RESULTS OF OPERATIONS UnitedHealth Group
2000 FINANCIAL PERFORMANCE HIGHLIGHTS
2000 was the strongest year in the history of UnitedHealth Group, resulting from
diversified business growth and continued productivity improvements. Financial
performance highlights include(1):
o Record revenues of $21.1 billion, a 12% increase in continuing markets over
1999.
o Record operating earnings of $1.2 billion, up 27% over 1999, with each
segment delivering strong year-over-year revenue and operating earnings
advances.
o Record net earnings applicable to common shareholders of $705 million, and
diluted net earnings per common share of $2.10, representing increases over
1999 of 25% and 32%, respectively.
o Record cash flows of more than $1.5 billion generated from operating
activities, an increase of 28% over 1999.
o Return on shareholders' equity of 19.0%, up from 14.1% in 1999.
(1)Where applicable, 2000 and 1999 results exclude the effects of separate
dispositions of UnitedHealth Capital investments.
Following is a five-year summary of selected financial data:
For the Year Ended December 31,
(in millions, except per share data) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
Revenues $21,122 $19,562 $17,355 $11,794 $ 10,074
Earnings (Loss) From Operations $ 1,200 $ 943 $ (42)(3) $ 742 $ 581(4)
- ---------------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) $ 736(1) $ 568(2) $ (166) $ 460 $ 356(4)
Net Earnings (Loss) Applicable
to Common Shareholders $ 736 $ 568 $ (214)(3) $ 431 $ 327
- ---------------------------------------------------------------------------------------------------------------------------
Basic Net Earnings (Loss)
per Common Share $ 2.27 $ 1.63 $ (0.56) $ 1.15 $ 0.90
Diluted Net Earnings (Loss)
per Common Share $ 2.19(1) $ 1.60(2) $ (0.56)(3) $ 1.13 $ 0.88(4)
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock Dividends per Share $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.02
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated Cash Flows
From Operating Activities $ 1,521 $ 1,189 $ 1,071 $ 683 $ 562
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated Financial Condition
(As of December 31)
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Investments $ 5,053 $ 4,719 $ 4,424 $ 4,041 $3,453
Total Assets $ 11,053 $10,273 $ 9,675 $ 7,623 $6,997
Debt $ 1,209 $ 991 $ 708(5) $ - $ -
Convertible Preferred Stock $ - $ - $ -(5) $ 500 $ 500
Shareholders' Equity $ 3,688 $ 3,863 $ 4,038 $ 4,534 $3,823
Return on Shareholders' Equity 19.0 % 14.1% na(3) 10.4% 9.2%(4)
- ---------------------------------------------------------------------------------------------------------------------------
Results of Operations should be read together with the accompanying Consolidated
Financial Statements and Notes.
(1) 2000 results include a $14 million net permanent tax benefit related to the
contribution of UnitedHealth Capital investments to the UnitedHealth Foundation
and a $27 million gain ($17 million after tax) related to a separate disposition
of UnitedHealth Capital investments. Excluding these items, net earnings and
diluted net earnings per common share were $705 million and $2.10 per share for
the year ended December 31, 2000.
(2) 1999 results include a net permanent tax benefit primarily related to the
contribution of UnitedHealth Capital investments to the UnitedHealth Foundation.
Excluding this benefit, net earnings and diluted net earnings per common share
were $563 million and $1.59 per share.
(3) 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, and return on shareholders' equity would
have been 11.9%.
(4) Excluding the merger costs associated with the acquisition of HealthWise of
America, Inc. of $15 million ($9 million after tax) and the provision for future
losses on two multi-year contracts of $45 million ($27 million after tax), 1996
earnings from operations and net earnings would have been $641 million and $392
million, or $0.98 diluted net earnings per common share, and return on
shareholders' equity would have been 10.2%.
(5) During 1998, we issued debt totaling $708 million and redeemed $500 million
of convertible preferred stock.
na -- not applicable
19
2000 RESULTS COMPARED TO 1999 RESULTS
CONSOLIDATED FINANCIAL RESULTS
REVENUES
Revenues are comprised of premium revenue associated with insured products, fees
associated with management, administrative and consulting services, and
investment and other income.
Consolidated revenues increased in 2000 to $21.1 billion. Strong and
balanced growth across all business segments was partially offset by transitions
in certain geographic and Medicare markets. Adjusted for the effects of these
market transitions, consolidated revenues increased approximately $2.2 billion,
or 12%, over 1999. Following is a discussion of 2000 consolidated revenue trends
for each of our three revenue components.
PREMIUM REVENUES Consolidated premium revenues in 2000 totaled $18.9 billion, an
increase of $1.4 billion, or 8%, compared with 1999. This increase was driven by
two primary factors: premium yield increases on UnitedHealthcare's commercial
insured business, and growth in individuals served. These increases were
partially offset by transitions in certain geographic and Medicare markets.
Adjusted for the effect of these market transitions, premium revenues increased
12% over 1999.
MANAGEMENT SERVICES FEE REVENUES Fee revenues in 2000 totaled $2.0 billion,
representing an increase of $171 million, or 10%, over 1999. The overall
increase in fee revenues is primarily the result of record growth in Uniprise's
multi-site customer base, growth in UnitedHealthcare's fee-based business,
modest price increases, and acquisitions and growth from our Specialized Care
Services and Ingenix businesses.
INVESTMENT AND OTHER INCOME Investment and other income during the year ended
December 31, 2000, totaled $232 million, representing an increase of $13 million
over 1999. Higher interest yields on investments in 2000 compared with 1999 were
largely offset by $34 million of net realized capital losses in 2000. Net
realized capital losses were $6 million in 1999.
MEDICAL COSTS
The combination of 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 85.7% in 1999 to 85.4% in
2000. Excluding AARP business, on a year-over-year basis, the medical care ratio
decreased 30 basis points to 83.9%. Decreases in our year-over-year medical care
ratios are attributable to commercial net premium yield increases exceeding the
underlying increase in total benefit costs.
On an absolute dollar basis, the increase in medical costs of $1.1 billion,
or 7%, over 1999 was driven by a combination of growth in individuals served
with insured products, medical cost inflation, benefit changes and product mix
changes.
20
OPERATING COSTS
Operating costs as a percentage of total revenues (the operating cost ratio) was
16.7% in 2000, compared with 17.1% in 1999. This decrease was primarily driven
by productivity increases achieved through process improvement, technology
deployment and cost reduction initiatives, and by further leveraging the fixed
cost components of our infrastructure.
Changes in revenue mix also affect the operating cost ratio. For our
fastest-growing businesses (Uniprise, Specialized Care Services and Ingenix),
most direct costs of revenue are included in operating costs, not medical costs.
Using a revenue mix comparable to 1999, the 2000 operating cost ratio would have
decreased 80 basis points to 16.3%.
On an absolute dollar basis, operating costs increased by $177 million, or
5%, over 1999. This increase reflects the additional costs to support product
and technology development initiatives, and to support the 8% increase in
consolidated revenues in 2000, partially offset by the benefit of productivity
and technology improvements discussed above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $247 million in 2000 and $233 million in 1999.
This increase resulted primarily from increased levels of capital expenditures
to support business growth and technology enhancements, and the amortization of
goodwill and other intangible assets related to acquisitions.
INCOME TAXES
Our 2000 income tax provision includes nonrecurring tax benefits primarily
related to the contribution of UnitedHealth Capital investments to the
UnitedHealth Foundation. Excluding nonrecurring tax benefits, our effective
income tax rate was 37.5% in 2000 and 37.0% in 1999.
