved record results. We enter
the dynamic marketplace of 2000 excited by the opportunities, committed to
helping improve the health and well-being of the individuals we serve, and --
most importantly -- steadfast in our resolve to apply ourselves creatively in
order to optimize whatever the future holds.
/s/ William W. McGuire, M.D.
William W. McGuire, M.D.
Chairman and Chief Executive Officer
6
<PAGE>
A progressive corporate architecture allows autonomous businesses to flourish.
[PHOTO OF WOMAN]
[PHOTO OF HAND]
UnitedHealth Group is composed of five businesses working within a shared
vision. Our competencies in network management, knowledge and information, and
service infrastructure serve as our foundation.
We have streamlined decision-making and renewed individual accountability--
pushing our performance to new heights.
[PHOTO OF MAN]
<PAGE>
My daughter is seven. If she gets sick, I want to know that I can get her the
care she needs at a fair price. I want the freedom and control to decide,
together with my daughter's pediatrician, which course of treatment is most
appropriate for her and to have my health care company respect our decision. And
I want the whole process to be simpler.
I need help accessing quality care and using health care resources
effectively, but I want enough control and flexibility to choose what's best for
our family. And because our lives are so hectic, our benefits have to be easy to
understand and convenient to use.
It's not too much to ask.
What's right
UnitedHealthcare
--------------------------------------------------------------------------------
We understand. That's why four simple principles shape UnitedHealthcare and, we
believe, will ultimately shape the marketplace for health care services.
Simple, Convenient Access to Quality Care
UnitedHealthcare is making it easier for people to get the care they need, when
they need it, with its comprehensive Care Coordination philosophy. Care
Coordination helps make the use of health care services more effective and
efficient, while helping to preserve broad access. Health care professionals
work with individuals to help identify and prevent delays in receiving care,
assist them in understanding and complying with doctors' instructions and
medication requirements, and coordinate access to a broad set of resources and
services.
UnitedHealthcare has programs that provide health education, admission
counseling before a hospital stay, care advocacy to help prevent delays in
accessing resources, help ensuring a safe transition from the hospital, support
for individuals at risk of needing intensive treatment, continuous coordination
for people with chronic conditions, and prescription drug management, which
promotes safe and effective use of medications.
Benefits and Services that Value Individual Choice and Control
UnitedHealthcare wants people to be engaged and active participants in managing
their own health and well-being. The company designs options that let
individuals choose what is best for themselves and their families and offers
incentives that increase involvement in treatment and buying decisions.
UnitedHealthcare's multi-tiered pharmacy benefit program, for example,
provides access to a wide range of generic and brand-name drugs. Individuals can
benefit by accessing higher-priced brand-name drugs, as well as generic drugs,
which will cost them less. In addition, UnitedHealthcare was a leader in
aggressively promoting open access, which allows individuals to schedule
appointments directly with specialists without a referral from a primary care
physician.
Improved Quality of Care Through Information
To help physicians make better treatment decisions, UnitedHealthcare uses
Clinical Profiles -- data that compares a physician's actual practices to
nationally accepted benchmarks for the most successful care.
UnitedHealthcare distributes profiles to physicians twice a year, and has
added physi-
8
<PAGE>
[photo of girl]
for my family
cians with each distribution. More than 70,000 physicians currently participate
in this leading-edge effort.
An enriched Web site puts in-depth information at consumers' fingertips: a
directory of physicians and hospitals, reports on thousands of health topics,
and soon, a health profile tailored to individual interests.
Affordable Value
UnitedHealthcare's efforts to help improve quality also help keep health care
costs affordable. Care Coordination, by helping connect people with the right
care in a timely manner, strives to improve health outcomes by avoiding
complications and optimizing the use of health care resources, which ultimately
lowers costs.
Further, UnitedHealthcare arranges access to care through more than 340,000
physicians and 3,200 hospitals across the United States. The consolidated
purchasing power represented by the individuals we serve makes it possible for
UnitedHealthcare to contract cost-effectively, passing on savings to consumers
and employers while providing access to broad convenient networks of care
providers.
9
<PAGE>
I have a great relationship with my physician, but I know she may not be able to
provide all of the services I need to maintain my total health and well-being. I
need vision care and dental services. I believe many alternative therapies
provide valuable benefits, and I want affordable access to services such as
acupuncture and chiropractic care.
And though I feel healthy today, I want to know that if I ever need special
help, I will have access to quality specialized care for things like heart or
cancer treatment, transplantation, behavioral health services or counseling
support.
Specialized care
Specialized Care Services
--------------------------------------------------------------------------------
Specialized Care Services was conceived and built to respond to people's desire
for affordable access to an ever broadening range of specialized health and
well-being resources. Its portfolio of businesses connects people with leading
care providers in more specialized fields, gives them access to valuable
information and educational materials, and makes these services increasingly
affordable.
Specialized Care Services offers access to the most comprehensive array of
specialized and alternative care available to the consumer directly or through
the business-to-business marketplace. For a wide set of needs -- whether as a
comprehensive package of specialty services or as access to a specific,
individual service -- Specialized Care Services can organize services that can
help. That translates into added convenience, simplicity and value for its
customers.
Critical Care
United Resource Networks is a gateway to leading critical care and chronic care
programs at more than 50 of the best medical centers throughout the United
States. The company's focus on quality helps improve outcomes -- including
survival rates -- even as it lowers costs an average of 35 percent.
Behavioral Health
United Behavioral Health provides mental health and substance abuse services,
employee assistance programs and PsychWorksSM, a unique service that helps
manage the impact of short-term disability due to mental illness. In 1999,
United Behavioral Health added specific programs that help health care
professionals manage psychiatric medications and, in turn, provide quality care
at a reasonable cost in this growing and sensitive area.
Health Information
Optum(R) helps individuals take charge of their health and well-being. For 10
years, Optum has been a leader in helping people meet their personal health
needs in a confidential and protected manner. The company provides information,
education and support in print, by phone, on tape, face-to-face and over the
Internet. Optum Internet services contain comprehensive
10
<PAGE>
[photo of woman]
at my fingertips
information, including interactive features for personalized information.
Dental Care
Dental Benefit Providers offers convenient access to affordable dental care with
the broadest benefits portfolio, demonstrated cost advantages and extensive
networks that allow maximum accessibility.
Vision Care
Coordinated Vision Care facilitates each step in the delivery of vision services
and products, helping to enhance quality and control costs to create value for
individual consumers or for health care organizations.
Life and Accident Benefits
Unimerica Life and Accident is a single convenient source for life and accident
benefits that align with other health and specialty coverages and benefits.
11
<PAGE>
I'm not a kid anymore, and I love it. I've worked hard all my life, and now I
have time to be myself, enjoy my grandkids, travel with my wife and hit the bike
trails.
I recognize my needs and opportunities are changing. My health concerns are
increasing. I need to understand my health care choices, whether I have enough
money, what coverage Medicare will provide, and what supplemental coverage I
will need. I want information and services tailored to my needs -- family,
health and fitness, travel and recreation, home and work.
After all, I intend to enjoy the second half of my life, not worry about
it.
Services to meet my
Ovations
--------------------------------------------------------------------------------
Ovations serves the needs and aspirations of people in the second half of life,
using UnitedHealth Group capabilities and buying power to develop products and
services around the distinct health and life-stage needs of people age 50 and
older.
Affordable Health Care
Americans are caught between the soaring cost of health care and pressure on
Medicare to remain viable by reducing costs. Ovations is responding through a
10-year partnership with AARP, offering Medicare Supplement and Hospital
Indemnity insurance to more than 3.7 million AARP members. Recently, Ovations
introduced AARP Eye Health Services to offer affordable eye exams, complimentary
glaucoma screenings and discounts on eyewear. Ovations' Medicare Supplement
Pharmacy Service addresses one of the most significant cost problems facing
older Americans -- prescription drug costs. These services saved AARP members
nearly $60 million in 1999. Ovations' AARP Division also developed a valuable
offering with lower cost Medicare Supplement coverage that provides a hospital
network and 24-hour access to health care information from nurses.
Healthy Lifestyles
In nearly every person's life, there comes a time when thinking about where to
live is influenced by health and family considerations. Ovations is shaping a
distinctive service that will respond to the complex health, housing and
well-being needs of older Americans. This integrated set of services will
leverage Ovations' and UnitedHealth Group's capabilities to serve the unique
needs of this market.
Knowledge About Health and Well-Being
Ovations Knowledge Group provides useful information for making health and
lifestyle decisions. The Ovations Press is developing books designed to improve
understanding of complex questions faced in life. The first books provide guides
to financial planning, caring for your heart, forgetfulness, memory loss and
Alzheimer's disease, and wills, trusts and estate planning.
12
<PAGE>
[PHOTO OF MAN]
changing needs
--------------------------------------------------------------------------------
Eldercare
Through the EverCare(R) network, on-site nurse practitioners collaborate with
physicians to enhance care to the elderly through improved timeliness,
disciplined continuity and coordination of care. EverCare has innovative
programs to detect and treat common conditions -- such as pneumonia and other
infections, congestive heart failure, hip fractures and medication side effects
-- which are among the top reasons for hospital admissions among elderly
individuals. In its first year, the pneumonia early treatment and detection
program helped individuals served by EverCare receive timely access to services
to treat their illnesses, helping them avoid the trauma of hospitalization, and
lowering hospital admissions for pneumonia by 10 percent.
13
<PAGE>
To run a world-class business, you need to recruit and retain world-class
employees. That's why it's so important to me to be able to offer my employees
and their families competitive benefits that are distinctive in how they combine
quality, convenience and affordability.
I want to align with an organization that makes it easy for my company to
offer a set of employee services that delivers maximum value to our people. And
as my business needs change, I want a technologically advanced, progressive
partner with the initiative to continually strive to develop and deliver
superior solutions.
Benefits that run as well as
Uniprise
--------------------------------------------------------------------------------
Uniprise offers the most advanced and comprehensive set of employee services and
technologies in the entire spectrum of health care benefits. Uniprise services
fit seamlessly into any business environment and serve the needs of employees
and their families -- from simplified benefits design with broad network access
to world-class Internet connectivity to consumer-friendly services and
experiences.
Whether you represent a large domestic company, university, government
agency or diverse global enterprise, or an insurance company, a provider network
or health care company seeking an outsourcing solution, Uniprise can respond
with a set of services appropriate for your needs.
Uniprise works with clients to develop a strategic plan that takes them
from where they are today to wherever they want to go -- and gets them there
fast. That's why, in 1998 and 1999, Uniprise grew more than any other enterprise
in its marketplace, and has retained more than 98 percent of its customers over
the past three years.
Consumer Focus
Uniprise serves more than one-fourth of the Fortune 500 companies, including
many of the most progressive companies in the world. In 2000, Uniprise will
handle more than 350 million transactions with industry-leading levels of
timeliness and quality.
During the past 24 months, Uniprise has invested more than $100 million in
infrastructure enhancements aimed at improving the consumer experience by
strengthening service quality and accuracy, simplifying operations and applying
advanced technology. In this effort, Uniprise is looking beyond the historic
health care services industry and emulating the best consumer services
companies, regardless of industry. In 2000, Uniprise will expand these
investments and continue to advance its consumer-focused agenda. That is what
the marketplace desires, and it defines a great future for Uniprise.
Advanced Technology
Uniprise has aggressively expanded its Internet technology. Already among the
most connected, Internet-
14
<PAGE>
[PHOTO OF MAN]
my business
--------------------------------------------------------------------------------
capable companies in all of health care, Uniprise has invested heavily to
enhance service features, speed and functionality even further, so that ease of
use and speed of service is optimized.
Comprehensive Outsourcing
Through Uniprise, clients can seamlessly access all of the services and features
within the domain of UnitedHealth Group, as well as products and services from
providers in any location outside of UnitedHealth Group, if that works best for
their situation. Uniprise is rapidly expanding institutional outsourcing
relationships with insurers, providers and other health care industry
participants.
2000 will be a defining year for Uniprise as the company continues to apply
innovative solutions to its deep understanding of the needs of large employers.
What will emerge is an ever more consumer-centered operating environment that
opens new opportunities and enhances service for clients and their employees or
customers.
15
<PAGE>
How are new technologies changing care protocols and costs? Who provides the
best care? What should I expect in terms of duration, recovery and total costs
for a given procedure?
Health care is too important for guesswork. I want information I can use --
evidence -- to improve outcomes and help control costs.
Knowing the cost of a single procedure or the result of one patient's
experience with a treatment just isn't enough. To draw meaningful conclusions, I
need information that helps me understand broad trends, evaluate what works and
doesn't work, consider results and costs over a longer period of time, and learn
from the experience of large populations.
Knowledge that
Ingenix
--------------------------------------------------------------------------------
Whether you represent a corporation trying to better understand and shape health
care benefits for its employees, a pharmaceutical manufacturer seeking to bring
a new product to market, a health insurer or payer trying to understand costs,
or a health care provider trying to improve coding and billing disciplines,
Ingenix has the health care informatic databases and expertise to help. Ingenix
combines the power of information and technology to guide better clinical,
technical and financial decisions. Through its information, analysis, research
and consulting services, Ingenix can help customers improve health care
operations and address critical issues, such as rising medical costs, quality of
care and new therapies and compounds.
The Source for Pharmaceutical Services
Ingenix conducts clinical research and studies to help develop new therapeutic
agents, evaluate medical outcomes and consider economic impacts. Ingenix helps
devise research protocols, identify and train investigators, and assist with
recruitment. The company also provides data management, biostatistics,
regulatory services and overall project management services.
With access to massive databases, Ingenix can identify physicians with the
necessary experience for a certain study and establish data sets for broad
populations. As demonstrated in its work on clinical trials, Ingenix's ability
to organize physician and patient populations advances the search for better
treatments and cures. Its access to UnitedHealth Group's deep, rich base of care
and outcomes data aids in trial design and enables Ingenix to identify treatment
patterns and outcomes, as well as pinpoint factors that contribute to adverse
effects or other problems.
The Source for Health Information
As a leader in health information, Ingenix offers one-stop shopping to meet
business-to-business health care information needs.
From the beginning, UnitedHealth Group has used information to study and
make advances in care, the reimbursement process, population risk management and
cost management. Now, with a growing arsenal of advanced information
technologies, including increasingly sophisticated analytic tools, Ingenix is
poised to help solve the most challenging operational issues and make
breakthroughs in
16
<PAGE>
[PHOTO OF WOMAN]
drives results
--------------------------------------------------------------------------------
the treatment of today's most serious health problems.
. Data and Software Products. Ingenix helps companies streamline, interpret and
manage activities by providing data services and software to support
benchmarking, pricing, cost management, utilization, regulation, reporting,
coding, claim review and provider contracting. UnitedHealthcare's Clinical
Profiling, which encourages improvement in clinical performance by comparing an
individual physician's practices to local peer group and national standards, is
conducted using Ingenix data and software products.
. Publishing. Ingenix business-to-business publications deal with coding and
reimbursement information. These publications are used by virtually all
providers and payers in America to understand the use of health benefits more
clearly.
. Consulting. In the United States and abroad, Ingenix advises providers,
insurance companies and government programs on their health care operations.
17
<PAGE>
United Health Group At A Glance
<TABLE>
<CAPTION>
Customer Base (as of
Business Description Jan. 31, 2000) Market Opportunity
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UnitedHealth Group Focused on forming and operating orderly, Not applicable $ 1.1 trillion in aggregate U.S.
efficient markets for the exchange of high health care spending, and
quality health and well-being services further potential in worldwide
through five distinct businesses operating activities in various markets.
in strategic alignment across separate
market segments.
------------------------------------------------------------------------------------------------------------------------------------
UnitedHealthcare Network-based health and well-being services, . 7.4 million individuals Approximately $150 billion in
including commercial, Medicare and Medicaid from small andmid-sized small and mid-sized employer
products for locally based employers and employers group, Medicare and Medicaid
individuals in six broad regional markets. . 412,000 Medicare- spending across the
eligible individuals UnitedHealthcare markets.
. 485,000 Medicaid-
eligible individuals
------------------------------------------------------------------------------------------------------------------------------------
Ovations Health and well-being services for people in . 3.7 million individuals About $20 billion of spending in
the second half of life and their families. served through the AARP supplemental Medicare and
Division hospital indemnity products;
. 16,000 individuals about $18 billion in eldercare
served through services; additional revenue
EverCare(R) opportunity in emerging
businesses, such as health and
housing, and knowledge and
information services.
------------------------------------------------------------------------------------------------------------------------------------
Uniprise Network-based health and well-being services, . 218 large organizations, More than $100 billion
business-to-business transactional including in U.S. employers with
infrastructure services, consumer connectivity 131 Fortune 500 companies, more than 5,000 employees
and service,and technology support for large representing 6.3 million through either fee-based or
employers, health plans, and other payers. individuals or risk--sharing business
models; further opportunity
to manage infrastructure
for other payers in the
marketplace.
-----------------------------------------------------------------------------------------------------------------------------------
Specialized Care Portfolio of specialized health and well-being . United Behavioral Health More than $200 billion in
Services companies, each serving a specialized market serves more than 15 million total payer, employer and
need with a unique blend of benefits, provider individuals consumer spending across
networks, services and resources. . United Resource Networks the spectrum of
serves 1,400 clients specialized benefits and
representing more than products; purchases made
41 million individuals on both a fee basis as
. Optum/(R) /services are well as on partially or
available to more than 16 fully insured terms.
million individuals
. Dental Benefit Providers
serves more than 2 million
individuals
------------------------------------------------------------------------------------------------------------------------------------
Ingenix Two primary business unit divisions -- . More than 200,000 health More than $40 billion in
pharmaceutical services and health care providers worldwide spending on
information -- providing a comprehensive . 2,000 payers pharmaceutical research and
line of health care knowledge and . 100 Fortune 500 companies development; an additional
information products and services to . Most major pharmaceutical $13 billion in data,
pharmaceutical companies, health insurers manufacturers software and health
and payers, care providers, large employers business information
and governments. services.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Competitive Strengths 1999 Operating Highlights
------------------------------------------------------------------------------------------------------------------------------
<S> <C>
. Strategically aligned, market-facing business model . Revenues increased nearly 13% to $19.6 billion
. Deep, talented and motivated management team . Earnings per share grew by 22%
. Entrepreneurial roots . More than 40% of operating income contributed
. Advanced technology capabilities from outside of our health plan business
. Cash flows from operations well exceeded $1
billion for the second consecutive year
. Return on equity rose to 14.1%
. Stock price increased 23%
------------------------------------------------------------------------------------------------------------------------------
. Flexible, access-oriented products . Revenues reached $13.9 billion, an increase of 16%
. Pro-consumer philosophy . Introduced Care Coordination process to help enhance health
. Local orientation outcomes
. Simplicity, quality and affordability of services . What works for you?(SM) campaign and branding initiatives
. Strong underwriting capabilities launched
. Focus on health care providers as central participants . Added 160,000 net new fee-based commercial individuals
in the system
------------------------------------------------------------------------------------------------------------------------------
. Exclusive focus on needs of people 50 and older . Revenues increased 1% to $3.6 billion
. Nation's largest Medicare Supplement insurance offering . Enhanced the AARP Medicare Supplement product offerings
with AARP, including unique services to address for individuals, improving membership trends
affordability and quality of health care . Expanded EverCare/(R) /membership and revenues 47% with
. EverCare/(R)/, one of the nation's largest eldercare improving clinical and operational performance
companies . Created total consumer savings of $60 million
. EverCare's award-winning nurse practitioner model through Medicare Supplement Pharmacy Service offering
. Depth of research and information through the Ovations . New operational processes created medical
Knowledge Group savings of more than $50 million
. Launched publishing enterprise
------------------------------------------------------------------------------------------------------------------------------
. Focused commitment to this market segment . Revenues increased 15% to $1.9 billion
. Consumer orientation . Added 30 new major corporate employers as clients
. Advanced technology . Processed 300 million transactions
. Scalable infrastructure serving 1.5 million members . Achieved customer retention rate of 98.7%
covered by other health insurers . Electronic claim submission hit 46% and claim auto-
. Comprehensive outsourcing for employee services adjudication rate exceeded 65%
. Financial accuracy measured 99%
. Developing new customer service solutions leveraging the
Internet
------------------------------------------------------------------------------------------------------------------------------
. Most complete offering of access to specialized health . Revenues increased 17% to $726 million
care services in America . Added dental, vision, life and accident product capabilities
. Premier behavioral health offering . Enhanced behavioral health, catastrophic care and
. Largest center of excellence critical care program in information-based service offerings
the nation
. One of top consumer health information services
. One of largest managed dental services companies
. Vision care services that help improve quality and control
costs
------------------------------------------------------------------------------------------------------------------------------
. Unique, proprietary data sets . Revenues reached $258 million, an increase of 40%
. Therapeutic clinical expertise . Enrolled 13,000 physicians in clinical investigator network
. Commercialized medical cost and utilization knowledge and . Increased clinical trials business sixfold
information in business-to-business sector
</TABLE>
19
<PAGE>
[PHOTO OF A WOMAN]
Financial Review
<PAGE>
Results of Operations
1999 Financial Performance Highlights
1999 was the strongest year in the history of UnitedHealth Group, resulting
from business growth and continued productivity improvements. Financial
performance highlights include/1/:
. Record earnings from operations, net earnings applicable to common
shareholders, and diluted net earnings per common share of $943 million,
$568 million and $1.60 per share, respectively, representing increases
over 1998 of 10%, 12% and 22%, respectively.
