.
.
.
EXHIBIT 13
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
For the Year Ended December 31,
(in millions, except per share data) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
CONSOLIDATED OPERATING RESULTS
Revenues $ 25,020 $ 23,454 $ 21,122 $ 19,562 $ 17,355
-------- -------- -------- -------- --------
Earnings (Loss) From Operations $ 2,186 $ 1,566 $ 1,200 $ 943 $ (42)(3)
Net Earnings (Loss) $ 1,352 $ 913 $ 736(1) $ 568(2) $ (166)
Net Earnings (Loss) Applicable
to Common Shareholders $ 1,352 $ 913 $ 736 $ 568 $ (214)(3)
Return on Shareholders' Equity 33.0% 24.5% 19.8%(1) 14.1% na(3)
-------- -------- -------- -------- --------
Basic Net Earnings (Loss)
per Common Share $ 4.46 $ 2.92 $ 2.27 $ 1.63 $ (0.56)
Diluted Net Earnings (Loss)
per Common Share $ 4.25 $ 2.79 $ 2.19(1) $ 1.60(2) $ (0.56)(3)
-------- -------- -------- -------- --------
Common Stock Dividends per Share $ 0.03 $ 0.03 $ 0.02 $ 0.02 $ 0.02
-------- -------- -------- -------- --------
CONSOLIDATED CASH FLOWS
FROM OPERATING ACTIVITIES $ 2,423 $ 1,844 $ 1,521 $ 1,189 $ 1,071
-------- -------- -------- -------- --------
CONSOLIDATED FINANCIAL CONDITION
(As of December 31)
Cash and Investments $ 6,329 $ 5,698 $ 5,053 $ 4,719 $ 4,424
Total Assets $ 14,164 $ 12,486 $ 11,053 $ 10,273 $ 9,675
Debt $ 1,761 $ 1,584 $ 1,209 $ 991 $ 708
Shareholders' Equity $ 4,428 $ 3,891 $ 3,688 $ 3,863 $ 4,038
Debt-to-Total-Capital Ratio 28.5% 28.9% 24.7% 20.4% 14.9%
</Table>
na - not applicable
Financial Highlights and Results of Operations should be read together with the
accompanying Consolidated Financial Statements and Notes.
(1) 2000 results include a $14 million net permanent tax benefit related to the
contribution of UnitedHealth Capital investments to the United Health Foundation
and a $27 million gain ($17 million after tax) related to a separate disposition
of UnitedHealth Capital investments. Excluding these items, 2000 net earnings
and diluted net earnings per common share were $705 million and $2.10 per share,
and return on shareholders' equity was 19.0%.
(2) 1999 results include a net permanent tax benefit primarily related to the
contribution of UnitedHealth Capital investments to the United Health
Foundation. Excluding this benefit, net earnings and diluted net earnings per
common share were $563 million and $1.59 per share.
(3) Excluding the operational realignment and other charges of $725 million,
$175 million of charges related to contract losses associated with certain
Medicare markets and other increases to commercial and Medicare medical costs
payable estimates, and the $20 million convertible preferred stock redemption
premium from 1998 results, earnings from operations and net earnings applicable
to common shareholders would have been $858 million and $509 million, or $1.31
diluted net earnings per common share, and return on shareholders' equity would
have been 11.9%.
19
UnitedHealth Group
RESULTS OF OPERATIONS
2002 FINANCIAL PERFORMANCE HIGHLIGHTS
2002 was a record year for UnitedHealth Group as the company continued strong
diversified growth across its business segments and realized diluted net
earnings per common share of $4.25, up 52% over 2001 on a reported basis and up
38% on a FAS No. 142 comparable reporting basis(1). Other financial performance
highlights include:
> Revenues of $25.0 billion, a 7% increase over 2001.
> Operating earnings of $2.2 billion, up 40% over 2001 on a reported basis and
up 32% on a FAS No. 142 comparable reporting basis.
> Net earnings of nearly $1.4 billion, a 48% increase over 2001 on a reported
basis and a 35% increase on a FAS No. 142 comparable reporting basis.
> Operating cash flows of more than $2.4 billion, an increase of 31% over 2001.
> Consolidated operating margin of 8.7%, up from 6.7% in 2001 on a reported
basis and up from 7.1% on a FAS No. 142 comparable reporting basis, driven by
operational and productivity improvements, improved margins on risk-based
products, and a product mix shift from risk-based products to higher-margin,
fee-based products.
> Return on shareholders' equity of 33.0%, up from 24.5% in 2001 on a reported
basis and up from 26.8% on a FAS No. 142 comparable reporting basis.
2002 RESULTS COMPARED TO 2001 RESULTS
CONSOLIDATED FINANCIAL RESULTS
Revenues
Revenues are comprised of premium revenues from risk-based products; service
revenues, which primarily include fees for management, administrative and
consulting services; and investment and other income.
Premium revenues are derived from risk-based arrangements in which the
premium is fixed, typically for a one-year period, and we assume the economic
risk of funding health care services and related administrative costs. Service
revenues consist primarily of fees derived from services performed for customers
that self-insure the medical costs of their employees and their dependents. For
both premium risk-based and fee-based customer arrangements, we provide
coordination and facilitation of medical services, transaction processing,
customer, consumer and care provider services, and access to contracted networks
of physicians, hospitals and other health care professionals.
Consolidated revenues increased by approximately $1.6 billion, or 7%, in
2002 to $25.0 billion. Strong growth across our business segments was partially
offset by the impact of targeted withdrawals from unprofitable risk-based
arrangements with customers using multiple health benefit carriers, and
withdrawals and benefit design changes in our Medicare+Choice product offering
in certain markets.
(1) On January 1, 2002, UnitedHealth Group adopted Statement of Financial
Accounting Standards (FAS) No. 142, "Goodwill and Other Intangible Assets,"
which eliminated the amortization of goodwill. To enhance analysis, the FAS No.
142 comparable reporting basis excludes $93 million ($89 million after tax
effect) of goodwill amortization from 2001 results.