BUSINESS SEGMENTS
The following summarizes the operating results of our business segments for the
years ended December 31 (in millions):
REVENUES
Percent
2000 1999 Change
- ---------------------------------------------------------------------------------------------------------------------------
Health Care Services $ 18,696 $ 17,581 6%
Uniprise 2,140 1,865 15%
Specialized Care Services 974 726 34%
Ingenix 375 258 45%
Corporate and Eliminations (1,063) (868) nm
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated Revenues $ 21,122 $ 19,562 8%
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS
Percent
2000 1999 Change
- ---------------------------------------------------------------------------------------------------------------------------
Health Care Services $ 739 $ 578 28%
Uniprise 289 222 30%
Specialized Care Services 174 128 36%
Ingenix 32 25 28%
- ---------------------------------------------------------------------------------------------------------------------------
Total Operating Segments 1,234 953 29%
Corporate (34) (10) nm
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated Earnings from Operations $ 1,200 $ 943 27%
- ---------------------------------------------------------------------------------------------------------------------------
nm-- not meaningful
21
HEALTH CARE SERVICES
The Health Care Services segment consists of the UnitedHealthcare and Ovations
businesses. UnitedHealthcare coordinates network-based health and well-being
services on behalf of local employers and consumers nationwide. Ovations, which
administers Medicare Supplement benefits on behalf of AARP, offers health and
well-being services for Americans age 50 and older.
The Health Care Services segment posted record revenues of $18.7 billion,
representing an increase of $1.1 billion, or 6%, over 1999. This increase is
primarily attributable to premium yield increases on UnitedHealthcare's
commercial business and growth in individuals served in continuing markets,
partially offset by targeted pullbacks in certain geographic and Medicare
markets. Adjusted for the effects of these market transitions, Health Care
Services' revenues increased by 10% on a year-over-year basis.
The Health Care Services segment contributed earnings from operations of
$739 million in 2000, an increase of $161 million, or 28%, over 1999. This
increase is primarily the result of improved margins on UnitedHealthcare's
commercial business and reduced operating costs as a percentage of revenues,
driven by process improvement, technology deployment and cost reduction
initiatives. Health Care Services' operating margin increased to 4.0% in 2000
from 3.3% in 1999.
UnitedHealthcare's commercial medical care ratio improved to 84.1% in 2000
from 84.6% in 1999, driven by net premium yield increases in excess of
underlying medical costs. Commercial health plan premium rates are established
based on anticipated benefit costs, including the effects of medical cost
inflation, benefit changes and product mix.
UnitedHealthcare's year-over-year Medicare enrollment decreased 7% as a
result of actions taken to better position this program for long-term success.
Effective January 1, 2000 and 2001, UnitedHealthcare withdrew its
Medicare+Choice product from targeted counties affecting 40,000 individuals and
56,000 individuals, respectively. These actions reduce Medicare enrollment, but
improve profitability in the long term relative to the cost of capital and
required resource management.
The following table summarizes individuals served by UnitedHealthcare, by
major market segment and funding arrangement, as of December 31 (in thousands):
2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Commercial
Insured 5,495 5,150
Fee-based 1,927 1,745
- ---------------------------------------------------------------------------------------------------------------------------
Total Commercial 7,422 6,895(1)
Medicare 406 437
Medicaid 549 479
- ---------------------------------------------------------------------------------------------------------------------------
Total UnitedHealthcare 8,377 7,811
- ---------------------------------------------------------------------------------------------------------------------------
(1) Excludes individuals served through UnitedHealthcare platforms located in
Puerto Rico and Pacific Coast regions. As of December 31, 2000, UnitedHealthcare
had substantially transitioned from these markets. Including these markets,
individuals served at December 31, 1999 were:
- --------------------------------------------------------------------------------
Commercial
Insured 5,650
Fee-based 1,887
- --------------------------------------------------------------------------------
Total Commercial 7,537
22
UNIPRISE
Uniprise provides network-based health and well-being services,
business-to-business transactional infrastructure services, consumer
connectivity, and technology support for large employers and health plans.
Uniprise revenues of $2.1 billion increased by $275 million, or 15%, over 1999.
This increase was driven primarily by continued growth in Uniprise's large
multi-site customer base, which had an 11% increase in individuals served, as
well as changes in funding arrangements selected by certain customers and price
increases on fee-based business. Uniprise served 6.7 million and 6.0 million
individuals as of December 31, 2000 and 1999, respectively. Uniprise's earnings
from operations grew by $67 million, or 30%, over 1999 as a result of the
increased revenues, and operating margin improved to 13.5% in 2000 from 11.9% in
1999. As revenues have increased, Uniprise has expanded its operating margin by
improving productivity through process improvement initiatives, increased
deployment of technology and by further leveraging the fixed cost components of
its infrastructure.
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 of $974 million increased by $248 million, or 34%, over 1999. This
increase was driven primarily by an increase in the number of individuals served
by United Behavioral Health, its mental health and substance abuse services
business, and the acquisitions of Dental Benefit Providers, Inc. in June 1999
and National Benefit Resources, Inc. in November 1999. Earnings from operations
of $174 million increased by 36% compared with 1999, commensurate with 2000
revenue growth. Specialized Care Services' operating margin improved from 17.6%
in 1999 to 17.9% in 2000.
INGENIX
Ingenix is a leader in the field of health care data and information, research
analysis and application, serving pharmaceutical companies, health insurers and
payers, care providers, large employers and governments. Revenues of $375
million increased by $117 million, or 45%, over 1999 driven by organic growth of
$54 million and 1999 acquisitions that broadened the business franchise in
clinical research and development, clinical marketing and data mining. Earnings
from operations of $32 million increased 28% over 1999. Operating margin
decreased to 8.5% in 2000 from 9.7% in 1999, principally as a result of
increased goodwill amortization expense associated with acquisitions.
CORPORATE
Corporate includes investment income derived from cash and investments not
assigned to operating segments and the company-wide costs associated with
process improvement initiatives. The decrease of $24 million in 2000 earnings
reflects a decline in the level of unassigned cash and investments and
associated investment income, primarily resulting from share repurchases and
incremental 2000 process improvement costs.
23
1999 RESULTS COMPARED TO 1998 RESULTS
CONSOLIDATED FINANCIAL RESULTS
REVENUES
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 primarily
driven by premium yield increases on UnitedHealthcare's commercial insured
business, growth in the number of individuals served by United Behavioral Health
and the acquisitions of HealthPartners of Arizona, Inc. and Dental Benefit
Providers, Inc.
MANAGEMENT SERVICES FEE REVENUES Management services fee revenues in 1999
totaled $1.8 billion, representing an increase of $203 million, or 13%, over
1998. The overall increase in management services fee revenues was 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 in contrast 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. For the year ended December 31, 1998, realized net capital gains
were $26 million.
MEDICAL COSTS
The consolidated medical care ratio decreased to 85.7% in 1999 from 87.2% in
1998. 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 in medical costs of $1.5 billion,
or 11%, over 1998 was driven by a combination of growth in individuals served
with insured products, medical cost inflation, benefit changes and product mix
changes.
OPERATING COSTS
Operating costs as a percentage of total revenues (the operating cost ratio) was
17.1% in 1999, consistent with 1998. Operating cost reductions in 1999 were
partially offset by $39 million of incremental expenses in 1999 related to
process improvement initiatives and platform system conversions. On a comparable
revenue mix basis, the operating cost ratio would have decreased 30 basis points
to 16.8%.