. Record revenues of $19.6 billion, a 13% increase over 1998.
. Segment operating earnings of $953 million, up 20% over 1998, with each
segment delivering strong year-over-year gains.
. Record cash flows of $1.2 billion generated from operating activities,
an 11% increase over 1998.
. Continued financing initiatives to achieve a more efficient capital
structure, including the repurchase of 38.8 million shares of our common
stock.
. 1999 return on equity of 14.1%, up from 11.9% in 1998.
-------
/1/ Where applicable, 1998 results exclude special operating charges.
Following is a five-year summary of selected financial data:
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------
(in millions, except per
share data) 1999 1998 1997 1996 1995
------------------------ ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Consolidated Operating
Results
Revenues................... $19,562 $17,355 $11,794 $10,074 $5,671
Earnings (Loss) From
Operations................ $ 943 $ (42)/1/ $ 742 $ 581 /2/ $ 461 /3/
------- ------- ------- ------- ------
Net Earnings (Loss)........ $ 568 $ (166) $ 460 $ 356 /2/ $ 286 /3/
Net Earnings (Loss)
Applicable to Common
Shareholders.............. $ 568 $ (214)/1/ $ 431 $ 327 $ 279
------- ------- ------- ------- ------
Basic Net Earnings (Loss)
per Common Share.......... $ 1.63 $ (0.56) $ 1.15 $ 0.90 $ 0.80
Diluted Net Earnings (Loss)
per Common Share.......... $ 1.60 $ (0.56)/1/ $ 1.13 $ 0.88 /2/ $ 0.79 /3/
------- ------- ------- ------- ------
Common Stock Dividends per
Share..................... $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.02
------- ------- ------- ------- ------
Consolidated Cash Flows
From Operating
Activities................ $ 1,189 $ 1,071 $ 683 $ 562 $ 435
------- ------- ------- ------- ------
Consolidated Financial
Condition
(As of December 31)
Cash and Investments....... $ 4,719 $ 4,424 $ 4,041 $ 3,453 $3,078
Total Assets............... $10,273 $ 9,675 $ 7,623 $ 6,997 $6,161
Debt....................... $ 991 $ 708 /4/ $ -- $ -- $ --
Convertible Preferred
Stock..................... $ -- $ -- /4/ $ 500 $ 500 $ 500
Shareholders' Equity....... $ 3,863 $ 4,038 $ 4,534 $ 3,823 $3,188
------- ------- ------- ------- ------
</TABLE>
-------
Results of Operations should be read together with the accompanying
Consolidated Financial Statements and Notes.
/1/Excluding the operational realignment and other charges of $725 million,
$175 million of charges related to contract losses associated with certain
Medicare markets and other increases to commercial and Medicare medical
costs payable estimates, and the $20 million convertible preferred stock
redemption premium from 1998 results, earnings from operations and net
earnings applicable to common shareholders would have been $858 million and
$509 million, or $1.31 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 $0.03 diluted net
earnings per common share) and the provision for future losses on two large
multi-year contracts of $45 million ($27 million after tax, or $0.08 diluted
net earnings per common share), 1996 earnings from operations and net
earnings would have been $641 million and $392 million, or $0.98 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 $0.28
diluted net earnings per common share), 1995 earnings from operations and
net earnings would have been $615 million and $383 million, or $1.06 diluted
net earnings per common share.
/4/During 1998, we issued debt totaling $708 million and redeemed $500 million
of convertible preferred stock.
21
<PAGE>
1999 Results Compared to 1998 Results
Consolidated Financial Results
Revenues
Revenues are comprised of: 1) premium revenues associated with risk-based
products (those where we assume financial responsibility for health care
costs); 2) management services and fees associated with administrative
services, managed health plans, and our Specialized Care Services and Ingenix
businesses; and 3) investment and other income.
Consolidated revenues increased 13% in 1999 to $19.6 billion, reflecting
balanced growth across all business segments. Following is a discussion of 1999
consolidated revenue trends for each of our three revenue components.
Premium Revenues
Consolidated premium revenues in 1999 totaled $17.6 billion, an increase of
$2.0 billion, or 13%, compared to 1998. This increase was driven by
UnitedHealthcare's average year-over-year premium yield increases on risk-based
commercial groups of approximately 9%. The balance of the increase is
attributable to growth in individuals served by United Behavioral Health, and
our acquisitions of HealthPartners of Arizona, Inc. in October 1998 and Dental
Benefit Providers, Inc. in June 1999.
Management Services and Fee Revenues
Management services and fee revenues in 1999 totaled $1.8 billion,
representing an increase of $203 million, or 13%, over 1998. The overall
increase in management services and fee revenues is primarily the result of
strong growth in Uniprise's multi-site customer base, price increases in fee
business, and acquisitions and growth from our Ingenix business.
Investment and Other Income
Investment and other income during the year ended December 31, 1999, totaled
$219 million, representing a decrease of $30 million from 1998. This decrease
is primarily the result of net realized capital losses from the sale of
investments in 1999 as opposed to net realized capital gains in 1998, along
with decreases in cash and investments and associated investment income
resulting from our stock repurchase activities and business acquisitions.
Rising interest rates during 1999 resulted in declines in the fair value of
fixed income investments and we realized net capital losses of $6 million
during 1999, excluding the gain on the transfer of Healtheon Corporation
(Healtheon) common stock to UnitedHealth Foundation (see Note 7 to the
financial statements). For the year ended December 31, 1998, we realized net
capital gains of $26 million.
Operating Expenses
Medical Costs
The combination of our pricing and care coordination efforts is reflected in
the medical care ratio (medical costs as a percentage of premium revenues).
Our consolidated medical care ratio decreased from 87.2% in 1998 to 85.7% in
1999. Excluding the AARP business and the effects of 1998 special charges, on a
year-over-year basis, the medical care ratio decreased 10 basis points to
84.2%.
On an absolute dollar basis, the increase of $1.5 billion, or 11%, in
medical costs over 1998 is driven by a combination of growth in individuals
served with risk-based products, medical cost inflation, benefit changes and
product mix changes.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses as a percent of total
revenues (the operating cost ratio) was 17.1% in 1999, consistent with 1998.
SG&A reductions in 1999 were partially offset by $39 million of incremental
expenses over 1998 expense levels related to core process improvement
initiatives and platform system conversions. Additionally, changes in revenue
mix affect our operating cost ratio. Our fastest growing businesses (Uniprise,
Specialized Care Services and Ingenix) maintain proportionately higher SG&A
costs as the majority of their direct costs of revenue are included in SG&A
expenses, not medical costs. On a comparable revenue mix basis, the operating
cost ratio would have decreased 30 basis points to 16.8%.
On an absolute dollar basis, SG&A expenses increased by $379 million, or
13%, over 1998. This increase reflects the additional costs to support the
corresponding 13% increase in consolidated revenues in 1999, and the
incremental core process improvement expenses described above.
Depreciation and Amortization
Depreciation and amortization was $233 million in 1999 and $185 million in
1998. This increase resulted from a combination of increased levels of capital
expenditures in 1998 and 1999 to support business growth and technology
enhancements and amortization of goodwill and other intangible assets related
to acquisitions.
22
<PAGE>
Business Segments
The following summarizes the operating results of our business segments for
the years ended December 31 (in millions):
Revenues
<TABLE>
<CAPTION>
1999 1998 Percent Change
------- ------- --------------
<S> <C> <C> <C>
Health Care Services..................... $17,581 $15,612 13%
Uniprise................................. 1,865 1,624 15%
Specialized Care Services................ 726 618 17%
Ingenix.................................. 258 184 40%
Corporate and Eliminations............... (868) (683) nm
------- ------- ---
Consolidated Revenues................... $19,562 $17,355 13%
------- ------- ---
</TABLE>
Earnings (Loss) from Operations
<TABLE>
<CAPTION>
1998
--------------------- Percent
1999 Reported Adjusted (a) Change (b)
---- -------- ------------ ----------
<S> <C> <C> <C> <C>
Health Care Services............. $578 $ (46) $503 15%
Uniprise......................... 222 10 161 38%
Specialized Care Services........ 128 14 109 17%
Ingenix.......................... 25 (66) 20 25%
---- ----- ---- ---
Total Operating Segments........ 953 (88) 793 20%
Corporate and Eliminations....... (10) 46 65 nm
---- ----- ---- ---
Consolidated Earnings (Loss)
from Operations................ $943 $ (42) $858 10%
---- ----- ---- ---
</TABLE>
-------
(a) Excludes $725 million of operational realignment and other charges
and $175 million of charges related to contract losses associated
with certain Medicare markets and other increases to commercial and
Medicare medical costs payable estimates.
(b) Calculated as percentage change between 1999 results and 1998
results, as adjusted.
nm -- not meaningful
Health Care Services
The Health Care Services segment consists of the UnitedHealthcare and
Ovations businesses. UnitedHealthcare designs and operates network-based
health and well-being services, including commercial, Medicare and Medicaid
products for locally based employers and individuals in six broad regional
markets. Ovations, which administers Medicare Supplement benefits on behalf of
AARP (American Association of Retired Persons), offers health and well-being
services for Americans age 50 and older.
The Health Care Services segment posted record revenues of $17,581 million,
representing an increase of $1,969 million, or 13%, over 1998. This increase
is primarily attributable to UnitedHealthcare's average net premium yield
increases on commercial business of approximately 9% and the acquisition of
HealthPartners of Arizona, Inc. in October 1998.
The Health Care Services segment contributed earnings from operations of
$578 million in 1999, an increase of $75 million, or 15%, over 1998. The
increase is primarily due to growth in the average number of individuals
served by UnitedHealthcare during 1999 and reduced operating costs as a
percentage of revenues driven by our realignment process improvement
initiatives.
The following table summarizes UnitedHealthcare's medical care ratios by
product line for the years ended December 31:
<TABLE>
<CAPTION>
1998
---------------------
1999 Reported Adjusted (a)
---- -------- ------------
<S> <C> <C> <C>
UnitedHealthcare
Commercial................................... 84.6% 85.6% 84.9%
Medicare..................................... 89.6% 92.0% 87.0%
Medicaid..................................... 86.3% 85.2% 85.2%
---- ---- ----
</TABLE>
-------
(a) Excludes the effects of $175 million of contract losses associated
with certain Medicare markets and other increases to commercial and
Medicare medical costs payable estimates.
UnitedHealthcare's commercial medical care ratio improved on a year-over-
year basis, driven by net premium yield increases in excess of underlying
medical costs. Commercial health plan premium rates are established based on
anticipated benefit costs. During 1999, our total cost of benefits, including
the effects of medical cost inflation, benefit changes and product mix,
increased at a rate of approximately 8% while average premium yield increases
were approximately 9%. For 2000, we are pricing renewal commercial business
with average 9% to 10% premium yield increases, while our projected total cost
of benefits increase is 8.0% to 8.5%.
UnitedHealthcare's Medicare medical care ratio increased in 1999 compared
to 1998 (excluding 1998 special charges). We continue to evaluate Medicare
markets and alter benefit designs to further improve our Medicare product
margins.
Our year-over-year Medicare enrollment decreased 9% as a result of actions
taken to better position this program for long-term success. Effective January
1, 1999, we withdrew Medicare+Choice product offerings from 86 counties,
affecting approximately 60,000, or 12%, of our Medicare members as of December
31, 1998. On July 1, 1999, we announced plans to withdraw, effective January
1, 2000, from the Medicare+Choice product program in another 49 counties
affecting 40,000 existing members, and also filed significant benefit
adjustments. Annual revenues for 1999 from the Medicare markets we exited
effective January 1, 2000, were approximately $230 million. These actions are
expected to further reduce Medicare enrollment, but better position this
program in the long term in terms of profitability relative to its cost of
capital and required resource management.
We will continue to evaluate the markets we serve and, where necessary,
take actions that may result in further withdrawals of Medicare product
offerings or reductions in membership, when and as permitted by our contracts
with the Health Care Financing Administration (HCFA).
The following table summarizes individuals served by UnitedHealthcare, by
product and funding arrangement, as of December 31 (in thousands)/1/:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Commercial
Risk-based................................................... 5,150 5,141
Fee-based.................................................... 1,745 1,616
----- -----
Total Commercial........................................... 6,895 6,757
Medicare..................................................... 437 482
Medicaid..................................................... 479 430
----- -----
Total UnitedHealthcare..................................... 7,811 7,669
----- -----
</TABLE>
/1/Excludes individuals served through UnitedHealthcare platforms located
in Puerto Rico and Pacific Coast regions. The company is transitioning
these markets.
-------
23
<PAGE>
Uniprise
Uniprise provides network-based health and well-being services, business-to-
business transactional infrastructure services, consumer connectivity and
service, and technology support for large employers and health plans.
Uniprise's revenues increased by $241 million, or 15%, over 1998 driven
primarily by continued growth in its large multi-site customer base, as
demonstrated by 11% growth in individuals served, and price increases on fee-
based business. Uniprise served 5,980,000 and 5,400,000 individuals as of
December 31, 1999 and 1998, respectively. Uniprise's earnings from operations
grew by $61 million, or 38%, over 1998 as a result of the increased revenues,
ongoing process improvement initiatives, and improved operating margins on
risk-based products.
Specialized Care Services
Specialized Care Services is an expanding portfolio of health and well-being
companies, each serving a specialized market need with a unique blend of
benefits, provider networks, services and resources. Specialized Care Services'
revenues increased by $108 million, or 17%, over 1998. This increase was driven
primarily by an increase in the number of individuals served by United
Behavioral Health, our mental health and substance abuse services business, and
the acquisition of Dental Benefit Providers, Inc. in June 1999. Earnings from
operations of $128 million increased by 17% compared with 1998, commensurate
with 1999 revenue growth.
Ingenix
Ingenix is a leading health care information and research company that
offers a comprehensive line of health care knowledge and information products
and services to pharmaceutical companies, health insurers and payers, care
providers, large employers and governments. Revenues increased by $74 million,
or 40%, over 1998 primarily as a result of acquisitions during the last half of
1998 and during 1999. Earnings from operations of $25 million increased by 25%
compared with 1998.
Corporate and Eliminations
Corporate includes investment income derived from cash and investments not
assigned to operating segments and the company-wide costs associated with core
process improvement initiatives. The decrease of $75 million in 1999 Corporate
earnings is attributable to $39 million of incremental core process improvement
costs over 1998 levels and a decline in the level of unassigned cash and
investments and associated investment income, primarily resulting from share
repurchases and business acquisitions.
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 second quarter of 1998, which reflected the
estimated costs to be incurred 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 claim processing operations and associated real estate
obligations.
The asset impairments consisted principally of: 1) purchased in-process
research and development associated with our acquisition of Medicode, Inc; 2)
goodwill and other long-lived assets including fixed assets, computer hardware
and software, and leasehold improvements associated with businesses we intend
to dispose of or markets where we plan to curtail operations or change our
operating presence; and 3) other realignment initiatives. Activities associated
with the Plan will result in the reduction of approximately 5,200 positions,
affecting approximately 6,400 people in various locations. Through December 31,
1999, we had eliminated approximately 3,900 positions, affecting approximately
3,700 people, pursuant to the Plan. The remaining positions are expected to be
eliminated by December 31, 2000.
In August 1999, we completed the sale of our managed workers' compensation
business. During the second half of 1998 and the first half of 1999, we also
completed the sale of our medical provider clinics and reconfigured our small
group insurance business and a non-strategic health plan market. The balances
accrued in our operational realignment and other charges were sufficient to
cover actual costs associated with the disposition and reconfiguration of these
businesses.
Remaining markets where we plan to curtail or make changes to our operating
presence include two health plan markets that are in non-strategic markets. In
Puerto Rico, we expect to complete the sale of this business prior to April 30,
2000. In the Pacific Coast region, we will be exiting our operations related to
small and mid-sized customer groups with anticipated completion in 2000. We
believe the balances accrued in our operational realignment and other charges
will be sufficient to cover expenses incurred in the sale and exit of these
markets.
Our accompanying financial statements include the operating results of
businesses and markets to be disposed of or discontinued in connection with the
operational realignment. The carrying value of the net assets held for sale or
disposal was approximately $20 million as of December 31, 1999. Our
accompanying Consolidated Statements of Operations for the years ended December
31, 1999 and 1998, include revenues of $689 million and $964 million,
respectively, and losses from operations of $41 million and $52 million,
respectively, from businesses disposed of or to be disposed of and markets we
plan to exit.
The revenues and operating losses described above do not include operating
results from the counties where we withdrew our Medicare product offerings,
effective January 1, 1999, and where we are withdrawing our Medicare product
offerings, effective January 1, 2000. Annual revenues for 1998 for Medicare
counties we exited in January 1999 were approximately $225 million. Annual
revenues for 1999 from the Medicare counties we are exiting in January 2000
were approximately $230 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 are charged to
expense as incurred or capitalized, as appropriate. During 1999 and 1998, we
incurred expenses of approximately $52 million and $13 million, respectively,
related to these activities.
The Plan provided for substantial completion in 1999. However, some
initiatives, including the consolidation of certain claim and administrative
processing functions and certain divestitures and market realignment activities
are requiring additional time in order to complete them in the most effective
manner and will extend through 2000. Based on current facts and circumstances,
we believe the remaining realignment reserve is adequate to cover the costs to
be incurred in executing the remainder of the Plan. However, as we proceed with
the execution of the Plan and more current information becomes available, it
may be necessary to adjust our estimates for severance, lease obligations on
exited facilities, and losses on disposition of businesses.
24
<PAGE>
The table below summarizes accrued operational realignment and other charges
through December 31, 1999 (in millions):
<TABLE>
<CAPTION>
Noncancelable Disposition of
Asset Severance and Lease Business and
Impairments Outplacement Costs Obligations Other Costs Total
----------- ------------------ ------------- -------------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... $ -- $ -- $ -- $ -- $ --
Provision for
Operational Realignment
and Other Charges...... 430 142 82 71 725
Additional Charges
(Credits).............. 21 (20) (9) 8 --
Cash Payments........... -- (19) (6) (13) (38)
Noncash Charges......... (451) -- -- -- (451)
----- ----- ----- ----- -----
Balance at December 31,
1998................... -- 103 67 66 236
Additional Charges
(Credits).............. -- (22) 13 9 --
Cash Payments........... -- (46) (18) (45) (109)
----- ----- ----- ----- -----
Balance at December 31,
1999................... $ -- $ 35 $ 62 $ 30 $ 127
===== ===== ===== ===== =====
</TABLE>
1998 Results Compared to 1997 Results
Consolidated Financial Results
Revenues
Premium Revenues
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 Health Care
Services' 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
billion, an increase of 19% over 1997. This increase was primarily the result
of growth in our Health Care Services' UnitedHealthcare business. On a year-
over-year same-store basis, UnitedHealthcare's premium revenues increased $1.7
billion, or 18%, during 1998. The increase reflected 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 to four times higher than average commercial premium rates because
Medicare members typically use proportionately more medical 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.
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
was primarily the result of acquisitions by Ingenix during 1997 and 1998.
Additionally, our Specialized Care Services business--most notably in United
Behavioral Health and Optum(R), our telephone- and Internet-based health
information and services business--increased the number of individuals it
serves.
Investment and Other Income
Investment and other income increased to $249 million in 1998 from $231
million in 1997. The increase of $18 million was primarily attributable to an
increase in average cash and investments from $3.6 billion in 1997 to $4.1
billion in 1998. Net realized capital gains were $26 million in both 1998 and
1997.