{20}
UnitedHealth Group
Following is a discussion of 2002 consolidated revenue trends for each revenue
component.
Premium Revenues Consolidated premium revenues in 2002 totaled $21.9 billion, an
increase of $1.2 billion, or 6%, compared with 2001.
Premium revenues from UnitedHealthcare's commercial risk-based products
increased by approximately $1.2 billion, or 10%, to $12.9 billion in 2002.
Average net premium rate increases exceeded 13% on UnitedHealthcare's renewing
commercial risk-based business. This increase was partially offset by the
effects of targeted withdrawals from unprofitable risk-based arrangements with
customers using multiple health benefit carriers and a shift in product mix from
risk-based to fee-based products. During 2002, the number of individuals served
by UnitedHealthcare commercial risk-based products decreased by 180,000, or 3%.
Premium revenues from state-sponsored Medicaid and federally sponsored
Medicare+Choice programs decreased by $400 million, or 11%, to $3.2 billion in
2002. Premium revenues from Medicare+Choice programs decreased by $850 million
to $1.6 billion because of planned withdrawals and benefit design changes in
certain markets, undertaken in response to insufficient Medicare program
reimbursement rates. Premium revenues from Medicaid programs increased by $450
million to $1.6 billion in 2002. More than half of this increase, $240 million,
related to the acquisition of AmeriChoice on September 30, 2002.
The balance of premium revenue growth in 2002 included a $240 million
increase in Health Care Services' premium revenues driven by an increase in the
number of individuals served by both Ovations' Medicare supplement products
provided to AARP members and by its Evercare business. In addition, Specialized
Care Services realized a $140 million increase in premium revenues in 2002.
Service Revenues Service revenues in 2002 totaled $2.9 billion, an increase of
$404 million, or 16%, over 2001. The increase in service revenues was driven
primarily by aggregate growth of 11% in individuals served by Uniprise and
UnitedHealthcare under fee-based arrangements. Uniprise and UnitedHealthcare
service revenues grew by an aggregate of $230 million during 2002. Additionally,
revenues from Ovations' Pharmacy Services business, established in June 2001,
increased by approximately $110 million as it was in operation for the full year
in 2002.
Investment and Other Income Investment and other income in 2002 totaled $220
million, a decrease of $61 million, or 22%, from 2001. Interest income decreased
by $32 million due to lower interest yields on investments in 2002 compared with
2001, partially offset by the impact of increased levels of cash and
fixed-income investments. Net realized capital losses in 2002 were $18 million,
compared to net realized capital gains of $11 million in 2001. The 2002 net
realized capital losses were mainly due to sales of investments in debt
securities of certain companies in the telecommunications industry and
impairments recorded on certain UnitedHealth Capital equity investments. The
losses were partially offset by capital gains on sales of investments in other
debt securities.
{21}
UnitedHealth Group
Medical Costs
The combination of pricing, benefit designs, consumer health care utilization
and comprehensive care facilitation efforts is reflected in the medical care
ratio (medical costs as a percentage of premium revenues).
The consolidated medical care ratio decreased from 85.3% in 2001 to 83.0%
in 2002. Excluding the AARP business(1), the medical care ratio decreased by 250
basis points from 83.9% in 2001 to 81.4% in 2002. Approximately 90 basis points
of the medical care ratio decrease resulted from targeted withdrawals from
unprofitable risk-based arrangements with commercial customers using multiple
health benefit carriers and a shift in commercial customer mix, with a larger
percentage of premium revenues derived from our small business customers. These
employer groups typically have a lower medical care ratio, but carry higher
operating costs than larger customers. Additionally, the impact of withdrawals
and benefit design changes in certain Medicare markets pertaining to our
Medicare+Choice offering improved the medical care ratio by approximately 90
basis points. The balance of the decrease in the medical care ratio was
primarily driven by changes in product and business mix, care management
activities and net premium rate increases that exceeded overall medical benefit
cost increases.
On an absolute dollar basis, consolidated medical costs increased by $548
million, or 3%, over 2001. This increase principally resulted from a rise in
medical costs of approximately 12%, or $2.1 billion, driven by the combination
of medical cost inflation and increased health care consumption. Partially
offsetting this increase, medical costs decreased by approximately $1.4 billion
resulting from net reductions in the number of people receiving benefits under
our Medicare and commercial risk-based products. The balance of the decrease in
medical costs was driven primarily by changes in benefit designs in certain
Medicare markets.
Operating Costs
The operating cost ratio (operating costs as a percentage of total revenues) was
17.5% in 2002, compared with 17.0% in 2001. Changes in productivity and revenue
mix affect the operating cost ratio. Our fee-based products and services, which
are growing at a faster rate than our premium-based products, have much higher
operating cost ratios than our premium-based products. In addition, our Medicare
business, which has relatively low operating costs as a percentage of revenues,
has decreased in size relative to our overall operations. Using a revenue mix
comparable to 2001, the 2002 operating cost ratio would have decreased by
approximately 20 basis points, representing the equivalent of a $50 million
year-over-year reduction in operating costs. This decrease was principally
driven by operating cost efficiencies derived from process improvements,
technology deployment and cost management initiatives, primarily in the form of
reduced labor and occupancy costs supporting our transaction processing and
customer service, billing and enrollment functions. The impact of these
efficiencies was partially offset by the incremental costs associated with the
development, deployment, adoption and maintenance of new technology releases as
well as increased business self-insurance costs during 2002.
On an absolute dollar basis, operating costs increased by $408 million, or
10%, over 2001. This increase was driven by a 7% increase in total individuals
served by Health Care Services and Uniprise during 2002, general operating cost
inflation and the additional costs associated with acquired businesses.
(1) Premium revenues and medical costs from the AARP business were $3.7 billion
and $3.4 billion, respectively, in 2002 and $3.6 billion and $3.3 billion,
respectively, in 2001. Underwriting gains or losses related to the AARP business
are recorded as an increase or decrease to a rate stabilization fund as
described in Note 4 to the Consolidated Financial Statements.