On an absolute dollar basis, operating costs 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
process improvement expenses described above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $233 million in 1999 and $185 million in 1998.
The increase in 1999 resulted from increased levels of capital expenditures in
1998 and 1999 to support business growth and technology enhancements and
amortization of goodwill and other intangible assets.
24
BUSINESS SEGMENTS
The following summarizes the operating results of our business segments for the
years ended December 31 (in millions):
REVENUES PERCENT
1999 1998 CHANGE
- ---------------------------------------------------------------------------------------------------------------------------
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%
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS PERCENT
1999 1998(1) CHANGE
- ---------------------------------------------------------------------------------------------------------------------------
Health Care Services $ 578 $ 503 15%
Uniprise 222 161 38%
Specialized Care Services 128 109 17%
Ingenix 25 20 25%
- ---------------------------------------------------------------------------------------------------------------------------
Total Operating Segments 953 793 20%
Corporate (10) 65 nm
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated Earnings from Operations $ 943 $ 858 10%
- ---------------------------------------------------------------------------------------------------------------------------
(1) 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.
nm--not meaningful
HEALTH CARE SERVICES
The Health Care Services segment posted revenues of $17.6 billion, representing
an increase of $2.0 billion, or 13%, over 1998. This increase was primarily
attributable to UnitedHealthcare's net premium yield increases on commercial
business and the acquisition of HealthPartners of Arizona, Inc.
The Health Care Services segment contributed earnings from operations of
$578 million in 1999, an increase of $75 million, or 15%, over 1998. This
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 process improvement initiatives.
UnitedHealthcare's commercial medical care ratio improved to 84.6% in 1999
from 84.9% in 1998 (excluding 1998 special operating charges), driven by net
premium yield increases in excess of underlying medical costs.
25
The following table summarizes individuals served by UnitedHealthcare, by
major market segment and funding arrangement, as of December 31 (in
thousands)(1):
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Commercial
Insured 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
- ---------------------------------------------------------------------------------------------------------------------------
(1) Excludes individuals served through UnitedHealthcare platforms in Puerto
Rico and Pacific Coast regions. The company has transitioned these markets.
Uniprise
Uniprise's revenues increased by $241 million, or 15%, over 1998 driven
primarily by continued growth in its large multi-site customer base, which had
an 11% increase in individuals served, and price increases on fee-based
business. Uniprise served 6.0 million individuals as of December 31, 1999, and
5.4 million individuals as of December 31, 1998. 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 insured business.
SPECIALIZED CARE SERVICES
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, 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
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 represented an increase of 25% over 1998.
CORPORATE
The decrease of $75 million in 1999 Corporate earnings was attributable to $39
million of incremental process improvement costs over 1998 levels, and a decline
in the level of unassigned cash and investments and associated investment
income, which resulted primarily 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.
26
Our accompanying financial statements include the operating results of
businesses and markets disposed of or discontinued, and markets we have exited
in connection with the operational realignment. The accompanying Consolidated
Statements of Operations include revenues and operating earnings (losses) from
businesses disposed of and markets exited for the years ended December 31, as
follows (in millions):
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $ 312 $ 689 $ 964
Earnings (Loss) From Operations $ 9 $ (41) $ (52)
- ---------------------------------------------------------------------------------------------------------------------------
The table above does not include operating results from the counties where
UnitedHealthcare withdrew its Medicare product offerings effective January 1,
2000, and January 1, 2001. Annual revenues for 1999 from the counties exited
effective January 1, 2000, were approximately $230 million. Annual revenues for
2000 from the counties exited effective January 1, 2001, were approximately $320
million.
During 2000, we finalized our agreement with Blue Shield of California to
transition approximately 210,000 individuals served by our California health
plan. Additionally, we transitioned approximately 75,000 individuals served by
our Oregon and Washington health plans to Premera BlueCross and LifeWise. These
actions conclude our planned transition to concentrate resources in the Pacific
Coast region on Uniprise national, multi-site customers and Specialized Care
Services customers. We have also transitioned out of the market in Puerto Rico.
The balances accrued in our operational realignment and other charges were
sufficient to cover expenses incurred in the sale and 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 are expensed as
incurred or capitalized, as appropriate. During 2000, 1999 and 1998, we incurred
expenses of approximately $57 million, $52 million and $13 million,
respectively, related to these activities.
We expect to complete our realignment initiatives during 2001. Based on
current facts and circumstances, we believe our remaining accrued liability for
realignment initiatives of $65 million will be adequate to cover the costs to be
incurred in executing the remainder of the Plan.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 2000
During 2000, we generated cash from operations of more than $1.5 billion, an
increase of $332 million, or 28%, over 1999. The increase in operating cash
flows resulted from an increase of $182 million in net income excluding
depreciation and amortization expense, working capital improvements of
approximately $57 million, and $93 million related to income tax benefits
resulting from employee stock option exercises.
We maintained a strong financial condition and liquidity position, with cash
and investments of $5.1 billion at December 31, 2000. Total cash and investments
increased by $334 million since December 31, 1999, primarily resulting from
strong cash flows from operations partially offset by common stock repurchases.
As further described under "Regulatory Capital and Dividend Restrictions,"
many of our subsidiaries are subject to various government regulations. At
December 31, 2000, approximately $327 million of our $5.1 billion of cash and
investments was held by non-regulated subsidiaries. Of this amount,
approximately $65 million was available for general corporate use, including
acquisitions and share repurchases. The remaining $262 million consists of
public and non-public equity securities primarily held by UnitedHealth Capital,
our venture and development capital business. Our operating cash flows and
financing capability also provide us with funds, as needed, for general
corporate use.
As of December 31, 2000, we had $409 million of commercial paper
outstanding, with interest rates ranging from 6.6% to 6.9%. In July 2000, we
executed new credit arrangements supporting our commercial paper program for an
aggregate of $900 million. These credit arrangements are composed of a $450
million revolving facility expiring in July 2005, and a $450 million, 364-day
facility expiring in July 2001. We also have the capacity to issue approximately
$200 million of extendible commercial notes (ECNs). During 2000, we had no
amounts outstanding under our credit facilities or ECNs. During 2000, we also
issued $400 million of five-year 7.5% senior unsecured notes.
27
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 Fitch (formerly known as Duff & Phelps), and "A3" 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 remaining aggregate issuing capacity of all securities covered by shelf
registration statements for common stock, preferred stock, debt securities and
other securities is $850 million. 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
the 12 months ended December 31, 2000, we repurchased 31.0 million shares at an
aggregate cost of $1.2 billion. Through December 31, 2000, we had repurchased
approximately 92.9 million shares for an aggregate cost of $2.6 billion since
the inception of the program in November of 1997. In December of 1998, we also
repurchased $500 million of preferred stock that was convertible into 20.2
million shares of common stock. As of December 31, 2000, we have board of
directors' authorization to purchase up to an additional 28.4 million shares of
our common stock.
In October 2000, the 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. This
dividend was issued on December 22, 2000, to shareholders of record as of
December 1, 2000. The accompanying consolidated financial statements have 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 will be sufficient to meet our current operating
requirements and other corporate development initiatives. A substantial portion
of our long-term investments (approximately $3.3 billion as of December 31,
2000) is classified as available for sale. Subject to the previously described
regulations, these investments may be used 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.