Operating Expenses
Medical Costs
The following table summarizes our medical care ratio by product line for
the years ended December 31:
<TABLE>
<CAPTION>
1998
---------------------
Reported Adjusted /1/ 1997
-------- ------------ -----
<S> <C> <C> <C>
UnitedHealthcare:
Commercial..................................... 85.6% 84.9% 85.7%
Medicare....................................... 92.0% 87.0% 83.3%
Medicaid....................................... 85.2% 85.2% 82.8%
----- ----- -----
Consolidated UnitedHealth Group................ 87.2% 86.0% 84.3%
----- ----- -----
Consolidated (excluding AARP).................. 85.8% 84.3% 84.3%
----- ----- -----
</TABLE>
-------
/1/Excludes the effects of contract losses associated with certain
Medicare markets and other increases to commercial and Medicare
medical costs payable estimates.
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 was primarily due to average
Medicare premium rate increases of 2.5%, which 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
were generally newer markets where we had 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 that exceeded the
fixed Medicare premiums, which only increased 2.5% on average.
Despite increasing commercial medical cost trends in certain health plan
markets, UnitedHealthcare's commercial medical care ratio improved slightly to
85.6% in 1998 from 85.7% in 1997.
25
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percent of total revenues
(the operating cost ratio) decreased from 20.0% in 1997 to 17.1% in 1998. The
improvement in the year-over-year operating cost ratio principally reflected
the operating leverage we gained with the addition of the AARP business. On an
absolute dollar basis, selling, general and administrative costs increased by
$600 million, or 25%, over 1997. The increase primarily reflected the
additional infrastructure needed to support the $5.4 billion, or 53%, increase
in premium-based business.
Depreciation and Amortization
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.
Financial Condition and Liquidity at December 31, 1999
During 1999, we generated $1.2 billion in cash from operating activities. We
continued to maintain a strong financial condition and liquidity position, with
cash and investments of $4.7 billion at December 31, 1999, an increase of $295
million from December 31, 1998.
Cash and investments included $484 million and $111 million of equity
securities as of December 31, 1999 and 1998, respectively. The increase in
equity securities is primarily attributable to unrealized gains of $318 million
during 1999, largely resulting from our investment in Healtheon common stock,
which increased in value subsequent to Healtheon's initial public stock
offering in February 1999.
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 $300 million (excluding
equity securities of $484 million) of our $4.7 billion of cash and investments
at December 31, 1999, was available for general corporate use, including share
repurchases, acquisitions and working capital needs. Of this amount,
approximately $200 million was maintained at year-end as part of our Year 2000
risk mitigation planning. Our operating cash flows and financing capability
also provide us with funds, as needed, for general corporate use.
During 1999, we issued commercial paper and, as of December 31, 1999, we had
$591 million outstanding, with interest rates ranging from 5.5% to 6.3%.
In November 1999, we also issued a $150 million two-year floating rate note.
The interest rate for the initial three-month period is 6.65%.
We used the proceeds from the commercial paper and the floating rate note to
repay $400 million of unsecured notes in December 1999.
In August 1999, we increased our commercial paper program and our supporting
credit arrangements with a group of banks to an aggregate of $900 million. The
supporting credit arrangements are composed of a $300 million revolving credit
facility, expiring in December 2003, and a $600 million 364-day facility,
expiring in August 2000. We also have the capacity to issue approximately $180
million of extendible commercial notes (ECNs). At December 31, 1999, we had no
amounts outstanding under our credit facilities or ECN programs.
Our debt arrangements and credit facilities contain various covenants, the
most restrictive of which place limitations on secured and unsecured borrowings
and require us to exceed minimum interest coverage levels. We are in compliance
with the requirements of all debt covenants.
Our senior debt is rated "A" by Standard & Poor's and Duff & Phelps, and
"A3" by Moody's. Our commercial paper and ECN programs are rated "A-1" by
Standard & Poor's, "D-1" by Duff & Phelps, and "P-2" by Moody's.
The aggregate issuing capacity of all securities covered by shelf
registration statements for common stock, preferred stock, debt securities and
other securities is $1.25 billion. We may publicly offer such securities from
time to time at prices and terms to be determined at the time of offering.
Under the board of directors' authorization, we are operating a common stock
repurchase program. Repurchases may be made from time to time at prevailing
prices, subject to certain restrictions on volume, pricing and timing. During
1999, we repurchased 38.8 million shares for an aggregate of $983 million.
Since inception of our stock repurchase activities in November 1997 and through
December 31, 1999, we have repurchased 61.8 million shares for an aggregate of
$1.4 billion. As of December 31, 1999, we have board of directors'
authorization to purchase up to an additional 27.8 million shares of our common
stock.
In the second quarter of 1998, we recognized special charges to operations
of $725 million associated with implementing our operational realignment plan.
We believe our remaining after-tax cash outlay associated with these charges
will be approximately $80 million over the next 12 months.
We expect our available cash and investment resources, operating cash flows
and financing capability will be sufficient to meet our current operating
requirements and other corporate development initiatives. A substantial portion
of our long-term investments ($2.6 billion as of December 31, 1999) is
classified as available for sale. Subject to the previously described
regulations, these investments may be sold prior to their maturity to fund
working capital or for other purposes.
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.
During 1999, we formed and initiated funding of the UnitedHealth Foundation
using a portion of our investment in Healtheon common stock valued at
approximately $50 million. UnitedHealth Foundation is dedicated to improving
Americans' health and well-being by supporting consumer and physician education
and awareness programs, generating objective information that will contribute
to improving health care delivery, and sponsoring community-based health and
well-being activities.
26
<PAGE>
Regulatory Capital and Dividend Restrictions
Our operations are conducted through our wholly-owned subsidiaries, which
include 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, 1999, our regulated subsidiaries had aggregate statutory
capital and surplus of approximately $1.5 billion, compared with their
aggregate minimum statutory capital and surplus requirements of approximately
$350 million.
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 not many states had adopted the rules as of December 31, 1999. The HMO
rules, if adopted by the states in their proposed form, would significantly
increase the minimum 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.
Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of changes in value of a financial
instrument caused by fluctuations in interest rates and equity prices.
Approximately $4.2 billion of our cash and investments at December 31, 1999,
was invested in fixed income securities. We manage our investment portfolio
within risk parameters approved by our board of directors; however our fixed
income securities are subject to the effects of market fluctuations in interest
rates. Assuming a hypothetical and immediate 1% increase in rates applicable to
our fixed income portfolio at December 31, 1999, the fair value of our fixed
income investments would decrease by approximately $110 million.
As of December 31, 1999, we owned approximately 7.8 million shares of
Healtheon common stock. With Healtheon's public stock offering in February 1999
and subsequent increases to the fair value of Healtheon's stock, we have
recorded a $283 million unrealized gain, or $178 million net of income tax
effects, in shareholders' equity as of December 31, 1999. Assuming an immediate
decrease of 25% in Healtheon's stock price, the hypothetical reduction in
shareholders' equity related to these holdings is estimated to be $45 million
(net of income tax effects), or 1% of total shareholders' equity at December
31, 1999.
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, care coordination with various health care providers, and various
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 and pharmaceutical 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, which
constitute approximately 4% of our consolidated risk-based membership. We
consider these inflation risks when determining prices for those products.
Year 2000 Infrastructure Modification Activities
Our Year 2000 infrastructure remediation efforts were successful and, during
2000, we have not experienced any business disruptions or system failures.
Legal Matters
See Note 13 to the accompanying consolidated financial statements for a
discussion of legal matters.
Cautionary Statement Regarding "Forward-Looking" Statements
The statements contained in Results of Operations, and other sections of
this annual report to shareholders, include forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (the
PSLRA). When used herein, the words or phrases "believes," "expects,"
"anticipates," "intends," "will likely result," "estimates," "projects" or
similar expressions are intended to identify such forward-looking statements.
Any of these forward-looking statements involve risks and uncertainties that
may cause the Company's actual results to differ materially from the results
discussed in the forward-looking statements. Statements that are not strictly
historical are "forward-looking" statements under the safe harbor provisions of
the PSLRA. Forward-looking statements involve known and unknown risks, which
may cause actual results and corporate developments to differ materially from
those expected. Factors that could cause results and developments to differ
materially from expectations include, without limitation: the effects of state
and federal regulations, the effects of acquisitions and divestitures, and
other risks described from time to time in each of UnitedHealth Group's SEC
reports, including quarterly reports on Form 10-Q, annual reports on Form 10-K,
and reports on Form 8-K.
27
<PAGE>
Consolidated Statements of Operations
UnitedHealth Group
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-------------------------
(in millions, except per share data) 1999 1998 1997
------------------------------------ ------- ------- -------
<S> <C> <C> <C>
Revenues
Premiums...................................... $17,550 $15,516 $10,135
Management Services and Fees.................. 1,793 1,590 1,428
Investment and Other Income................... 219 249 231
------- ------- -------
Total Revenues................................ 19,562 17,355 11,794
------- ------- -------
Operating Expenses
Medical Costs................................. 15,043 13,523 8,542
Selling, General and Administrative Expenses.. 3,343 2,964 2,364
Depreciation and Amortization................. 233 185 146
Operational Realignment and Other Charges..... -- 725 --
------- ------- -------
Total Operating Expenses...................... 18,619 17,397 11,052
------- ------- -------
Earnings (Loss) From Operations................ 943 (42) 742
Interest Expense.............................. (49) (4) --
------- ------- -------
Earnings (Loss) Before Income Taxes............ 894 (46) 742
Provision for Income Taxes.................... (326) (120) (282)
------- ------- -------
Net Earnings (Loss)............................ 568 (166) 460
Convertible Preferred Stock Dividends and
Redemption Premium............................ -- (48) (29)
------- ------- -------
Net Earnings (Loss) Applicable To Common
Shareholders.................................. $ 568 $ (214) $ 431
------- ------- -------
Basic Net Earnings (Loss) per Common Share..... $ 1.63 $ (0.56) $ 1.15
------- ------- -------
Diluted Net Earnings (Loss) per Common Share... $ 1.60 $ (0.56) $ 1.13
------- ------- -------
Basic Weighted-Average Number of Common Shares
Outstanding................................... 348.2 381.2 374.0
Dilutive Effect of Outstanding Stock Options... 6.8 -- 7.6
------- ------- -------
Weighted-Average Number of Common Shares
Outstanding, Assuming Dilution................ 355.0 381.2 381.6
------- ------- -------
</TABLE>
See notes to consolidated financial statmests.
28
<PAGE>
Consolidated Balance Sheets
UnitedHealth Group
<TABLE>
<CAPTION>
As of December
31,
--------------
(in millions, except share and per share data) 1999 1998
---------------------------------------------- ------- ------
<S> <C> <C>
Assets
Current Assets
Cash and Cash Equivalents................................. $ 1,605 $1,644
Short-Term Investments.................................... 546 170
Accounts Receivable, net of allowances of $117 and $64.... 912 965
Assets Under Management................................... 1,328 1,155
Other Current Assets...................................... 177 320
------- ------
Total Current Assets.................................... 4,568 4,254
Long-Term Investments....................................... 2,568 2,610
Property and Equipment, net of accumulated depreciation of
$482 and $463.............................................. 278 294
Goodwill and Other Intangible Assets, net of accumulated
amortization of $376 and $258.............................. 2,859 2,517
------- ------
Total Assets............................................ $10,273 $9,675
======= ======
Liabilities and Shareholders' Equity
Current Liabilities
Medical Costs Payable..................................... $ 2,915 $2,780
Accounts Payable and Accrued Liabilities.................. 1,003 949
Other Policy Liabilities.................................. 910 714
Short-Term Debt........................................... 591 459
Unearned Premiums......................................... 473 414
------- ------
Total Current Liabilities............................... 5,892 5,316
Long-Term Debt.............................................. 400 249
Deferred Income Taxes and Other Liabilities................. 118 72
Commitments and Contingencies (Note 13).....................
------- ------
Shareholders' Equity
Common Stock, $0.01 par value--500,000,000 shares
authorized; 334,940,000 and 367,860,000 issued and
outstanding.............................................. 3 4
Additional Paid-in Capital................................ 250 1,107
Retained Earnings......................................... 3,445 2,883
Accumulated Other Comprehensive Income:
Net Unrealized Holding Gains on Investments Available
for Sale, net of income tax effects.................... 165 44
------- ------
Total Shareholders' Equity.............................. 3,863 4,038
------- ------
Total Liabilities and Shareholders' Equity.............. $10,273 $9,675
======= ======
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
UnitedHealth Group
<TABLE>
<CAPTION>
Net Unrealized
Holding Gains
Common Stock Additional (Losses) on Total
(in millions, except per share ------------- Paid-in Retained Investments Shareholders' Comprehensive
data) Shares Amount Capital Earnings Available for Sale Equity Income (Loss)
------------------------------ ------ ------ ---------- -------- ------------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996........................ 370 $ 4 $1,148 $2,678 $ (7) $3,823
Issuance of Common Stock
Stock Plans and Related
Tax Benefits............. 6 -- 116 -- -- 116
Acquisitions.............. 6 -- 144 -- -- 144
Stock Repurchases........... -- -- (10) -- -- (10)
Comprehensive Income
Net Earnings.............. -- -- -- 460 -- 460 $ 460
Other Comprehensive Income
Adjustments
Change in Net Unrealized
Holding Gains (Losses)
on Investments
Available for Sale, net
of income tax effects.. -- -- -- -- 36 36 36
------
Comprehensive Income... -- -- -- -- -- -- $ 496
------
Cash Dividends
Common Stock ($0.02 per
share)................... -- -- -- (6) -- (6)
Convertible Preferred
Stock ($57.50 per
share)................... -- -- -- (29) -- (29)
---- ---- ------ ------ ----- ------ ------
Balance at December 31,
1997........................ 382 4 1,398 3,103 29 4,534
Issuance of Common Stock
Stock Plans and Related
Tax Benefits............. 8 -- 131 -- -- 131
Acquisitions.............. -- -- 14 -- -- 14
Stock Repurchases........... (22) -- (436) -- -- (436)
Comprehensive Income (Loss)
Net Loss.................. -- -- -- (166) -- (166) $ (166)
Other Comprehensive Income
Adjustments
Change in Net Unrealized
Holding Gains on
Investments Available
for Sale, net of income
tax effects............ -- -- -- -- 15 15 15
------
Comprehensive Loss..... -- -- -- -- -- -- $ (151)
------
Cash Dividends
Common Stock ($0.02 per
share)................... -- -- -- (6) -- (6)
Convertible Preferred
Stock ($56.03 per
share)................... -- -- -- (28) -- (28)
Convertible Preferred Stock
Redemption Premium......... -- -- -- (20) -- (20)
---- ---- ------ ------ ----- ------ ------
Balance at December 31,
1998........................ 368 4 1,107 2,883 44 4,038
Issuance of Common Stock
Stock Plans and Related
Tax Benefits............. 6 -- 125 -- -- 125
Stock Repurchases........... (39) (1) (982) -- -- (983)
Comprehensive Income
Net Earnings.............. -- -- -- 568 -- 568 $ 568
Other Comprehensive Income
Adjustments
Change in Net Unrealized
Holding Gains on
Investments Available
for Sale, net of income
tax effects............ -- -- -- -- 121 121 121
------
Comprehensive Income... -- -- -- -- -- -- $ 689
------
Cash Dividends
Common Stock ($0.02 per
share)................... -- -- -- (6) -- (6)
---- ---- ------ ------ ----- ------ ------
Balance at December 31,
1999........................ 335 $ 3 $ 250 $3,445 $ 165 $3,863
---- ---- ------ ------ ----- ------ ------
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
Consolidated Statements of Cash Flows
UnitedHealth Group
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------
(in millions) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Operating Activities
Net Earnings (Loss).............................. $ 568 $ (166) $ 460
Noncash Items
Depreciation and Amortization.................. 233 185 146
Deferred Income Taxes and Other................ 35 (184) 91
Asset Impairments.............................. -- 451 --
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... 84 67 (84)
Medical Costs Payable.......................... 165 269 53
Accounts Payable and Other Current
Liabilities................................... 60 347 (30)
Unearned Premiums.............................. 44 102 47
------ ------ ------
Cash Flows From Operating Activities........... 1,189 1,071 683
------ ------ ------
Investing Activities
Cash Paid for Acquisitions, net of cash assumed
and other effects............................... (334) (464) --
Purchases of Property and Equipment and
Capitalized Software............................ (196) (210) (187)
Proceeds from Sales of Property and Equipment
and Disposition of Businesses................... 51 59 --
Purchases of Investments......................... (2,208) (2,799) (6,706)
Maturities/Sales of Investments.................. 2,064 3,435 5,889
------ ------ ------
Cash Flows (Used For) From Investing
Activities.................................... (623) 21 (1,004)
------ ------ ------
Financing Activities
Proceeds from Stock Option Exercises............. 102 84 79
Proceeds from Short-Term Borrowings, net of
payments........................................ 132 459 --
Proceeds from Issuance of Long-Term Debt......... 150 249 --
Common Stock Repurchases......................... (983) (436) (10)
Redemption of Convertible Preferred Stock........ -- (520) --
Dividends Paid................................... (6) (34) (35)
------ ------ ------
Cash Flows (Used For) From Financing
Activities.................................... (605) (198) 34
------ ------ ------
Increase (Decrease) in Cash and Cash Equivalents.. (39) 894 (287)
------ ------ ------
Cash and Cash Equivalents, Beginning of Period.... 1,644 750 1,037
------ ------ ------
Cash and Cash Equivalents, End of Period.......... $1,605 $1,644 $ 750
------ ------ ------
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
Notes to Consolidated Financial Statements UnitedHealth Group
(1)Description of Business
UnitedHealth Group Incorporated (also referred to as "UnitedHealth Group,"
"the Company," "we," "us," "our") is a national leader in forming and operating
orderly, efficient markets for the exchange of high quality health and well-
being services. Through five distinct but strategically aligned businesses
operating in separate market segments, we offer health care coverage and
related services to help people achieve improved health and well-being.
(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
intercompany balances 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
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 21% in 1999, 20% in 1998, and 22% in 1997.
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 1999, 1998 or
1997. 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, 1999.
Cash, Cash Equivalents and Investments
Cash and cash equivalents are highly liquid investments with an original
maturity of three months or less. The fair value of cash and cash equivalents
approximates their carrying value because of the short maturity of the
instruments. Investments with a maturity of less than one year are classified
as short-term.
Investments held by trustees or agencies according to state regulatory
requirements are classified as held-to-maturity based on our ability and intent
to hold these investments to maturity. Such investments are reported at
amortized cost and are included in long-term investments. All other investments
are classified as available for sale and reported at fair value based on quoted
market prices and are classified as short-term or long-term depending on their
maturity term. Periodically, we sell investments classified as long-term prior
to their maturity to fund working capital or for other purposes.
Unrealized gains and losses on investments available for sale are excluded
from earnings and reported as a separate component of shareholders' equity, net
of income tax effects. To calculate realized gains and losses on the sale of
investments available for sale, we use the specific cost of each investment
sold. We have no investments classified as trading securities.
Assets Under Management
Under our 10-year agreement with AARP, we are administering certain aspects
of AARP's insurance program that were transferred from the program's previous
carrier (see Note 6). Pursuant to our agreement with AARP, the associated
assets are managed separately from our general investment portfolio and are
used to fund expenditures associated with the AARP Program. These assets are
invested at our discretion, within certain investment guidelines approved by
the AARP. At December 31, 1999, 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 fair
value. Unrealized gains and losses are included in the rate stabilization fund
associated with the AARP Program (see Note 6). As of December 31, 1999, the
AARP investment portfolio included net unrealized losses of $34 million
compared with net unrealized gains of $12 million as of December 31, 1998.
Other Policy Liabilities
Other policy liabilities include the rate stabilization fund associated with
the AARP Program (see Note 6) and retrospective rate credit liabilities and
customer balances related to experience-rated indemnity products.
Retrospective rate credit liabilities represent premiums we received in
excess of amounts contractually owed by customers based on actual claim
experience. Liabilities established for closed policy years are based on actual
experience, while liabilities for open years are based on estimates of
premiums, claims and expenses incurred.
32
<PAGE>
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 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, 1999, was approximately four years.
Goodwill and Other Intangible Assets
Goodwill represents the purchase price and transaction costs associated with
businesses we have acquired in excess of the estimated fair value of the net
assets of these businesses. To the extent possible, a portion of the excess
purchase price and transaction costs is assigned to 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 at December 31, 1999.
