FINANCIAL HIGHLIGHTS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
Revenues $10,073,790 $5,670,878 $3,768,882 $3,115,202 $2,200,636
Earnings from Operations $ 596,410(1) $ 460,785(2) $ 506,047 $ 336,351 $ 207,306
- ------------------------------------------------------------------------------------------------------------------
Net Earnings Before
Extraordinary Gain $ 355,637(1) $ 285,964(2) $ 288,139(3) $ 212,078 $ 130,591
Extraordinary Gain on Sale of
Subsidiary, net -- -- 1,377,075 -- --
- ------------------------------------------------------------------------------------------------------------------
Net Earnings $ 355,637(1) $ 285,964(2) $1,665,214 $ 212,078 $ 130,591
Convertible Preferred Stock Dividends 28,752 7,188 -- -- --
- ------------------------------------------------------------------------------------------------------------------
Net Earnings Applicable to
Common Shareholders $ 326,885 $ 278,776 $1,665,214 $ 212,078 $ 130,591
- ------------------------------------------------------------------------------------------------------------------
Net Earnings Per Common Share
Net Earnings Before
Extraordinary Gain $ 1.76(1) $ 1.57(2) $ 1.64(3) $ 1.23 $ 0.79
Extraordinary Gain -- -- 7.86 -- --
- ------------------------------------------------------------------------------------------------------------------
Net Earnings $ 1.76(1) $ 1.57(2) $ 9.50 $ 1.23 $ 0.79
- ------------------------------------------------------------------------------------------------------------------
Dividends Per Share
Common Stock $ 0.03 $ 0.03 $ 0.03 $ 0.015 $ 0.0075
Convertible Preferred Stock $ 57.50 $ 14.38 -- -- --
Weighted-average Number of
Common Shares Outstanding 185,845 177,443 175,209 171,739 166,091
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL POSITION (AT YEAR END)
Cash and Investments $3,452,261 $3,078,395 $2,769,390 $1,169,433 $ 923,576
Total Assets $6,996,630 $6,160,986 $3,489,479 $1,787,354 $1,321,174
Long-term Obligations $ 29,443 $ 31,152 $ 24,275 $ 39,099 $ 24,132
Shareholders' Equity $3,823,087 $3,188,020 $2,795,456 $1,085,410 $ 822,903
- ------------------------------------------------------------------------------------------------------------------
Financial Highlights should be read in conjunction with Financial Review
and Consolidated Financial Statements and notes thereto included in this
Annual Report.
1 Excluding the non-operating merger costs associated with the acquisition of
HealthWise of America, Inc. of $14.9 million ($9.1 million after tax, or
$0.05 per common share) and the provision for future losses on two
multi-year contracts of $45.0 million ($27.4 million after tax, or $0.15 per
common share), 1996 earnings from operations and net earnings would have
been $641.4 million and $392.2 million, or $1.96 per common share.
2 Excluding restructuring charges of $153.8 million ($96.9 million after tax,
or $0.55 per common share) associated with the acquisition of The
MetraHealth Companies, Inc., 1995 earnings from operations and net earnings
would have been $614.6 million and $382.9 million, or $2.12 per common
share.
3 Excluding the non-operating merger costs of $35.9 million ($22.3 million
after income taxes, or $0.13 per common share) incurred in connection with
the acquisitions of Complete Health Services, Inc. and Ramsay-HMO, Inc.,
1994 net earnings before extraordinary gain would have been $310.4 million,
or $1.77 per common share.
________________________________________________________________________________
18 United HealthCare - 1996 Annual Report
FINANCIAL REVIEW
The Company has completed several recent transactions which affect the
year-to-year comparability of its consolidated financial position and results
of operations. The most significant of these transactions was the Company's
October 2, 1995, acquisition of The MetraHealth Companies, Inc.
(MetraHealth). MetraHealth was formed in January 1995 by combining the group
health care operations of Metropolitan Life Insurance Company and The
Travelers Insurance Group. At the time of acquisition, MetraHealth served
over 10 million individuals, including 5.9 million in network-based care
programs, 469,000 of whom were health plan members.
In addition to MetraHealth, the Company acquired four other companies during
1996 and 1995 with health plan operations. On April 12, 1996, the Company
acquired HealthWise of America, Inc. (HealthWise), a health care management
company that owned or operated health plans in Maryland, Kentucky, Tennessee and
Arkansas serving 154,000 members at the time of acquisition.
On March 29, 1996, the Company acquired PHP, Inc. (PHP), a health plan based
in Greensboro, North Carolina, serving 132,000 members at the time of
acquisition. On February 28, 1995, the Company acquired Group Sales and Services
of Puerto Rico, Inc. (Group Sales), a health plan based in San Juan, Puerto
Rico, serving 135,000 members at the time of acquisition. On January 3, 1995,
the Company acquired GenCare Health Systems, Inc. (GenCare), a health plan based
in St. Louis, Missouri, serving 230,000 members at the time of acquisition.
The acquisition of HealthWise was accounted for as a pooling of interests;
however, the Company's consolidated financial results were not restated because
the effects of the acquisition on the Company's consolidated financial
statements were not material. The MetraHealth, PHP, Group Sales and GenCare
acquisitions were accounted for as purchase transactions. Accordingly, only the
post-acquisition results of all of these acquired companies are included in the
Company's consolidated financial statements.
This Financial Review should be read in conjunction with the accompanying
Consolidated Financial Statements and notes thereto.
SUMMARY OPERATING INFORMATION
1996 1995 1994
--------------------------------------------------------------------------
AMOUNT OR PERCENT Amount or Percent Amount or
PERCENT INCREASE (DECREASE) Percent Increase Percent
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------------------------------------------------------------
Revenues $ 10,073,790(1) 78% $5,670,878(2) 51% $3,768,882(3)
Net Operating Earnings $ 392,217(1) 2% $ 382,864(2) 23% $ 310,439(3)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Medical Costs to Premium Revenues 84.0%(1) 79.7% 78.3%
SG&A Expenses to Total Revenues 21.5% 18.2%(2) 14.7%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Enrollment (at year end)
Health Plan Products
Commercial 4,100(4) 36% 3,005(4) 68% 1,791(4)
Medicaid 525 49% 352 24% 285
Medicare 230 55% 148 36% 109
- ---------------------------------------------------------------------------------------------------------------------
Total Health Plan Products 4,855 39% 3,505 60% 2,185
Other Network-Based Products 5,674(4) (1)% 5,738(4) -- 67(4)
Indemnity Products 3,249(4) (26)% 4,367(4) -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Enrollment 13,778 1% 13,610 504% 2,252
- ---------------------------------------------------------------------------------------------------------------------
1 Amounts include post-acquisition operating results of PHP, Inc. acquired on
March 29, 1996, and HealthWise of America, Inc. acquired on April 12, 1996.
Amounts exclude merger costs of $14.9 million ($9.1 million after tax)
associated with the acquisition of HealthWise and the provision for future
losses on two multi-year contracts of $45.0 million ($27.4 million after
tax).
2 Amounts include post-acquisition operating results of GenCare Health
Systems, Inc., acquired on January 3, 1995; Group Sales and Services of
Puerto Rico, Inc., acquired on February 28, 1995; and The MetraHealth
Companies, Inc., acquired on October 2, 1995. Amounts exclude restructuring
charges of $153.8 million ($96.9 million after tax) associated with the
MetraHealth acquisition.
3 Amounts exclude merger costs of $35.9 million ($22.3 million after tax)
associated with the May 1994 acquisitions of Complete Health Services, Inc.
and Ramsay-HMO, Inc. The results of Complete Health and Ramsay are included
for the full year in accordance with pooling-of-interests accounting.
4 Amounts include both fully insured and self-funded enrollment. End of year
self-funded enrollment was as follows: Commercial HealthPlan
Products--313,000 in 1996, 243,000 in 1995, and 123,000 in 1994. Other
Network-Based Products--4,955,000 in 1996, 5,038,000 in 1995, and 67,000 in
1994; Indemnity Products--2,664,000 in 1996 and 3,385,000 in 1995.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 19
RESULTS OF OPERATIONS
REVENUES -- Premium revenues in 1996 of $8.50 billion increased $3.57
billion, or 72%, compared to 1995. Excluding the effects of the Company's
acquisitions of MetraHealth, HealthWise and PHP, the increase in 1996 premium
revenues over 1995 was 28%, reflecting year-over-year total health plan
enrollment growth of 30% and an average year-over-year premium rate increase
on renewing commercial groups of approximately 1% to 2%.
Premium revenues in 1995 were $4.93 billion, a 46% increase over 1994.
Excluding the effects of the Company's 1995 acquisitions of MetraHealth,
Group Sales and GenCare, the increase in 1995 premium revenues over 1994 was
19%, reflecting year-over-year health plan enrollment growth of 21% and an
average premium rate increase on renewing commercial groups of approximately
1% to 2%.
The effect of year-over-year enrollment growth (excluding acquisitions) and
average premium rate increases was not fully realized in the corresponding
increases in 1996 and 1995 premium revenues due to changes in customer mix. Much
of the enrollment growth in 1996 and 1995 had been in health plan small group
products which generally are characterized as having lower benefits (and
therefore lower premiums) than the Company's other commercial health plan
products.