{22}
UnitedHealth Group
Depreciation and Amortization
Depreciation and amortization was $255 million in 2002 and $265 million in 2001.
This decrease was due to $93 million of amortization expense in 2001 recorded
for goodwill, which is no longer amortized in 2002 pursuant to FAS No. 142. This
decrease was largely offset by $83 million of additional depreciation and
amortization resulting from higher levels of equipment and capitalized software
as a result of technology enhancements and business growth.
Income Taxes
Our effective income tax rate was 35.5% in 2002 and 38.0% in 2001. The decrease
was primarily due to the impact of non-tax-deductible goodwill amortization that
is no longer amortized for financial reporting purposes, as required by FAS No.
142. Assuming FAS No. 142 was effective during 2001, the effective tax rate
would have been approximately 36.0% during 2001.
BUSINESS SEGMENTS
The following summarizes the operating results of our business segments for the
years ended December 31 (in millions):
<Table>
<Caption>
REVENUES Percent
2002 2001 Change
------------ ------------ ------------
Health Care Services $ 21,644 $ 20,494 6%
Uniprise 2,713 2,462 10%
Specialized Care Services 1,509 1,254 20%
Ingenix 491 447 10%
Corporate and Eliminations (1,337) (1,203) nm
------------ ------------ ------------
Consolidated Revenues $ 25,020 $ 23,454 7%
------------ ------------ ------------
</Table>
<Table>
<Caption>
EARNINGS FROM OPERATIONS
2001 Percent
2002 Reported Adjusted(1) Change(1)
---------- ---------- ----------- ----------
Health Care Services $ 1,336 $ 944 $ 982 36%
Uniprise 509 374 402 27%
Specialized Care Services 286 214 220 30%
Ingenix 55 48 69 (20%)
---------- ---------- ---------- ----------
Total Operating Segments 2,186 1,580 1,673 31%
Corporate -- (14) (14) nm
---------- ---------- ---------- ----------
Consolidated Earnings From Operations $ 2,186 $ 1,566 $ 1,659 32%
---------- ---------- ---------- ----------
</Table>
nm -- not meaningful
(1) Adjusted to exclude $93 million of amortization expense associated with
goodwill. Pursuant to FAS No. 142, which we adopted effective January 1, 2002,
goodwill is no longer amortized. Where applicable, the percent change is
calculated comparing the 2002 results to the 2001 "Adjusted" results.
{23}
UnitedHealth Group
Health Care Services
The Health Care Services segment consists of the UnitedHealthcare, Ovations and
AmeriChoice businesses. UnitedHealthcare coordinates network-based health and
well-being services on behalf of local employers and consumers. Ovations
delivers health and well-being services for Americans age 50 and older.
AmeriChoice facilitates and manages health care services for state Medicaid
programs and their beneficiaries.
Health Care Services posted record revenues of $21.6 billion in 2002, an
increase of approximately $1.2 billion, or 6%, over 2001. The increase in
revenues primarily resulted from an increase of approximately $1.2 billion in
UnitedHealthcare's commercial premium revenues. This was driven by average net
premium rate increases in excess of 13% on renewing commercial risk-based
business, partially offset by the effects of targeted withdrawals from
unprofitable risk-based arrangements with commercial customers using multiple
health benefit carriers. Premium revenues from Medicaid programs increased by
$450 million in 2002, of which $240 million related to the acquisition of
AmeriChoice on September 30, 2002. Offsetting these increases, Medicare+Choice
premium revenues decreased by $850 million as a result of planned withdrawals
and benefit design changes in certain markets in response to insufficient
Medicare program reimbursement rates. The balance of Health Care Services'
revenue growth in 2002 includes a $240 million increase in Ovations' revenues
driven by an increase in individuals served by both its Medicare supplement
products provided to AARP members and its Evercare business, and a $140 million
increase in revenues from its Pharmacy Services business, established in June
2001.
Health Care Services realized earnings from operations of $1.3 billion in
2002, an increase of $392 million, or 42%, over 2001 on a reported basis, and an
increase of $354 million, or 36%, over 2001 on a FAS No. 142 comparable
reporting basis. This increase primarily resulted from improved gross margins on
UnitedHealthcare's commercial risk-based products, revenue growth and operating
cost efficiencies derived from process improvements, technology deployment and
cost management initiatives, principally in the form of reduced labor and
occupancy costs supporting transaction processing and customer service, billing
and enrollment functions. Health Care Services' operating margin increased to
6.2% in 2002 from 4.6% on a reported basis and from 4.8% on a FAS No. 142
comparable reporting basis in 2001. This increase was driven by a combination of
an improved medical care ratio, productivity improvements and a shift in product
mix from risk-based products to higher-margin, fee-based products.
UnitedHealthcare's commercial medical care ratio decreased by 230 basis
points from 84.1% in 2001 to 81.8% in 2002. Approximately 130 basis points of
the commercial medical care ratio decrease resulted from targeted withdrawals
from unprofitable risk-based arrangements with commercial customers using
multiple carriers and a shift in commercial customer mix, with a larger
percentage of premium revenues derived from small business customers. These
employer groups typically have a lower medical care ratio, but carry higher
operating costs than larger customers. The balance of the decrease in the
commercial medical care ratio was primarily driven by changes in product mix,
care management activities and net premium rate increases that exceeded overall
medical benefit cost increases.
{24}
UnitedHealth Group
The number of individuals served by UnitedHealthcare's commercial products
increased by 230,000, or 3%, during 2002. This included an increase of 410,000,
or 18%, in the number of individuals served with fee-based products, driven by
new customer relationships and customers converting from risk-based products
during 2002. This increase was partially offset by a decrease of 180,000, or 3%,
in individuals served by risk-based products, driven by customers converting to
self-funded, fee-based arrangements and UnitedHealthcare's targeted withdrawal
of risk-based product offerings from unprofitable arrangements with customers
using multiple health benefit carriers.