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
composed of goodwill of $2.1 billion at December 31, 1999, and $1.8 billion at
December 31, 1998, and employer group contracts, supporting infrastructure,
distribution networks and institutional knowledge of $550 million at December
31, 1999, and $570 million at December 31, 1998, 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 outstanding stock
options is included in Note 11.
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 that might be issued upon
exercise of common stock options. In periods where losses are reported, the
weighted-average number of common shares outstanding excludes common stock
equivalents, since their inclusion would be anti-dilutive.
Comprehensive Income
Comprehensive income and its components are 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 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.
Reclassifications
Certain 1998 and 1997 amounts in the consolidated financial statements have
been reclassified to conform to the 1999 presentation. These reclassifications
have no effect on net earnings (loss) or shareholders' equity as previously
reported.
(3)Acquisitions
In September 1999, our Ingenix business segment acquired Worldwide Clinical
Trials, Inc. (WCT), a leading contract research organization. We paid $214
million in cash in exchange for all outstanding shares of WCT. We accounted for
the purchase 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
WCT 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 $214 million, which has been assigned to
goodwill and is being amortized over its estimated useful life of 30 years. The
pro forma effects of the WCT acquisition on our consolidated financial
statements were not material.
In June 1999, our Specialized Care Services business segment acquired Dental
Benefit Providers, Inc. (DBP), one of the largest managed dental care services
companies in the United States. We paid $105 million in cash, and 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 $105 million, which has been assigned to
goodwill and is being amortized over its estimated useful life of 40 years. The
pro forma effects of the DBP acquisition on our consolidated financial
statements were not material.
In October 1998, our Health Care Services segment 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
33
<PAGE>
the purchase method of accounting. The purchase price and costs associated with
the acquisition exceeded the estimated fair value of net assets acquired by
$223 million, which has been assigned to goodwill and is being amortized over
its estimated useful life of 40 years. The pro forma effects of the HPA
acquisition on our consolidated financial statements were not material.
During 1998, our Ingenix segment acquired Kern McNeill International, Inc.
(KMI), a leading 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 fair value of net assets acquired by $205 million,
which has been assigned to trade names and goodwill and is being amortized over
their estimated useful lives ranging from 15 to 40 years. The pro forma effects
of these acquisitions on our consolidated financial statements were not
material.
On December 31, 1997, our Ingenix segment 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 originally assigned entirely 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. As of the date of our acquisition, Medicode had invested $8.5 million in
in-process research and development projects. An additional $5 million was
expended through September 30, 1999, at which time all projects that were in-
process as of the acquisition date were complete. 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 and
is being amortized over their estimated useful lives, averaging 13 years. The
pro forma effects of the Medicode acquisition on our consolidated financial
statements were not material.
(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 second quarter of 1998, which reflected the
estimated costs to be incurred 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 claim processing operations and associated real estate
obligations.
The asset impairments consisted principally of: 1) purchased in-process
research and development associated with our acquisition of Medicode, Inc.; 2)
goodwill and other long-lived assets including fixed assets, computer hardware
and software, and leasehold improvements associated with businesses we intend
to dispose of or markets where we plan to curtail our operations or change our
operating presence; and 3) other realignment initiatives. Activities associated
with the Plan will result in the reduction of approximately 5,200 positions,
affecting approximately 6,400 people in various locations. Through December 31,
1999, we had eliminated approximately 3,900 positions, affecting approximately
3,700 people, pursuant to the Plan. The remaining positions are expected to be
eliminated by December 31, 2000.
In August 1999, we completed the sale of our managed workers' compensation
business. During the second half of 1998 and the first half of 1999, we also
completed the sale of our medical provider clinics and the reconfiguration of
our small group insurance business and a non-strategic health plan market. The
balances accrued in our operational realignment and other charges were
sufficient to cover actual costs associated with the disposition and
reconfiguration of these businesses.
Remaining markets where we plan to curtail or make changes to our operating
presence include two health plan markets that are in non-strategic markets. In
Puerto Rico, we expect to complete the sale of this business prior to April 30,
2000. In the Pacific Coast region, we will be exiting our operations related to
small and mid-sized customer groups with anticipated completion in 2000. We
believe the balances accrued in our operational realignment and other charges
will be sufficient to cover expenses incurred in the sale and exit of these
markets.
Our accompanying financial statements include the operating results of
businesses and markets to be disposed of or discontinued in connection with the
operational realignment. The carrying value of the net assets held for sale or
disposal is approximately $20 million as of December 31, 1999. Our accompanying
Consolidated Statements of Operations include revenues and operating losses
from businesses disposed of or to be disposed of, and markets we plan to exit
for the years ended December 31 as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Revenues..................................................... $ 689 $ 964
Loss from operations......................................... $ (41) $ (52)
</TABLE>
The table above does not include operating results from the counties where
we withdrew our Medicare product offerings, effective January 1, 1999, and
where we will be withdrawing our Medicare product offerings, effective January
1, 2000. Annual revenues for 1998 for Medicare counties we exited in January
1999 were approximately $225 million. Annual revenues for 1999 from the
Medicare counties we are exiting in January 2000 were approximately $230
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 are charged to
expense as incurred or capitalized, as appropriate. During 1999 and 1998, we
incurred expenses of approximately $52 million and $13 million, respectively,
related to these activities.
The Plan provided for substantial completion in 1999. However, some
initiatives, including the consolidation of certain claim and
34
<PAGE>
administrative processing functions and certain divestitures and market
realignment activities are requiring additional time in order to complete them
in the most effective manner and will extend through 2000. Based on current
facts and circumstances, we believe the remaining realignment reserve is
adequate to cover the costs to be incurred in executing the remainder of the
Plan. However, as we proceed with the execution of the Plan and more current
information becomes available, it may be necessary to adjust our estimates for
severance, lease obligations on exited facilities, and losses on disposition of
businesses.
The accrual for operational realignment and other charges is included in
Accounts Payable and Accrued Liabilities in the accompanying Consolidated
Balance Sheets. The table below summarizes accrued operational realignment and
other charges through December 31, 1999 (in millions):
<TABLE>
<CAPTION>
Severance and Noncancelable Disposition of
Asset Outplacement Lease Business and
Impairments Costs Obligations Other Costs Total
----------- ------------- ------------- -------------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... $ -- $ -- $ -- $ -- $ --
Provision for
Operational
Realignment and Other
Charges............... 430 142 82 71 725
Additional Charges
(Credits)............. 21 (20) (9) 8 --
Cash Payments.......... -- (19) (6) (13) (38)
Noncash Charges........ (451) -- -- -- (451)
----- ----- ----- ----- -----
Balance at December 31,
1998................... -- 103 67 66 23
Additional Charges
(Credits)............. -- (22) 13 9
Cash Payments.......... -- (46) (18) (45) (109)
----- ----- ----- ----- -----
Balance at December 31,
1999.................. $ -- $ 35 $ 62 $ 30 $ 127
----- ----- ----- ----- -----
</TABLE>
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 contributed half of our annual Medicare premiums of $2.4
billion in 1998. Six of these markets were generally newer markets where we had
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 that exceeded the fixed Medicare premiums, which only
increased 2.5% on average.
(5)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 multi-year 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, 1999, there were 40,000 members covered under
this contract. During 1999 and 1998, we utilized $6 million and $8 million,
respectively, of the accrual for future losses. At December 31, 1999, we had $7
million remaining in the accrual for future losses, which is included in
Medical Costs Payable in the accompanying Consolidated Balance Sheets. We
expect this accrual will be sufficient to cover expected future losses from the
remaining contract.
(6)AARP (American Association of Retired Persons)
On January 1, 1998, we entered into a 10-year contract to provide insurance
products and services to members of the AARP. Under the terms of the contract,
we are compensated for claim 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. 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 AARP. Premium revenues from our portion of the AARP
insurance offerings were approximately $3.5 billion during both 1999 and 1998.
The underwriting results related to the AARP business are recorded as an
increase or decrease to a rate stabilization fund (RSF). The primary components
of the underwriting results are premium revenue, medical costs, investment
income, administrative expenses, member service expenses, marketing expenses
and premium taxes. To the extent underwriting losses 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 $713 million as of December 31, 1999, and $509 million as of
December 31, 1998, and is included in Other Policy Liabilities in the
accompanying Consolidated Balance Sheets. We believe the RSF balance is
sufficient to cover 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 premium receivables from the previous insurance
carrier equal to the carrying value of the liabilities assumed as of January 1,
1998. The following AARP Program-related assets and liabilities are included in
our Consolidated Balance Sheets (in millions):
<TABLE>
<CAPTION>
Balance as of
December 31,
-------------
1999 1998
------ ------
<S> <C> <C>
Assets Under Management..................................... $1,307 $1,155
Accounts Receivable......................................... $ 276 $ 287
Medical Costs Payable....................................... $ 791 $ 830
Other Policy Liabilities.................................... $ 713 $ 509
Accounts Payable and Accrued Liabilities.................... $ 79 $ 103
</TABLE>
The effects of changes in balance sheet amounts associated with the AARP
Program accrue to AARP policyholders through the RSF balance. Accordingly, we
do not include the effect of such changes in our Consolidated Statements of
Cash Flows.
35
<PAGE>
(7)Cash, Cash Equivalents and Investments
As of December 31, the amortized cost, gross unrealized holding gains and
losses, and fair value of cash, cash equivalents, and investments were as
follows (in millions):
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized
Amortized Cost Holding Gains Holding Losses Fair Value
1999 -------------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Cash and Cash
Equivalents............ $1,605 $ -- $ -- $1,605
Debt Securities --
Available for Sale
U.S. Government and
Agencies.............. 726 -- (18) 708
State and State
Agencies.............. 555 2 (9) 548
Municipalities......... 527 2 (9) 520
Corporate.............. 797 -- (22) 775
------ ----- ----- ------
Debt Securities --
Available for Sale..... 2,605 4 (58) 2,551
Equity Securities --
Available for Sale..... 166 318 -- 484
------ ----- ----- ------
Total Investments
Available for Sale..... 2,771 322 (58) 3,035
------ ----- ----- ------
Investments Held to
Maturity
U.S. Government and
Agencies.............. 58 -- -- 58
State and State
Agencies.............. 1 -- -- 1
Municipalities......... 1 -- -- 1
Corporate.............. 19 -- -- 19
------ ----- ----- ------
Total Investments Held
to Maturity............ 79 -- -- 79
------ ----- ----- ------
Total Cash and
Investments......... $4,455 $ 322 $ (58) $4,719
====== ===== ===== ======
1998
Cash and Cash
Equivalents............ $1,644 $ -- $ -- $1,644
------ ----- ----- ------
Debt Securities --
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
------ ----- ----- ------
Debt Securities --
Available for Sale..... 2,506 67 (2) 2,571
Equity Securities --
Available for Sale..... 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
====== ===== ===== ======
</TABLE>
As of December 31, 1999, the contractual maturities of our investments in
debt securities were as follows (in millions):
<TABLE>
<CAPTION>
Less Than One to More Than Five More Than
Years to Maturity One Year Five Years to Ten Years Ten Years Total
----------------- --------- ---------- -------------- --------- ------
<S> <C> <C> <C> <C> <C>
At Amortized Cost:
Investments Available
for Sale.............. $202 $851 $835 $717 $2,605
Investments Held to
Maturity.............. 36 43 -- -- 79
---- ---- ---- ---- ------
Total Debt
Securities.......... $238 $894 $835 $717 $2,684
---- ---- ---- ---- ------
At Fair Value:
Investments Available
for Sale.............. $202 $841 $816 $692 $2,551
Investments Held to
Maturity.............. 36 43 -- -- 79
---- ---- ---- ---- ------
Total Debt
Securities.......... $238 $884 $816 $692 $2,630
---- ---- ---- ---- ------
</TABLE>
Gross realized gains of $9 million, $31 million and $37 million and gross
realized losses of $15 million, $5 million and $11 million were recognized in
1999, 1998 and 1997, respectively, and are included in Investment and Other
Income in the accompanying Consolidated Statements of Operations.
During 1999, we contributed approximately 1.2 million shares of Healtheon
Corporation common stock valued at approximately $50 million to the
UnitedHealth Foundation. The difference between the realized gain of
approximately $49 million on the stock transfer and the related contribution
expense of $50 million was $1 million. The net effect of this transaction is
included in Investment and Other Income in the accompanying Consolidated
Statement of Operations for 1999.
36
<PAGE>
(8)Debt
Debt consisted of the following as of December 31(in millions):
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Commercial Paper........ $591 $591 $ 59 $ 59
5.65% Senior Unsecured
Note due December
1999................... -- -- 400 400
Floating Rate Note due
November 2001.......... 150 150 -- --
6.60% Senior Unsecured
Note due December
2003................... 250 238 249 249
---- ---- ---- ----
Total Debt.............. $991 $979 $708 $708
Less Current Portion.... (591) (591) (459) (459)
---- ---- ---- ----
Total Long-Term Debt.... $400 $388 $249 $249
---- ---- ---- ----
</TABLE>
As of December 31, 1999, we had $591 million of commercial paper
outstanding, with interest rates ranging from 5.5% to 6.3%. In November 1999,
we also issued a $150 million two-year floating rate note. The interest rate is
adjusted quarterly to the three-month LIBOR (London Interbank Offered Rate)
plus 0.5%, which was 6.65% as of December 31, 1999.
The repayment of the $400 million unsecured note in December 1999 was
financed with the $150 million floating rate note and commercial paper
issuance.
In August 1999, we increased our commercial paper program and our supporting
credit arrangements with a group of banks to an aggregate of $900 million. The
supporting credit arrangements are comprised of a $300 million revolving credit
facility, expiring in December 2003, and a $600 million 364-day facility,
expiring in August 2000. We also have the capacity to issue approximately $180
million of extendible commercial notes (ECNs) under our ECN program. At
December 31, 1999, we had no amounts outstanding under our credit facilities or
ECN program.
Our debt agreements and credit facilities contain various covenants, the
most restrictive of which place limitations on secured and unsecured borrowings
and require us to exceed minimum interest coverage levels. We are in compliance
with the requirements of all debt covenants.
Maturities of long-term debt for the years ending December 31 are as follows
(in millions):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
-- $150 -- $250 --
</TABLE>
We made cash payments for interest of $43 million in 1999.
(9)Convertible Preferred Stock
In December 1998, we redeemed all 500,000 outstanding shares of 5.75% Series
A Convertible Preferred Stock (Preferred Stock). This Preferred Stock was
issued to certain former shareholders of The MetraHealth Companies, Inc.
(MetraHealth) as a portion of the total consideration of our 1995 acquisition
of MetraHealth. The redemption price per share of stock was $1,040 per share,
or $520 million in the aggregate, which included a redemption premium of $40
per share or $20 million in the aggregate. The redemption premium of $20
million is deducted from Net Earnings (Loss) to arrive at Net Earnings (Loss)
Applicable to Common Shareholders in the accompanying Consolidated Statement of
Operations for 1998.
(10)Shareholders' Equity
Regulatory Capital and Dividend Restrictions
Our operations are conducted through our wholly-owned subsidiaries, which
include 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, 1999, the Company's regulated subsidiaries had aggregate
statutory capital and surplus of approximately $1.5 billion, compared with
their aggregate minimum statutory capital and surplus requirements of
approximately $350 million.
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 not many states had adopted the rules as of December 31, 1999. The HMO
rules, if adopted by the states in their proposed form, would significantly
increase the minimum 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
Under the board of directors' authorization, we are operating a common stock
repurchase program. Repurchases may be made from time to time at prevailing
prices, subject to certain restrictions on volume, pricing and timing. During
1999, we repurchased 38.8 million shares for an aggregate of $983 million.
Since inception of our stock repurchase activities in November 1997 and through
December 31, 1999, we have repurchased 61.8 million shares for an aggregate of
$1.4 billion. As of December 31, 1999, we have board of directors'
authorization to purchase up to an additional 27.8 million shares of our common
stock.
Dividends
On February 10, 2000, the board of directors approved an annual dividend for
2000 of $0.02 per share to holders of common stock.
(11)Stock-Based Compensation Plans
We have stock and incentive plans (the Stock Plans) for the benefit of
eligible employees. As of December 31, 1999, the Stock Plans allowed for the
future granting of up to 14.4 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, 1999, 958,000 shares were available for future grants of non-
qualified stock options under the 1995 Plan.
Stock options are 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 and up to 10 years from the date of grant.
37
<PAGE>
A summary of the activity under our Stock Plans and the 1995 Plan during
1999, 1998 and 1997 is presented in the table below (shares in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ ------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning
of Year................ 36,748 $18.5 34,226 $ 17 33,788 $14.5
Granted................. 14,406 $ 20 11,694 $19.5 8,732 $ 22
Issued in Acquisition... -- $ -- -- $ -- 1,014 $ 2
Exercised............... (4,666) $16.5 (6,758) $11.5 (6,190) $ 10
Forfeited............... (2,408) $19.5 (2,414) $19.5 (3,118) $17.5
------ ----- ------ ----- ------ -----
Outstanding at end of
year................... 44,080 $ 19 36,748 $18.5 34,226 $ 17
====== ===== ====== ===== ====== =====
Exercisable at end of
year................... 15,558 $ 17 13,450 $16.5 13,404 $ 14
====== ===== ====== ===== ====== =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Weighted-Average
Number Remaining Weighted-Average Number Weighted-Average
Range of Exercise Prices Outstanding Option Term (years) Exercise Price Exercisable Exercise Price
------------------------ ----------- ------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0 -- $22.............. 3,182 2.9 $ 8 3,058 $ 8
$23 -- $35.............. 11,000 7.4 $16.5 5,260 $16.5
$36 -- $46.............. 23,668 8.5 $20.5 5,992 $20.5
$47 -- $55.............. 6,100 7.2 $ 25 1,162 $ 25
$56 -- $73.............. 130 8.5 $ 34 86 $ 36
------ --- ----- ------ -----
$ 0 -- $73.............. 44,080 7.6 $ 19 15,558 $ 17
------ --- ----- ------ -----
</TABLE>
We increased additional paid-in capital $23 million in 1999, $47 million in
1998, and $37 million in 1997 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 related to the Stock Plans and the 1995 Plan because we grant stock
options at exercise prices that equal or exceed the fair market value of the
stock at the time options are granted. If we had determined compensation
expense using fair market values for the stock options, net earnings (loss) per
common share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
----- ------ -----
<S> <C> <C> <C>
Net Earnings (Loss) (in millions)
As Reported.......................................... $ 568 $ (166) $ 460
Pro Forma............................................ $ 531 $ (206) $ 430
----- ------ -----
Diluted Net Earnings (Loss) Per Common Share
As Reported.......................................... $1.60 $ (.56) $1.13
Pro Forma............................................ $1.50 $ (.67) $1.05
----- ------ -----
Weighted-Average Fair Value Per Share of Options
Granted.............................................. $11.5 $ 8 $12.5
----- ------ -----
</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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-Free Interest Rate.................................. 6.7% 5.2% 6.0%
Expected Volatility...................................... 50% 46% 56%
Expected Dividend Yield.................................. 0.1% 0.1% 0.1%
Expected Life in Years................................... 5.0 5.8 5.6
</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 (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 $5
million in 1999, $4 million in 1998 and $4 million in 1997.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (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 to the ESPP were
$19 million for 1999, $19 million for 1998 and $17 million for 1997. Through
the ESPP, we issued to employees 920,000 shares for 1999, 412,000 shares for
1998, and 844,000 for 1997. As of December 31, 1999, 5 million shares were
available for future issue.