New and renewal commercial health plan premium rates generally are
established by the Company based on anticipated health care costs. Over the past
several years, the Company had been able to effectively manage health care costs
and maintain the rate at which its health care costs had grown within the
commercial health plan line of business to low single-digit percentage
increases. Commercial health plan premium rates were set accordingly. However, a
number of factors contributed to an adverse relationship between the Company's
1996 commercial health plan premium rate increases and the corresponding
increase in health care costs. Competition for commercial enrollment in certain
of the Company's health plan markets had increased in recent years, particularly
related to calendar year 1995 and January 1996 renewal business. The January
renewal period is significant for the Company as approximately 45% of its
existing commercial health plan enrollment renews in that month. In addition,
when establishing premium rates for late 1995 and January 1996 new and renewing
commercial health plan business, the Company believed that its commercial health
plan health care cost trend for 1996 would be 1% to 2%, similar to the
corresponding health care cost trend experienced in 1995.
However, the Company now believes the current year-over-year health care
cost trend experienced by its commercial health plan business in 1996 was 3% to
4%. Lastly, anticipated health care provider contract savings associated with
the MetraHealth health plan products had not been realized in time to match the
pricing decisions made for these products in late 1995 and into 1996. These
products comprised approximately 15% of MetraHealth's total revenues in 1995. As
a result of all of these factors, the health plan premium rates achieved by the
Company during late 1995 and January 1996 were less than the corresponding
increase in health care costs.
The Company currently believes that the competitive premium environment has
improved since January 1996. As a result, the Company has been able to realize
4% to 5% renewal rate increases in its commercial health plan business from
February 1996 through January 1997, which more closely reflects the higher
health care cost trend experienced by the Company for these products during
1996. New group pricing has been similarly increased. Depending on the level of
future competition, customer acceptance of the Company's premium increases, or
other factors, there can be no assurance that the Company's recent commercial
health plan enrollment growth trends will continue or that the Company will be
able to price its commercial health plan products consistent with the
corresponding health care cost trends.
As a result of its acquisition of MetraHealth, the Company had approximately
585,000 enrollees at December 31, 1996, in fully insured non-network-based
indemnity products, primarily from small group employers. These products do not
use health care cost containment measures similar to the Company's network-based
products and, accordingly, are priced differently. In response to increased
medical costs associated with these products, the Company instituted rate
increases averaging from 10% to 20% during the second half of 1995 and all of
1996. These rating actions appear to have been sufficient to cover the
corresponding increases in medical costs. As a result of these pricing decisions
and other factors, the Company has seen enrollment decreases in the non-network
based indemnity products and expects these decreases to continue throughout
1997. To the extent practicable, the Company will attempt to convert these
enrollees to its network-based managed care products. While these recent rate
increases were based on the Company's estimate of health care cost trends within
the non-network-based products, there can be no assurance that these rate
increases will be consistent with the related future health care cost
experience.
________________________________________________________________________________
20 United HealthCare - 1996 Annual Report
Management services and fee revenues in 1996 of $1.40 billion were two times
more than the comparable 1995 revenues. Prior to the MetraHealth acquisition,
these revenues were primarily comprised of administrative fees relating to
services performed on behalf of the Company's managed health plans and fees
generated by the Company's specialty managed care services. Excluding the effect
of the Company's acquisitions of MetraHealth, HealthWise and PHP, the Company
recorded management services and fee revenues in 1996 of $409.1 million, a 42%
increase over 1995. The increase in management services and fee revenues can be
attributed primarily to enrollment growth within the managed health plans and an
increase in lives served by the specialty managed care services operations, most
notably in the behavioral health and demand management businesses.
The Company had approximately 7.9 million enrollees in self-funded products
at December 31, 1996, most of which related to the former MetraHealth business.
Under these funding arrangements, the Company receives a fee for the provision
of administrative services and generally assumes no financial responsibility for
health care costs associated with these products. The Company recorded
management services and fee revenues related to the former MetraHealth
self-funded products of $821.9 million in 1996, and $216.2 million in the fourth
quarter of 1995.
OPERATING EXPENSES -- The combination of the Company's pricing strategy
and its medical management efforts are reflected in its medical expense ratio
(the percent of premium revenues expensed as medical costs). The medical
expense ratio increased from 78.3% in 1994 to 79.7% in 1995, and then to
84.6% in 1996. A portion of the sequential year-over-year increases in the
medical expense ratio generally is attributable to the former MetraHealth
products (included in 1996 results, but only in one quarter of 1995) which
historically have had a higher medical expense ratio as compared to the
Company's previous products. Had the MetraHealth products been included in
the Company's financial results for all of 1995, the medical expense ratio
would have been approximately 81%. The 1996 medical expense ratio also
reflects the increasing health care cost trend of 3% to 4% as previously
discussed. In particular, the Company experienced increases in some health
care cost components within its health plan commercial products, led by
outpatient services, physician utilization and prescription drugs. Decreases
in inpatient hospital utilization in the health plans did not fully offset
the increases in these other health care services. In addition, in the second
quarter of 1996 the Company recorded a provision to cover the estimated
losses expected to be incurred through the remaining term of two large,
multi-year contracts in its St. Louis health plan of $45.0 million. These
contracts cover approximately 23% of the health plan's total commercial
insured enrollment and run through 1998. Excluding the contract loss
provision, the 1996 medical expense ratio was 84.0%.
The Company typically experiences a favorable downward seasonal trend in
health care utilization in the fourth quarter of any given year. However,
this favorable trend was not as pronounced in the fourth quarter of 1996. The
Company believes that this higher-than-expected health care utilization is
attributable to regional outbreaks of influenza observed in certain health
plans. As a result, the medical expense ratio in the fourth quarter of 1996
was 84.0%, comparable to the full year 1996 medical expense ratio, but
slightly better than the 84.4% reported in the third quarter of 1996.
Selling, general and administrative expenses as a percent of total revenues
(the SG&A ratio) increased from 14.7% in 1994, to 18.2% in 1995, and then to
21.5% in 1996. As expected, the MetraHealth acquisition had a significant impact
on the Company's selling, general and administrative expenses (in total dollars
as well as a percentage of revenue) because a greater proportion of the former
MetraHealth business consists of fee-based, self-funded products rather than
products which generate full premium revenue. Since the MetraHealth acquisition
at the beginning of the fourth quarter of 1995, the Company has successfully
achieved selling, general and administrative efficiencies resulting in a
decrease in the SG&A ratio from 24.2% in the fourth quarter of 1995 to 21.5% in
1996.
Depreciation and amortization was $133.2 million in 1996, $94.5 million
in 1995, and $64.1 million in 1994. Depreciation and amortization increased
each year due to higher levels of capital expenditures in support of the
growth in business and the amortization of goodwill and other intangible
assets related to the recent acquisitions of MetraHealth, PHP, Group Sales
and GenCare.
In connection with its acquisition of MetraHealth, the Company developed a
comprehensive plan to integrate the business activities of the combined
companies. The plan encompassed, among other matters, the disposition,
discontinuance and restructuring of certain businesses and product lines, and
the recognition of certain asset impairments. In the fourth quarter of 1995, the
Company recorded $153.8 million in restructuring charges associated with the
plan. The restructuring charges did not cover certain aspects of the plan,
including new information systems, anticipated operating losses from businesses
to be discontinued, employee relocation, and training. These costs are being
recognized in future periods as incurred.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 21
MERGER COSTS -- In connection with its April 1996 acquisition of
HealthWise, the Company recorded non-operating merger costs of $14.9 million,
consisting primarily of professional fees and other direct costs associated
with the acquisition.
EXTRAORDINARY GAIN ON SALE OF SUBSIDIARY -- On May 27, 1994, the Company
sold Diversified Pharmaceutical Services, Inc., then a wholly owned
subsidiary, to SmithKline Beecham Corporation for $2.30 billion in cash. In
connection with this transaction, the Company recognized an extraordinary
gain after transaction costs and income tax effects of $1.38 billion.
GOVERNMENT REGULATION
The Company's primary business, offering health care coverage and health
care management services, is heavily regulated at both the federal and state
levels. The Company believes that it is in compliance in all material respects
with the various federal and state regulations applicable to its current
operations. To maintain such compliance, it may be necessary for the Company or
one of its subsidiaries to make changes from time to time in its services,
products, marketing methods, or organizational or capital structure.
Government regulation of health care coverage products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Changes in
applicable laws and regulations are continually being considered and the
interpretation of existing laws and rules also may change from time to time.
Regulatory agencies generally have broad discretion in promulgating regulations
and in interpreting and enforcing laws and rules.
While the Company is unable to predict what regulatory changes may occur or
the impact on the Company of any particular change, the Company's operations and
financial results could be negatively affected by regulatory revisions. Certain
proposed changes in Medicare and Medicaid programs may increase the
opportunities for the Company to enroll people under products developed for the
Medicare-and Medicaid-eligible populations. Other proposed changes also may
limit the reimbursement available to the Company and increase competition in
those programs, which could adversely affect the Company's financial results.
The continued consideration and enactment of "anti-managed care" laws and
regulations, such as "any willing provider" laws and limits on utilization
management, by federal and state bodies may make it more difficult for the
Company to control medical costs and may adversely affect financial results.
A number of jurisdictions have enacted small group insurance and rating
reforms, which generally limit the ability of insurers and health plans to use
risk selection as a method of controlling medical costs for small group
business. These laws generally may limit or eliminate use of preexisting
conditions exclusions, experience rating and industry class rating, and may
limit the amount of rate increases from year to year. Under these laws, medical
cost control through provider contracting and managing care may become more
important, and the Company currently believes its experience in these areas will
allow it to compete effectively.