UnitedHealthcare's year-over-year Medicare enrollment decreased 35% because
of market withdrawals and benefit design changes. These actions were taken in
response to insufficient Medicare program reimbursement rates in specific
counties and were intended to preserve profit margins and better position the
Medicare program for long-term success. UnitedHealthcare will continue to
evaluate Medicare markets and, where necessary, take actions that may result in
further withdrawals of Medicare product offerings or reductions in enrollment,
when and as permitted by its contracts with CMS (Centers for Medicare and
Medicaid Services).
UnitedHealthcare's year-over-year Medicaid enrollment increased by 390,000,
largely due to the acquisition of AmeriChoice on September 30, 2002, which
served approximately 360,000 individuals as of the acquisition date.
The following table summarizes individuals served, by major market segment
and funding arrangement, as of December 31(1):
<Table>
<Caption>
(in thousands) 2002 2001
------------ ------------
Commercial
Risk-Based 5,070 5,250
Fee-Based 2,715 2,305
------------ ------------
Total Commercial 7,785 7,555
------------ ------------
Medicare 225 345
Medicaid 1,030 640
------------ ------------
Total Government Programs 1,255 985
------------ ------------
Total 9,040 8,540
------------ ------------
</Table>
(1) Excludes individuals served by Ovations' Medicare supplement products
provided to AARP members.
Uniprise
Uniprise provides health and well-being access and services,
business-to-business transaction processing services, consumer connectivity and
technology support services to large employers and health plans. Uniprise
revenues were $2.7 billion in 2002, up $251 million, or 10%, over 2001. This
increase was driven primarily by an 8% increase in Uniprise's customer base.
Uniprise served 8.6 million individuals as of December 31, 2002, and 8.0 million
individuals as of December 31, 2001.
Uniprise earnings from operations grew by $135 million, or 36%, over 2001
on a reported basis, and by $107 million, or 27%, over 2001 on a FAS No. 142
comparable reporting basis. Operating margin improved to 18.8% in 2002 from
15.2% on a reported basis and from 16.3% on a FAS No. 142 comparable reporting
basis in 2001. Uniprise has expanded its operating margin through operating cost
efficiencies derived from process improvements, technology deployment and cost
management initiatives, primarily in the form of reduced labor and occupancy
costs supporting its transaction processing and customer service, billing and
enrollment functions. Additionally, Uniprise's infrastructure can be scaled
efficiently, allowing its business to grow revenues at a proportionately higher
rate than the associated growth in operating expenses.
{25}
UnitedHealth Group
Specialized Care Services
Specialized Care Services is a portfolio of health and well-being businesses,
each serving a specialized market need with a unique blend of benefits,
networks, services and resources. Specialized Care Services had revenues of $1.5
billion in 2002, an increase of $255 million, or 20%, over 2001. This increase
was principally driven by $140 million of revenue growth from Spectera, its
vision care benefits business acquired in October 2001, and an increase in the
number of individuals served by United Behavioral Health, its mental health
benefits business, and Dental Benefit Providers, its dental services business.
Earnings from operations reached $286 million in 2002, an increase over
2001 of $72 million, or 34%, on a reported basis and $66 million, or 30%, on a
FAS No. 142 comparable reporting basis. Specialized Care Services' operating
margin increased to 19.0% in 2002, up from 17.1% on a reported basis and from
17.5% on a FAS No. 142 comparable reporting basis in 2001. This increase was
driven by operational and productivity improvements, partially offset by a
shifting business mix toward higher revenue, lower margin products. With the
continuing growth of this segment, we have begun consolidating production and
service operations to a segment-wide service and production infrastructure to
improve service quality and consistency and enhance productivity and efficiency.
Ingenix
Ingenix is an international leader in the field of health care data analysis and
application, serving pharmaceutical companies, health insurers and other payers,
health care providers, large employers and governments. Revenues were $491
million in 2002, an increase of $44 million, or 10%, over 2001. This was the
result of strong new business growth in the health information business and
revenues from acquired businesses, partially offset by reduced revenues in the
pharmaceutical services business.
Earnings from operations were $55 million, up $7 million, or 15%, over 2001
on a reported basis, and down $14 million, or 20%, from 2001 on a FAS No. 142
comparable reporting basis. Operating margin was 11.2% in 2002, up from 10.7% in
2001 on a reported basis, and down from 15.4% on a FAS No. 142 comparable
reporting basis. The reduction in earnings from operations and operating margin
on a FAS No. 142 comparable reporting basis was due to cancellations and delays
of certain clinical research trials by pharmaceutical clients, which have been
affected by weak industry-specific conditions. This reduction was partially
offset by strong business growth and slightly expanding margins in the health
information business.
Corporate
Corporate includes costs for certain company-wide process improvement
initiatives, net expenses from charitable contributions to the United Health
Foundation and eliminations of intersegment transactions. The decrease in
corporate expenses of $14 million from 2001 to 2002 reflects the completion
during 2001 of certain company-wide process improvement initiatives.
{26}
UnitedHealth Group
2001 RESULTS COMPARED TO 2000 RESULTS
CONSOLIDATED FINANCIAL RESULTS
Revenues
Consolidated revenues increased by 11% in 2001 to $23.5 billion. Strong and
balanced growth across all business segments was partially offset by the impact
of planned exits in 2000 from UnitedHealthcare's commercial businesses in the
Pacific Coast region, the withdrawal of its Medicare+Choice product offering
from targeted counties and the closure of Uniprise's Medicare fiscal
intermediary operations. Following is a discussion of 2001 consolidated revenue
trends for each revenue component.
Premium Revenues Consolidated premium revenues in 2001 totaled $20.7 billion, an
increase of $1.8 billion, or 9%, compared with 2000. This increase was primarily
driven by average net premium rate increases in excess of 13% on
UnitedHealthcare's renewing commercial risk-based business, partially offset by
the impact of business and market exits.
Service Revenues Service revenues in 2001 totaled $2.5 billion, an increase of
$526 million, or 27%, over 2000. The overall increase in service revenues was
primarily the result of 20% growth in Uniprise's customer base, growth in
UnitedHealthcare's fee-based business, and establishment of the Ovations
Pharmacy Services business in June 2001.