Through December 31, 2000, we made contributions to the UnitedHealth Foundation
using a portion of our UnitedHealth Capital investments 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 and insurance companies. These
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 our regulated subsidiaries, without
prior approval by state regulatory authorities, is limited based on the entity's
level of statutory net income and statutory capital and surplus.
The National Association of Insurance Commissioners has developed minimum
capitalization guidelines for health maintenance organizations, subject to
state-by-state adoption. Many states have adopted and other states will likely
adopt some form of these rules. We do not expect that further state adoptions or
implementations will require us to make significant incremental investments of
general corporate resources into regulated subsidiaries.
28
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 $4.8 billion of our cash and investments at December 31, 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 interest
rates applicable to our fixed income portfolio at December 31, 2000, the fair
value of our fixed income investments would decrease or increase by
approximately $140 million.
INFLATION
The national health care cost inflation rate 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, coordinating care with various health care providers, and using
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, appropriate use of specialty and
hospital services, education and closing gaps in care.
We believe our strategies to mitigate the impact of health care cost
inflation will be successful. However, other factors such as competitive
pressures, new health care and pharmaceutical product introductions, demands
from health care providers and consumers, applicable regulations or other
factors may affect our ability to control the impact of health care cost
increases.
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 non-economic 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.
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.
29
CONSOLIDATED STATEMENTS OF OPERATIONS United Health Group
For the Year Ended December 31,
(in millions, except per share data) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
REVENUES
Premiums $ 18,926 $ 17,550 $ 15,516
Management Services Fees 1,964 1,793 1,590
Investment and Other Income 232 219 249
- ---------------------------------------------------------------------------------------------------------------------------
Total Revenues 21,122 19,562 17,355
- ---------------------------------------------------------------------------------------------------------------------------
MEDICAL AND OPERATING COSTS
Medical Costs 16,155 15,043 13,523
Operating Costs 3,520 3,343 2,964
Depreciation and Amortization 247 233 185
Operational Realignment and Other Charges - - 725
- ---------------------------------------------------------------------------------------------------------------------------
Total Medical and Operating Costs 19,922 18,619 17,397
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS 1,200 943 (42)
Gain on Disposition of UnitedHealth Capital Investments 27 - -
Interest Expense (72) (49) (4)
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE TAXES 1,155 894 (46)
Provision for Income Taxes (419) (326) (120)
- ---------------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) 736 568 (166)
Convertible Preferred Stock Dividends
and Redemption Premium - - (48)
- ---------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ 736 $ 568 $ (214)
- ---------------------------------------------------------------------------------------------------------------------------
BASIC NET EARNINGS (LOSS) PER COMMON SHARE $ 2.27 $ 1.63 $ (0.56)
- ---------------------------------------------------------------------------------------------------------------------------
DILUTED NET EARNINGS (LOSS) PER COMMON SHARE $ 2.19 $ 1.60 $ (0.56)
- ---------------------------------------------------------------------------------------------------------------------------
BASIC WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 324.2 348.2 381.2
DILUTIVE EFFECT OF OUTSTANDING STOCK OPTIONS 12.3 6.8 -
- ---------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
ASSUMING DILUTION 336.5 355.0 381.2
See notes to consolidated financial statements.
30
CONSOLIDATED BALANCE SHEETS United Health Group
As of December 31,
(in millions, except share and per share data) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 1,419 $ 1,605
Short-Term Investments 200 546
Accounts Receivable, net of allowances of $118 and $117 867 912
Assets Under Management 1,646 1,328
Other Current Assets 273 177
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,405 4,568
Long-Term Investments 3,434 2,568
Property and Equipment, net of accumulated
depreciation of $513 and $482 303 278
Goodwill and Other Intangible Assets, net of accumulated
amortization of $501 and $376 2,911 2,859
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 11,053 $ 10,273
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical Costs Payable $ 3,266 $ 2,915
Accounts Payable and Accrued Liabilities 1,050 1,003
Other Policy Liabilities 1,216 910
Commercial Paper and Current Maturities of Long-Term Debt 559 591
Unearned Premiums 479 473
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 6,570 5,892
Long-Term Debt 650 400
Deferred Income Taxes and Other Liabilities 145 118
Commitments and Contingencies (Note 11)
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common Stock, $0.01 par value - 500,000,000 shares authorized;
317,235,000 and 334,941,000 shares outstanding 3 3
Additional Paid-In Capital - 250
Retained Earnings 3,595 3,445
Accumulated Other Comprehensive Income:
Net Unrealized Holding Gains on Investments Available for Sale,
net of income tax effects 90 165
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 3,688 3,863
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,053 $ 10,273
- ---------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
31
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY United Health Group
Net Unrealized
Common Stock Additional Holding Gains Total
--------------- Paid-in Retained on Investments Shareholders' Comprehensive
(in millions) Shares Amount Capital Earnings Available for Sale Equity Income (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 382 $ 4 $ 1,398 $ 3,103 $ 29 $ 4,534
Issuances of Common Stock 8 -- 145 -- -- 145
Common 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 Availablefor Sale,
net of income tax effects -- -- -- -- 15 15 15
-------
Comprehensive Loss -- -- -- -- -- -- $ (151)
-------
Cash Dividends
Common Stock -- -- -- (6) -- (6)
Convertible Preferred Stock -- -- -- (28) -- (28)
Convertible Preferred Stock
Redemption Premium -- -- -- (20) -- (20)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 368 4 1,107 2,883 44 4,038
Issuances of Common Stock 6 -- 125 -- -- 125
Common 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
-------
Common Stock Dividend -- -- -- (6) -- (6)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 335 3 250 3,445 165 3,863
Issuances of Common Stock 13 -- 349 -- -- 349
Common Stock Repurchases (31) -- (599) (581) -- (1,180)
Comprehensive Income
Net Earnings -- -- -- 736 -- 736 $ 736
Other Comprehensive Income Adjustments
Change in Net Unrealized Holding Gains
on Investments Available for Sale,
net of income tax effects -- -- -- -- (75) (75) (75)
-------
Comprehensive Income -- -- -- -- -- -- $ 661
-------
Common Stock Dividend -- -- -- (5) -- (5)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 317 $ 3 $ -- $ 3,595 $ 90 $3,688
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS United Health Group
For the Year Ended December 31,
(in millions) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Earnings (Loss) $ 736 $ 568 $ (166)
Noncash Items
Depreciation and Amortization 247 233 185
Deferred Income Taxes and Other 73 35 (184)
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 26 84 67
Medical Costs Payable 288 165 269
Accounts Payable and Other Current Liabilities 162 60 347
Unearned Premiums (11) 44 102
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1,521 1,189 1,071
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash Paid for Acquisitions, net of cash assumed
and other effects (76) (334) (464)
Purchases of Property and Equipment and Capitalized Software (245) (196) (210)
Proceeds from Sales of Property and Equipment and
Disposition of Businesses 12 51 59
Purchases of Investments (3,022) (2,208) (2,799)
Maturities and Sales of Investments 2,363 2,064 3,435
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS (USED FOR) FROM INVESTING ACTIVITIES (968) (623) 21
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from Common Stock Issuances 228 102 84
(Payments of) Proceeds from Commercial Paper, net (182) 132 459
Proceeds from Issuance of Long-Term Debt 400 150 249
Common Stock Repurchases (1,180) (983) (436)
Redemption of Convertible Preferred Stock -- -- (520)
Dividends Paid (5) (6) (34)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS USED FOR FINANCING ACTIVITIES (739) (605) (198)
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (186) (39) 894
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,605 1,644 750
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,419 $ 1,605 $ 1,644
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS United Health 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 independent but strategically aligned,
market-defined businesses, we offer health care coverage and related services
designed to enable, facilitate and advance optimal health.