In addition to changes in applicable laws and rules, the Company is
potentially subject to governmental investigations and enforcement actions.
These include possible government actions relating to the federal Employee
Retirement Income Security Act (ERISA), which regulates insured and
self-insured health coverage plans offered by employers, and the Company's
employers, the Federal Employees Health Benefit Plan (FEHBP), federal and
state fraud and abuse laws, and laws relating to utilization management and
the delivery of health care. Any such government action could result in
assessment of damages, civil or criminal fines or penalties, or other
sanctions, including exclusion from participation in government programs.
Although the Company is currently involved in various government audits, such
as under the FEHBP or relating to services for ERISA plans, the Company
currently does not believe the results of such audits will have a material
adverse effect on the Company's financial position or results of operations.
INFLATION
Although the general rate of inflation has remained relatively stable and
health care cost inflation has declined in recent years, the national health
care cost inflation rate still exceeds the general inflation rate. As mentioned
previously, the Company believes the 1996 year-over-year health care cost trend
experienced in its commercial health plan business was 3% to 4%.
The Company uses various strategies to mitigate the negative effects of
health care cost inflation, including setting commercial premiums based on its
anticipated health care costs, risk-sharing arrangements with the Company's
various health care providers, and other health care cost containment measures.
Specifically, the Company's health plans attempt to control medical and hospital
costs through contractual arrangements primarily with independent providers of
health care services. Cost-effective delivery of health care services by such
health care providers is achieved by emphasizing preventive health services,
appropriate use of specialty referral services, and the reduction of unnecessary
hospitalizations.
________________________________________________________________________________
22 United HealthCare - 1996 Annual Report
While the Company currently believes its strategies to mitigate health
care cost inflation will continue to be successful, competitive pressures,
new health care product introductions, demands from providers and customers,
applicable regulations or other factors may adversely affect the Company's
ability to control the impact of health care cost increases. In addition,
certain non-network-based products of the former MetraHealth business do not
have similar health care cost containment measures as the Company's
network-based managed care products. As a result, the Company is subject to
more health care cost inflation risk with these products.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash and investments increased from $3.08 billion at
December 31, 1995, to $3.45 billion at December 31, 1996. The increase in
cash and investments is primarily the result of cash generated from
operations of $562.3 million, offset by net purchases of property and
equipment of $165.2 million and cash used to settle certain purchase
considerations associated with the Company's acquisition of MetraHealth.
Under the terms of the acquisition, the former owners of MetraHealth were
eligible to receive up to an additional $350.0 million if MetraHealth
achieved certain 1995 operating results, as defined. During 1996, the Company
paid $105.4 million in cash, including interest, as full settlement of the
1995 earnout.
In addition, certain former owners of MetraHealth will be eligible to
receive up to an additional $175.0 million in cash for each of 1996 and 1997
if the Company's post-acquisition combined net earnings for each of those
years reaches certain specified levels. Based on combined 1996 operating
results, the Company does not expect to make any such payment related to the
1996 earnout.
Under applicable state regulations, several of the Company's subsidiaries
are required to maintain specified capital levels to support their operations.
After giving effect to these regulations and certain business considerations,
the Company had approximately $848.6 million in cash and investments available
for general corporate use at December 31, 1996.
As described more fully in Note 3 to the consolidated financial statements,
the Company acquired in separate transactions, HealthWise and PHP. These
transactions were completed through the exchange of shares of the Company's
common stock for all the outstanding shares of HealthWise and PHP, with the
exception of transaction costs, did not require the use of cash.
The Company continues to focus on expanding its health care programs to
the Medicare population. In the past 12 months, the number of sites offering
a Medicare health plan product increased from 8 to 19 sites. Over the same
period, health plan Medicare enrollment grew 55%. The Company continues to
invest in new markets and expects to have approximately 30 sites offering
Medicare programs by year-end 1997. Significant expenditures must be incurred
in connection with the introduction of a Medicare health plan product in a
particular site. These start-up expenditures include a lengthy and detailed
regulatory approval process, product-specific provider contracting and
network configuration, high up-front sales and marketing costs, and staffing
of service areas in advance of product sales. The Company expects to incur
operating losses from its Medicare products in these start-up markets usually
for the first 12 to 18 months until Medicare enrollment is sufficient to
cover the corresponding administrative cost structure in each site.
In February 1997, the Company completed a contract to deliver Medicare
supplement insurance and develop an array of new products for the American
Association of Retired Persons (AARP) beginning in January 1998. Under the terms
of the 10-year contract, the Company's portion of the AARP insurance offerings
represents approximately $4.0 billion in annual premium revenue from over 5
million policyholders (based on year-end 1996 figures).
The Company currently believes its available cash resources will be
sufficient to meet its current operating requirements and internal development
and integration initiatives. In addition, the Company believes that, based on
its current financial condition and results of operations, it would be able to
finance additional cash requirements in the public or private markets, if
necessary.
There currently are no other material definitive commitments for future use
of the Company's available cash resources; however, management continually
evaluates opportunities to expand its operations, which includes internal
development of new products and programs and may include additional
acquisitions.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 23
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums $ 8,490,304 $ 4,931,355 $ 3,376,238
Management Services and Fees 1,398,217 579,707 274,616
Investment and Other Income 185,269 159,816 118,028
- ------------------------------------------------------------------------------------------------------------------
Total Revenues 10,073,790 5,670,878 3,768,882
- ------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Medical Costs 7,179,679 3,930,933 2,643,107
Selling, General and Administrative Costs 2,164,535 1,030,906 555,649
Depreciation and Amortization 133,166 94,458 64,079
Restructuring Charges -- 153,796 --
- ------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 9,477,380 5,210,093 3,262,835
- ------------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 596,410 460,785 506,047
Interest Expense (592) (771) (2,163)
Merger Costs (14,968) -- (35,940)
- ------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES, MINORITY INTERESTS AND
EXTRAORDINARY GAIN 580,850 460,014 467,944
Provision for Income Taxes (224,598) (170,205) (177,822)
Minority Interests in Net Earnings of Consolidated Subsidiaries (615) (3,845) (1,983)
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS BEFORE EXTRAORDINARY GAIN 355,637 285,964 288,139
EXTRAORDINARY GAIN ON SALE OF SUBSIDIARY,
NET OF INCOME TAXES OF $808,758 -- -- 1,377,075
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS 355,637 285,964 1,665,214
CONVERTIBLE PREFERRED STOCK DIVIDENDS 28,752 7,188 --
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS $ 326,885 $ 278,776 $ 1,665,214
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY GAIN $ 1.76 $ 1.57 $ 1.64
EXTRAORDINARY GAIN PER COMMON SHARE -- -- 7.86
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE $ 1.76 $ 1.57 $ 9.50
- ------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 185,845 177,443 175,209
- ------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
________________________________________________________________________________
24 United HealthCare - 1996 Annual Report
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,036,716 $ 940,110
Short-term investments 610,572 863,815
Accounts receivable, net of allowances of $46,322 and $27,184 605,801 550,313
Assets under management 155,090 309,170
Other 331,485 203,713
- ------------------------------------------------------------------------------------------------------------------
Total Current Assets 2,739,664 2,867,121
Long-term Investments 1,804,973 1,274,470
Property and Equipment, net of accumulated depreciation
of $275,355 and $149,514 312,984 267,652
Goodwill and Other Intangible Assets, net of accumulated
amortization of $136,700 and $76,203 2,139,009 1,751,743
- ------------------------------------------------------------------------------------------------------------------
Total Assets $ 6,996,630 $ 6,160,986
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical costs payable $ 1,516,111 $ 1,201,421
Other policy liabilities 334,039 412,528
Accounts payable 73,077 79,796
Accrued expenses 491,297 566,770
Unearned premiums 228,258 173,481
- ------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,642,782 2,433,996
Long-term Obligations and Minority Interests 30,761 38,970
Convertible Preferred Stock 500,000 500,000
Commitments and Contingencies (Note 10)
- ------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.01 par value -- 500,000,000 shares authorized;
184,865,000 and 175,215,000 issued and outstanding 1,849 1,752
Additional paid-in capital 1,148,039 822,429
Retained earnings 2,680,191 2,358,640
Net unrealized holding gains (losses) on investments available
for sale, net of income tax effects (6,992) 5,199
- ------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 3,823,087 3,188,020
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 6,996,630 $ 6,160,986
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
________________________________________________________________________________
United HealthCare - 1996 Annual Report 25
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NET UNREALIZED
HOLDING GAINS
COMMON STOCK ADDITIONAL (LOSSES)
---------------------- PAID IN RETAINED ON INVESTMENTS
SHARES AMOUNT CAPITAL EARNINGS AVAILABLE FOR SALE TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 169,100 $ 1,691 $ 659,359 $ 424,360 $ -- $1,085,410
Issuance of Common Stock
Stock Plans and Related Tax Benefits 3,731 37 93,113 -- -- 93,150
Change in Net Unrealized Holding
Losses on Investments Available
for Sale, net of income tax effects -- -- -- -- (43,765) (43,765)
Amortization of Deferred Compensation -- -- -- 73 -- 73
Cash Dividend