Investment and Other Income Investment and other income in 2001 totaled $281
million, an increase of $49 million over 2000. Lower interest yields on
investments in 2001 compared with 2000 were substantially offset by the impact
of increased levels of cash and fixed-income investments in 2001. Net realized
capital gains in 2001 were $11 million, compared to net realized capital losses
of $34 million in 2000.
Medical Costs
The consolidated medical care ratio decreased from 85.4% in 2000 to 85.3% in
2001. Excluding the AARP business, the medical care ratio was 83.9% in both 2000
and 2001, as net premium rate increases were generally well matched with
increases in medical benefit costs.
On an absolute dollar basis, medical costs increased $1.5 billion, or 9%,
over 2000. The increase was driven by medical cost inflation, increased health
care consumption patterns, benefit changes and product mix changes.
{27}
UnitedHealth Group
OPERATING COSTS
The operating cost ratio was 17.0% in 2001, compared with 16.7% in 2000. Changes
in productivity and revenue mix affect the operating cost ratio. For many of our
faster-growing businesses, most direct costs of revenue are included in
operating costs, not medical costs. Using a revenue mix comparable to 2000, the
2001 operating cost ratio would have decreased by approximately 70 basis points.
This decrease was principally driven by operating cost efficiencies derived from
process improvements, technology deployment and cost management initiatives,
primarily in the form of reduced labor and occupancy costs supporting our
transaction processing and customer service, billing and enrollment functions.
Additionally, because our infrastructure can be scaled efficiently, we have been
able to grow revenues at a proportionately higher rate than associated expenses.
On an absolute dollar basis, operating costs increased by $459 million, or
13%, over 2000. This increase reflected additional costs to support product and
technology development initiatives, general operating cost inflation and the 10%
increase in individuals served by Health Care Services and Uniprise in 2001.
These increases were partially offset by productivity and technology
improvements discussed above.
Depreciation and Amortization
Depreciation and amortization was $265 million in 2001 and $247 million in 2000.
This increase resulted primarily from higher levels of capital expenditures to
support business growth and technology enhancements, as well as the amortization
of goodwill and other intangible assets related to acquisitions.
Income Taxes
The 2000 income tax provision includes nonrecurring tax benefits primarily
related to the contribution of UnitedHealth Capital investments to the United
Health Foundation. Excluding nonrecurring tax benefits, our effective income tax
rate was 38.0% in 2001 and 37.5% in 2000.
BUSINESS SEGMENTS
The following summarizes the operating results of our business segments for the
years ended December 31 (in millions):
<Table>
<Caption>
REVENUES Percent
2001 2000 Change
------------ ------------ ------------
Health Care Services $ 20,494 $ 18,696 10%
Uniprise 2,462 2,140 15%
Specialized Care Services 1,254 974 29%
Ingenix 447 375 19%
Corporate and Eliminations (1,203) (1,063) nm
------------ ------------ ------------
Consolidated Revenues $ 23,454 $ 21,122 11%
------------ ------------ ------------
</Table>
<Table>
<Caption>
EARNINGS FROM OPERATIONS Percent
2001 2000 Change
------------ ------------ ------------
Health Care Services $ 944 $ 739 28%
Uniprise 374 289 29%
Specialized Care Services 214 174 23%
Ingenix 48 32 50%
------------ ------------ ------------
Total Operating Segments 1,580 1,234 28%
Corporate (14) (34) nm
------------ ------------ ------------
Consolidated Earnings From Operations $ 1,566 $ 1,200 31%
------------ ------------ ------------
</Table>
nm -- not meaningful
{28}
UnitedHealth Group
Health Care Services
The Health Care Services segment posted revenues of $20.5 billion in 2001, an
increase of $1.8 billion, or 10%, over 2000. This increase resulted from average
net premium rate increases in excess of 13% on UnitedHealthcare's renewing
commercial risk-based business, partially offset by the impact of
UnitedHealthcare's targeted exits in 2000 from its commercial businesses in the
Pacific Coast region and the withdrawal of its Medicare+Choice product offering
from certain counties.
Health Care Services had earnings from operations of $944 million in 2001,
an increase of $205 million, or 28%, over 2000. This increase resulted from
revenue growth and stable gross margins on UnitedHealthcare's commercial
business and operating cost efficiencies from process improvement, technology
deployment and cost management initiatives. Health Care Services' operating
margin increased to 4.6% in 2001 from 4.0% in 2000, driven by the productivity
improvements described above and a shift in product mix from risk-based products
to higher-margin, fee-based products.
UnitedHealthcare's commercial medical care ratio remained flat compared
with 2000 at 84.1%, as net premium rate increases were generally well matched
with increases in overall medical benefit costs.
The number of individuals served by UnitedHealthcare commercial products
increased by 135,000, or 2%, during 2001. This included an increase of 380,000
in the number of individuals served with fee-based products as a result of
customers converting from risk-based products and new customer relationships
established in 2001. This increase was partially offset by a 245,000 decrease in
individuals served by risk-based products, driven by customers converting to
self-funded, fee-based arrangements and UnitedHealthcare's targeted withdrawal
of its risk-based product offerings from unprofitable arrangements with
customers using multiple health benefit carriers.
UnitedHealthcare's year-over-year Medicare enrollment decreased by 15% in
2001 because of targeted market withdrawals and benefit design changes in
response to insufficient Medicare program reimbursement rates.
The following table summarizes individuals served, by major market segment
and funding arrangement, as of December 31(1):
<Table>
<Caption>
(in thousands) 2001 2000
------------ ------------
Commercial
Risk-Based 5,250 5,495
Fee-Based 2,305 1,925
------------ ------------
Total Commercial 7,555 7,420
------------ ------------
Medicare 345 405
Medicaid 640 550
------------ ------------
Total Government Programs 985 955
------------ ------------
Total 8,540 8,375
------------ ------------
</Table>
(1) Excludes individuals served by Ovations' Medicare supplement products
provided to AARP members.