(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,
medical costs payable, other policy liabilities and intangible asset valuations
relating to acquisitions. These estimates may be adjusted as more current
information becomes available, and any adjustment could be significant. The
impact of any changes in estimates is included in the determination of earnings
in the period of change.
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 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 17% in 2000, 21% in 1999 and 20% in 1998.
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 2000, 1999 and 1998.
Management believes that the amount of medical costs payable is adequate to
cover the company's liability for unpaid claims as of December 31, 2000.
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, because of regulatory restrictions, are included in
long-term investments regardless of their maturity date. All other investments
are classified as available for sale and reported at fair value based on quoted
market prices. Investments 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.
34
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, 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 5). 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 AARP. At
December 31, 2000, the assets were invested in marketable debt securities.
Interest earnings and realized investment gains and losses on these assets
accrue to 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. As of December 31, 2000, the AARP investment
portfolio included net unrealized gains of $19 million compared with net
unrealized losses of $34 million as of December 31, 1999.
OTHER POLICY LIABILITIES
Other policy liabilities include the rate stabilization fund associated with the
AARP program (see Note 5) 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.
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, net of accumulated depreciation.
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, 2000, 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 32 years at December 31, 2000.
The most significant components of goodwill and other intangible assets are
composed of goodwill of $2.1 billion at December 31, 2000 and 1999, and employer
group contracts, supporting infrastructure, distribution networks and
institutional knowledge of $530 million at December 31, 2000, and $550 million
at December 31, 1999, net of accumulated amortization.
LONG-LIVED ASSETS
We review long-lived assets, including goodwill and other intangible assets, for
events or changes in circumstances that would indicate we might 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.
35
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 9.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133 regarding accounting for derivative
instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137 and
No. 138, establishes accounting and reporting standards requiring that
derivative instruments (including certain derivative instruments embedded in
other contracts) and hedging activity be recorded in the balance sheet either as
an asset or liability measured at its fair value. The statement requires changes
in the derivative's fair value to be recognized in earnings or, for derivatives
that hedge market risk related to future cash flows, in accumulated other
comprehensive income, unless specific hedge accounting criteria are met. The
company adopted SFAS No. 133 within its financial statements effective January
1, 2001, which did not result in a material effect on its financial position,
results of operations or cash flows.
(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. 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 dental benefit management
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
36
$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 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.
(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. 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, 2000, we have eliminated approximately 4,900
positions, affecting approximately 5,000 people, pursuant to the Plan. The
remaining positions are expected to be eliminated during 2001.
Our accompanying financial statements include the operating results of
businesses and markets disposed of or discontinued, and markets we have exited
in connection with the operational realignment. The accompanying Consolidated
Statements of Operations include revenues and operating earnings (losses) from
businesses disposed of and markets we exited for the years ended December 31, as
follows (in millions):
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $ 312 $ 689 $ 964
Earnings (Loss) From Operations $ 9 $ (41) $ (52)
- ---------------------------------------------------------------------------------------------------------------------------
The table above does not include operating results from the counties where
UnitedHealthcare withdrew its Medicare product offerings effective January 1,
2000, and January 1, 2001. Annual revenues for 1999 from the counties exited
effective January 1, 2000, were approximately $230 million. Annual revenues for
2000 from the counties exited effective January 1, 2001, were approximately $320
million.
During 2000, we finalized our agreement with Blue Shield of California to
transition approximately 210,000 individuals served by our California health
plan. Additionally, we transitioned approximately 75,000 individuals served by
our Oregon and Washington health plans to Premera BlueCross and LifeWise. These
actions conclude our planned transition to concentrate resources in the Pacific
Coast region on Uniprise national, multi-site customers and Specialized Care
Services customers. We have also transitioned out of the market in Puerto Rico.
37
The balances accrued in our operational realignment and other charges were
sufficient to cover expenses incurred in the sale and 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 are expensed as
incurred or capitalized, as appropriate. During 2000, 1999 and 1998, we incurred
expenses of approximately $57 million, $52 million and $13 million,
respectively, related to these activities.
The Plan anticipated 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 to complete in the most effective manner. These
activities 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 table below is a roll-forward of accrued operational realignment and
other charges, which are included in Accounts Payable and Accrued Liabilities in
the accompanying Consolidated Balance Sheets, through December 31, 2000 (in
millions):
Severance and Noncancelable Disposition of
Asset Outplacement Lease Businesses and
Impairments Costs Obligations Other Costs Total
- ---------------------------------------------------------------------------------------------------------------------------
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
Cash Payments - (24) (20) (18) (62)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ - $ 11 $ 42 $ 12 $ 65
- ------------------------------------------------------------------------------------------------------------------------------------
MEDICAL COSTS
During the second quarter of 1998, we recorded $175 million of
medical cost charges. Of this amount, $120 million related to Medicare contract
losses and increases to Medicare medical costs payable estimates, and $55
million related to increases to commercial medical costs payable estimates.
38
(5) AARP CONTRACT
In February 1997, we entered into a 10-year contract to provide insurance
products and services to members of 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. Premium
revenues from our portion of the AARP insurance offerings were approximately
$3.5 billion during 2000, 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 is
reported 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):
Balance as of December 31,
2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Assets Under Management $1,625 $1,307
Accounts Receivable $ 277 $ 276
Medical Costs Payable $ 855 $ 791
Other Policy Liabilities $ 932 $ 713
Accounts Payable and Accrued Liabilities $ 115 $ 79
- ---------------------------------------------------------------------------------------------------------------------------
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.
39
(6) 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):
Amortized Gross Unrealized Gross Unrealized Fair
2000 Cost Holding Gains Holding Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents $1,419 $ - $ - $1,419
Debt Securities--Available for Sale 3,198 89 (6) 3,281
Equity Securities--Available for Sale 201 61 - 262
Debt Securities--Held to Maturity 91 - - 91
- ---------------------------------------------------------------------------------------------------------------------------
Total Cash and Investments $4,909 $ 150 $ (6) $5,053
- ---------------------------------------------------------------------------------------------------------------------------
1999
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents $1,605 $ - $ - $1,605
Debt Securities--Available for Sale 2,605 4 (58) 2,551
Equity Securities--Available for Sale 166 318 - 484
Debt Securities--Held to Maturity 79 - - 79
- ---------------------------------------------------------------------------------------------------------------------------
Total Cash and Investments $4,455 $ 322 $ (58) $4,719
- ---------------------------------------------------------------------------------------------------------------------------
As of December 31, 2000, debt securities consisted of $855 million in U.S.
Government obligations, $1,386 million in state and municipal obligations, and
$1,131 million in corporate obligations. At December 31, 2000, we held $209
million in debt securities with maturities less than one year, $1,227 million in
debt securities maturing in one to five years, and $1,936 million in debt
securities with maturities of more than five years.
We recorded realized gains and losses on the sale of investments, excluding
UnitedHealth Capital investments, as follows (in millions):
For the Year Ended December 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Gross Realized Gains $ 12 $ 9 $ 31
Gross Realized Losses (46) (15) (5)
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Gains (Losses) $ (34) $ (6) $ 26
- ---------------------------------------------------------------------------------------------------------------------------
During 2000 and 1999, respectively, we contributed UnitedHealth Capital
investments valued at approximately $52 million and $50 million to the
UnitedHealth Foundation. The realized gain of approximately $51 million in 2000
and $49 million in 1999 was offset by the related contribution expense of $52
million in 2000 and $50 million in 1999. The $1 million net expense of these
transactions in both 2000 and 1999 is included in Investment and Other Income in
the accompanying Consolidated Statements of Operations.