Common Stock ($0.03 per share) -- -- -- (4,626) -- (4,626)
Net Earnings -- -- -- 1,665,214 -- 1,665,214
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 172,831 1,728 752,472 2,085,021 (43,765) 2,795,456
Issuance of Common Stock
Stock Plans and Related Tax Benefits 2,384 24 69,957 -- -- 69,981
Change in Net Unrealized Holding
Gains on Investments Available
for Sale, net of income tax effects -- -- -- -- 48,964 48,964
Amortization of Deferred Compensation -- -- -- 35 -- 35
Cash Dividends
Common Stock ($0.03 per share) -- -- -- (5,192) -- (5,192)
Convertible Preferred Stock
($14.38 per share) -- -- -- (7,188) -- (7,188)
Net Earnings -- -- -- 285,964 -- 285,964
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 175,215 1,752 822,429 2,358,640 5,199 3,188,020
Issuance of Common Stock
Stock Plans and Related Tax Benefits 1,721 17 56,351 -- -- 56,368
1996 Acquisitions 7,929 80 269,259 -- -- 269,339
Change in Net Unrealized Holding
Losses on Investments Available
for Sale, net of income tax effects -- -- -- -- (12,191) (12,191)
Cash Dividends
Common Stock ($0.03 per share) -- -- -- (5,334) -- (5,334)
Convertible Preferred Stock
($57.50 per share) -- -- -- (28,752) -- (28,752)
Net Earnings -- -- -- 355,637 -- 355,637
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 184,865 $ 1,849 $1,148,039 $2,680,191 $ (6,992) $3,823,087
- ------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
________________________________________________________________________________
26 United HealthCare - 1996 Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
- ------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Earnings $ 355,637 $ 285,964 $ 1,665,214
Non-cash Items
Depreciation and amortization 133,166 94,458 64,079
Non-cash restructuring charges -- 141,137 --
Gain on sales of subsidiaries, net -- -- (1,377,075)
Provision for future losses 45,000 -- --
Other (7,920) (5,724) (4,267)
Net Change in Other Operating Items, net of effects from
acquisitions and sales of subsidiaries
Accounts receivable and other current assets (137,431) (25,079) (24,486)
Medical costs payable 321,336 143,231 (17,931)
Accounts payable (10,659) (25,854) (84,324)
Accrued expenses and other current liabilities (190,557) (189,163) 105,757
Unearned premiums 53,687 15,305 (710)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities 562,259 434,275 326,257
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash Paid for Acquisitions, net of cash assumed and other effects (51,864) (969,392) (51,442)
Cash Received from Sales of Subsidiaries, net of cash
surrendered and other effects -- -- 2,298,819
Cash Paid for Income Taxes and Transaction Costs Related
to Sale of Subsidiary -- -- (836,253)
Net Purchases of Property and Equipment (165,223) (109,230) (79,609)
Purchases of Investments Available for Sale (4,976,898) (3,268,664) (1,334,654)
Maturities/Sales of Investments Available for Sale 4,727,448 3,306,140 956,808
Purchases of Investments Held to Maturity (31,950) (20,522) (20,205)
Maturities of Investments Held to Maturity 27,481 14,957 8,005
Other (1,504) 961 (2,373)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from (Used for) Investing Activities (472,510) (1,045,750) 939,096
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Proceeds from Stock Option Exercises 41,563 41,374 48,609
Payment of Long-term Obligations (620) (3,646) (18,547)
Dividends Paid
Convertible Preferred Stock (28,752) -- --
Common Stock (5,334) (5,192) (4,626)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities 6,857 32,536 25,436
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 96,606 (578,939) 1,290,789
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 940,110 1,519,049 228,260
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,036,716 $ 940,110 $ 1,519,049
- -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
________________________________________________________________________________
United HealthCare - 1996 Annual Report 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 DESCRIPTION OF BUSINESS
United HealthCare Corporation (the Company) is a national leader in offering
health care coverage and related services through a broad continuum of products
and services in all 50 states and Puerto Rico. The Company's products and
services reflect a number of core capabilities, including medical information
management, health benefit administration, risk assessment and pricing, health
benefit design, and provider contracting and risk sharing. With these
capabilities, the Company is able to provide comprehensive managed care
services, such as health maintenance organizations, insurance and self-funded
health care coverage products. The Company also offers unbundled health care
management and cost containment products such as mental health and substance
abuse services, utilization review services, specialized provider networks, and
employee assistance programs.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
These consolidated financial statements include some amounts that are based
on management's best estimates and judgments. The most significant estimates
relate to medical costs payable and other policy liabilities, intangible asset
valuations and integration reserves relating to the Company's recent
acquisitions. These estimates are subject to adjustment as more accurate
information becomes available and any such adjustment could be significant.
REVENUE RECOGNITION -- Premium revenues are recognized in the period in
which enrolled members are entitled to receive health care services. Premiums
received prior to such period are recorded as unearned premiums. Management
services and fee revenues are recognized in the period the related services
are performed.
Premium revenues related to Medicare and Medicaid programs as a percentage
of total premium revenues were 19% in 1996, 22% in 1995, and 26% in 1994.
MEDICAL COSTS -- Medical costs include claims paid, claims in process and
pending, and estimated unreported claims and charges by physicians, hospitals
and other health care providers for services rendered to enrolled members during
the period. Medical cost adjustments to prior period estimates are reflected in
the current period.
CASH AND 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 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 pursuant to state regulatory
requirements are classified as held to maturity based on the Company's ability
and intent to hold these investments to maturity. Such investments are presented
at amortized cost. All other investments are classified as available for sale
and are reported at fair value based on quoted market prices, with unrealized
gains and losses excluded from earnings and reported as a separate component of
shareholders' equity, net of income tax effects. For purposes of calculating
realized gains and losses on the sale of investments available for sale, the
amortized cost of each investment sold is used. The Company has no investments
it classifies as trading securities.
ASSETS UNDER MANAGEMENT -- In connection with its 1995 acquisition of The
MetraHealth Companies, Inc. (MetraHealth) (see Note 3), the Company is
administering certain aspects of the health care operations of MetraHealth's
predecessor companies related to business expected to be conveyed to the
Company pursuant to agreements effected in conjunction with the initial
formation of MetraHealth. Upon conveyance to the Company, the associated
assets will be invested in marketable securities in accordance with the
Company's investment policy.
________________________________________________________________________________
28 United HealthCare - 1996 Annual Report
OTHER POLICY LIABILITIES -- Other policy liabilities principally relate
to experience-rated indemnity products written by MetraHealth or its
predecessor companies and are comprised primarily of retrospective rate
credit reserves and customer balances.
Retrospective rate credit reserves represent premiums received in excess
of claims and expenses charged under eligible contracts. Reserves established
for closed policy years are based on actual experience, while reserves for
open years are based on estimates of premiums, claims and expenses incurred.
Customer balances consist principally of deposit accounts and reserves
that have accumulated under certain experience-rated contracts. At the
customer's option, these balances may be returned to the customer or may be
used to pay future premiums or claims under certain eligible contracts.
LONG-LIVED ASSETS -- Effective December 31, 1995, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS No. 121). Following the criteria set forth in SFAS No. 121, long-lived
assets to be held are reviewed by the Company for events or changes in
circumstances which would indicate that the carrying value may not be
recoverable. In making this determination, the Company considers a number of
factors, including estimated future undiscounted cash flows associated with
the long-lived asset. Assets held for sale are recorded at the lower of the
carrying amount or fair value, less any costs associated with its disposition.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful life of the respective assets ranging from 3 years to 30 years.
GOODWILL AND OTHER INTANGIBLE ASSETS -- Goodwill and other intangible
assets primarily relate to the Company's acquisition activities in 1996 and
1995 (see Note 3). Goodwill represents the purchase price and costs
associated with the acquisitions in excess of the estimated fair value of net
assets acquired. To the extent practicable, a portion of the excess purchase
price and acquisition costs has been assigned to certain identifiable
intangible assets, primarily employer group contracts. Goodwill and other
intangible assets are being amortized on a straight-line basis over useful
lives ranging from 3 years to 40 years.
The useful lives of goodwill and other intangible assets have been
assigned by management based on their best current judgment. The Company
periodically evaluates whether events and circumstances have occurred which
may affect the estimated useful lives or the recoverability of the
unamortized balance of goodwill or other intangible assets.
Goodwill of $1.15 billion in 1996 and $760.4 million in 1995 and employer
group contracts of $938.8 million in 1996 and $966.6 million in 1995, net of
accumulated amortization, comprise the most significant components of
goodwill and other intangible assets.
INCOME TAXES -- Deferred income tax assets and liabilities are recognized
for the differences between financial and income tax reporting basis 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 the Company's various income tax returns for the
year reported.
STOCK-BASED COMPENSATION -- The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) which establishes a fair
value-based method of accounting for employee stock-based compensation.
However, it also allows companies to continue to apply the intrinsic
value-based method prescribed under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," (APB No. 25), provided
certain pro forma disclosures are made (see Note 8). The Company follows APB
No. 25 for stock-based compensation using the intrinsic value method for
stock-based compensation.
NET EARNINGS PER COMMON SHARE -- Net earnings per common share is
determined using the weighted average number of common shares outstanding
during the period, adjusted for the dilutive effect of outstanding options.
The convertible preferred stock is not considered a common stock equivalent
for the purposes of determining primary earnings per share.