Uniprise
Uniprise revenues were $2.5 billion in 2001, up $322 million, or 15%, over 2000.
This increase was driven primarily by continued growth in Uniprise's customer
base, which had a 20% increase in the number of individuals served. Uniprise
served 8.0 million individuals as of December 31, 2001, and 6.7 million
individuals as of December 31, 2000. Uniprise's earnings from operations grew by
$85 million, or 29%, over 2000 as a result of the increased revenues. The
operating margin improved to 15.2% in 2001 from 13.5% in 2000. As revenues have
increased, Uniprise has expanded its operating margin by improving productivity
through process improvement initiatives and deployment of technology.
Additionally, Uniprise's infrastructure can be scaled efficiently, allowing its
business to grow revenues at a proportionately higher rate than the associated
growth in operating expenses.
{29}
UnitedHealth Group
Specialized Care Services
Specialized Care Services had revenues of $1.3 billion in 2001, an increase of
$280 million, or 29%, over 2000. This increase was driven primarily by an
increase in the number of individuals served by United Behavioral Health, and an
increase in specialized services purchased by customers of Uniprise and
UnitedHealthcare. Earnings from operations reached $214 million in 2001, an
increase of 23% over 2000. Specialized Care Services' operating margin decreased
from 17.9% in 2000 to 17.1% in 2001. The decrease in operating margin was the
result of a shifting product mix, with a larger percentage of revenues coming
from businesses with higher revenues per individual served and lower percentage
operating margins.
Ingenix
Revenues were $447 million in 2001, an increase of $72 million, or 19%, over
2000. This increase reflected growth in both the health information and
pharmaceutical services businesses. Earnings from operations were $48 million,
up 50% over 2000. Operating margin increased to 10.7% in 2001 from 8.5% in 2000,
principally as a result of revenue growth and improved productivity.
Corporate
The decrease of $20 million in 2001 corporate expenses reflected lower
company-wide process improvement expenses in 2001 compared to 2000, as certain
process improvement initiatives were completed in 2001.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 2002
LIQUIDITY
We manage our cash, investments and capital structure so we are able to meet the
short- and long-term obligations of our business while maintaining financial
flexibility and liquidity. We forecast, analyze and monitor our cash flows to
enable prudent investment and financing within the confines of our financial
strategy, such as our self-imposed limit of 30% on our debt-to-total-capital
ratio (calculated as the sum of commercial paper and debt divided by the sum of
commercial paper, debt and shareholders' equity).
A majority of the assets held by our regulated subsidiaries are in the form
of cash, cash equivalents and investments. After considering expected cash flows
from operating activities, we generally invest monies of regulated subsidiaries
that exceed our near-term obligations in longer term, investment grade
marketable debt securities, to improve our overall investment return. Factors we
consider in making these investment decisions include our board of directors'
approved investment policy, regulatory limitations, return objectives, tax
implications, risk tolerance and maturity dates. Our long-term investments are
also available for sale to meet short-term liquidity and other needs. Monies in
excess of the capital needs of our regulated entities are paid to their
non-regulated parent companies, typically in the form of dividends, for general
corporate use, when and as permitted by applicable regulations.
Our non-regulated businesses also generate significant cash from
operations. Also, we issue long-term debt and commercial paper with staggered
maturity dates and have available credit facilities. These additional sources of
liquidity allow us to maintain further operating and financial flexibility.
Because of this flexibility, we typically maintain low cash and investment
balances in our non-regulated companies. Cash in these entities is generally
used to reinvest in our businesses in the form of capital expenditures, to
expand the depth and breadth of our services through business acquisitions, and
to repurchase shares of our common stock, depending on market conditions.
{30}
UnitedHealth Group
Cash generated from operating activities, our primary source of liquidity,
is principally from net earnings, excluding depreciation and amortization. As a
result, any future decline in our profitability may have a negative impact on
our liquidity. The availability of financing in the form of debt or equity is
influenced by many factors, including our profitability, operating cash flows,
debt levels, debt ratings, contractual restrictions, regulatory requirements and
market conditions. We believe that our strategies and actions toward maintaining
financial flexibility mitigate much of this risk.
CASH AND INVESTMENTS
During 2002, we generated cash from operations of more than $2.4 billion, an
increase of $579 million, or 31%, over 2001. The increase in operating cash
flows primarily resulted from an increase of $429 million in net earnings
excluding depreciation and amortization expense.
We maintained a strong financial condition and liquidity position, with
cash and investments of $6.3 billion at December 31, 2002. Total cash and
investments increased by $631 million since December 31, 2001, primarily
resulting from strong cash flows from operations and acquisitions requiring
maintenance of incremental regulated capital, partially offset by common stock
repurchases, capital expenditures and business acquisitions.
As further described under "Regulatory Capital and Dividend Restrictions,"
many of our subsidiaries are subject to various government regulations that
restrict the timing and amount of dividends and other distributions that may be
paid to their parent companies. At December 31, 2002, approximately $280 million
of our $6.3 billion of cash and investments was held by non-regulated
subsidiaries. Of this amount, approximately $130 million was available for
general corporate use, including acquisitions and share repurchases. The
remaining $150 million consists primarily of public and non-public equity
securities held by UnitedHealth Capital, our investment capital business.
FINANCING AND INVESTING ACTIVITIES
We use commercial paper and debt to maintain adequate operating and financial
flexibility. As of December 31, 2002 and 2001, we had commercial paper and debt
outstanding of $1.8 billion and $1.6 billion, respectively. Our
debt-to-total-capital ratio was 28.5% and 28.9% as of December 31, 2002 and
2001, respectively. We expect to maintain our debt-to-total-capital ratio
between 25% and 30%. Within this range, we believe our cost of capital and
return on shareholders' equity are optimized, while maintaining a prudent level
of leverage and liquidity.
