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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-13253
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UNITED HEALTHCARE CORPORATION
State of Incorporation: Minnesota
I.R.S. Employer Identification No: 41-1321939
Principal Executive Offices:
300 Opus Center
9900 Bren Road East
Minnetonka MN, 55343
Telephone Number: (612)936-1300
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Indicate by check mark (x) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _/X/_ No _/ /_
The number of shares of Common Stock, par value $.01 per share, outstanding on
May 12, 1997 was 186,246,869.
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UNITED HEALTHCARE CORPORATION
INDEX
PAGE NUMBER
-------------
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at
March 31, 1997 and December 31, 1996.............................................................. 3
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 1997 and 1996....................................................... 4
Condensed Consolidated Statements of Cash Flows for the
three month periods ended March 31, 1997 and 1996................................................. 5
Notes to Condensed Consolidated Financial Statements................................................ 6
Report of Independent Public Accountants............................................................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................... 8
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 14
ITEM 6. EXHIBITS.................................................................................... 14
Signatures.............................................................................................. 15
2
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents.......................................................... $ 903,965 $1,036,716
Short-term investments............................................................. 446,362 610,572
Accounts receivable, net........................................................... 681,545 605,801
Assets under management............................................................ 133,519 155,090
Other.............................................................................. 364,090 331,485
------------ ------------
Total Current Assets............................................................. 2,529,481 2,739,664
Long-term Investments................................................................ 2,081,403 1,804,973
Property and Equipment, net.......................................................... 322,129 312,984
Goodwill and Other Intangible Assets, net............................................ 2,129,595 2,139,009
------------ ------------
TOTAL ASSETS......................................................................... $ 7,062,608 $6,996,630
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical costs payable.............................................................. $ 1,619,151 $1,516,111
Other policy liabilities........................................................... 312,811 334,039
Accounts payable................................................................... 130,011 73,077
Accrued expenses................................................................... 426,220 491,297
Unearned premiums.................................................................. 111,549 228,258
------------ ------------
Total Current Liabilities........................................................ 2,599,742 2,642,782
Long-term Obligations and Minority Interests......................................... 28,825 30,761
Convertible Preferred Stock.......................................................... 500,000 500,000
------------ ------------
Shareholders' Equity
Common stock, $.01 par value--500,000,000 shares authorized; 185,759,000 and
184,865,000 issued and outstanding............................................... 1,858 1,849
Additional paid-in capital......................................................... 1,176,480 1,148,039
Retained earnings.................................................................. 2,776,311 2,680,191
Net unrealized holding losses on investments available for sale, net of income tax
effects.......................................................................... (20,608) (6,992)
------------ ------------
Total Shareholders' Equity....................................................... 3,934,041 3,823,087
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................... $ 7,062,608 $6,996,630
------------ ------------
------------ ------------
See notes to condensed consolidated financial statements
3
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH
31,
--------------------------
1997 1996
------------ ------------
REVENUES
Premiums......................................................................... $ 2,444,580 $ 1,914,364
Management Services and Fees..................................................... 355,733 357,841
Investment and Other Income...................................................... 50,798 45,905
------------ ------------
Total Revenues................................................................. 2,851,111 2,318,110
------------ ------------
OPERATING EXPENSES
Medical Costs.................................................................... 2,064,020 1,585,369
Selling, General and Administrative Costs........................................ 575,074 508,034
Depreciation and Amortization.................................................... 33,607 31,101
------------ ------------
Total Operating Expenses....................................................... 2,672,701 2,124,504
------------ ------------
EARNINGS FROM OPERATIONS........................................................... 178,410 193,606
Interest Expense................................................................. (123) (251)
------------ ------------
EARNINGS BEFORE INCOME TAXES, AND MINORITY INTERESTS............................... 178,287 193,355
Provision for Income Taxes....................................................... (69,532) (73,475)
Minority Interests in Net Losses (Earnings) of Consolidated Subsidiaries......... 124 (934)
------------ ------------
NET EARNINGS....................................................................... 108,879 118,946
CONVERTIBLE PREFERRED STOCK DIVIDENDS.............................................. (7,188) (7,188)
------------ ------------
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS..................................... $ 101,691 $ 111,758
------------ ------------
------------ ------------
NET EARNINGS PER COMMON SHARE...................................................... $ 0.54 $ 0.62
------------ ------------