In a separate disposition of UnitedHealth Capital investments during 2000,
we realized a gain of $27 million.
40
(7) COMMERCIAL PAPER AND DEBT
Commercial paper and debt consisted of the following as of December 31 (in
millions):
2000 1999
------------------ --------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------------
Commercial Paper $ 409 $ 409 $ 591 $ 591
Floating Rate Notes
due November 2001 150 150 150 150
6.6% Senior Unsecured Notes
due December 2003 250 250 250 238
7.5% Senior Unsecured Notes
due November 2005 400 413 - -
- -------------------------------------------------------------------------------------
Total Commercial Paper and Debt 1,209 1,222 991 979
Less Current Maturities (559) (559) (591) (591)
- -------------------------------------------------------------------------------------
Total Long-Term Debt $ 650 $ 663 $ 400 $ 388
- -------------------------------------------------------------------------------------
As of December 31, 2000, our outstanding commercial paper had interest rates
ranging from 6.6% to 6.9%. In November 1999, we issued $150 million of two-year
floating-rate notes. The interest rate is adjusted quarterly to the three-month
LIBOR (London Interbank Offered Rate) plus 0.5%. As of December 31, 2000, the
applicable rate was 7.25%.
In July 2000, we executed new credit arrangements supporting our commercial
paper program for an aggregate of $900 million. These credit arrangements are
composed 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 $200 million of extendible commercial notes
(ECNs). During 2000, we had no amounts outstanding under our credit facilities
or ECNs.
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 commercial paper and debt for the years ending December 31 are
as follows (in millions):
2001 2002 2003 2004 2005
- ---------------------------------------------------------------------------------------------------------------------------
$ 559 - $ 250 - $ 400
- ---------------------------------------------------------------------------------------------------------------------------
We made cash payments for interest of $68 million and $43 million in 2000 and
1999, respectively. We made no cash payments for interest in 1998.
41
(8) SHAREHOLDERS' EQUITY
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
Our operations are conducted through our wholly-owned subsidiaries, which
include health maintenance organizations and insurance companies. These
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 our regulated subsidiaries, without
prior approval by state regulatory authorities, is limited based on the entity's
level of statutory net income and statutory capital and surplus. Approximately
$4.7 billion of our $5.1 billion of cash and investments at December 31, 2000,
was held by regulated subsidiaries.
The National Association of Insurance Commissioners has developed minimum
capitalization guidelines for health maintenance organizations, subject to
state-by-state adoption. Many states have adopted and other states will likely
adopt some form of these rules. We do not expect that further state adoptions or
implementations will require us to make significant incremental investments of
general corporate resources into 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
2000, we repurchased 31.0 million shares for an aggregate of $1.2 billion. Since
inception of our stock repurchase activities in November 1997 through December
31, 2000, we have repurchased 92.9 million shares for an aggregate of $2.6
billion. As of December 31, 2000, we have board of directors' authorization to
purchase up to an additional 28.4 million shares of our 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 we
purchase, if any, is dependent upon market conditions and other contractual
terms. As of December 31, 2000, we have agreements to purchase up to 8.9 million
shares of our common stock at various times through 2003, at an average cost of
approximately $40 per share.
COMMON STOCK SPLIT
In October 2000, our 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 was issued on December 22, 2000, to shareholders of record as of
December 1, 2000. The accompanying consolidated financial statements have been
restated to reflect the share and per share effects of the common stock split.
DIVIDENDS
On February 13, 2001, the board of directors approved an annual dividend for
2001 of $0.03 per share. The dividend will be paid on April 18, 2001, to
shareholders of record at the close of business on April 2, 2001.
PREFERRED STOCK
In December 1998, the company redeemed all 500,000 outstanding shares of 5.75%
Series A Convertible Preferred Stock. At December 31, 2000, we have 10 million
shares of $0.001 par value preferred stock authorized for issuance, and no
preferred shares issued and outstanding.
42
(9) STOCK-BASED COMPENSATION PLANS
The company maintains various stock and incentive plans for the benefit of
eligible employees and directors. As of December 31, 2000, employee stock and
incentive plans allowed for the future granting of up to 22.4 million shares as
incentive or non-qualified stock options, stock appreciation rights, restricted
stock awards and performance awards. Our non-employee director stock option plan
allowed for future granting of 825,000 non-qualified stock options as of
December 31, 2000.
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. A summary of activity
under our various stock plans is presented in the table below (shares in
thousands):
2000 1999 1998
------------------------ ------------------------ ---------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at Beginning of Year 44,080 $ 19 36,748 $ 19 34,226 $ 17
Granted 8,516 $ 30 14,406 $ 20 11,694 $ 20
Exercised (12,331) $ 17 (4,666) $ 17 (6,758) $ 12
Forfeited (1,455) $ 20 (2,408) $ 20 (2,414) $ 20
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at End of Year 38,810 $ 22 44,080 $ 19 36,748 $ 19
- ---------------------------------------------------------------------------------------------------------------------------
Exercisable at End of Year 17,367 $ 20 15,558 $ 17 13,450 $ 17
- ---------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
$ 0-$20 9,723 6.0 $ 17 6,755 $ 16
$21-$30 25,611 8.1 $ 22 10,482 $ 22
$31-$40 3,269 9.5 $ 39 130 $ 34
$41-$50 207 9.6 $ 44 - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
$ 0-$50 38,810 7.7 $ 22 17,367 $ 20
- ------------------------------------------------------------------------------------------------------------------------------------
We do not recognize compensation expense in connection with stock option grants
because we grant stock options at exercise prices that equal or exceed the fair
market value of the stock at the time options are granted. If we had determined
compensation expense using fair market values for the stock options, net
earnings (loss) per common share would have been reduced to the following pro
forma amounts:
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) (in millions)
As Reported $ 736 $ 568 $ (166)
Pro Forma $ 660 $ 531 $ (206)
- ---------------------------------------------------------------------------------------------------------------------------
Diluted Net Earnings (Loss) Per
Common Share
As Reported $ 2.19 $ 1.60 $(0.56)
Pro Forma $ 2.04 $ 1.50 $(0.67)
- ---------------------------------------------------------------------------------------------------------------------------
Weighted-Average Fair Value Per Share of
Options Granted $ 14 $ 12 $ 8
- ---------------------------------------------------------------------------------------------------------------------------
43
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:
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Risk-Free Interest Rate 5.0% 6.7% 5.2%
Expected Volatility 49.0% 50.0% 46.0%
Expected Dividend Yield 0.1% 0.1% 0.1%
Expected Life in Years 4.5 5.0 5.8
- ---------------------------------------------------------------------------------------------------------------------------
We also maintain a non-leveraged employee stock ownership plan and an employee
stock purchase plan. Activity related to these plans was not material in
relation to our consolidated financial results in 2000, 1999 and 1998.