In January 2002, we issued $400 million of 5.2% fixed-rate notes due
January 2007. We used proceeds from this borrowing to repay commercial paper and
for general corporate purposes, including working capital, capital expenditures,
business acquisitions and share repurchases. When we issued these notes, we
entered into short-term LIBOR-based (London Interbank Offered Rate) variable
interest rate swap agreements for $200 million of the above notes. At December
31, 2002, the rate used to accrue interest expense on these swaps was
approximately 1.4%.
As of December 31, 2002, we had outstanding commercial paper of $461
million and current maturities of long-term debt of $350 million. We intend to
issue new term debt during the first half of 2003, subject to favorable market
conditions, and commercial paper, as necessary during 2003, to finance the
repayment of these obligations. As noted below, we believe that we have
sufficient flexibility to obtain additional financing in the public or private
markets.
{31}
UnitedHealth Group
We have credit arrangements for $900 million that support our commercial
paper program. These credit arrangements include a $450 million revolving
facility that expires in July 2005, and a $450 million, 364-day facility that
expires in July 2003. We also have the capacity to issue approximately $200
million of extendible commercial notes (ECNs). As of December 31, 2002 and 2001,
we had no amounts outstanding under our credit facilities or ECNs.
Our debt arrangements and credit facilities contain various covenants, the
most restrictive of which require us to maintain a debt-to-total-capital ratio
below 45% and to exceed specified minimum interest coverage levels. We are in
compliance with the requirements of all debt covenants.
Our senior debt is rated "A" by Standard & Poor's (S&P) and Fitch, and "A3"
by Moody's. Our commercial paper and ECN programs are rated "A-1" by S&P, "F-1"
by Fitch, and "P-2" by Moody's. Consistent with our intention of maintaining our
senior debt ratings in the "A" range, we intend to maintain our
debt-to-total-capital ratio at 30% or less. A significant downgrade in our debt
and commercial paper ratings would likely adversely affect our borrowing
capacity and costs.
The remaining issuing capacity of all securities covered by our S-3 shelf
registration statement (for common stock, preferred stock, debt securities and
other securities) is $450 million. We may publicly offer such securities from
time to time at prices and terms to be determined at the time of offering. We
also have an S-4 acquisition shelf registration statement under which we have
remaining issuing capacity of approximately 5.6 million shares of our common
stock in connection with acquisition activities.
During 2002 and 2001, we invested $419 million and $425 million,
respectively, in property, equipment, capitalized software and information
technology hardware. These investments were made to support business growth,
operational and cost efficiencies, service improvements and technology
enhancements.
Effective September 30, 2002, we acquired AmeriChoice Corporation
(AmeriChoice), a leading organization engaged in facilitating health care
benefits and services for Medicaid beneficiaries in the states of New York, New
Jersey and Pennsylvania. We are integrating our existing Medicaid business with
AmeriChoice, creating efficiencies from the consolidation of health care
provider networks, technology platforms and operations. We issued 5.3 million
shares of our common stock with a fair value of approximately $480 million in
exchange for 93.5% of the outstanding AmeriChoice common stock. We issued vested
stock options with a fair value of approximately $15 million in exchange for
outstanding stock options held by AmeriChoice employees, and we paid cash of
approximately $82 million, mainly to pay off existing AmeriChoice debt. We will
acquire the remaining minority interest after five years at a value based on a
multiple of the earnings of the combined Medicaid business. We have the option
to acquire the minority interest at an earlier date if specific events occur,
such as the termination or resignation of key AmeriChoice employees.
{32}
UnitedHealth Group
Under our board of directors' authorization, we maintain a common stock
repurchase program. Repurchases may be made from time to time at prevailing
prices, subject to certain restrictions on volume, pricing and timing. During
2002, we repurchased 22.3 million shares at an aggregate cost of approximately
$1.8 billion. As of December 31, 2002, we had board of directors' authorization
to purchase up to an additional 16.5 million shares of our common stock.
As a limited part of our share repurchase activities, we had entered into
purchase agreements with an independent third party to purchase shares of our
common stock at various times and prices. In May 2002, the share purchase
agreements were terminated, and we elected to receive shares of our common stock
from the third party as settlement consideration. The favorable settlement
amount was not material and was recorded through additional paid-in capital. We
currently have no outstanding purchase agreements with respect to our common
stock.
On February 11, 2003, the board of directors approved an annual dividend
for 2003 of $0.03 per share. The dividend will be paid on April 17, 2003, to
shareholders of record at the close of business on April 1, 2003.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table summarizes future obligations due by period as of December
31, 2002, under our debt agreements, lease obligations and other commercial
commitments (in millions):
<Table>
<Caption>
2003 2004 to 2005 2006 to 2007 Thereafter Total
------------ ------------ ------------ ------------ ------------
Debt and Commercial Paper(1) $ 811 $ 550 $ 400 $ -- $ 1,761
Operating Leases 109 179 142 190 620
Unconditional Purchase Obligations(2) 40 44 17 -- 101
------------ ------------ ------------ ------------ ------------
Total Contractual Obligations $ 960 $ 773 $ 559 $ 190 $ 2,482
------------ ------------ ------------ ------------ ------------
</Table>
(1) Debt payments could be accelerated upon violation of debt covenants. We
believe the likelihood of a debt covenant violation is remote.
(2) Amounts represent minimum purchase commitments under existing service
agreements.
Currently, we do not have any other material definitive commitments that require
cash resources; however, we continually evaluate opportunities to expand our
operations. This includes internal development of new products, programs and
technology applications and may include acquisitions.
AARP
In January 1998, we initiated a 10-year contract to provide insurance products
and services to members of AARP. Under the terms of the contract, we are
compensated for transaction processing and other services as well as for
assuming underwriting risk. We are also engaged in product development
activities to complement the insurance offerings under this program. Premium
revenues from our portion of the AARP insurance offerings were approximately
$3.7 billion in 2002, $3.6 billion in 2001 and $3.5 billion in 2000.