RECLASSIFICATIONS -- Certain 1995 and 1994 amounts in the consolidated
financial statements have been reclassified to conform with the 1996
presentation. These reclassifications had no effect on net earnings or
shareholders' equity as previously reported.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 29
3 ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS -- On April 12, 1996, the Company completed its acquisition
of HealthWise of America, Inc. (HealthWise), a health care management company
based in Nashville, Tennessee. HealthWise owned or operated health plans in
Maryland, Kentucky, Tennessee and Arkansas, that served 154,000 members at
the time of acquisition. The Company issued approximately 4.3 million shares
of common stock in exchange for all the outstanding shares of HealthWise. The
acquisition was accounted for as a pooling of interests; however, the
historical consolidated financial results of the Company were not restated
because the effects of this acquisition on the Company's consolidated
financial statements were not material. In connection with the HealthWise
acquisition, the Company incurred non-operating merger costs of $14.9 million.
On March 29, 1996, the Company completed its acquisition of PHP, Inc.
(PHP), a health plan based in Greensboro, North Carolina, which served
132,000 members at the time of acquisition. The Company issued approximately
2.3 million shares of common stock, with a fair value of $140.0 million, in
exchange for all the outstanding shares of PHP. The acquisition was accounted
for using the purchase method of accounting, whereby the purchase price has
been allocated to assets and liabilities based on their estimated fair values
at the date of acquisition. The purchase price and costs associated with the
acquisition exceeded the estimated fair value of net assets acquired by
$115.4 million and has been assigned to goodwill. The pro forma effects of
the PHP acquisition on the Company's consolidated financial statements were
not material.
The Company acquired MetraHealth on October 2, 1995. MetraHealth was
formed in January 1995 by combining the group health care operations of
Metropolitan Life Insurance Company and The Travelers Insurance Group. At the
time of acquisition, MetraHealth served over 10 million individuals,
including 5.9 million in network-based care programs, 469,000 of whom were
health plan members. The acquisition was accounted for using the purchase
method of accounting. Based on estimates made at the date of acquisition, the
purchase price and costs associated with the acquisition exceeded the
estimated fair value of net assets acquired by $992.2 million.
The total purchase price of the acquisition was $1.09 billion in cash and
$500.0 million of convertible preferred stock, for a total consideration at
closing of $1.59 billion. In addition, the former owners of MetraHealth were
eligible to receive up to an additional $350.0 million if MetraHealth
achieved certain 1995 operating results, as defined. In 1996, the Company
paid $105.4 million in cash, including interest, as full settlement of the
1995 earnout. This earnout payment has been reflected in the accompanying
consolidated financial statements as additional goodwill. With the settlement
of the 1995 earnout and certain revisions to estimates made in connection
with the acquisition, goodwill and other intangible assets associated with
the MetraHealth acquisition totaled $1.19 billion.
In addition, certain of MetraHealth's former owners will be eligible to
receive up to an additional $175.0 million in cash for each of 1996 and 1997
if the Company's post-acquisition combined net earnings for each of those
years reaches certain specified levels. Based on combined 1996 operating
results, the Company does not expect to make any such payment related to the
1996 earnout. Any additional consideration that might be paid pursuant to
these arrangements will be reflected as additional goodwill.
On January 3, 1995, the Company completed its acquisition of GenCare
Health Systems, Inc. (GenCare), a health plan based in St. Louis, Missouri,
which served 230,000 members at the time of acquisition. The total purchase
price of the acquisition was $515.4 million in cash. The acquisition was
accounted for 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 $476.0 million and has been assigned to goodwill.
Had the MetraHealth and GenCare acquisitions occurred on January 1, 1994,
combined unaudited pro forma results for the years ended December 31, 1995
and 1994, would have been: revenues -- $8.71 and $8.21 billion; net earnings
before restructuring charges and extraordinary gain -- $449.6 and $399.9
million; and net earnings per common share before restructuring charges and
extraordinary gain -- $2.53 and $2.28. After giving effect to 1995
restructuring charges and 1994 merger costs, net earnings before
extraordinary gain would have been $352.7 million in 1995 ($1.98 per common
share) and $377.6 million in 1994 ($2.15 per common share).
On May 31, 1994, the Company's acquisition of Complete Health Services, Inc.
(Complete Health) was completed. Complete Health, based in Birmingham, Alabama,
owned or operated health plans in Alabama, Louisiana, Tennessee, Arkansas,
Georgia, Mississippi and Florida, that served 272,000 members at the time of
acquisition. In connection with the transaction, the Company issued 5.0 million
shares of common stock in exchange for all the outstanding common and preferred
shares of Complete Health.
________________________________________________________________________________
30 United HealthCare - 1996 Annual Report
Also on May 31, 1994, the Company's acquisition of Ramsay-HMO, Inc. (Ramsay)
was completed. Ramsay, based in Coral Gables, Florida, owned and operated a
predominantly staff model health plan that served 177,000 members in South and
Central Florida at the time of acquisition. In connection with the transaction,
the Company issued 11.2 million shares of common stock in exchange for all the
outstanding shares of Ramsay.
In connection with the Complete Health and Ramsay acquisitions, the Company
incurred non-operating merger costs of $35.9 million. Each acquisition was
accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements and notes thereto include the results of
Complete Health and Ramsay for all periods presented.
DISPOSITIONS -- On May 27, 1994, the Company completed the sale of 100%
of the outstanding common stock of Diversified Pharmaceutical Services, Inc.
(Diversified), then a wholly owned subsidiary of the Company, to SmithKline
Beecham Corporation (SmithKline), the U.S. operating subsidiary of
London-based SmithKline Beecham plc., a pharmaceutical manufacturer. In
connection with the sale, the Company received $2.30 billion in cash and
recognized a $1.38 billion extraordinary gain after transaction costs and
income taxes.
Under a six-year management services agreement, SmithKline will pay the
Company a management fee for certain administrative and management services
to be provided by the Company to Diversified and for exclusive rights among
pharmaceutical and medical diagnostic companies to access certain data used
in Diversified's ongoing business. During the same six-year period,
Diversified and SmithKline also will provide the Company, subject to
competitive cost and quality considerations, the Diversified drug benefit
management services that the Company requires in its health plan and other
operations.
Had the Diversified sale occurred on January 1, 1994, combined unaudited
pro forma results for the year ended December 31, 1994, excluding the
extraordinary gain on such sale, would have been: revenues -- $3.74 billion;
net earnings $275.5 million; net earnings per common share -- $1.57. These
pro forma results include the estimated effects on the Company's operations
of the management services agreement between the Company and SmithKline, but
do not take into consideration any reinvestment of the net proceeds from the
sale. These pro forma results also include non-operating merger costs related
to the Complete Health and Ramsay acquisitions.
4 RESTRUCTURING CHARGES
In connection with its acquisition of MetraHealth, the Company developed a
comprehensive plan to integrate the business activities of the combined
companies (the Plan). The Plan encompassed, among other matters, the
disposition, discontinuance and restructuring of certain businesses and product
lines, and the recognition of certain asset impairments. In the fourth quarter
of 1995, the Company recorded $153.8 million in restructuring charges associated
with the Plan. The restructuring charges include $102.3 million for activities
under the Plan which were expected to be completed through 1996, and $51.5
million for asset impairment.
In conjunction with its ongoing integration efforts, the Company modified
the Plan during 1996. The restructuring reserves established pursuant to the
original Plan were an accurate estimation of the costs incurred in 1996 related
to the Company's restructuring initiatives; however, reallocation of the reserve
estimates among the restructuring activities was required in response to changes
in the original Plan.
The original charges included $24.0 million for severance and
outplacement costs which were based on the projected impact of the Plan on
employment levels. In developing the Plan, the Company expected approximately
800 positions to be eliminated through December 31, 1996, under the
restructuring efforts. As of December 31, 1996, the elimination of
approximately 375 positions has required severance and outplacement payments
of $14.0 million. Severance and outplacement costs were less than originally
estimated as the outsourcing of certain information technology services (see
Note 10) and general attrition resulted in the planned elimination of certain
positions without any cost to the Company.
In addition, the restructuring charges included a $58.1 million provision
for costs associated with the termination of certain contracts and the
elimination of certain products, networks and systems related to changes in
strategies resulting from the MetraHealth acquisition. Expenditures related to
these activities of $61.2 million were incurred through December 31, 1996.
The restructuring charges also included a $20.2 million provision for
property and lease discontinuances at certain office locations, resulting
primarily from various exit strategies and payment of portions of
non-cancelable lease obligations. As of December 31, 1996, the Company had
paid $14.5 million related to the closing of 24 office locations. The Company
had remaining reserves of $12.6 million at December 31, 1996, which
represents its future lease obligations associated with these closed office
locations.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 31
5 PROVISION FOR FUTURE LOSSES
PROVISION FOR FUTURE LOSSES -- In the second quarter of 1996, the
Company recorded a charge to medical costs of $45.0 million, or $0.15 per
common share, to provide for the future estimated losses expected to be
incurred through the remaining term of two multi-year contracts in its St.
Louis health plan. These contracts cover approximately 23% of the health
plan's total commercial enrollment and run through 1998.