------------ ------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............................... 189,330 180,470
------------ ------------
------------ ------------
See notes to condensed consolidated financial statements
4
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH
31,
--------------------------
1997 1996
------------- -----------
OPERATING ACTIVITIES
Net Earnings........................................................................ $ 108,879 $ 118,946
Non-cash Items:
Depreciation and amortization..................................................... 33,607 31,101
Other............................................................................. 1,879 (2,974)
Net Change in Other Operating Items:
Accounts receivable and other current assets...................................... (108,349) (61,244)
Accounts payable.................................................................. 56,934 (7,338)
Accrued expenses.................................................................. (59,588) 48,018
Medical costs payable............................................................. 103,855 65,025
Other policy liabilities.......................................................... (472) 40,169
Unearned premiums................................................................. (116,709) (69,702)
------------- -----------
Cash Flows From Operating Activities............................................ 20,036 162,001
------------- -----------
INVESTING ACTIVITIES
Cash Assumed in Acquisition, net of cash paid and other effects..................... -- 34,788
Net Purchases of Property and Equipment............................................. (32,820) (22,015)
Purchases of Investments Available for Sale......................................... (1,009,107) (794,206)
Maturities/Sales of Investments Available for Sale.................................. 867,837 719,978
Purchases of Investments Held to Maturity........................................... (5,416) (2,085)
Maturities of Investments Held to Maturity.......................................... 13,692 1,964
Other............................................................................... 2,825 449
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Cash Flows Used for Investing Activities........................................ (162,989) (61,127)
------------- -----------
FINANCING ACTIVITIES
Net Proceeds from Stock Option Exercises............................................ 17,390 6,696
Dividends Paid on Convertible Preferred Stock....................................... (7,188) (7,188)
------------- -----------
Cash Flows From (Used for)Financing Activities.................................. 10,202 (492)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (132,751) 100,382
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................ 1,036,716 940,110
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CASH AND CASH EQUIVALENTS, END OF PERIOD.............................................. $ 903,965 $ 1,040,492
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See notes to condensed consolidated financial statements
5
UNITED HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting solely of
normal recurring adjustments, necessary for a fair presentation of the financial
results for the interim periods presented. These 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 and restructuring
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.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, footnote disclosures which would substantially duplicate the
disclosures contained in the audited financial statements of the Company have
been omitted from these interim financial statements. Although the Company
believes that the disclosures presented below are adequate to make the interim
financial statements presented not misleading, these unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
2. 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 of $5.6 million were paid on April 15, 1997 to shareholders of record
at the close of business on April 3, 1997.
3. CASH AND INVESTMENTS
As of March 31, 1997, 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
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
Cash and Cash Equivalents.................................... $ 903,965 $ -- $ -- $ 903,965
Investments Available for Sale............................... 2,497,791 2,505 (36,288) 2,464,008
Investments Held to Maturity................................. 63,757 127 (309) 63,575
------------ ----------- ----------- ------------
Total Cash and Investments................................. $ 3,465,513 $ 2,632 $ (36,597) $ 3,431,548
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
4. RECENTLY ISSUED ACCOUNTING STANDARD
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No.128, "Earnings per Share" (SFAS
No. 128), which changes the computation and disclosure of earnings per share.
SFAS No. 128 is effective for both interim and annual periods ending after
December 15, 1997 and earlier application is not permitted. Under the Company's
current capital structure, the adoption of SFAS No. 128 will not have a material
impact on the Company's determination of earnings per share.
6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United HealthCare Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
United HealthCare Corporation (a Minnesota corporation) and Subsidiaries as of
March 31, 1997, and the related condensed consolidated statements of operations
and cash flows for the three month periods ended March 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of United HealthCare
Corporation and Subsidiaries as of and for the year ended December 31, 1996 (not
presented herein), and, in our report dated February 28, 1997, we expressed an
unqualified opinion on those statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 1996, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota
May 7, 1997
7
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has completed certain transactions which affect the year-to-year
comparability of the Company's consolidated financial position and results of
operations. 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, which served at the time of acquisition
154,000 members. 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 HealthWise acquisition was accounted for as a pooling of interests;
however, the historical financial results of the Company were not restated
because the effects of this acquisition on the Company's financial statements
were not material. The PHP acquisition was accounted for using the purchase
method of accounting. Accordingly, only the post-acquisition results of
HealthWise and PHP are included in the Company's consolidated financial
statements.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements and notes thereto.