(10) INCOME TAXES
Components of the Provision (Benefit) for Income Taxes
Year Ended December 31, (in millions) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Current
Federal $ 330 $ 264 $ 273
State 38 36 31
- ---------------------------------------------------------------------------------------------------------------------------
Total Current 368 300 304
Deferred 51 26 (184)
- ---------------------------------------------------------------------------------------------------------------------------
Total Provision $ 419 $ 326 $ 120
- ---------------------------------------------------------------------------------------------------------------------------
Reconciliation of the Tax Provision at the U.S. Federal Statutory Rate to the
Provision for Income Taxes
Year Ended December 31, (in millions) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Tax Provision (Benefit) at the
U.S. Federal Statutory Rate $ 404 $ 313 $ (16)
State Income Taxes, net of federal benefit 29 24 19
Tax-Exempt Investment Income (17) (16) (25)
Non-Deductible Amortization 27 25 24
Non-Deductible Asset Impairments - - 100
Charitable Contributions (18) (16) -
Other, net (6) (4) 18
- ---------------------------------------------------------------------------------------------------------------------------
Provision for Income Taxes $ 419 $ 326 $ 120
- ---------------------------------------------------------------------------------------------------------------------------
44
Components of Deferred Income Tax Assets and Liabilities
December 31, (in millions) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Deferred Income Tax Assets
Accrued Expenses and Allowances $ 126 $ 101
Unearned Premiums 74 87
Medical Costs Payable and
Other Policy Liabilities 84 62
Net Operating Loss Carryforwards 42 43
Other 10 10
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal 336 303
Less: Valuation Allowances (56) (52)
- ---------------------------------------------------------------------------------------------------------------------------
Total Deferred Income Tax Assets 280 251
- ---------------------------------------------------------------------------------------------------------------------------
Deferred Income Tax Liabilities
Capitalized Software Development (80) (54)
Net Unrealized Gains on Investments
Available for Sale (59) (97)
Depreciation & Amortization (12) (4)
- ---------------------------------------------------------------------------------------------------------------------------
Total Deferred Income Tax Liabilities (151) (155)
- ---------------------------------------------------------------------------------------------------------------------------
Net Deferred Income Tax Assets $ 129 $ 96
- ---------------------------------------------------------------------------------------------------------------------------
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 $352 million in 2000, $214 million
in 1999 and $245 million in 1998. We increased additional paid-in capital by
$116 million in 2000, $23 million in 1999 and $47 million in 1998 to reflect the
tax benefit we received upon the exercise of non-qualified stock options.
Consolidated income tax returns for fiscal years 1996 through 1999 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.
(11) COMMITMENTS AND CONTINGENCIES
LEASES
We lease facilities, computer hardware and other equipment under long-term
operating leases that are non-cancelable and expire on various dates through
2011. Rent expense under all operating leases was $132 million in 2000, $129
million in 1999 and $119 million in 1998.
At December 31, 2000, future minimum annual lease payments under all
non-cancelable operating leases were as follows (in millions):
2001 2002 2003 2004 2005 Thereafter
- ---------------------------------------------------------------------------------------------------------------------------
$ 121 $ 108 $ 95 $ 84 $ 74 $ 340
- ---------------------------------------------------------------------------------------------------------------------------
SERVICE AGREEMENTS
In 1995 and 1996, we entered into three separate contracts for certain data
center operations and support, and network and voice communication services,
each with an approximate term of 10 years. Expenses incurred in connection with
these agreements were $182 million in 2000, $172 million in 1999 and $162
million in 1998.
45
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 non-economic 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.
GOVERNMENT REGULATION
Our business is regulated at federal, state and local levels. The laws and rules
governing our business are subject to frequent change and broad latitude is
given to the agencies administering those regulations. State legislatures and
Congress continue to focus on health care issues as the subject of proposed
legislation. 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 requirements, and increase our liability
for medical malpractice or other actions. Further, we must obtain and maintain
regulatory approvals to market many of our products.
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.
(12) 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
on the next page (in millions):
46
Health Care Specialized Corporate
2000 Services Uniprise Care Services Ingenix and Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Revenues-- External Customers $ 18,502 $ 1,595 $ 503 $ 290 $ - $ 20,890
Revenues-- Intersegment - 520 461 85 (1,066) -
Investment and Other Income 194 25 10 - 3 232
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 18,696 $ 2,140 $ 974 $ 375 $(1,063) $ 21,122
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) From Operations $ 739 $ 289 $ 174 $ 32 $ (34) $ 1,200
Total Assets(1) $ 8,118 $ 1,578 $ 525 $ 730 $ (133) $ 10,818
Net Assets(1) $ 3,085 $ 978 $ 276 $ 617 $ (113) $ 4,843
Purchases of Property and Equipment
and Capitalized Software $ 88 $ 94 $ 28 $ 35 $ - $ 245
Depreciation and Amortization $ 100 $ 75 $ 25 $ 47 $ - $ 247
- ------------------------------------------------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------------------------------------------------
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) $ 7,364 $ 1,411 $ 446 $ 683 $ 206 $ 10,110
Net Assets(1) $ 2,892 $ 953 $ 230 $ 573 $ 221 $ 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 (Loss) 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
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Total Assets and Net Assets exclude, where applicable, debt and accrued
interest of $1,222 million, $1,002 million and $708 million, income tax-related
assets of $235 million, $163 million and $266 million, and income tax-related
liabilities of $168 million, $167 million and $4 million as of December 31,
2000, 1999 and 1998, respectively.
(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 operating earnings (loss) from operations were as
follows:
Year Ended December 31, 1998
- ---------------------------------------------------------------
Health Care Services $ (46)
Uniprise 10
Specialized Care Services 14
Ingenix (66)
- ---------------------------------------------------------------
Total Operating Segments (88)
Corporate 46
- ---------------------------------------------------------------
Total Consolidated $ (42)
- ---------------------------------------------------------------
47
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended
-------------------------------------------------------------
(in millions, except per share data) March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------------------------------------------------
2000
REVENUES $ 5,099 $ 5,220 $ 5,369 $ 5,434
MEDICAL AND OPERATING COSTS $ 4,826 $ 4,932 $ 5,060 $ 5,104
NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS $ 174(1) $ 170 $ 182 $ 210(2)
BASIC NET EARNINGS PER COMMON SHARE $ 0.53 $ 0.52 $ 0.56 $ 0.66
DILUTED NET EARNINGS PER COMMON SHARE $ 0.52(1) $ 0.50 $ 0.54 $ 0.63(2)
- ---------------------------------------------------------------------------------------------------------------------------
1999
Revenues $ 4,809 $ 4,858 $ 4,903 $ 4,992
Medical and Operating Costs $ 4,588 $ 4,633 $ 4,664 $ 4,734
Net Earnings Applicable to
Common Shareholders $ 132 $ 135 $ 144 $ 157(3)
Basic Net Earnings per Common Share $ 0.36 $ 0.39 $ 0.41 $ 0.47
Diluted Net Earnings per Common Share $ 0.36 $ 0.38 $ 0.40 $ 0.46(3)
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes a $14 million, net permanent tax benefit related to the
contribution of UnitedHealth Capital investments to the UnitedHealth Foundation.
Excluding this benefit, Net Earnings Applicable to Common Shareholders and
Diluted Net Earnings Per Common Share were $160 million or $0.48 per share,
respectively.
(2) Includes a $27 million gain ($17 million after-tax) related to the
disposition of UnitedHealth Capital investments. Excluding this gain, Net
Earnings and Diluted Net Earnings per Common Share were $193 million and $0.58
per share, respectively.
(3) Includes a net permanent tax benefit primarily related to the contribution
of UnitedHealth Capital investments 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.
48
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,
2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 2, 2001
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.
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 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
Patrick J. Erlandson
Chief Financial Officer
49
CORPORATE AND BUSINESS LEADERS
UNITEDHEALTH GROUP
William W McGuire, M.D.