6 CASH AND INVESTMENTS
As of December 31, 1996 and 1995, the amortized cost, gross unrealized
holding gains and losses, and fair value of the Company's cash and
investments were as follows (in thousands):
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1996 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS $1,036,716 $ -- $ -- $ 1,036,716
- ----------------------------------------------------------------------------------------------
INVESTMENTS AVAILABLE FOR SALE
U.S. Government and Agencies 825,281 1,255 (14,267) 812,269
State and State Agencies 471,047 2,253 (425) 472,875
Municipalities and Local Agencies 473,661 2,300 (984) 474,977
Corporate 415,744 715 (2,209) 414,250
Other 179,298 20 (120) 179,198
- ----------------------------------------------------------------------------------------------
Total Investments Available for Sale 2,365,031 6,543 (18,005) 2,353,569
- ----------------------------------------------------------------------------------------------
INVESTMENTS HELD TO MATURITY
U.S. Government and Agencies 36,086 113 (118) 36,081
State and State Agencies 4,938 44 (1) 4,981
Municipalities and Local Agencies 1,454 84 -- 1,538
Corporate 16,603 -- (2) 16,601
Other 2,895 -- -- 2,895
- ----------------------------------------------------------------------------------------------
Total Investments Held to Maturity 61,976 241 (121) 62,096
- ----------------------------------------------------------------------------------------------
Total Cash and Investments $3,463,723 $ 6,784 $(18,126) $3,452,381
- ----------------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1995 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS $ 940,110 $ -- $ -- $ 940,110
- ----------------------------------------------------------------------------------------------
INVESTMENTS AVAILABLE FOR SALE
U.S. Government and Agencies 665,904 6,187 (11,465) 660,626
State and State Agencies 263,922 3,310 (82) 267,150
Municipalities and Local Agencies 251,631 3,077 (213) 254,495
Corporate 868,855 8,839 (1,400) 876,294
Other 35,111 -- -- 35,111
- ----------------------------------------------------------------------------------------------
Total Investments Available for Sale 2,085,423 21,413 (13,160) 2,093,676
- ----------------------------------------------------------------------------------------------
INVESTMENTS HELD TO MATURITY
U.S. Government and Agencies 26,030 357 (43) 26,344
State and State Agencies 5,991 90 -- 6,081
Municipalities and Local Agencies 1,258 98 -- 1,356
Corporate 9,273 -- (7) 9,266
Other 2,057 76 -- 2,133
- ----------------------------------------------------------------------------------------------
Total Investments Held to Maturity 44,609 621 (50) 45,180
- ----------------------------------------------------------------------------------------------
Total Cash and Investments $3,070,142 $22,034 $(13,210) $3,078,966
- ----------------------------------------------------------------------------------------------
________________________________________________________________________________
32 United HealthCare - 1996 Annual Report
As of December 31, 1996, the contractual maturities of the Company's cash
and investments were as follows (in thousands):
Caption
Less Than One to Over Five to Over Ten
YEARS TO MATURITY One Year Five Years Ten Years Years
- ----------------------------------------------------------------------------------------------
At Amortized Cost:
Cash and Cash Equivalents $1,036,716 $ -- $ -- $ --
Investments Available for Sale 625,926 1,398,884 229,766 110,289
Investments Held to Maturity 32,048 29,487 350 91
- ----------------------------------------------------------------------------------------------
Total Cash and Investments $1,694,690 $1,428,371 $230,116 $ 110,380
- ----------------------------------------------------------------------------------------------
At Fair Value:
Cash and Cash Equivalents $1,036,716 $ -- $ -- $ --
Investments Available for Sale 626,493 1,396,554 228,487 102,035
Investments Held to Maturity 32,097 29,550 371 78
- ----------------------------------------------------------------------------------------------
Total Cash and Investments $1,695,306 $1,426,104 $228,858 $ 102,113
- ----------------------------------------------------------------------------------------------
Mortgage-backed securities that do not have a single maturity date have been
presented in the above tables based on their estimated maturity dates.
Under applicable state regulations, several of the Company's subsidiaries
are required to maintain specified capital levels to support their
operations. In addition, investments of $62.0 million at December 31, 1996,
were held by trustees or state regulatory agencies to ensure adequate
financial reserves exist as required by state regulatory agencies. After
giving effect to these regulations and certain business considerations, the
Company had approximately $848.6 million in cash and investments available
for general corporate use at December 31, 1996. Investment income earned on
all investments accrues to the Company.
7 CONVERTIBLE PREFERRED STOCK
The Company has 10,000,000 shares of $0.001 par value preferred stock
authorized for issuance. In conjunction with its acquisition of MetraHealth,
the Company designated a series of 500,000 shares as 5.75% Series A
Convertible Preferred Stock (Preferred Stock). This Preferred Stock was
issued to certain former shareholders of MetraHealth as a portion of the
total consideration of the MetraHealth acquisition (see Note 3).
Preferred Stock dividends are fully cumulative and are payable quarterly
at the rate of 5.75% per annum from available funds.
At the option of the shareholders, the Preferred Stock may be redeemed
anytime after October 1, 1998, at certain defined redemption rates. Each
shareholder has the right to convert the Preferred Stock into shares of the
Company's common stock at predetermined conversion prices at any time. The
Preferred Stock is subject to mandatory redemption no later than October 1,
2005.
8 SHAREHOLDERS' EQUITY
DIVIDENDS -- On February 13, 1997, the Company's Board of Directors
approved an annual dividend for 1997 of $0.03 per share to holders of the
Company's common stock. Dividends will be paid on April 15, 1997, to
shareholders of record at the close of business on April 3, 1997.
REGULATORY REQUIREMENTS -- The Company's regulated subsidiaries must
comply with certain minimum capital or tangible net equity requirements in
each of the states in which they operate. As of December 31, 1996, all of the
Company's regulated subsidiaries were in compliance in all material respects
with these requirements.
STOCK-BASED COMPENSATION PLANS -- The Company has stock and incentive
plans (Stock Plans) for the benefit of eligible employees of the Company and
its subsidiaries. As of December 31, 1996, the Stock Plans allow for the
future granting of up to 1,168,000 shares as incentive or non-qualified stock
options, stock appreciation rights, restricted stock awards and performance
awards to employees of the Company.
In 1995 the Company adopted the Non-Employee Director Stock Option Plan
(the 1995 Plan) to benefit individuals on the Company's Board of Directors
who are not employees of the Company. Up to 350,000 shares of the Company's
common stock may be issued under the terms of the 1995 Plan. As of December
31, 1996, up to 172,000 non-qualified stock options were available for future
grants under the 1995 Plan.
Options generally are granted at an exercise price not less than the fair
market value of the common stock at the date of grant and are exercisable
over varying periods up to 10 years from the date of grant.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 33
A summary of the status of the Company's Stock Plans and the 1995 Plan at
December 31, 1996, 1995 and 1994 and changes during the years then ended
is presented in the table below (shares in thousands):
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 14,927 $28 11,509 $22 12,692 $15
Granted 4,125 33 6,792 35 3,392 39
Exercised (1,336) 19 (2,168) 16 (3,509) 11
Forfeited (822) 33 (1,206) 31 (1,066) 25
- ----------------------------------------------------------------------------------------------------------
Outstanding at end of year 16,894 $29 14,927 $28 11,509 $22
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Exercisable at end of year 6,914 4,542 3,554
- ----------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at December 31, 1996 (shares in thousands):
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at December 31, 1996 Option Term Exercise Price at December 31, 1996 Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
$ 0 -- $22 5,341 5.3 $13 3,876 $12
$23 -- $35 6,654 8.7 33 1,194 29
$36 -- $46 3,635 7.9 40 1,345 40
$47 -- $63 1,264 8.6 50 499 51
- ----------------------------------------------------------------------------------------------------------------------
$ 0 -- $63 16,894 7.4 $29 6,914 $23
- ----------------------------------------------------------------------------------------------------------------------
The Company recorded $14.8 million, $28.6 million and $44.5 million in
1996, 1995 and 1994, respectively, to additional paid-in capital to reflect
the tax benefit received by the Company upon the exercise of non-qualified
stock options and the vesting of restricted stock.
The Company follows APB No. 25, under which no compensation cost has been
recognized in connection with stock option grants pursuant to the Stock
Plans. Had compensation cost been determined consistent with SFAS No. 123,
the Company's net earnings and net earnings per common share would have been
reduced to the following pro forma amounts (in thousands):
1996 1995
- ----------------------------------------------------------------
Net Earnings:
As reported $355,637 $285,964
Pro Forma $331,651 $265,527
Net Earnings Per Common Share:
As reported $ 1.76 $ 1.57
Pro Forma $ 1.63 $ 1.46
- ----------------------------------------------------------------
In determining compensation cost pursuant to SFAS No. 123, the fair value
of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: Risk-free
interest rates of 6.6% and 6.4%; expected dividend yields of approximately
zero percent; expected stock option lives of 5.0 years and 5.2 years;
expected market price volatility of 57% and 55%. The weighted-average fair
value of options granted, determined using the Black-Scholes model, was $23
in 1996 and $24 in 1995.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
EMPLOYEE STOCK OWNERSHIP PLAN -- The Company has an unleveraged Employee
Stock Ownership Plan (ESOP) for the benefit of all eligible employees of the
Company and its subsidiaries. Company contributions to the ESOP are made at
the discretion of the Board of Directors. Contributions of $3.0 million, $1.3
million and $2.0 million in the years ended December 31, 1996, 1995 and 1994,
respectively, have been made to the ESOP.