SUMMARY OF OPERATING INFORMATION (IN THOUSANDS)
Three Month Period Ended
------------------------------------------------
March 31, 1997 March 31,
-------------------------------- 1996
Percent -------------
AMOUNT OR Increase Amount or
PERCENT(a) (Decrease) Percent
--------------- -------------- -------------
Total Revenues.......................... $ 2,851,111 23% $2,318,110
Earnings From Operations................ $ 178,410 (8)% $ 193,606
--------------- ----- -------------
Medical Costs to Premium Revenue........ 84.4% 82.8%
SG&A Expenses to Total Revenues......... 20.2% 21.9%
--------------- ----- -------------
Enrollment (at period end)
Health Plan Products
Commercial.......................... 4,282(b) 25% 3,424(b)
Medicaid............................ 475 30% 365
Medicare............................ 257 57% 164
--------------- ----- -------------
Total............................. 5,014 27% 3,953
Other Network-Based Products.......... 5,533(b) (3)% 5,675(b)
Indemnity Products.................... 2,993(b) (24)% 3,950(b)
--------------- ----- -------------
Total Enrollment........................ 13,540 0% 13,578
--------------- ----- -------------
--------------- ----- -------------
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(a) Amounts include post-acquisition operating results of PHP, Inc. acquired on
March 29, 1996 and HealthWise of America, Inc. acquired on April 12, 1996.
(b) Amounts include both fully insured and self-funded enrollment. As of March
31, 1997 and 1996, self-funded enrollment was as follows: Commercial Health
Plan Products--316,000 in 1997 and 294,000 in
8
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
1996; Other Network-Based Products--4,837,000 in 1997 and 4,936,000 in 1996;
Indemnity Products--2,464,000 in 1997 and 3,091,000 in 1996.
PREMIUM REVENUES
Premium revenues of $2.44 billion in the first quarter of 1997 increased
$530 million, or 28%, compared to the first quarter of 1996. Excluding the
effects of the Company's 1996 acquisitions of HealthWise and PHP, the increase
in first quarter 1997 premium revenues over the first quarter of 1996 was 21%.
The increase in premium revenues is primarily attributable to year-over-year
same store health plan premium revenue growth of $412 million, or 29%. The
health plan premium revenue increase reflects same store enrollment growth of
23% and an average year-over-year premium rate increase on renewing commercial
groups of approximately 5%. Growth in the Company's Medicare programs also
contributed to the increase in premium revenues. Included in the total health
plan same-store enrollment growth of 23% is year-over-year same-store increases
of 48% in the Company's Medicare enrollment. Significant growth in Medicare
enrollment will impact year-over-year comparability of premium revenues. The
Medicare product generally realizes per member premium rates three to four times
higher than the average commercial premium rates because of the higher level of
medical care services utilized by this population.
The year-over-year increase in premium revenues from health plan operations
was partially offset by an expected decrease in premium revenues from fully
insured non-network-based indemnity products of $13 million. In response to
increased medical costs associated with these products, the Company instituted
rate increases averaging from 10% to 20% during 1996 and into 1997. 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.
MEDICAL COSTS
The combination of the Company's pricing strategy and its medical management
efforts are reflected in its medical care ratio (the percent of premium revenues
expensed as medical costs). The Company's commercial health plan business is
most sensitive to this strategy.
New and renewal commercial health plan premium rates are generally
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 premium rates were set accordingly.
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. The
9
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
January renewal period is significant for the Company as approximately 45% of
its existing commercial health plan enrollment renews in that month.
As 1996 progressed, the Company determined year-over-year commercial health
care cost trend had risen to the 3% to 4% range. The increasing health care cost
trend was attributed to certain cost components 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. Consequently, the commercial health plan premium
rates achieved by the Company during late 1995 and January 1996 were less than
the corresponding increase in health care costs, causing the Company's
consolidated medical care ratio to increase from 82.8% during the first quarter
of 1996 to 84.4% during the first quarter of 1997.
The Company believes that the competitive premium environment has improved
since January 1996. The Company has been able to realize rate increases in
excess of 5% in its commercial health plan business during the remainder of 1996
and into 1997. These rate increases combined with stable medical cost trends
during the first quarter of 1997 enabled the Company to maintain its
consolidated medical care ratio at 84.4%, a level relatively consistent with the
consolidated medical care ratio of 84.0% during the fourth quarter of 1996. The
modest increase in the first quarter 1997 medical care ratio is the result of
expected seasonally higher first quarter utilization, as well as changes in the
Company's product mix. The rapid growth associated with recently introduced
Medicare products in several new markets (with the proportionately higher
medical care ratios expected at this early stage of product introduction) and
the absence of Medicaid premium increases contributed to the increased medical
care ratio. The medical care ratio for the commercial health plan business
declined slightly from the fourth quarter of 1996 to the first quarter of 1997,
partially offsetting the impact of the Company's Medicare and Medicaid business.
The Company will continue to strive to establish its commercial premium
rates based on anticipated health care costs. Depending on the level of future
competition, customer acceptance of the Company's premium increases, future
health care cost trends or other factors, there can be no assurance that the
Company's recent enrollment growth trends will continue or that the Company will
be able to price its products consistent with health care cost trends.