38
<PAGE>
(12)Income Taxes
Components of the Provision (Benefit) for Income Taxes
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1999 1998 1997
------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Current
Federal..................................................... $264 $273 $171
State....................................................... 36 31 20
---- ---- ----
Total Current............................................. 300 304 191
Deferred..................................................... 26 (184) 91
---- ---- ----
Total Provision........................................... $326 $120 $282
---- ---- ----
</TABLE>
Reconciliation of the Tax Provision at the U.S. Federal Statutory Rate to the
Provision for Income Taxes
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1999 1998 1997
------------------------------------- ---- ----- ----
<S> <C> <C> <C>
Tax Provision (Benefit) at the U.S. Federal Statutory
Rate.................................................. $313 $ (16) $259
State Income Taxes, net of federal benefit............. 24 19 21
Tax-Exempt Investment Income........................... (16) (25) (21)
Non-Deductible Amortization............................ 25 24 21
Non-Deductible Asset Impairments....................... -- 100 --
Non-Deductible Losses and Expenses..................... 3 12 7
Charitable Contributions............................... (16) -- --
Other, net............................................. (7) 6 (5)
---- ----- ----
Provision for Income Taxes............................ $326 $ 120 $282
---- ----- ----
</TABLE>
Components of Deferred Income Tax Assets and Liabilities
<TABLE>
<CAPTION>
December 31, (in millions) 1999 1998
-------------------------- ---- ----
<S> <C> <C>
Deferred Income Tax Assets
Accrued Operational Realignment and Other Charges, and
Restructuring Reserves.................................... $ 63 $138
Unearned Premiums.......................................... 87 68
Loss Reserve Discounting................................... 52 51
Net Operating Loss Carryforwards........................... 43 34
Bad Debt Allowance......................................... 29 13
Medical Costs Payable and Other Policy Liabilities......... 19 22
Intangible Amortization.................................... 5 7
Other...................................................... 10 8
---- ----
Subtotal.................................................... 308 341
Less: Valuation allowances................................. (52) (34)
---- ----
Total Deferred Income Tax Assets............................ 256 307
---- ----
Deferred Income Tax Liabilities
Net Unrealized Gains on Investments Available for Sale..... (97) (23)
Capitalized Software Development........................... (54) (31)
Depreciation............................................... (9) (12)
Other...................................................... -- (2)
---- ----
Total Deferred Income Tax Liabilities....................... (160) (68)
---- ----
Net Deferred Income Tax Assets.............................. $ 96 $239
---- ----
</TABLE>
Valuation allowances are provided when it is considered unlikely that
deferred tax assets will be realized. The valuation allowance primarily relates
to future tax benefits on certain purchased domestic and foreign net operating
losses.
We made cash payments for income taxes of $214 million in 1999, $245 million
in 1998 and $124 million in 1997.
Consolidated income tax returns for fiscal years 1997 and 1996 are currently
being examined by the Internal Revenue Service. We do not believe any
adjustments that may result will have a significant impact on our consolidated
operating results or financial position.
(13)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 $129 million in 1999, $119
million in 1998 and $104 million in 1997.
At December 31, 1999, future minimum annual lease payments under all
noncancelable operating leases were as follows (in millions):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
$102 $86 $72 $59 $48 $197
</TABLE>
Service Agreements
On June 1, 1996, and November 16, 1995, we entered into two separate
contracts with nonaffiliated third parties for information technology services,
each with an approximate term of 10 years. Under the terms of the contracts,
the third parties assumed responsibility for certain data center operations and
support. On September 19, 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 $172 million in
1999, $162 million in 1998 and $125 million in 1997.
39
<PAGE>
Legal Matters
Because of the nature of our business, we are routinely subject to suits
alleging various causes of action. Some of these suits may include claims for
substantial noneconomic or punitive damages. We do 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 our
financial position or results of operations.
On February 4, 2000, we entered into a settlement agreement with the
attorneys representing the plaintiff classes that assert claims under the U.S.
securities laws against UnitedHealth Group and certain of its current and
former officers and directors. The proposed settlement agreement is subject to
court approval. Our insurers have agreed to cover the cost of this settlement.
Government Regulation
Our business is regulated on a federal, state and local level. The laws and
rules governing our business are subject to ongoing change, and latitude is
given to the agencies administering those regulations. Existing or future laws
and rules could affect how we do business, increase our health care and
administrative costs and capital requirements, and increase our obligations.
Further, we must obtain and maintain regulatory approvals to market many of our
products.
State legislatures and Congress continue to focus on health care issues. In
Congress, managed health care has been the subject of proposed legislation. Any
such legislation could expand health plan liability and could have an impact on
the costs and revenues of our health plans. Proposed federal bills and
regulations may also impact other aspects of our business.
We are also subject to various governmental reviews, audits and
investigations. However, we do not believe the results of any of the current
audits, individually or in the aggregate, will have a material adverse effect
on our financial position or results of operations.
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 under an
investment policy authorized by the board of directors. These policies limit
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 constitute our customer base. As of December 31,
1999, there were no significant concentrations of credit risk.
40
<PAGE>
(14)Segment Financial Information
Our accounting policies for 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. In accordance with
generally accepted accounting principles, segments with similar economic
characteristics may be combined. The financial results of UnitedHealthcare and
Ovations have been combined in the Health Care Services segment column in the
tables presented below.
<TABLE>
<CAPTION>
Health Care Specialized Corporate and
Services Uniprise Care Services Ingenix Eliminations Consolidated
1999 ----------- -------- ------------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues -- External
Customers.............. $17,419 $1,398 $328 $198 $ -- $19,343
Revenues --
Intersegment........... -- 445 393 59 (897) --
Investment and Other
Income................. 162 22 5 1 29 219
------- ------ ---- ---- ------- -------
Total Revenues.......... $17,581 $1,865 $726 $258 $. (868) $19,562
------- ------ ---- ---- ------- -------
Earnings (Loss) From
Operations............. $ 578 $ 222 $128 $ 25 $ (10) $ 943
Total Assets /1/ ....... $ 7,198 $1,411 $365 $683 $ 453 $10,110
Net Assets /1/ ......... $ 2,726 $ 953 $149 $573 $ 468 $ 4,869
Purchases of Property
and Equipment and
Capitalized Software... $ 69 $ 71 $ 28 $ 28 $ -- $ 196
Depreciation and
Amortization........... $ 97 $ 76 $ 23 $ 37 $ -- $ 233
------- ------ ---- ---- ------- -------
1998
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 From Operations
/2/ ................... $ 503 $ 161 $109 $ 20 $ 65 $ 858
Total Assets /1/ ....... $ 6,652 $1,499 $231 $472 $ 555 $ 9,409
Net Assets /1/ ......... $ 2,512 $ 940 $ 89 $388 $ 555 $ 4,484
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/ ....... $ 4,124 $1,447 $208 $204 $ 1,599 $ 7,582
Net Assets /1/ ......... $ 2,152 $1,008 $116 $170 $ 1,599 $ 5,045
Purchases of Property
and Equipment and
Capitalized Software... $ 80 $ 79 $ 23 $ 5 $ -- $ 187
Depreciation and
Amortization........... $ 78 $ 54 $ 12 $ 2 $ -- $ 146
------- ------ ---- ---- ------- -------
</TABLE>
-------
/1/Total Assets and Net Assets exclude, where applicable, debt and accrued
interest of $1,002 million and $708 million, income tax-related assets of
$163 million and $266 million, and income tax-related liabilities of $167
million and $4 million as of December 31, 1999 and 1998, respectively. 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.
/2/For comparability purposes, 1998 results are adjusted to exclude $725
million of operational realignment and other charges and $175 million of
charges related to contract losses associated with certain Medicare markets
and other increases to commercial and Medicare medical costs payable
estimates. Including these charges, 1998 segment earnings (loss) from
operations were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------
<S> <C>
Health Care Services......................... $(46)
Uniprise..................................... 10
Specialized Care Services.................... 14
Ingenix...................................... (66)
----
Total Operating Segments.................... (88)
Corporate.................................... 46
----
Total Consolidated.......................... $(42)
----
</TABLE>
41
<PAGE>
(15)Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1999 and 1998 (in millions, except per share
data):
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1999
Revenues.................. $4,809 $4,858 $4,903 $4,992
Operating Expenses........ $4,588 $4,633 $4,664 $4,734
Net Earnings Applicable to
Common Shareholders...... $ 132 $ 135 $ 144 $ 157 /1/
Basic Net Earnings per
Common Share............. $ 0.37 $ 0.39 $ 0.41 $ 0.46
Diluted Net Earnings per
Common Share............. $ 0.36 $ 0.38 $ 0.40 $ 0.46 /1/
------ ------ ------ ------
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)/2/ $ 128 $ 105 /3/
Basic Net Earnings (Loss)
per Common Share......... $ 0.32 $(1.48) $ 0.33 $ 0.28
Diluted Net Earnings
(Loss) per Common Share.. $ 0.31 $(1.48)/2/ $ 0.33 $ 0.28 /3/
------ ------ ------ ------
</TABLE>
-------
/1/Includes a net permanent tax benefit primarily related to the
contribution of Healtheon Corporation common stock to the UnitedHealth
Foundation. Excluding this benefit, Net Earnings Applicable to Common
Shareholders and Diluted Net Earnings per Common Share were $152
million and $0.44 per share, respectively.
/2/Includes $725 million of operational realignment and other charges and
$175 million of charges related to contract 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 $0.34 Diluted Net Earnings per Common Share.
/3/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 $0.34 Diluted Net Earnings per Common Share.
(16) Stock Split
All common share and per share data in the accompanying consolidated
financial statements have been adjusted to reflect a two-for-one split of the
Company's common stock in the form of a 100 percent common stock dividend,
which was declared by the Board of Directors on October 25, 2000 and payable on
December 22, 2000 to shareholders of record on December 1, 2000.
42
<PAGE>
Report of Independent
Public Accountants
To the Shareholders and Directors of UnitedHealth Group Incorporated:
We have audited the accompanying consolidated balance sheets of UnitedHealth
Group Incorporated (a Minnesota Corporation) and Subsidiaries as of December
31, 1999 and 1998, 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, 1999. 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
Incorporated and its Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 10, 2000
---------------
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 judgments.
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.
Chairman and Chief Executive Officer
Stephen J. Hemsley
President and Chief Operating Officer
Arnold H. Kaplan
Chief Financial Officer
43
<PAGE>
Corporate and Business Leaders
UnitedHealth Group UnitedHealthcare Specialized Care
William W. McGuire, M.D. Jeannine M. Rivet Services
Chairman and Chief Executive Officer Ronald B. Colby
Chief Executive Officer Chief Executive Officer
Ovations
Stephen J. Hemsley Lois Quam Ingenix
President and Chief Executive Officer Kevin W. Pearson
Chief Operating Officer Chief Executive Officer
Ingenix Health
Information
Uniprise
Arnold H. Kaplan R. Channing Wheeler
Chief Financial Officer Chief Executive Officer
Kevin H. Roche
David J. Lubben Chief Executive Officer
General Counsel Ingenix International
Robert J. Backes UnitedHealth
Senior Vice President Technologies
Human Resources James B. Hudak
Chief Executive Officer
John S. Penshorn
Director of Capital Markets
Communications and Strategy
44
<PAGE>
Board of Directors
William C. Ballard, Jr. Walter F. Mondale Audit Committee
Of Counsel Partner William C. Ballard, Jr.
Greenbaum, Doll & Dorsey & Whitney LLP James A. Johnson
McDonald Minneapolis, Minnesota,
Louisville, Kentucky, law firm Douglas W. Leatherdale
law firm
Mary O. Mundinger
Richard T. Burke Dean and Professor, Robert L. Ryan
Chief Executive Officer School of Nursing,
and Governor
and Associate Dean, Compensation and Human
Phoenix Coyotes Faculty of Medicine Resources Committee
National Hockey League Columbia University
team
Thomas H. Kean
Robert L. Ryan
Stephen J. Hemsley Senior Vice President Mary O. Mundinger
President and Chief and William G. Spears
Operating Officer Chief Financial Officer
UnitedHealth Group Medtronic, Inc. Compliance and
Government
Medical devices company
James A. Johnson Affairs Committee
Chairman and Chief William G. Spears
Executive Officer Managing Partner Richard T. Burke
Johnson Capital W. G. Spears Grisant &
Partners Brown LLC Walter F. Mondale
Private investment New York City-based
company investment Gail R. Wilensky
counseling and
Thomas H. Kean management firm Executive Committee
President
Drew University Gail R. Wilensky William C. Ballard, Jr.
Senior Fellow
Douglas W. Leatherdale Project HOPE Douglas W. Leatherdale
Chairman and Chief International health William W. McGuire,
Executive Officer foundation M.D.
William G. Spears
The Saint Paul
Companies, Inc.
Nominating Committee
Insurance and related
services
William C. Ballard, Jr.
William W. McGuire,
M.D.
Chairman and Chief
Executive Officer Thomas H. Kean
UnitedHealth Group
Douglas W. Leatherdale
William W. McGuire,
M.D.
William G. Spears
45
<PAGE>
Investor Information
UnitedHealth Group
Market Price of Common Stock
The following table shows the range of high and low sales prices for the
Company's stock as reported on the New York Stock Exchange Composite Tape for
the calendar periods shown through February 25, 2000. These prices do not
include commissions or fees associated with purchasing or selling this
security.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
2000
First Quarter 2000
Through February 25, 2000.................................. $32.35 $25.28
------ ------
1999
First Quarter 1999.......................................... $27.34 $19.72
Second Quarter 1999......................................... $35.00 $22,36
Third Quarter 1999.......................................... $33.36 $24.03
Fourth Quarter 1999......................................... $29.25 $19.69
------ ------
1998
First Quarter 1998.......................................... $33.41 $23.28
Second Quarter 1998......................................... $36.97 $30.63
Third Quarter 1998.......................................... $33.25 $14.78
Fourth Quarter 1998......................................... $25.31 $16.69
------ ------
</TABLE>
-------
As of February 25, 2000, the Company had 11,271 shareholders of record.
Account Questions
Our transfer agent, Norwest Bank Minnesota, N.A., can help you with a
variety of shareholder-related services, including:
Change of address
Lost stock certificates
Transfer of stock to another person
Additional administrative services
You can call our transfer agent at (800) 468-9716 or locally at (651) 450-
4064.
You can write to them at:
Norwest Shareowner Services
P.O. Box 64854
St. Paul, MN 55164-0854
Or you can e-mail our transfer agent at:
[email protected].
Investor Relations
You can contact UnitedHealth Group's Investor Relations group any time to
order, without charge, financial documents, such as the annual report and Form
10-K. You can write to us at:
Investor Relations
UnitedHealth Group
P.O. Box 1459,
Route MN008-8092
Minneapolis, MN 55440-1459
Annual Meeting
We invite UnitedHealth Group shareholders to attend our annual meeting,
which will be held on Wednesday, May 10, 2000, at 3:00 p.m., at the Lutheran
Brotherhood Building, 625 Fourth Avenue South, Minneapolis, Minnesota.
Dividend Policy
UnitedHealth Group's dividend policy was established by the board of
directors in August 1990. The policy 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 1, 1999, received an annual dividend for
1999 of $0.02 per share. On February 10, 2000, the Company's board of directors
announced an annual dividend for 2000 of $0.02 per share. The dividend will be
paid on April 19, 2000, to shareholders of record at the close of business on
April 3, 2000.
Stock Listing
The Company's common stock is traded on the New York Stock Exchange under
the symbol UNH.
Information Online
You can view our annual report and obtain more information about
UnitedHealth Group and its businesses via the Internet.
Our Internet address is: www.unitedhealthgroup.com.
46
<PAGE>
[LOGO OF UNITEDHEALTH GROUP]
UnitedHealth Group
UnitedHealth Group Center
9900 Bren Road East
Minnetonka, Minnesota 55343
<PAGE>
ANNEX H
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15() OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15() OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 1-10864
----------------
UNITEDHEALTH GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1321939
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
UNITEDHEALTH GROUP CENTER 55343
9900 BREN ROAD EAST (Zip Code)
MINNETONKA, MINNESOTA
(Address of principal executive
offices)
(952) 936-1300
(Registrant's telephone number, including area code)
----------------
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 [_]
As of November 1, 2000, 159,427,606 shares of the Registrant's Common Stock,
$.01 par value per share, were issued and outstanding.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
UNITEDHEALTH GROUP
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999..................................................... 3
Condensed Consolidated Statements of Operations for the three and nine
month periods ended September 30, 2000 and 1999....................... 4
Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 2000 and 1999............................. 5
Notes to Condensed Consolidated Financial Statements................... 6
Report of Independent Public Accountants............................... 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.............................................. 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 24
Part II. Other Information
Item 1. Legal Proceedings............................................. 25
Item 5. Other Information............................................. 25
Item 6. Exhibits...................................................... 25
Signatures.............................................................. 26
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements (unaudited)
UNITEDHEALTH GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents.......................... $ 1,103 $ 1,605
Short-Term Investments............................. 274 546
Accounts Receivable, net........................... 906 912
Assets Under Management............................ 1,487 1,328
Other Current Assets............................... 225 177
Total Current Assets.............................. 3,995 4,568
Long-Term Investments............................... 3,308 2,568
Property and Equipment, net......................... 269 278
Goodwill and Other Intangible Assets, net........... 2,891 2,859
------- -------
TOTAL ASSETS........................................ $10,463 $10,273
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical Costs Payable.............................. $ 3,169 $ 2,915
Other Policy Liabilities........................... 1,108 910
Accounts Payable and Accrued Liabilities........... 1,064 1,003
Short-Term Debt.................................... 665 591
Unearned Premiums.................................. 275 473
Total Current Liabilities......................... 6,281 5,892
Long-Term Debt...................................... 400 400
Deferred Income Taxes and Other Liabilities......... 125 118
Shareholders' Equity
Common Stock, $.01 par value; 500,000,000 shares
authorized;
318,878,000 and 334,940,000 issued and
outstanding....................................... 3 3
Additional Paid-in Capital......................... -- 250
Retained Earnings.................................. 3,565 3,445
Accumulated Other Comprehensive Income:
Net Unrealized Holding Gains on Investments
Available for Sale, net
of income tax effects............................ 89 165
------- -------
Total Shareholders' Equity......................... 3,657 3,863
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $10,463 $10,273
======= =======
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
UNITEDHEALTH GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Three Months Ended Ended September
September 30, 30,
-------------------- ----------------
2000 1999 2000 1999
--------- --------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Premiums............................. $ 4,812 $ 4,405 $14,056 $13,095
Management Services and Fees......... 501 444 1,464 1,311
Investment and Other Income.......... 56 54 168 164
--------- --------- ------- -------
Total Revenues...................... 5,369 4,903 15,688 14,570
--------- --------- ------- -------
MEDICAL AND OPERATING COSTS
Medical Costs........................ 4,105 3,769 12,000 11,235
Operating Costs...................... 893 834 2,633 2,479
Depreciation and Amortization........ 62 61 185 171
--------- --------- ------- -------
Total Medical and Operating Costs... 5,060 4,664 14,818 13,885
--------- --------- ------- -------
EARNINGS FROM OPERATIONS.............. 309 239 870 685
Interest Expense..................... (18) (10) (51) (32)
--------- --------- ------- -------
EARNINGS BEFORE INCOME TAXES.......... 291 229 819 653
Provision for Income Taxes........... (109) (85) (293) (242)
--------- --------- ------- -------
NET EARNINGS.......................... $ 182 $ 144 $ 526 $ 411
========= ========= ======= =======
BASIC NET EARNINGS PER COMMON SHARE... $ 0.57 $ 0.41 $ 1.62 $ 1.17
========= ========= ======= =======
DILUTED NET EARNINGS PER COMMON
SHARE................................ $ 0.54 $ 0.41 $ 1.56 $ 1.15
========= ========= ======= =======
WEIGHTED-AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING................... 321.8 347.6 325.2 352.6
DILUTIVE EFFECT OF OUTSTANDING STOCK
OPTIONS.............................. 13.8 7.8 12.0 6.0
--------- --------- ------- -------
WEIGHTED-AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, ASSUMING
DILUTION............................. 335.6 355.4 337.2 358.6
========= ========= ======= =======
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
UNITEDHEALTH GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
----------------
2000 1999
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings................................................ $ 526 $ 411
Noncash Items:
Depreciation and Amortization.............................. 185 171
Deferred Income Taxes and Other............................ 78 66
Net Change in Assets and Liabilities, net of effects from
acquisitions, sales of
subsidiaries and changes in AARP balances:
Accounts Receivable and Other Current Assets............... 3 26
Medical Costs Payable...................................... 234 158
Accounts Payable and Accrued Liabilities................... 152 82
Unearned Premiums.......................................... (211) (219)
------- -------
Cash Flows From Operating Activities...................... 967 695
------- -------
INVESTING ACTIVITIES
Cash Paid for Acquisitions, net of cash assumed............. (64) (327)
Proceeds from Disposal of Business.......................... -- 51
Purchases of Property and Equipment and Capitalized
Software, net.............................................. (146) (151)
Purchases of Investments.................................... (2,392) (1,612)
Maturities/Sales of Investments............................. 1,779 1,384
------- -------
Cash Flows Used For Investing Activities.................. (823) (655)
------- -------
FINANCING ACTIVITIES
Proceeds from Stock Option Exercises........................ 179 91
Common Stock Repurchases.................................... (894) (737)
Proceeds (Repayments) of Short-term Borrowings, net......... 74 (60)
Dividends Paid.............................................. (5) (5)
------- -------
Cash Flows Used For Financing Activities.................. (646) (711)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS........................ (502) (671)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 1,605 1,644
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 1,103 $ 973
======= =======
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
UNITEDHEALTH GROUP
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 UnitedHealth Group
Incorporated 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 certain amounts that are based on our best
estimates and judgments. The most significant estimates relate to medical
costs, medical costs payable, intangible asset valuations, and liabilities
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, 1999.