________________________________________________________________________________
34 United HealthCare - 1996 Annual Report
EMPLOYEE STOCK PURCHASE PLAN -- The Company's Employee Stock Purchase
Plan (ESPP) enables all eligible employees of the Company to subscribe for
shares of common stock on semiannual offering dates at a purchase price which
is the lesser of 85% of the fair market value of the shares on the first day
or the last day of the semiannual period. Employee contributions to the ESPP
were $16.1 million, $7.0 million and $5.8 million for 1996, 1995 and 1994.
Pursuant to the ESPP, 392,000, 216,000 and 145,000 shares were issued to
employees during 1996, 1995 and 1994. As of December 31, 1996, 3,648,000
shares are available for future issuances.
9 INCOME TAXES
COMPONENTS OF THE PROVISION FOR INCOME TAXES
Year Ended December 31,
--------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
(in thousands)
Current
Federal $159,336 $182,483 $166,893
State 17,764 26,724 22,495
- -------------------------------------------------------------------------------
Total Current 177,100 209,207 189,388
Deferred 47,498 (39,002) (11,566)
- -------------------------------------------------------------------------------
Total Provision $224,598 $170,205 $177,822
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
RECONCILIATION OF STATUTORY TO EFFECTIVE INCOME TAX RATE
Year Ended December 31,
--------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Federal statutory rate 35.0% 34.9% 35.0%
State income taxes,
net of federal benefit 2.4 3.0 3.1
Tax-exempt
investment income (2.0) (2.6) (2.2)
Intangible Amortization 3.1 2.0 1.2
Other, net 0.2 (0.3) 0.9
- -------------------------------------------------------------------------------
Effective Income Tax Rate 38.7% 37.0% 38.0%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
COMPONENTS OF DEFERRED INCOME TAX ASSETS AND LIABILITIES
December 31,
------------------------------
1996 1995
- -------------------------------------------------------------------------------
Deferred Income Tax Assets:
Medical costs payable $31,085 $16,702
Facility consolidation reserves 23,690 16,562
Loss reserve discounting 20,729 7,411
Severance and deferred
compensation 18,865 24,743
Unearned premiums 12,395 10,771
Bad debt allowance 10,403 4,433
Other restructuring reserves 10,203 7,565
Impaired assets reserves 9,182 23,099
Intangible amortization 5,759 6,501
Unrealized losses on investments
available for sale 4,405 --
Accrued expenses 3,559 4,238
Self insurance 2,577 4,170
Depreciation 1,194 8,930
Development costs 733 18,455
Other -- 2,667
Federal tax carryovers -- 1,130
- -------------------------------------------------------------------------------
Total Deferred Income Tax Assets 154,779 157,377
- -------------------------------------------------------------------------------
Valuation Allowance -- (1,130)
- -------------------------------------------------------------------------------
Deferred Income Tax Liabilities:
Other (1,053) --
Unrealized gains on investments
available for sale -- (3,055)
- -------------------------------------------------------------------------------
Total Deferred Income Tax Liabilities (1,053) (3,055)
- -------------------------------------------------------------------------------
Net Deferred Income Tax Assets $153,726 $153,192
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Deferred income tax assets, net of the valuation allowance, are included
in other current assets and deferred income tax liabilities are included in
long-term obligations in the accompanying consolidated balance sheets. The
change in net deferred income taxes is primarily the result of the deferred
income tax benefit for the year ended December 31, 1996, the income tax
effects of net unrealized holding gains on investments available for sale and
net deferred income taxes assumed with the Company's 1996 acquisitions.
Income taxes paid were $96.0 million, $189.7 million, and $935.0 million
($801.7 million attributable to the sale of Diversified), in 1996, 1995 and
1994.
The Company's consolidated income tax returns for fiscal years 1995 and
1994 are currently under examination by the Internal Revenue Service. The
Company believes any adjustments which may result from this examination would
not have a significant impact on its consolidated operating results or
financial position.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 35
10. COMMITMENTS AND CONTINGENCIES
LEASES -- The Company leases facilities, computer hardware and other
equipment under long-term operating leases which are non-cancelable and
expire on various dates through 2011. Rent expense under all operating leases
was $113.5 million, $61.0 million and $41.4 million for 1996, 1995 and 1994.
At December 31, 1996, future minimum annual lease payments under all
non-cancelable operating leases are as follows (in thousands):
1997 1998 1999 2000 2001 Thereafter
-----------------------------------------------------------------
$85,549 $68,433 $54,380 $33,825 $23,992 $16,395
-----------------------------------------------------------------
-----------------------------------------------------------------
SERVICE AGREEMENTS -- On June 1, 1996, and November 16, 1995, the Company
entered into separate 10-year contracts with non-affiliated third parties for
information technology services. Under the terms of the contracts, the third
parties assumed responsibility for certain data center operations and
support. On September 19, 1996, the Company entered into a 10-year contract
with a third party for certain data network and voice communication services.
Future payments under all of these contracts are estimated to be $950.0
million; however, the actual timing and amount of payments will vary based on
usage. Expenses incurred in connection with these agreements were $69.6
million in 1996 and $5.9 million in 1995.
LEGAL PROCEEDINGS -- The Company is involved in legal actions which arise
in the ordinary course of its business. Although the outcomes of any such
legal actions cannot be predicted, in the opinion of management, the
resolution of any currently pending or threatened actions will not have a
material adverse effect upon the consolidated financial position or results
of operations of the Company.
BUSINESS RISKS -- Certain factors relating to the industry in which the
Company operates and the Company's business should be carefully considered.
The Company's primary business, offering health care coverage and health care
management services, is heavily regulated at both the federal and state
levels. While the Company is unable to predict what regulatory changes may
occur or the impact on the Company of any particular change, the Company's
operations and financial results could be negatively affected.
After several years of moderate increases in health care costs and
utilization, the industry experienced a more pronounced increase during 1996.
There can be no assurance that health care costs and utilization will not
again increase at a more rapid pace. If they do begin to increase more
rapidly, there can be no assurance that the Company will be able to meet its
goal of maintaining price increases at least sufficient to cover increases in
health care costs.
Also, the Company operates in a highly competitive industry which has
seen significant consolidation over the past few years. The current
competitive markets in certain areas may limit the company's ability to price
its products at levels the Company believes appropriate. These competitive
factors could adversely affect the Company's consolidated financial results.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of
investments in marketable securities and commercial premiums receivable. The
Company's investments in marketable securities are managed by professional
investment managers within guidelines established by the Board of Directors
which, as a matter of policy, limit the amounts which may be invested in any
one issuer. Concentrations of credit risk with respect to commercial premiums
receivable are limited due to the large number of employer groups comprising
the Company's customer base. As of December 31, 1996, the Company had no
significant concentrations of credit risk.
________________________________________________________________________________
36 United HealthCare - 1996 Annual Report
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
(in thousands, except per share data) for the years ended December 31, 1996
and 1995:
QUARTERS ENDED
- -----------------------------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -----------------------------------------------------------------------------------------------------------
1996
Revenues $2,318,110 $2,492,183 $2,587,358 $2,676,139
Operating Expenses 2,124,504 2,394,708 2,437,959 2,520,208
Net Earnings 118,946 50,320(1) 91,227 95,144
Net Earnings Applicable to Common Shareholders 111,758 43,132 84,039 87,956
Net Earnings Per Common Share $ 0.62 $ 0.23(1) $ 0.45 $ 0.47
Weighted-average Number of Common Shares Outstanding 180,470 186,657 187,130 187,964
- -----------------------------------------------------------------------------------------------------------
1995
Revenues $1,103,835 $1,157,945 $1,215,536 $2,193,562
Operating Expenses 960,744 1,014,064 1,064,968 2,170,317(2)
Net Earnings 89,432 89,879 93,670 12,983(2)
Net Earnings Applicable to Common Shareholders 89,432 89,879 93,670 5,795
Net Earnings Per Common Share $ 0.51 $ 0.51 $ 0.53 $ 0.03(2)
Weighted-average Number of Common Shares Outstanding 176,403 176,304 177,070 179,478
- -----------------------------------------------------------------------------------------------------------
(1) Excluding the non-operating merger costs associated with the acquisition of
HealthWise of America, Inc. of $14.9 million ($9.1 million after tax, or
$0.05 per common share) and the provisions for future losses on two
multi-year contracts of $45.0 million ($27.4 million after tax, or $0.15 per
common share) net earnings would have been $79.7 million, or $0.43 per
common share.
(2) Excluding fourth quarter restructuring charges of $153.8 million ($96.9
million after tax, or $0.54 per common share) associated with The
MetraHealth Companies, Inc. acquisition, net earnings for the three-month
period ending December 31, 1995, would have been $109.9 million, or $0.57
per common share.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND DIRECTORS OF
UNITED HEALTHCARE CORPORATION:
We have audited the accompanying consolidated balance sheets of United
HealthCare Corporation (a Minnesota Corporation) and Subsidiaries as of
December 31, 1996 and 1995, 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, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of United HealthCare
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 28, 1997
REPORT OF MANAGEMENT
The management of United HealthCare Corporation is responsible for the
integrity and objectivity of the consolidated financial statements and other
financial information contained in this annual report. The consolidated
financial statements and related information were prepared in accordance with
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
safe-guarded. Qualified personnel throughout the organization maintain and
monitor these internal accounting controls on an ongoing basis. Internal
auditors review the accounting practices, systems of internal control, and
compliance therewith.