MANAGEMENT SERVICES AND FEE REVENUES
Management services and fee revenues were $356 million in the first quarter
of 1997, comparable to revenues of $358 million reported in the first quarter of
1996. These revenues are primarily generated from self-funded indemnity products
wherein 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. Additionally, the Company generates fee revenues
from administrative services performed on behalf of managed health plans and for
services provided by the Company's specialty managed care services.
Management services and fee revenues from self-funded indemnity products has
decreased $14 million from the first quarter of 1996 as a result of declining
enrollment in this product. This decrease is fully offset by an increase in
revenues generated from the Company's other sources of management services and
fee revenues, attributable 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.
10
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs as a percent of total revenues
(the SG&A ratio) decreased from 21.9% in the first quarter of 1996 to 21.1% in
the fourth quarter of 1996, and again to 20.2% in the first quarter of 1997. The
decrease in the SG&A ratio reflects increased operating efficiencies as well as
the Company's diligence in managing these expenses. On an absolute dollar basis,
selling, general and administrative costs in the first quarter of 1997 increased
$67 million, or 13%, over the first quarter of 1996, reflecting the additional
infrastructure necessary to support the corresponding $530 million increase in
premium based business, as well as additional investment in new Medicare markets
and increased support for its growing specialty managed care service operations.
INFLATION
Although the general rate of inflation has remained relatively stable and
health care cost inflation has declined in recent years, the total national
health care cost inflation rate still exceeds the general inflation rate. 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. 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 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.
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-
11
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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, 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.
FINANCIAL CONDITION AND LIQUIDITY
The Company has continued strong financial condition and liquidity with cash
and investments of $3.43 billion at March 31, 1997, relatively unchanged from
December 31, 1996. Cash flows from operations in the first quarter of 1997 of
$20 million reflects net earnings for the quarter of $109 million, offset by
normal timing issues in operating cash payments and receipts. The Company
expects operating cash flows in the subsequent quarters of 1997 to reflect the
positive impact of the reversal of these timing items.
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 $864 million in cash and investments available for
general corporate use at March 31, 1997.
The Company continues to focus on expanding its health care programs to the
Medicare population. In connection with the introduction of a Medicare health
plan product in a particular site, significant expenditures must be incurred.
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. In addition, start-up markets generally experience a higher
medical care ratio due to the low enrollment base. 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 and to absorb the
medical risk attributable to these products.
12
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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
is expected to represent approximately $3.8 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.
CAUTIONARY STATEMENTS
A number of factors should be considered in conjunction with any discussion
of operations or results by the Company or its representatives, including any
forward-looking discussion, as well as comments contained in press releases,
presentations to securities analysts or investors, or communications by the
Company. These factors are set forth in Exhibit 99 to this Quarterly Report.
13
UNITED HEALTHCARE CORPORATION
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders held on May 14, 1997, the
Company's shareholders elected three directors and ratified the appointment of
Arthur Andersen LLP as independent public accountants.
Three directors whose terms expire in 2000 (Class II) were elected: James A.
Johnson with 149,669,494.12 votes cast for his election and 2,068,143.58 votes
withheld; Douglas W. Leatherdale with 149,677,404.12 votes cast for his election
and 2,060,233.58 votes withheld; Walter F. Mondale, with 149,743,551.135 votes
cast for his election and 1,994,086.565 votes withheld.
The appointment of Arthur Andersen LLP as independent public accountants for
the Company for the year ending December 31, 1997 was ratified with
151,284,351.51 votes cast for ratification, 110,618.830 votes cast against
ratification and 342,667.360 abstaining votes cast. There were 0 broker nonvotes
on this matter.
ITEM 6. EXHIBITS
The following exhibits are filed in response to Item 601 of Regulation S-K.
EXHIBIT NO. EXHIBIT
- ------------ ---------------------------------------------------------------------------
Exhibit 10 -- 1997 Management Incentive Plan
Exhibit 11 -- Statements Re Computation of Per Share Earnings
Exhibit 15 -- Letter Re Unaudited Interim Financial Information
Exhibit 99 -- Cautionary Statements
14
UNITED HEALTHCARE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED HEALTHCARE CORPORATION
Dated: May 14, 1997
By /s/ WILLIAM W. MCGUIRE, M.D.
--------------------------------------
William W. McGuire, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: May 14, 1997
By /s/ DAVID P. KOPPE
--------------------------------------
David P. Koppe
CHIEF FINANCIAL OFFICER
15
UNITED HEALTHCARE CORPORATION
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------------- -----
10 1997 Management Incentive Plan....................................................................
11 Statements Re Computation of Per Share Earnings...................................................
15 Letter Re Unaudited Interim Financial Information.................................................
99 Cautionary Statements.............................................................................