2. Reclassifications
Certain 1999 amounts in the condensed consolidated financial statements have
been reclassified to conform to the 2000 presentation. These reclassifications
have no effect on net earnings or shareholders' equity as previously reported.
3. 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 second quarter of 1998, which reflected the
estimated costs to be incurred 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 claims processing operations and associated real
estate obligations. Activities associated with the Plan will result in the
reduction of approximately 5,200 positions, affecting approximately 6,400
people in various locations. Through September 30, 2000, we have eliminated
approximately 4,800 positions, affecting approximately 4,700 people, pursuant
to the Plan. The remaining positions are expected to be eliminated by June 30,
2001.
Our accompanying financial statements include the operating results of
businesses and markets disposed of or discontinued and markets we are exiting
in connection with the operational realignment. The accompanying Condensed
Consolidated Statements of Operations include revenues and operating earnings
(losses) from
6
<PAGE>
businesses disposed of and markets we are exiting for the three and nine month
periods ended September 30 as follows (in millions):
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
September 30, September 30,
-------------- -----------------
2000 1999 2000 1999
------ ------- -------- --------
<S> <C> <C> <C> <C>
Revenues.................................... $ 86 $ 137 $ 283 $ 569
Earnings (Loss) from operations............. $ 4 $ (9) $ 3 $ (33)
</TABLE>
The table above does not include operating results from the counties where we
withdrew our Medicare product offerings, effective January 1, 2000, and where
we will be withdrawing Medicare product offerings effective January 1, 2001.
Annual revenues for 1999 from the Medicare markets we exited, effective
January 1, 2000, were approximately $230 million. Annual revenues for 2000
from the Medicare markets we are exiting, effective January 1, 2001, are
expected to be approximately $320 million.
In the third quarter of 2000, we finalized our agreement with Blue Shield of
California to transition approximately 210,000 of our commercial health plan
members, including our California health plan members. Additionally, we
received approval to transition approximately 75,000 of our Oregon and
Washington health plan members to Premera BlueCross and LifeWise. Our
UnitedHealthcare business expects to transition all revenues related to these
markets to these organizations during the fourth quarter of 2000. These
actions are a continuation of our planned transition to concentrate resources
on Uniprise national, multi-site and Specialized Care Services customers in
the Pacific Coast region. We have also substantially transitioned out of the
market in Puerto Rico. We believe the balances accrued in our operational
realignment and other charges will be sufficient to cover expenses incurred in
the sale or exit of our operations in these markets.
The operational realignment and other charges do not cover certain aspects of
the Plan, including new information systems, data conversions, process re-
engineering, temporary duplicate staffing costs as we consolidate processing
centers and employee relocation and training. These costs will be charged to
expense as incurred or capitalized, as appropriate. During the three and nine
month periods ended September 30, 2000, we incurred expenses related to these
activities of approximately $16 million and $46 million, respectively,
compared to $12 million and $46 million for the comparable periods in 1999.
The Plan provided for substantial completion in 1999. However, some
initiatives, including the consolidation of certain claims and administrative
processing functions and certain divestitures and market realignment efforts
have required additional time in order to complete in the most effective
manner and to obtain certain required regulatory approvals, and will extend
through the middle of 2001. Based on current facts and circumstances, we
believe the remaining realignment reserve is adequate to cover the costs to be
incurred in executing the remainder of the Plan. However, as we proceed with
the execution of the Plan, and more current information becomes available, it
may be necessary to adjust our estimates for severance and lease obligations
on exited facilities.
7
<PAGE>
The following is a roll-forward of accrued operational realignment and other
charges, which are included in accounts payable and accrued liabilities in the
accompanying balance sheets, through September 30, 2000 (in millions):
<TABLE>
<CAPTION>
Severance and Noncancelable Disposition of
Asset Outplacement Lease Businesses and
Impairments Costs Obligations Other Costs Total
----------- ------------- ------------- -------------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... $ -- $ -- $ -- $ -- $ --
Provision for
Operational Realignment
and Other Charges...... 430 142 82 71 725
Additional
Charges/(Credits)...... 21 (20) (9) 8 --
Cash Payments........... -- (19) (6) (13) (38)
Non-cash Charges........ (451) -- -- -- (451)
Balance at December 31,
1998................... -- 103 67 66 236
Additional
Charges/(Credits)...... -- (22) 13 9 --
Cash Payments........... -- (46) (18) (45) (109)
Balance at December 31,
1999................... -- 35 62 30 127
Cash Payments........... -- (18) (17) (18) (53)
----- ---- ---- ---- -----
Balance at September 30,
2000................... $ -- $ 17 $ 45 $ 12 $ 74
===== ==== ==== ==== =====
</TABLE>
4. Cash and Investments
As of September 30, 2000, 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
Amortized Cost Holding Gains Holding Losses Fair Value
-------------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Cash and Cash
Equivalents............ $1,103 $ -- $ -- $1,103
Debt Securities--
Available for Sale..... 3,163 33 (13) 3,183
Equity Securities--
Available for Sale..... 187 123 -- 310
Debt Securities--Held to
Maturity............... 89 -- -- 89
------ ---- ---- ------
Total Cash and
Investments........... $4,542 $156 $(13) $4,685
====== ==== ==== ======
</TABLE>
During the three and nine month periods ended September 30, we recorded
realized gains and losses on the sale of investments as follows (in millions):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
2000 1999 2000 1999
------- ------ ------- ------
<S> <C> <C> <C> <C>
Gross Realized Gains........................ $ 2 $ 1 $ 8 $ 8
Gross Realized Losses....................... (13) (3) (34) (8)
------- ------ ------- ------
Net Realized Gains (Losses)................ $ (11) $ (2) $ (26) $ --
======= ====== ======= ======
</TABLE>
During the first quarter of 2000, we contributed approximately 700,000 shares
of WebMD Corporation (formerly Healtheon/WebMD Corporation) common stock
valued at approximately $52 million to the UnitedHealth Foundation. The
difference between the realized gain of approximately $51 million on the stock
transfer and the related contribution expense of $52 million was $1 million.
The net effect of this transaction is included in
8
<PAGE>
Investment and Other Income in the accompanying Condensed Consolidated
Statement of Operations. The provision for income taxes for the nine months
ended September 30, 2000 includes a $14 million net permanent tax benefit
related to this contribution.
5. Debt
Debt consists of the following (in millions):
<TABLE>
<CAPTION>
September 30,
2000 December 31, 1999
--------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------ ---------- --------
<S> <C> <C> <C> <C>
Commercial Paper....................... $ 665 $ 665 $ 591 $ 591
Floating Rate Note, due November 2001.. 150 150 150 150
6.60% Senior Unsecured Note due
December 2003......................... 250 236 250 238
------ ------ -------- --------
Total Debt............................. 1,065 1,051 991 979
Less: Current Portion.................. (665) (665) (591) (591)
------ ------ -------- --------
Total Long-Term Debt.................. $ 400 $ 386 $ 400 $ 388
====== ====== ======== ========
</TABLE>
As of September 30, 2000, our outstanding commercial paper had interest rates
ranging from 6.6% to 7.0%. In November 1999, we issued a $150 million two-year
floating rate note. The interest rate is adjusted quarterly to the three month
LIBOR (London Interbank Offered Rate) plus 0.5%. As of September 30, 2000, the
applicable rate on the note was 7.1%.
In July 2000, we executed new credit arrangements supporting our commercial
paper program with a group of banks for an aggregate of $900 million. These
credit arrangements are comprised of a $450 million revolving credit facility,
expiring in July 2005, and a $450 million 364-day facility, expiring in July
2001. We also have the capacity to issue approximately $180 million of
extendible commercial notes ("ECNs") under our ECN program. At September 30,
2000, we had no amounts outstanding under our credit facilities or ECN
program.
Our debt agreements and credit arrangements 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.
We are in compliance with the requirements of all debt covenants.
6. AARP Contract
In February 1997, we entered into a ten-year contract to provide insurance
products and services to members of 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. 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 AARP.
The underwriting results related to AARP business are recorded as an increase
or decrease to a rate stabilization fund ("RSF"). 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 underwriting losses 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 is included in Other Policy Liabilities in the accompanying Condensed
Consolidated Balance Sheets. We believe the RSF balance is sufficient to cover
any potential future underwriting or other risks associated with the contract.
9
<PAGE>
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 AARP program-related assets and liabilities are included in our
Condensed Consolidated Balance Sheets (in millions):
<TABLE>
<CAPTION>
Balance as of
------------------------------------
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Assets Under Management............. $1,464 $1,307
Receivables......................... $ 278 $ 276
Medical Costs Payable............... $ 811 $ 791
Other Policy Liabilities............ $ 832 $ 713
Accounts Payable and Accrued
Liabilities........................ $ 99 $ 79
</TABLE>
The effects 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 Condensed Consolidated
Statements of Cash Flows.
7. Stock Repurchase Program
Under Board of Directors' authorization, we are operating a common stock
repurchase program. Repurchases may be made from time to time at prevailing
prices, subject to certain restrictions on volume, pricing and timing. During
the nine months ended September 30, 2000 we repurchased 26 million shares at
an aggregate cost of $892 million. Through September 30, 2000, we had
repurchased approximately 87.8 million shares for an aggregate cost of $2.3
billion since the inception of the program in November 1997. In December 1998,
we also repurchased $500 million of preferred stock that was convertible into
20.2 million shares of common stock. In October 2000, the Board of Directors
renewed the stock repurchase program and authorized the Company to repurchase
up to an additional 32 million shares of its common stock.
As a component of our share repurchase activities, we have entered into
agreements to purchase shares of our common stock, where the number of shares
purchased, if any, are dependent upon market conditions and other contractual
terms. As of September 30, 2000, we have agreements to purchase up to 10.8
million shares of our common stock at various times through June 2003 at an
average cost of approximately $37 per share.
8. Common Stock Split
In October 2000, the Company's Board of Directors declared a two-for-one split
of the Company's common stock in the form of a 100 percent common stock
dividend. The dividend is payable on December 22, 2000 to shareholders of
record as of December 1, 2000. The accompanying condensed consolidated
financial statements have been restated to reflect the share and per share
effects of the common stock split.
10
<PAGE>
9. Comprehensive Income (Loss)
The table below presents comprehensive income (loss), defined as changes in
the equity of our business excluding changes resulting from investments by and
distributions to our shareholders, for the three and nine month periods ended
September 30 (in millions):
<TABLE>
<CAPTION>
Three Nine
Months Months
Ended Ended
September September
30, 30,
---------- ----------
2000 1999 2000 1999
---- ----- ---- ----
<S> <C> <C> <C> <C>
Net Earnings........................................... $182 $ 144 $526 $411
Change in Net Unrealized Holding Gains on Investments
Available for Sale, net of income tax effects......... 27 (224) (76) 151
---- ----- ---- ----
Comprehensive Income (Loss)............................ $209 $ (80) $450 $562
==== ===== ==== ====
</TABLE>
10. Segment Financial Information
Our reportable operating segments are organized and defined by a combination
of economic characteristics, including the types of products and services
offered and customer segments served by each segment. The following is a
description of the types of products and services from which each of our
business segments derives its revenues:
. Health Care Services consists of the UnitedHealthcare and Ovations
businesses. UnitedHealthcare designs and operates network-based health
and well-being services, including commercial, Medicare and Medicaid
products for locally based employers and individuals in six broad
regional markets. Ovations, which administers Medicare Supplement
benefits on behalf of AARP, offers health and well-being services for
Americans age 50 and older.
. Uniprise provides network and non-network based health and well-being
services, business-to-business transactional infrastructure services,
consumer connectivity and service, and technology support for large
employers and health plans.
. Specialized Care Services is an expanding portfolio of health and well-
being companies, each serving a specialized market need with a unique
blend of benefits, provider networks, services and resources.
. Ingenix is a leading health care information and research organization
that offers a comprehensive line of health care knowledge and
information products and services to pharmaceutical companies, health
insurers and other payers, care providers, large employers and
governments.
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. Assets and
liabilities that are jointly used are assigned to each segment using estimates
of pro-rata usage. Cash and investments are assigned such that each segment
has minimum specified levels of regulatory capital and working capital. The
"Corporate and Eliminations" column includes unassigned cash and investments,
investment income derived from these unassigned assets, costs associated with
company-wide core process improvement initiatives, and eliminations of
intersegment transactions and balances.
11
<PAGE>
The following tables present segment financial information for the three and
nine month periods ended September 30, 2000 and 1999 (in millions):
<TABLE>
<CAPTION>
Three Months Ended Health Care Specialized Corporate and
September 30, 2000 Services Uniprise Care Services Ingenix Eliminations Consolidated
------------------ ----------- -------- ------------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues--External
Customers.............. $4,694 $417 $125 $ 77 $ -- $5,313
Revenues--Intersegment.. -- 130 115 23 (268) --
Investment and Other
Income................. 46 7 3 -- -- 56
------ ---- ---- ---- ----- ------
Total Revenues.......... $4,740 $554 $243 $100 $(268) $5,369
====== ==== ==== ==== ===== ======
Earnings (loss) from
Operations............. $ 187 $ 75 $ 45 $ 12 $ (10) $ 309
====== ==== ==== ==== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Health Care Specialized Corporate and
September 30, 1999 Services Uniprise Care Services Ingenix Eliminations Consolidated
------------------ ----------- -------- ------------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues--External
Customers.............. $4,361 $352 $ 87 $49 $ -- $4,849
Revenues--Intersegment.. -- 110 104 15 (229) --
Investment and Other
Income................. 41 4 -- -- 9 54
------ ---- ---- --- ----- ------
Total Revenues.......... $4,402 $466 $191 $64 $(220) $4,903
====== ==== ==== === ===== ======
Earnings (loss) from
Operations............. $ 140 $ 57 $ 32 $10 $ -- $ 239
====== ==== ==== === ===== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Health Care Specialized Corporate and
September 30, 2000 Services Uniprise Care Services Ingenix Eliminations Consolidated
------------------ ----------- -------- ------------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues--External
Customers.............. $13,757 $1,211 $357 $195 $ -- $15,520
Revenues--Intersegment.. -- 383 346 63 (792) --
Investment and Other
Income................. 140 18 7 -- 3 168
Total Revenues.......... $13,897 $1,612 $710 $258 $(789) $15,688
======= ====== ==== ==== ===== =======
Earnings (loss) from
Operations............. $ 538 $ 213 $126 $ 18 $ (25) $ 870
======= ====== ==== ==== ===== =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Health Care Specialized Corporate and
September 30, 1999 Services Uniprise Care Services Ingenix Eliminations Consolidated
------------------ ----------- -------- ------------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues--External
Customers.............. $13,005 $1,039 $237 $125 $ -- $14,406
Revenues--Intersegment.. -- 331 292 45 (668) --
Investment and Other
Income................. 122 17 3 1 21 164
------- ------ ---- ---- ----- -------
Total Revenues.......... $13,127 $1,387 $532 $171 $(647) $14,570
======= ====== ==== ==== ===== =======
Earnings (loss) from
Operations............. $ 420 $ 167 $ 91 $ 14 $ (7) $ 685
======= ====== ==== ==== ===== =======
</TABLE>
11. Commitments and Contingencies
Governmental Regulation
Our businesses are heavily regulated on federal, state, and local levels. The
laws and rules governing our business and interpretations of those laws and
rules are subject to ongoing 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 our health care and administrative costs and capital
12
<PAGE>
requirements, and increase our liability for medical malpractice or other
actions. We must obtain and maintain regulatory approvals to market many of
our products.
State legislatures and Congress continue to focus on health care issues. In
Congress, managed health care has been the subject of proposed legislation.
Any such legislation could expand health plan liability and could also have an
impact on the costs and revenues of our health plans. Other proposed federal
bills and regulations may impact certain aspects of our business, including
provider contracting, claims payments, confidentiality of health information
and government funded programs.
We are also subject to various governmental reviews, audits and
investigations. Such oversight could result in the loss of license or the
right to participate in certain programs, or the imposition of civil or
criminal fines, penalties and other sanctions. We do not believe the results
of any current audits, individually or in the aggregate, will have a material
adverse effect on our financial position or results of operations.
Concentrations of Credit Risk
Investments in financial instruments such as marketable securities and
commercial premiums receivable may subject us to concentrations of credit
risk. Our investments in marketable securities are managed under 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 September 30, 2000, there were no significant concentrations of
credit risk.
13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Directors of
UnitedHealth Group Incorporated:
We have reviewed the accompanying condensed consolidated balance sheet of
UnitedHealth Group Incorporated (a Minnesota corporation) and Subsidiaries as
of September 30, 2000 and the related condensed consolidated statements of
operations and cash flows for the three and nine month periods ended September
30, 2000 and 1999. 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 auditing standards generally accepted in the
United States, 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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements of
UnitedHealth Group Incorporated and Subsidiaries as of and for the year-ended
December 31, 1999 (not presented herein), and, in our report dated February
10, 2000, 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, 1999, 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,
October 27, 2000
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
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 it operates, and business generally.
These factors are described in Exhibit 99 to this Quarterly Report.
Summary highlights of our third quarter 2000 results include:
. Earnings per share reached $0.54, an increase of 33% from $0.41 per
share reported in the third quarter of 1999, and up $0.04 per share, or
8%, sequentially over the second quarter of 2000.
. Cash flows from operations were $967 million ($1,168 million adjusted
for Medicare payment receipt timing) for the nine-month period ended
September 30, 2000, up 29%, year over year, after adjusting both 2000
and 1999 results for Medicare payment receipt timing.
. Earnings from operations increased to $309 million in the third quarter,
up $70 million, or 29%, over the prior year, and up $21 million, or 7%,
sequentially over the second quarter of 2000.
. Consolidated revenues increased 10% over the third quarter of 1999 to
$5.4 billion, reflecting strong and balanced growth across all business
segments, partially offset by targeted pullbacks in certain geographic
and product market segments.
. The third quarter operating cost ratio (calculated as operating costs
divided by total revenues) decreased to 16.6% of revenue from 17.0% in
the third quarter of 1999 and from 16.8% in the second quarter of 2000.
. We repurchased an additional 7.8 million shares of our common stock
during the third quarter. Since the inception of our stock repurchase
activities in November 1997, we have repurchased 87.8 million shares of
common stock and preferred stock that was convertible into 20.2 million
common shares.
. Annualized return on equity reached 19.8% in the third quarter of 2000,
up from 14.2% in the third quarter of 1999.
Summary Operating Information
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
Operating Results (in
millions, except per share Percent Percent
data) 2000 1999 Change 2000 1999 Change
-------------------------- ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues.............. $5,369 $4,903 10% $15,688 $14,570 8%
Earnings from Operations.... $ 309 $ 239 29% $ 870 $ 685 27%
Net Earnings................ $ 182 $ 144 26% $ 526 $ 411 28%
Diluted Net Earnings Per
Common Share............... $ 0.54 $ 0.41 33% $ 1.56 $ 1.15 36%
Diluted Net Earnings Per
Common Share--
Adjusted(1) n/a n/a n/a $ 1.52 $ 1.15 33%
Medical Costs to Premium
Revenues................... 85.3% 85.6% 85.4% 85.8%
Medical Costs to Premium
Revenues, Excluding AARP... 83.9% 84.1% 83.9% 84.3%
Operating Cost Ratio........ 16.6% 17.0% 16.8% 17.0%
</TABLE>
---------------------
(1) September year-to-date 2000 results include a net permanent tax benefit
related to the contribution of WebMD Corporation common stock to the
UnitedHealth Foundation. Excluding this benefit, net earnings and diluted
net earnings per common share were $512 million and $1.52 per share for
the nine month period ended September 30, 2000.
15
<PAGE>
Results of Operations
Consolidated Financial Results
Revenues
Revenues are comprised of premium revenues associated with risk-based products
(those where we assume financial responsibility for health care costs);
management services and fees associated with administrative services, managed
health plans, and our Specialized Care Services and Ingenix businesses; and
investment and other income.
Consolidated revenues increased $466 million, or 10%, year-over-year in the
third quarter of 2000 to $5.4 billion, reflecting balanced growth across all
business segments, partially offset by transitions in certain geographic and
Medicare markets. Adjusted for the effect of these market transitions,
consolidated revenues increased approximately $626 million, or 14%, year-over
year. Following is a discussion of third quarter and year-to-date consolidated
revenue trends for each of our three revenue components.