Chairman and
Chief Exectutive Officer
Stephen J. Hemsley
President and
Chief Operating Officer
Patrick J. Erlandson
Chief Financial Officer
David J. Luben
General Counsel
Jeannine M. Rivet
Executive Vice President
James B. Hudak
Chief Executive Officer
UnitedHealth Technologies
Reed V. Tuckson, M.D.
Senior Vice President
Consumer Health and Medical
Care Advancement
L.Robert Dapper
Senior Vice President
Human Capital
John S. Penshorn
Director of Capital Markets
Communications and Strategy
UNITEDHEALTHCARE
Robert J. Sheehy
Chief Executive Officer
OVATIONS
Lois Quam
Chief Executive Officer
UNIPRISE
R. Channing Wheeler
Chief Executive Officer
SPECIALIZED CARE SERVICES
Ronald B. Colby
Chief Executive Officer
INGENIX
Jeannine M. Rivet
Chief Executive Officer
50
BOARD OF DIRECTORS
William C. Ballard, Jr.
Of Counsel
Greenbaum, Doll & McDonald
Louisville, Kentucky, law firm
Richard T. Burke
Former Chairman and
Chief Executive Officer
United HealthCare
Corporation
Stephen J. Hemsley
President and
Chief Operating Officer
UnitedHealth Group
James A. Johnson
Chairman and
Chief Executive Officer
Johnson Capital Partners
Private investment company
Thomas H. Kean
President
Drew University
Douglas W. Leatherdale
Chairman and
Chief Executive Officer
The Saint Paul Companies Inc.
Insurance and related services
William W. McGuire, M.D.
Chairman and
Chief Executive Officer
UnitedHealth Group
Walter F. Mondale
Partner
Dorsey & Whitney LLP
Minneapolis, Minnesota, law firm
Mary O. Mundinger
Dean and Professor, School of Nursing,
and Associate Dean,
Faculty of Medicine
Columbia University
Robert L. Ryan
Senior Vice President and
Chief Financial Officer
Medtronic, Inc.
Medical devices company
William G. Spears
Managing Partner
W. G. Spears Grisant &
Brown LLC
New York City-based investment
counseling and management firm
Gail R. Wilensky
Senior Fellow
Project HOPE
International health foundation
AUDIT COMMITTEE
William C. Ballard, Jr.
James A. Johnson
Douglas W. Leatherdale
Robert L. Ryan
COMPENSATION AND HUMAN RESOURCES COMMITTEE
Thomas H. Kean
Mary O. Mundinger
William G. Spears
COMPLIANCE AND GOVERNMENT AFFAIRS COMMITTEE
Richard T. Burke
Walter F. Mondale
Gail R. Wilensky
EXECUTIVE COMMITTEE
William C. Ballard, Jr.
Douglas W. Leatherdale
William W. McGuire, M.D.
William G. Spears
NOMINATING COMMITTEE
William C. Ballard, Jr.
Thomas H. Kean
Douglas W. Leatherdale
William W. McGuire, M.D.
William G. Spears
51
FINANCIAL PERFORMANCE AT A GLANCE United Health Group
Growth & Profits - Consolidated(1)
(in millions, except per share data) 1998 1999 2000
- -------------------------------------------------------------------------------------------------------------
Revenues $17,355 $19,562 $21,122
Continuing Markets Revenue Growth Rate 12% 13% 12%
Earnings from Operation $ 858 $ 943 $1,200
Operationg Margin 4.9% 4.8% 5.7%
Return of Net Assets 17.7% 19.8% 25.5%
Net Earnings $ 509 $ 563 $ 705
Net Margin 2.9% 2.9% 3.3%
Diluted Net Earnings Per Share $ 1.31 $ 1.59 $ 2.10
- --------------------------------------------------------------------------------------------------------------
GROWTH & PROFITS - BY SEGMENT' (IN MILLIONS) 1998 1999 2000
- --------------------------------------------------------------------------------------------------------------
HEALTH CARE SERVICES
Revenues $15,612 $17,581 $18,696
Earnings from Operations $ 503 $ 578 $ 739
Operating margin 3.2% 3.3% 4.0%
Return on Net Assets 20.0% 20.6% 24.6%
UNIPRISE
Revenues $ 1,624 $ 1,865 $ 2,140
Earnings from Operations $ 161 $ 222 $ 269
Operating Margin 9.9% 11.9% 13.5%
Return on Net Assets 16.7% 22.6% 30.6%
SPECALIZED CARE SERVICES
Revenues $ 618 $ 726 $ 974
Earnings from Operations $ 109 $ 128 $ 174
Operating Margin 17.6% 17.6% 17.9%
Return on Net Assets 105.8% 80.0% 68.6%
INGENIX
Revenues $ 184 $ 258 $ 376
Earnings from Operations $ 20 $ 25 $ 32
Operating Margin 10.9% 9.7% 6.5%
Return on Net Assets 7.3% 5.4% 5.2%
- --------------------------------------------------------------------------------------------------------------
CAPITAL ITEMS(1)
(IN MILLIONS, EXCEPT PER SHARE DATA) 1998 1999 2000
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Operations $ 1,071 $ 1,189 $ 1,521
Captial Expenditures $ 210 $ 196 $ 245
Cash Paid for Acquistions $ 464 $ 334 $ 76
Debt to Total Capital nm 20.4% 24.7%
Return on Shareholders' Equity 11.9% 14.1% 19.0%
Year-End Market Capitalization $ 7,920 $ 8,896 $19,470
Year-End Common Share Price $ 21.53 $ 26.56 $ 61.38
(1)Excludes nonrecurring items and special operating charges.
nm - not meaningful
52
INVESTOR INFORMATION United Health 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 26, 2001. These prices do not
include commissions or fees associated with purchasing or selling this security.
High Low
- -----------------------------------------------------------
2001
First Quarter 2001
Through February 26, 2001 $62.41 $51.56
- -----------------------------------------------------------
2000
First Quarter 2000 $32.33 $23.18
Second Quarter 2000 $44.50 $28.88
Third Quarter 2000 $50.56 $39.06
Fourth Quarter 2000 $63.44 $48.63
- -----------------------------------------------------------
1999
First Quarter 1999 $27.34 $19.72
Second Quarter 1999 $35.00 $22.35
Third Quarter 1999 $33.35 $24.03
Fourth Quarter 1999 $29.25 $19.69
- -----------------------------------------------------------
Account Questions
Our transfer agent, Wells Fargo, National Association, 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 them at:
Wells Fargo Shareowner Services
P.O. Box 64854
Saint Paul, Minnesota 55164-0854
Or you can e-mail our transfer agent at:
stocktransfer@wellsfargo.com
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, MN008-T930
UnitedHealth Group
P.O. Box 1459
Minneapolis, Minnesota 55440-1459
ANNUAL MEETING
We invite UnitedHealth Group shareholders to attend our annual meeting, which
will be held on Wednesday, May 9, 2001, at 10 a.m., at UnitedHealth Group
Center, 9900 Bren Road East, Minnetonka, 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
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, 2000, received an annual dividend for
2000 of $0.015 per share. On October 24, 2000, UnitedHealth Group's board
of directors declared a two-for-one stock split. On February 13, 2001, the
company's board of directors approved an annual dividend for 2001 of $0.03 per
share. The dividend will be paid on April 18, 2001, to shareholders of record at
the close of business on April 2, 2001.
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 at:
www.unitedhealthgroup.com
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