The Audit Committee of the Board of Directors, composed entirely of
directors who are not employees of the Company, meets periodically and
privately with the Company's independent public accountants and its internal
auditors, as well as management, to review accounting, auditing, internal
control, financial reporting and other matters.
WILLIAM W. MCGUIRE, M.D.
President, Chairman and Chief Executive Officer
DAVID P. KOPPE
Chief Financial Officer
________________________________________________________________________________
38 United HealthCare - 1996 Annual Report
BUSINESS MANAGEMENT
FIELD OPERATIONS SPECIALTY SERVICES
DAVID G. DEVEREAUX WILLIAM J. BANNON
Western Operations Government Operations
FRED C. DUNLAP R. EDWARD BERGMARK, PH.D.
Florida Operations Optum
LEON KAPLAN JAMES T. BRAUN
Mid-Atlantic Operations MetraComp, ProAmerica
HENRY R. LOUBET ROBERT P. BROOK
Pacific Operations United HealthCare Administrators
MARSHALL V. ROZZI SAUL FELDMAN, D.P.A.
North Central Operations United Behavioral Health
ROBERT J. SHEEHY BRIAN S. GOULD, M.D.
Midwest Operations International Division
BLAIR R. SUELLENTROP STEPHEN H. MATHESON
Southeast Operations Developing Markets Group
R. CHANNING WHEELER DAVID J. MCLEAN, PH.D.
Northeast Operations United Resource Networks
RICHARD C. ZORETIC LOIS QUAM
Sales and Marketing AARP Division
KEVIN H. ROCHE
Applied HealthCare Informatics
MARCIA SMITH
EverCare
HEALTH PLAN CEOS
A. KELLEY ATKINSON WILLIAM E. MARTIN
Atlanta Columbia
DAVID S. BARKER FRANK R. MASCIA
Syracuse Greensboro
JOHN M. BRAASCH JANICE D. MESSEROFF
Omaha Richmond
KENNETH A. BURDICK RICHARD J. MIGLIORI, M.D.
Austin Providence
C. RICHARD COOK MICHAEL A. MUCHNICKI
Dallas Cleveland
PAUL P. COOPER, III TERRY L. NIMNICHT
Houston Denver
CHARLES EMERY DAMERON CHARLES C. PITTS
San Francisco Jackson, Miss.
THOMAS A. DAVIS LARRY A. RAMBO
Salt Lake City Milwaukee
OLGA DAZZO JOHN G. RUTHER
Lansing Chicago
ANTONIO FERNANDEZ HANITA SCHREIBER
Puerto Rico Washington, D.C.
ELWOOD FISHER, JR. GARY L. SCHULTZ
Lexington Miami
RONALD S. FRANZESE SUSAN K. SHARKEY
Muskegon Jackson, Mich.
GEORGE S. GOLDSTEIN, PH.D. G. DAVID SHAFER
Los Angeles Dayton
GLEN J. GOLEMI C. BRIAN SHIPP
Baton Rouge Nashville
W. BRADLEY GREEN JACK D. TOWSLEY, JR.
Mobile Phoenix
ALLEN E. HANSSEN VICTOR TURVEY
Charlotte St. Louis
V. ROB HERNDON, III KATHY WALSTEAD-PLUMB
Little Rock South Africa
JOHN A. JOINER JOHN A. WICKENS
Tampa Cincinnati
MICHAEL J. KOEHLER ROBERT A. YUNGK
Kalamazoo Birmingham
________________________________________________________________________________
United HealthCare - 1996 Annual Report 39
CORPORATE OFFICERS
WILLIAM W. MCGUIRE, M.D. DAVID J. LUBBEN
President, Chairman Corporate Secretary
and Chief Executive Officer and General Counsel
TRAVERS H. WILLS ELIZABETH A. MALKERSON
Chief Operating Officer Vice President and Senior
Communications Officer
DAVID P. KOPPE
Chief Financial Officer BERNARD F. MCDONAGH
Vice President,
ROBERT J. BACKES Investor Relations
Senior Vice President, and Business Research
Human Resources
THOMAS P. MCDONOUGH
JAMES G. CARLSON Executive Vice President,
Executive Vice President, Customer Services Group
Field Operations
MICHAEL A. MOONEY
JAMES A. CONTO Executive Vice President,
Senior Vice President, Underwriting and Pricing
Mergers and Acquisitions
LEE N. NEWCOMER, M.D.
DAVID A. GEORGE Chief Medical Officer
Executive Vice President,
Strategic Services Group JEANNINE M. RIVET
Executive Vice President,
SHEILA T. LEATHERMAN Health Care Services
Executive Vice President,
Public Policy and JOSEPH D. SAVONA
Government Affairs Vice President,
Internal Audit
PAUL F. LEFORT
Chief Information Officer
BOARD OF DIRECTORS
WILLIAM C. BALLARD, JR. AUDIT COMMITTEE
Of Counsel, Greenbaum,
Doll & McDonald JAMES A. JOHNSON
Louisville, Kentucky, law firm
DOUGLAS W. LEATHERDALE
RICHARD T. BURKE
Retired ELIZABETH J. MCCORMACK
JAMES A. JOHNSON GAIL R. WILENSKY
Chairman and
Chief Executive Officer
Fannie Mae COMPENSATION AND STOCK
Diversified financial services OPTION COMMITTEE
company
WILLIAM C. BALLARD, JR.
THOMAS H. KEAN
President THOMAS H. KEAN
Drew University
ROBERT L. RYAN
DOUGLAS W. LEATHERDALE
Chairman and WILLIAM G. SPEARS
Chief Executive Officer
The St. Paul Companies, Inc.
Insurance and related services EXECUTIVE COMMITTEE
ELIZABETH J. MCCORMACK
Chair WILLIAM C. BALLARD, JR.
John D. and Catherine T.
MacArthur Foundation DOUGLAS W. LEATHERDALE
WILLIAM W. MCGUIRE, M.D. WILLIAM W. MCGUIRE, M.D.
President, Chairman and
Chief Executive Officer KENNETT L. SIMMONS
United HealthCare
WILLIAM G. SPEARS
ROBERT L. RYAN
Senior Vice President and NOMINATING COMMITTEE
Chief Financial Officer
Medtronic, Inc. WILLIAM C. BALLARD, JR.
Medical devices company
DOUGLAS W. LEATHERDALE
KENNETT L. SIMMONS
Retired WILLIAM W. MCGUIRE, M.D.
WILLIAM G. SPEARS WILLIAM G. SPEARS
Chairman of the Board
Spears, Benzak, Salomon
& Farrell, Inc.
New York City-based investment
counseling and management firm
GAIL R. WILENSKY
Senior Fellow
Project HOPE
International health foundation
________________________________________________________________________________
40 United HealthCare - 1996 Annual Report
INVESTOR INFORMATION
CORPORATE HEADQUARTERS
United HealthCare Corporation
300 Opus Center
9900 Bren Road East
Minnetonka, Minnesota 55343
(612) 936-1300
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
Minneapolis, Minnesota
CORPORATE COUNSEL
Dorsey & Whitney LLP
Minneapolis, Minnesota
TRUSTEE, TRANSFER AGENT & REGISTRAR
Norwest Bank Minnesota, N.A.
Minneapolis, Minnesota
FORM 10-K
The Company has filed an annual report with the Securities and Exchange
Commission on Form 10-K. Shareholders may obtain a copy of this report,
without charge, by writing:
Investor Relations
United HealthCare
P.O. Box 1459, Route MN08-W213
Minneapolis, Minnesota 55440-1459
ANNUAL MEETING
The annual meeting of shareholders will be held at the Lutheran Brotherhood
Building, 625 Fourth Avenue South, Minneapolis, Minnesota, on Wednesday,
May 14, 1997, at 10 a.m.
STOCK LISTING
United HealthCare's common stock is traded on the New York Stock Exchange
under the symbol UNH.
[LOGO]
The following table shows the range of high and low sales prices for the
Company's common stock as reported on the New York Stock Exchange Composite
Tape for the calendar periods indicated through February 28, 1997. These
do not include commissions and/or fees associated with the purchase or sale
of this security.
High Low
- ---------------------------------------------------------------
1996
First Quarter $69.00 $56.125
Second Quarter 64.25 47.875
Third Quarter 51.125 30.00
Fourth Quarter 49.00 35.125
First Quarter 1997
through February 28, 1997 54.50 42.625
- ---------------------------------------------------------------
1995
First Quarter $50.00 $41.75
Second Quarter 46.375 34.125
Third Quarter 49.25 40.00
Fourth Quarter 65.625 47.375
- ---------------------------------------------------------------
As of February 28, 1997, the Company had 14,938 shareholders of record.
DIVIDEND POLICY
The Company's dividend policy, established by its board of directors in
August 1990, requires the board to review the Company's audited consolidated
financial statements following the end of each fiscal year and make a
determination as to the advisability of declaring a dividend on the
corporation's outstanding shares of common stock.
Shareholders of record on April 3, 1995, received an annual dividend for 1995
of $0.03 per share, and shareholders of record on April 3, 1996, received an
annual dividend for 1996 of $0.03 per share. On February 13, 1997, the
Company's board of directors approved an annual dividend for 1997 of $0.03
per share to holders of the Company's common stock. This dividend will be
paid on April 15, 1997, to shareholders of record at the close of business on
April 3, 1997.
INTERNET ADDRESS
To access information about United HealthCare, including news releases and
product and service information, visit our home page via the Internet. Our
address is www.unitedhealthcare.com.