Premium Revenues
Consolidated premium revenues totaled $4.8 billion in the third quarter of
2000, an increase of $407 million, or 9%, over the third quarter of 1999. For
the nine months ended September 30, 2000, premium revenues of $14.1 billion
represented an increase of $961 million, or 7%, over the same period in 1999.
These increases were primarily driven by average premium yield increases of
10% to 11% on UnitedHealthcare's commercial customer renewals and growth in
individuals served with risk-based products, partially offset by targeted
pullbacks in certain geographic and Medicare markets. Adjusted for the effects
of these market transitions, premium revenues increased 14% and 11%,
respectively, year-over-year for the three and nine month periods ended
September 30, 2000.
Management Services and Fee Revenues
Management services and fee revenues during the three and nine month periods
ended September 30, 2000 totaled $501 million and $1.5 billion, representing
increases of $57 million and $153 million, respectively, over the comparable
periods in 1999. The overall increase in management services and fee revenues
is primarily the result of strong growth in Uniprise's multi-site customer
base, price increases in fee business, and acquisitions and growth from our
Ingenix business.
Investment and Other Income
Investment and other income during the three and nine month periods ended
September 30, 2000 totaled $56 million and $168 million, representing
increases of $2 million and $4 million, respectively, from the same periods in
1999. The effect of higher interest yields on investments in 2000 compared
with 1999 was largely offset by $26 million of net realized capital losses
primarily resulting from the sale of fixed income investments during the first
three quarters of 2000 versus $0 of net realized capital gains (losses) during
the first three quarters of 1999.
Medical Costs
The combination of our pricing and care coordination efforts is reflected in
the medical care ratio (medical costs as a percentage of premium revenues).
Our consolidated medical care ratio decreased from 85.6% in the third quarter
of 1999 to 85.3% in the third quarter of 2000. Excluding the AARP business, on
a year-over-year basis, the medical care ratio decreased from 84.1% to 83.9%
for the three months ended September 30, 2000 and from 84.3% to 83.9% for the
nine months ended September 30, 2000. Our medical care ratio, excluding AARP,
remained stable at 83.9% when compared with the second quarter of 2000. The
decreases in our year-over-year medical care ratios are primarily attributable
16
<PAGE>
to 10% to 11% commercial premium yield increases which slightly exceeded the
underlying increase in total benefit costs.
On an absolute dollar basis, the increase of $336 million, or 9%, in medical
costs in the third quarter of 2000 over the comparable prior year period is
driven by a combination of growth in individuals served with risk-based
products, medical cost inflation, benefit changes, and product mix changes.
Operating Costs
Operating costs as a percentage of total revenues (the operating cost ratio)
decreased from 17.0% during the third quarter of 1999 to 16.6% during the
third quarter of 2000, primarily driven by productivity increases achieved
through our core process improvement and cost reduction initiatives, and by
further leveraging the fixed cost components of our infrastructure. For the
three and nine month periods ended September 30, 2000, operating costs on an
absolute dollar basis increased $59 million and $154 million, or 7% and 6%,
respectively, over the comparable periods in 1999. These increases resulted
from the additional costs to support the increase in 2000 consolidated
revenues over the comparable 1999 periods partially offset by the productivity
improvements discussed above.
Depreciation and Amortization
Depreciation and amortization was $62 million and $61 million, and $185
million and $171 million, for the three and nine months ended September 30,
2000 and 1999, respectively. These increases resulted from a combination of
increased levels of capital expenditures and technology enhancements to
support business growth and amortization of goodwill and other intangible
assets related to acquisitions.
Business Segments
The following summarizes the operating results of our business segments for
three and nine month periods ended September 30 (in millions):
Revenues
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
Percent Percent
2000 1999 Change 2000 1999 Change
------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Health Care Services........ $4,740 $4,402 8% $13,897 $13,127 6%
Uniprise.................... 554 466 19% 1,612 1,387 16%
Specialized Care Services... 243 191 27% 710 532 33%
Ingenix..................... 100 64 56% 258 171 51%
Corporate and Eliminations.. (268) (220) n/a (789) (647) n/a
------ ------ --- ------- ------- ---
Consolidated Revenues....... $5,369 $4,903 10% $15,688 $14,570 8%
====== ====== === ======= ======= ===
Earnings (loss) from
operations
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
Percent Percent
2000 1999 Change 2000 1999 Change
------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Health Care Services........ $187 $140 34% $538 $420 28%
Uniprise.................... 75 57 32% 213 167 28%
Specialized Care Services... 45 32 41% 126 91 38%
Ingenix..................... 12 10 20% 18 14 29%
Corporate and Eliminations.. (10) -- n/a (25) (7) n/a
------ ------ --- ------- ------- ---
Consolidated Earnings from
Operations................. $309 $239 29% $870 $685 27%
====== ====== === ======= ======= ===
</TABLE>
17
<PAGE>
Health Care Services
The Health Care Services segment, comprised of UnitedHealthcare and Ovations,
posted third quarter revenues of $4.7 billion, representing an increase of
$338 million, or 8%, over the third quarter of 1999. For the nine months ended
September 30, 2000, Health Care Services' revenues grew to $13.9 billion, an
increase of $770 million, or 6%, over the same period in 1999. This increase
is primarily attributable to UnitedHealthcare's average net premium yield
increases of 10% to 11% on renewing commercial business, partially offset by
targeted pullbacks in certain geographic and Medicare markets. Adjusted for
the effect of these market transitions, Health Care Services' revenues
increased by approximately 12% and 10%, respectively, on a year-over-year
basis for the three and nine month periods ended September 30, 2000.
The Health Care Services segment contributed earnings from operations of $187
million and $538 million during the three and nine month periods ended
September 30, 2000, representing increases of $47 million, or 34%, and $118
million, or 28%, over the comparable 1999 periods. The increases are primarily
related to improved margins on UnitedHealthcare's commercial business and
reduced operating costs as a percentage of revenues, driven by our core
process improvement and cost reduction initiatives.
The following table summarizes UnitedHealthcare's medical care ratios by
product line for the three and nine month periods ending September 30 (in
thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Commercial................................ 84.1% 84.8% 84.1% 84.7%
Medicare.................................. 90.1% 89.5% 89.9% 89.3%
Medicaid.................................. 88.5% 86.0% 88.5% 86.1%
</TABLE>
UnitedHealthcare's commercial medical care ratio improved on a year-over-year
basis, driven by net premium yield increases in excess of underlying medical
costs. Commercial health plan premium rates are established based on
anticipated benefit costs. Net average premium yield increases on renewing
business were approximately 10% to 11% during the first three quarters of
2000, which reflects our expectation that our total cost of benefits,
including the effects of medical cost inflation, benefit changes and product
mix, will increase at a rate of approximately 9% to 10% during 2000.
UnitedHealthcare's Medicare medical ratio increased year-over-year. We
continue to evaluate Medicare markets and alter benefit designs to further
improve our Medicare product margins. Our year-over-year Medicare enrollment
decreased 10% as a result of actions taken to better position this program for
long-term success. Effective January 1, 2000, we withdrew our Medicare+Choice
product program in 49 counties affecting 40,000 members, and also filed
significant benefit adjustments. Annual revenues for 1999 from the Medicare
markets we exited effective January 1, 2000 were approximately $230 million.
In June 2000, UnitedHealthcare announced that it will not renew its
Medicare+Choice contracts in 21 counties across the United States, effective
January 1, 2001, affecting 56,000 individuals. Annual revenues for 2000 from
the Medicare markets we are exiting, effective January 1, 2001, are expected
to be approximately $320 million. These actions are expected to further reduce
Medicare enrollment, but better position this program in the long term in
terms of profitability relative to the cost of capital and required resource
management. We will continue to evaluate the markets we serve and, where
necessary, take actions that may result in further withdrawals of Medicare
product offerings or reductions in membership, when and as permitted by our
contracts with the Health Care Financing Administration ("HCFA").
18
<PAGE>
The following table summarizes individuals served by UnitedHealthcare, by
product and funding arrangement, as of September 30 (in thousands)(/1/):
<TABLE>
<CAPTION>
2000 1999
----- -----
<S> <C> <C>
Commercial
Risk-based.................................................. 5,467 5,123
Fee-based................................................... 1,904 1,706
----- -----
Total Commercial........................................... 7,371 6,829
Medicare..................................................... 397 442
Medicaid..................................................... 528 459
----- -----
Total UnitedHealthcare..................................... 8,296 7,730
===== =====
</TABLE>
---------------------
(1) Excludes individuals served by UnitedHealthcare located in Puerto Rico and
Pacific Coast regions. The Company is transitioning these markets.
Including these markets, individuals served were:
<TABLE>
<CAPTION>
September
30,
-----------
2000 1999
----- -----
<S> <C> <C>
Commercial
Rick-based.................................................. 5,697 5,691
Fee-based................................................... 1,959 1,846
----- -----
Total Commercial........................................... 7,656 7,537
Medicare..................................................... 397 444
Medicaid..................................................... 528 608
----- -----
Total UnitedHealthcare..................................... 8,581 8,589
===== =====
</TABLE>
Uniprise
Uniprise's revenues increased by $88 million, or 19%, over the third quarter
of 1999 driven primarily by growth in its multi-site customer base, changes in
funding arrangements selected by certain customers, and modest price increases
on fee-based business. For the nine months ended September 30, 2000,
Uniprise's revenues grew to $1.6 billion, an increase of $225 million, or 16%,
over the same period in 1999. Uniprise served approximately 6.6 million and
5.9 million individuals as of September 30, 2000 and 1999, respectively.
Uniprise's earnings from operations for the three and nine months ended
September 30, 2000 grew by $18 million and $46 million, respectively, or 32%
and 28%, over the comparable periods in 1999. During the nine months ended
September 30, Uniprise's operating margin improved from 12.0% in 1999 to 13.2%
in 2000. As revenues have increased, Uniprise has improved operating margins
by improving productivity through core process improvement initiatives and by
further leveraging the fixed cost components of its infrastructure.
Specialized Care Services
Specialized Care Services' revenues increased by $52 million, or 27%, over the
third quarter of 1999. This increase was primarily driven by an increase in
the number of individuals served by United Behavioral Health, our mental
health benefit and substance abuse business, and the acquisition of National
Benefit Resources, Inc. in November 1999. For the nine months ended September
30, 2000, Specialized Care Services revenues grew to $710 million, an increase
of $178 million, or 33%, over the same period in 1999, primarily driven by
growth at United Behavioral Health and the acquisition of Dental Benefit
Providers, Inc. in June 1999. During the third quarter of 2000, earnings from
operations of $45 million increased by $13 million, or 41%, compared with the
19
<PAGE>
third quarter of 1999. During the nine months ended September 30, 2000,
Specialized Care Services' operating margin improved from 17.1% in 1999 to
17.7% in 2000.
Ingenix
Ingenix's revenues increased in the third quarter by $36 million over the
comparable prior year period as a result of new business and acquisitions
during the second half of 1999. For the nine months ended September 30, 2000,
Ingenix's revenues grew to $258 million, an increase of $87 million, or 51%,
over the same period in 1999. Earnings from operations of $12 million during
the third quarter of 2000 increased by $2 million over the comparable prior
year period. Operating margins decreased from 15.6% in the third quarter of
1999 to 12.0% for the third quarter of 2000, principally as a result of
increased goodwill amortization expense associated with Ingenix's
acquisitions. Ingenix generates higher revenues in the second half of the year
due to seasonally strong demand for software and information content projects.
Corporate and Eliminations
Corporate includes investment income derived from cash and investments not
assigned to operating segments and the company-wide costs associated with core
process improvement initiatives. The decrease in Corporate earnings is
attributable to a decline in the level of unassigned cash and investments, and
associated investment income, primarily resulting from common stock
repurchases, and incremental 2000 core process improvement costs.
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 second quarter of 1998, which reflected the
estimated costs to be incurred 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 claims processing operations and associated real
estate obligations. Activities associated with the Plan will result in the
reduction of approximately 5,200 positions, affecting approximately 6,400
people in various locations. Through September 30, 2000, we have eliminated
approximately 4,800 positions, affecting approximately 4,700 people, pursuant
to the Plan. The remaining positions are expected to be eliminated by June 30,
2001.
Our accompanying financial statements include the operating results of
businesses and markets disposed of or discontinued, and markets we are exiting
in connection with the operational realignment. The accompanying Condensed
Consolidated Statements of Operations include revenues and operating earnings
(losses) from businesses disposed of and markets we are exiting for the three
and nine month periods ended September 30 as follows (in millions):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- -------------
2000 1999 2000 1999
------ ------- ------ ------
<S> <C> <C> <C> <C>
Revenues.................................. $ 86 $ 137 $ 283 $ 569
Earnings (Loss) from operations........... $ 4 $ (9) $ 3 $ (33)
</TABLE>
The table above does not include operating results from the counties where we
withdrew our Medicare product offerings, effective January 1, 2000, and where
we will be withdrawing Medicare product offerings effective January 1, 2001.
Annual revenues for 1999 from the Medicare markets we exited, effective
January 1, 2000, were approximately $230 million. Annual revenues for 2000
from the Medicare markets we are exiting, effective January 1, 2001, are
expected to be approximately $320 million.
20
<PAGE>
In the third quarter of 2000, we finalized our agreement with Blue Shield of
California to transition approximately 210,000 of our commercial health plan
members, including our California health plan members. Additionally, we
received approval to transition approximately 75,000 of our Oregon and
Washington health plan members to Premera BlueCross and LifeWise. Our
UnitedHealthcare business expects to transition all revenues related to these
markets to these organizations during the fourth quarter of 2000. These
actions are a continuation of our planned transition to concentrate resources
on Uniprise national, multi-site and Specialized Care Services customers in
the Pacific Coast region. We have also substantially transitioned out of the
market in Puerto Rico. We believe the balances accrued in our operational
realignment and other charges will be sufficient to cover expenses incurred in
the sale or exit of our operations in these markets.
The operational realignment and other charges do not cover certain aspects of
the Plan, including new information systems, data conversions, process re-
engineering, temporary duplicate staffing costs as we consolidate processing
centers and employee relocation and training. These costs will be charged to
expense as incurred or capitalized, as appropriate. During the three and nine
month periods ended September 30, 2000, we incurred expenses related to these
activities of approximately $16 million and $46 million, respectively,
compared to $12 million and $46 million for the comparable periods in 1999.
The Plan provided for substantial completion in 1999. However, some
initiatives, including the consolidation of certain claims and administrative
processing functions and certain divestitures and market realignment efforts
have required additional time in order to complete in the most effective
manner and to obtain certain required regulatory approvals, and will extend
through the middle of 2001. Based on current facts and circumstances, we
believe the remaining realignment reserve is adequate to cover the costs to be
incurred in executing the remainder of the Plan. However, as we proceed with
the execution of the Plan, and more current information becomes available, it
may be necessary to adjust our estimates for severance and lease obligations
on exited facilities.
The following is a roll-forward of accrued operational realignment and other
charges, which are included in accounts payable and accrued liabilities in the
accompanying balance sheets, through September 30, 2000 (in millions):
<TABLE>
<CAPTION>
Severance and Noncancelable Disposition of
Asset Outplacement Lease Businesses and
Impairments Costs Obligations Other Costs Total
----------- ------------- ------------- -------------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... $ -- $ -- $ -- $ -- $ --
Provision for
Operational Realignment
and Other Charges...... 430 142 82 71 725
Additional
Charges/(Credits)...... 21 (20) (9) 8 --
Cash Payments........... -- (19) (6) (13) (38)
Non-cash Charges........ (451) -- -- -- (451)
----- ---- ---- ---- -----
Balance at December 31,
1998................... -- 103 67 66 236
Additional
Charges/(Credits)...... -- (22) 13 9 --
Cash Payments........... -- (46) (18) (45) (109)
----- ---- ---- ---- -----
Balance at December 31,
1999................... -- 35 62 30 127
Cash Payments........... -- (18) (17) (18) (53)
----- ---- ---- ---- -----
Balance at September 30,
2000................... $ -- $ 17 $ 45 $ 12 $ 74
===== ==== ==== ==== =====
</TABLE>
21
<PAGE>
Financial Condition and Liquidity at September 30, 2000
During the first nine months of 2000, we generated cash from operations of
$967 million, an increase of $272 million over the comparable 1999 period.
After adjusting 2000 and 1999 cash flows for the timing of cash receipts from
HCFA for Medicare premiums, operating cash flows increased $263 million, or
29%, over the comparable 1999 period. The increase in operating cash flows is
attributable to an increase of $129 million in net income excluding
depreciation and amortization expense, working capital improvements of
approximately $90 million, and $44 million related to income tax benefits
resulting from employee stock option exercises.
We continued to maintain a strong financial condition and liquidity position,
with cash and investments of $4.7 billion at September 30, 2000. Total cash
and investments decreased by approximately $34 million since December 31,
1999, primarily resulting from common stock repurchases, a decline in the
market value of WebMD Corporation (formerly Healtheon/WebMD Corporation)
common stock holdings during the first three quarters of 2000, and our
contribution of over 700,000 shares of WebMD common stock to the UnitedHealth
Foundation.
As further described under "Regulatory Capital and Dividend Restrictions,"
many of our subsidiaries are subject to various government regulations. At
September 30, 2000, approximately $100 million of our $4.4 billion of cash and
investments in debt securities was held by non-regulated subsidiaries and is
available for working capital needs, general corporate use, including share
repurchases, and acquisitions. Our operating cash flows and financing
capability also provide us with funds, as needed, for general corporate use.
As of September 30, 2000, we had $665 million of commercial paper outstanding,
with interest rates ranging from 6.6% to 7.0%. In July 2000, we executed new
credit arrangements supporting our commercial paper program with a group of
banks for an aggregate of $900 million. These credit arrangements are
comprised of a $450 million revolving credit facility, expiring in July 2005,
and a $450 million 364-day facility, expiring in July 2001. We also have the
capacity to issue approximately $180 million of extendible commercial notes
("ECNs") under our ECN program. At September 30, 2000, we had no amounts
outstanding under our credit facilities or ECN program.
Our 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.
We are in compliance with the requirements of all debt covenants.
Our senior debt is rated "A" by Standard & Poor's and Fitch (formerly known as
Duff & Phelps), and "A-3" by Moody's. Our commercial paper and ECN programs
are rated "A-1" by Standard & Poor's, "F-1" by Fitch, and "P-2" by Moody's.
The aggregate issuing capacity of all securities covered by shelf registration
statements for common stock, preferred stock, debt securities and other
securities is $1.25 billion. We may publicly offer such securities from time
to time at prices and terms to be determined at the time of offering.
Under Board of Directors' authorization, we are operating a common stock
repurchase program. Repurchases may be made from time to time at prevailing
prices, subject to certain restrictions on volume, pricing and timing. During
the nine months ended September 30, 2000 we repurchased 26 million shares at
an aggregate cost of $892 million. Through September 30, 2000, we had
repurchased approximately 87.8 million shares for an aggregate cost of $2.3
billion since the inception of the program in November 1997. In December 1998,
we also repurchased $500 million of preferred stock that was convertible into
20.2 million shares of common stock. In October 2000, the Board of Directors
renewed the stock repurchase program and authorized the Company to repurchase
up to an additional 32 million shares of its common stock.
22
<PAGE>
In October 2000, the Company's Board of Directors declared a two-for-one split
of the Company's common stock in the form of a 100 percent common stock
dividend. The dividend is payable on December 22, 2000 to shareholders of
record as of December 1, 2000. The accompanying condensed consolidated
financial statements have not been restated to reflect the share and per share
effects of the common stock split.
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. A substantial
portion of our long-term investments (approximately $3.2 billion as of
September 30, 2000) is classified as available for sale. Subject to the
previously described regulations, these investments may be sold to fund
working capital or for other purposes.
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 technology,
products and programs and may include acquisitions.
During 1999, we formed and initiated funding of the UnitedHealth Foundation.
Through September 30, 2000, we have made contributions using a portion of our
investment in WebMD Corporation common stock valued at approximately $100
million on the dates contributed. The UnitedHealth Foundation is dedicated to
improving Americans' health and well-being by supporting consumer and
physician education and awareness programs, generating objective information
that will contribute to improving health care delivery, and sponsoring
community-based health and well-being activities.
Regulatory Capital and Dividend Restrictions
Our operations are conducted through our wholly-owned subsidiaries, which
include 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 may 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 September 30, 2000, 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
approximately $400 million.
The National Association of Insurance Commissioners has adopted rules which
set new minimum capitalization requirements for insurance companies, HMOs and
other entities bearing risk for health care coverage. We do not expect these
rules changes will require us to make significant incremental investments of
general corporate resources into regulated subsidiaries.
Inflation
Although the general rate of inflation has remained relatively stable, 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, unique approaches to utilization review, 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 efficient delivery of
specialty and hospital services.
23
<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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of changes in value of a financial instrument
caused by fluctuations in interest rates and equity prices.
Approximately $4.4 billion of our cash and investments at September 30, 2000
was invested in fixed income securities. We manage our investment portfolio
within risk parameters approved by our Board of Directors; however, our fixed
income securities are subject to the effects of market fluctuations in
interest rates. Assuming a hypothetical and immediate 1% increase or decrease
in rates applicable to our fixed income portfolio at September 30, 2000, the
fair value of our fixed income investments would decrease or increase by
approximately $140 million.
24
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
In September 1999, a group of plaintiffs' trial lawyers publicly announced
that they were targeting the managed care industry by way of class action
litigation. Since that time, like other managed care companies, we have
received several purported class action matters that generally challenge
managed care practices including cost containment mechanisms, disclosure
obligations and payment methodologies. We intend to defend vigorously all of
these cases.
In Re: Managed Care Litigation: MDL No. 1334. The multi-district litigation
panel has consolidated several litigation matters involving UnitedHealth Group
and its affiliates in the Southern District of Florida, Miami division. The
UnitedHealth Group matters have been consolidated with litigation involving
other managed care industry members for the coordination of pre-trial
proceedings. To date, three UnitedHealth Group litigation matters have been
consolidated (including McRaney et al. v. UnitedHealthcare, Inc. and
UnitedHealth Group filed on June 23, 2000, which was described in our
Quarterly Report on Form 10-Q for the period ended June 30, 2000), with
several other matters likely to be consolidated in the near future (including
McRaney et al. v. UnitedHealthcare, Inc. and UnitedHealth Group filed on
February 8, 2000 and Murphy et al. v. UnitedHealth Group filed on April 20,
2000, each of which has been described in previous periodic reports filed by
us with the Securities and Exchange Commission). Generally, the claims made in
this consolidated litigation allege violations of the Employee Retirement
Income Security Act ("ERISA") and the Racketeer Influenced and Corrupt
Organizations Act ("RICO") in connection with alleged undisclosed policies
intended to maximize profits. The litigation also asserts breach of state
prompt payment laws and breach of contract claims alleging that UnitedHealth
Group affiliates fail to timely reimburse providers for medical services
rendered. The consolidated suits seek injunctive, compensatory and equitable
relief as well as restitution, costs, fees and interest payments.
The American Medical Association et al. v. Metropolitan Life Insurance
Company, United HealthCare Services, Inc. and UnitedHealth Group was filed on
March 15, 2000 in the Supreme Court of the State of New York, County of New
York. The suit alleges breach of contract and the implied covenant of good
faith and fair dealing, deceptive acts and practices, and trade libel in
connection with the calculation of reasonable and customary reimbursement
rates for out-of-network providers. The suit seeks declaratory, injunctive,
exemplary and compensatory relief as well as costs, fees and interest
payments. An amended complaint was filed on August 25, 2000, and we filed a
motion to dismiss on October 4, 2000.
Because of the nature of our business, we are routinely subject to suits
alleging various causes of action. Some of these suits may include claims for
substantial non-economic or punitive damages. Although the results of pending
litigation are always uncertain, we do not believe that any such actions,
including those described above, or any other types of actions, currently
threatened or pending will, individually or in the aggregate, have a material
adverse effect on our financial position or results of operations.
Item 5. Other Information
In October 2000, the Company's Board of Directors declared a two-for-one split
of the Company's common stock in the form of a 100 percent common stock
dividend. The dividend is payable on December 22, 2000 to shareholders of
record as of December 1, 2000.
Item 6. Exhibits
(a) The following exhibits are filed in response to Item 601 of Regulation
S-K.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <C> <S>
Exhibit 15 -- Letter Re Unaudited Interim Financial Information
Exhibit 27 -- Financial Data Schedule
Exhibit 99 -- Cautionary Statements
</TABLE>
25
<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.
UnitedHealth Group Incorporated
<TABLE>
<CAPTION>
<C> <C> <S>
/s/ Stephen J. Hemsley Dated: November 3, 2000
------------------------------------
Stephen J. Hemsley President and Chief
Operating Officer
/s/ Arnold H. Kaplan Dated: November 3, 2000
------------------------------------
Arnold H. Kaplan Chief Financial
Officer
/s/ Patrick J. Erlandson Dated: November 3, 2000
------------------------------------
Patrick J. Erlandson Chief Accounting
Officer
</TABLE>
26
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Minnesota Statutes Section 302A.521 provides that a corporation shall
indemnify any person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines (including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan),
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person (1) has not been indemnified therefor by another
organization or employee benefit plan; (2) acted in good faith; (3) received no
improper personal benefit and Section 302A.255 (with respect to director
conflicts of interest), if applicable, has been satisfied; (4) in the case of a
criminal proceeding, had no reasonable cause to believe the conduct was
unlawful; and (5) reasonably believed that the conduct was in the best
interests of the corporation in the case of acts or omissions in such person's
official capacity for the corporation or reasonably believed that the conduct
was not opposed to the best interests of the corporation in the case of acts or
omissions in such person's official capacity for other affiliated
organizations. Article IX of the amended and restated bylaws of UnitedHealth
Group provides that UnitedHealth Group shall indemnify officers and directors
to the extent permitted by Section 302A.521 as now enacted or hereafter
amended.
UnitedHealth Group also maintains an insurance policy or policies to assist
in funding indemnification of directors and officers for certain liabilities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)The following exhibits are filed herewith or incorporated by reference
herein:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
2(a) Agreement and Plan of Merger dated as of October 10, 2000 by and among
UnitedHealth Group, Leo Acquisition Corp. and Lifemark, as amended
(included as Annex A to the proxy statement/prospectus contained in
this registration statement).
2(b) Voting Agreement dated as of October 10, 2000 by and among
UnitedHealth Group and various Lifemark directors and executive
officers (included as Annex B to the proxy statement/prospectus
contained in this registration statement).
3(a) Articles of Merger amending UnitedHealth Group's Articles of
Incorporation, effective March 6, 2000. (Incorporated by reference to
Exhibit 3(a) to UnitedHealth Group's Annual Report on Form 10-K for
the year ended December 31, 1999.)
3(b) Second Restated Articles of Incorporation of UnitedHealth Group.
(Incorporated by reference to Exhibit 3(a) to UnitedHealth Group's
Annual Report on Form 10-K for the year ended December 31, 1996.)
3(c) Amended and Restated Bylaws of UnitedHealth Group. (Incorporated by
reference to Exhibit 3 to UnitedHealth Group's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.)
4(a) Senior Indenture, dated as of November 15, 1998, as amended by an
Amendment to Indenture dated as of November 6, 2000 between United
HealthCare Corporation and the Bank of New York. (Incorporated by
reference to Exhibit 4.1 to UnitedHealth Group's Registration
Statement on Form S-3 (SEC File No. 333-44569) and to Exhibit 4.2 to
UnitedHealth Group's Current Report on Form 8-K filed on November 16,
2000.)
4(b) Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of
instruments defining the rights of certain holders of long-term debt
are not filed. UnitedHealth Group agrees to furnish copies thereof to
the Securities and Exchange Commission upon request.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
5 Opinion of General Counsel of UnitedHealth Group regarding the legality
of the securities being issued.
8 Opinion of Bell, Boyd & Lloyd LLC regarding certain tax matters.
*10(a) United HealthCare Corporation 1990 Stock and Incentive Plan, as
amended. (Incorporated by reference to Exhibit 10(f) to UnitedHealth
Group'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 UnitedHealth Group'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 UnitedHealth Group's
Annual Report on Form 10-K for the year ended December 31, 1994.)
*10(d) UnitedHealth Group Leadership Results Plan. (Incorporated by reference
to Exhibit 10(d) to UnitedHealth Group's Annual Report on Form 10-K for
the year ended December 31, 1999.)
*10(e) UnitedHealth Group's 2000 Executive Savings Plan Brochure.
(Incorporated by reference to Exhibit 10(e) to UnitedHealth Group's
Annual Report on Form 10-K for the year ended December 31, 1999.)
*10(f) Employment Agreement, dated as of October 13, 1999, between United
HealthCare Corporation and William W. McGuire, M.D. (Incorporated by
reference to Exhibit 10(f) to UnitedHealth Group's Annual Report on
Form 10-K for the year ended December 31, 1999.)
*10(g) Employment Agreement dated as of October 13, 1999, between United
HealthCare Corporation and Stephen J. Hemsley. (Incorporated by
reference to Exhibit 10(g) to UnitedHealth Group's Annual Report on
Form 10-K for the year ended December 31, 1999.)
*10(h) Employment Agreement, dated as of May 19, 1998, between United
HealthCare Corporation and Arnold H. Kaplan. (Incorporated by reference
to Exhibit 10(h) to UnitedHealth Group's Annual Report on Form 10-K for
the year ended December 31, 1999.)
*10(i) Employment Agreement, dated as of October 16, 1998, between United
HealthCare Corporation and Lois E. Quam. (Incorporated by reference to
Exhibit 10(i) to UnitedHealth Group's Annual Report on Form 10-K for
the year ended December 31, 1999.)
*10(j) Employment Agreement dated as of January 15, 2000, between United
HealthCare Corporation and James B. Hudak. (Incorporated by reference
to Exhibit 10(j) to UnitedHealth Group's Annual Report on Form 10-K for
the year ended December 31, 1999.)
*10(k) Employment Agreement, dated as of October 16, 1998, between United
HealthCare Services, Inc. and Jeannine Rivet. (Incorporated by
reference to Exhibit 10(f) to UnitedHealth Group's Annual Report on
Form 10-K for the year ended December 31, 1998.)
*10(l) 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 UnitedHealth Group's Quarterly Report of
Form 10-Q for the quarter ended June 30, 1998.)
*10(m) Employment Agreement, dated as of October 16, 1998, between United
HealthCare Services, Inc. and David J. Lubben. (Incorporated by
reference to Exhibit 10(j) to UnitedHealth Group's Annual Report on
Form 10-K for the year ended December 31, 1998.)
+10(n) 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
UnitedHealth Group's Annual Report on Form 10-K for the year ended
December 31, 1995.)
+10(o) 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 UnitedHealth Group's
Annual Report on Form 10-K/A for the year ended December 31, 1996.)
+10(p) 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 UnitedHealth Group's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1998.)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
+10(q) 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 UnitedHealth Group's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.)
+10(r) Information Technology Services Agreement between United HealthCare
Services, Inc., a wholly owned subsidiary of UnitedHealth Group, and
Unisys Corporation dated June 1, 1996. (Incorporated by reference to
Exhibit 10 to UnitedHealth Group's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.)
11 Statement regarding computation of per share earnings. (Incorporated by
reference to the information contained under the heading "Net Earnings
(Loss) Per Common Share" in Note 2 to the Notes to Consolidated
Financial Statements included in UnitedHealth Group's Annual Report to
Shareholders for the fiscal year ended December 31, 1999, which is
included as part of Exhibit 13 hereto.)
13 UnitedHealth Group's Annual Report to Shareholders for the fiscal year
ended December 31, 1999. (included as Annex G to the proxy
statement/prospectus contained in this registration statement.)
15 Letter Re Unaudited Interim Financial Information.
**21 Subsidiaries of UnitedHealth Group.
23(a) Consent of Arthur Andersen LLP with respect to UnitedHealth Group's
financial statements.
23(b) Consent of PricewaterhouseCoopers LLP with respect to Lifemark's
financial statements.
23(c) Consent of Dorsey & Whitney LLP (included in Exhibit 5).
23(d) Consent of Bell, Boyd & Lloyd LLC (included in Exhibit 8).
23(e) Consent of Stephens Inc. (included in Exhibit 99.1).
**24 Power of Attorney.
99.1 Opinion of Stephens Inc. (included as Annex C to the proxy
statement/prospectus contained in this registration statement).
99.2 Form of Proxy Card.
</TABLE>
--------
+ 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.
** Previously filed.
(b) Not applicable.
(c) Opinion of Stephens Inc. (included as Annex C to the proxy
statement/prospectus contained in this registration statement).
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) that, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof;
(2) that, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form;
II-3
<PAGE>
(3) that every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to this Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
(4) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of Form
S-4, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of this Registration Statement through the date of
responding to the request;
(5) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in this Registration Statement
when it became effective; and
(6) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item
20 above, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minnetonka, State of Minnesota, on this 12th day of
January, 2001.
UNITEDHEALTH GROUP INCORPORATED
/s/ William W. McGuire, M.D.
By____________________________________
William W. McGuire, M.D.
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of
the Registrant in the capacities indicated on this 12th day of January, 2001.
/s/ William W. McGuire, M.D.
_________________________________ Director and Chief Executive Officer
William W. McGuire, M.D. (principal executive officer)
/s/ Patrick J. Erlandson
_________________________________
Patrick J. Erlandson Chief Financial Officer and Chief
Accounting Officer (principal
financial and accounting officer)
*
_________________________________ Director
William C. Ballard, Jr.
*
_________________________________ Director
Richard T. Burke
*
_________________________________ Director
Stephen J. Hemsley
*
_________________________________ Director
James A. Johnson
*
_________________________________ Director
Thomas H. Kean
II-5
<PAGE>
<TABLE>
<S> <C>
____________________*______________________ Director
Douglas W. Leatherdale
____________________*______________________ Director
Walter F. Mondale
____________________*______________________ Director
Mary O. Mundinger
____________________*______________________ Director
Robert L. Ryan
____________________*______________________ Director
William G. Spears
____________________*______________________ Director
Gail R. Wilensky
</TABLE>
/s/ David J. Lubben
*By__________________________________
David J. Lubben
As Attorney-In-Fact
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
2(a) Agreement and Plan of Merger dated as of October 10, 2000 by and among
UnitedHealth Group, Leo Acquisition Corp. and Lifemark, as amended
(included as Annex A to the proxy statement/prospectus contained in
this registration statement).
2(b) Voting Agreement dated as of October 10, 2000 by and among
UnitedHealth Group and various Lifemark directors and executive
officers (included as Annex B to the proxy statement/prospectus
contained in this registration statement).
3(a) Articles of Merger amending UnitedHealth Group's Articles of
Incorporation, effective March 6, 2000. (Incorporated by reference to
Exhibit 3(a) to UnitedHealth Group's Annual Report on Form 10-K for
the year ended December 31, 1999.)
3(b) Second Restated Articles of Incorporation of UnitedHealth Group.
(Incorporated by reference to Exhibit 3(a) to UnitedHealth Group's
Annual Report on Form 10-K for the year ended December 31, 1996.)
3(c) Amended and Restated Bylaws of UnitedHealth Group. (Incorporated by
reference to Exhibit 3 to UnitedHealth Group's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.)
4(a) Senior Indenture, dated as of November 15, 1998, as amended by an
Amendment to Indenture dated as of November 6, 2000 between United
HealthCare Corporation and the Bank of New York. (Incorporated by
reference to Exhibit 4.1 to UnitedHealth Group's Registration
Statement on Form S-3 (SEC File No. 333-44569) and to Exhibit 4.2 to
UnitedHealth Group's Current Report on Form 8-K filed on November 16,
2000.)
4(b) Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of
instruments defining the rights of certain holders of long-term debt
are not filed. UnitedHealth Group agrees to furnish copies thereof to
the Securities and Exchange Commission upon request.
5 Opinion of General Counsel of UnitedHealth Group regarding the
legality of the securities being issued.
8 Opinion of Bell, Boyd & Lloyd LLC regarding certain tax matters.
*10(a) United HealthCare Corporation 1990 Stock and Incentive Plan, as
amended. (Incorporated by reference to Exhibit 10(f) to UnitedHealth
Group'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 UnitedHealth Group'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 UnitedHealth Group's
Annual Report on Form 10-K for the year ended December 31, 1994.)
*10(d) UnitedHealth Group Leadership Results Plan. (Incorporated by reference
to Exhibit 10(d) to UnitedHealth Group's Annual Report on Form 10-K
for the year ended December 31, 1999.)
*10(e) UnitedHealth Group's 2000 Executive Savings Plan Brochure.
(Incorporated by reference to Exhibit 10(e) to UnitedHealth Group's
Annual Report on Form 10-K for the year ended December 31, 1999.)
*10(f) Employment Agreement, dated as of October 13, 1999, between United
HealthCare Corporation and William W. McGuire, M.D. (Incorporated by
reference to Exhibit 10(f) to UnitedHealth Group's Annual Report on
Form 10-K for the year ended December 31, 1999.)
*10(g) Employment Agreement dated as of October 13, 1999, between United
HealthCare Corporation and Stephen J. Hemsley. (Incorporated by
reference to Exhibit 10(g) to UnitedHealth Group's Annual Report on
Form 10-K for the year ended December 31, 1999.)
*10(h) Employment Agreement, dated as of May 19, 1998, between United
HealthCare Corporation and Arnold H. Kaplan. (Incorporated by
reference to Exhibit 10(h) to UnitedHealth Group's Annual Report on
Form 10-K for the year ended December 31, 1999.)
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*10(i) Employment Agreement, dated as of October 16, 1998, between United
HealthCare Corporation and Lois E. Quam. (Incorporated by reference to
Exhibit 10(i) to UnitedHealth Group's Annual Report on Form 10-K for
the year ended December 31, 1999.)
*10(j) Employment Agreement dated as of January 15, 2000, between United
HealthCare Corporation and James B. Hudak. (Incorporated by reference
to Exhibit 10(j) to UnitedHealth Group's Annual Report on Form 10-K for
the year ended December 31, 1999.)
*10(k) Employment Agreement, dated as of October 16, 1998, between United
HealthCare Services, Inc. and Jeannine Rivet. (Incorporated by
reference to Exhibit 10(f) to UnitedHealth Group's Annual Report on
Form 10-K for the year ended December 31, 1998.)
*10(l) 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 UnitedHealth Group's Quarterly Report of
Form 10-Q for the quarter ended June 30, 1998.)
*10(m) Employment Agreement, dated as of October 16, 1998, between United
HealthCare Services, Inc. and David J. Lubben. (Incorporated by
reference to Exhibit 10(j) to UnitedHealth Group's Annual Report on
Form 10-K for the year ended December 31, 1998.)
+10(n) 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
UnitedHealth Group's Annual Report on Form 10-K for the year ended
December 31, 1995.)
+10(o) 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 UnitedHealth Group's
Annual Report on Form 10-K/A for the year ended December 31, 1996.)
+10(p) 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 UnitedHealth Group's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1998.)
+10(q) 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 UnitedHealth Group's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.)
+10(r) Information Technology Services Agreement between United HealthCare
Services, Inc., a wholly owned subsidiary of UnitedHealth Group, and
Unisys Corporation dated June 1, 1996. (Incorporated by reference to
Exhibit 10 to UnitedHealth Group's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.)
11 Statement regarding computation of per share earnings. (Incorporated by
reference to the information contained under the heading "Net Earnings
(Loss) Per Common Share" in Note 2 to the Notes to Consolidated
Financial Statements included in UnitedHealth Group's Annual Report to
Shareholders for the fiscal year ended December 31, 1999, which is
included as part of Exhibit 13 hereto.)
13 UnitedHealth Group's Annual Report to Shareholders for the fiscal year
ended December 31, 1999. (included as Annex G to the proxy
statement/prospectus contained in this registration statement.)
15 Letter Re Unaudited Interim Financial Information.
**21 Subsidiaries of UnitedHealth Group.
23(a) Consent of Arthur Andersen LLP with respect to UnitedHealth Group's
financial statements.
23(b) Consent of PricewaterhouseCoopers LLP with respect to Lifemark's
financial statements.
23(c) Consent of Dorsey & Whitney LLP (included in Exhibit 5).
23(d) Consent of Bell, Boyd & Lloyd LLC (included in Exhibit 8).
23(e) Consent of Stephens Inc. (included in Exhibit 99.1).
**24 Power of Attorney.
99.1 Opinion of Stephens Inc. (included as Annex C to the proxy
statement/prospectus contained in this registration statement).
99.2 Form of Proxy Card.
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+ 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.
** Previously filed.
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