The underwriting gains or losses related to the AARP business are recorded
as an increase or decrease to a rate stabilization fund (RSF), which is reported
in Other Policy Liabilities in the accompanying Consolidated Balance Sheets. The
company is at risk for underwriting losses to the extent cumulative net losses
exceed the balance in the RSF. We may recover RSF deficits, if any, from gains
in future contract periods. To date, we have not been required to fund any
underwriting deficits. We believe the RSF balance is sufficient to cover
potential future underwriting or other risks associated with the contract.
The effects of changes in balance sheet amounts associated with the AARP
program accrue to AARP policyholders through the RSF balance. Accordingly, we do
not include the effect of such changes in our Consolidated Statements of Cash
Flows.
{33}
UnitedHealth Group
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
We conduct a significant portion of our operations through companies that are
subject to standards established by the National Association of Insurance
Commissioners (NAIC). These standards, among other things, require these
subsidiaries to maintain specified levels of statutory capital, as defined by
each state, and restrict the timing and amount of dividends and other
distributions that may be paid to their parent companies. Generally, the amount
of dividend distributions that may be paid by a regulated subsidiary, without
prior approval by state regulatory authorities, is limited based on the entity's
level of statutory net income and statutory capital and surplus. The agencies
that assess our creditworthiness also consider capital adequacy levels when
establishing our debt ratings. Consistent with our intent to maintain our senior
debt ratings in the "A" range, we maintain an aggregate statutory capital level
for our regulated subsidiaries that is significantly higher than the minimum
level regulators require. As of December 31, 2002, our regulated subsidiaries
had aggregate statutory capital of approximately $2.5 billion, which is
significantly more than the aggregate minimum regulatory requirements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those policies that require management to make
the most challenging, subjective or complex judgments, often because they must
estimate the effects of matters that are inherently uncertain and may change in
subsequent periods. Critical accounting policies involve judgments and
uncertainties that are sufficiently sensitive to result in materially different
results under different assumptions and conditions. We believe our most critical
accounting policies are those described below. For a detailed discussion of
these and other accounting policies, see Note 2 to the Consolidated Financial
Statements.
REVENUES
Revenues are principally derived from health care insurance premiums. We
recognize premium revenues in the period eligible individuals are entitled to
receive health care services. Customers are typically billed monthly at a
contracted rate per eligible person multiplied by the total number of people
eligible to receive services, as recorded in our records. Employer groups
generally provide us with changes to their eligible population one month in
arrears. Each billing includes an adjustment for prior month changes in
eligibility status that were not reflected in our previous billing. We estimate
and adjust the current period's revenues and accounts receivable accordingly.
Our estimates are based on historical trends, premiums billed, the level of
contract renewal activity and other relevant information. We also estimate the
amount of uncollectible receivables each period and record valuation allowances
based on historical collection rates, the age of unpaid amounts, and information
about the creditworthiness of the customers. We revise estimates of revenue
adjustments and uncollectible accounts receivable each period, and record
changes in the period they become known.
{34}
UnitedHealth Group
MEDICAL COSTS
A substantial portion of our medical costs payable is based on estimates, which
include estimates for the costs of health care services eligible individuals
have received under risk-based arrangements but for which claims have not yet
been submitted, and estimates for the costs of claims we have received but have
not yet processed. We develop medical costs payable estimates using consistently
applied actuarial methods based on historical claim submission and payment data,
cost trends, utilization of health care services, contracted service rates,
customer and product mix, and other relevant factors.
Over time, as actual claim costs and more current information become
available, our estimated liability for medical costs payable develops either
favorably, with revised payable estimates less than originally reported medical
costs payable, or unfavorably, with revised payable estimates more than
originally reported medical costs payable. We include the impacts of changes in
estimates in the operating results of the period in which we identify the
changes.
Each period, our operating results include the effects of revisions in
estimates related to all prior periods, based on actual claims processed and
paid. Changes in estimates may relate to the prior fiscal year or to prior
quarterly reporting periods within the same fiscal year. Changes in estimates
for prior quarterly reporting periods within the same fiscal year have no impact
on total medical costs reported for that fiscal year. In contrast, changes in
medical costs payable estimates for prior fiscal years that are identified in
the current year affect total medical costs reported for the current fiscal
year.
Our medical costs payable estimates as of December 31, 2001, 2000 and 1999
each developed favorably in the subsequent fiscal year by approximately $70
million, $30 million and $15 million, respectively, representing earnings from
operations of 3.2% in 2002, 1.9% in 2001 and 1.3% in 2000. Favorable development
of prior year medical costs payable estimates represented 0.5%, 0.2%, and 0.1%
of medical costs in 2002, 2001 and 2000, respectively, and 2.7%, 1.2%, and 0.7%
of medical costs payable as of December 31, 2001, 2000, and 1999, respectively.
Management does not believe the changes in medical costs payable estimates
described above were significant in relation to earnings from operations,
medical costs or medical costs payable. Amounts related to the AARP business
were excluded from these calculations since the underwriting gains and losses
associated with this business are recorded as an increase or decrease to a rate
stabilization fund. For additional information regarding the components of the
change in medical costs payable for the years ended December 31, 2002, 2001 and
2000, see Note 7 of the consolidated financial statements.
Our estimate of medical costs payable represents management's best estimate
of the company's liability for unpaid medical costs as of December 31, 2002,
developed using consistently applied actuarial methods. Management believes the
amount of medical costs payable is reasonable and adequate to cover the
company's liability for unpaid claims as of December 31, 2002; however, actual
claim payments may differ from established estimates. Assuming a hypothetical 1%
difference between our December 31, 2002 estimates of medical costs payable and
actual costs payable, excluding the AARP business, 2002 earnings from operations
would increase or decrease by approximately $28 million and basic and diluted
net earnings per common share would increase or decrease by approximately $0.06
per share.
{35}
UnitedHealth Group
INVESTMENTS
As of December 31, 2002, we had approximately $5.2 billion of investments,
primarily held in marketable debt securities. Our investments are principally
classified as available for sale and are recorded at fair value. We exclude
unrealized investment gains and losses from earnings and report them together as
a separate component in shareholders' equity. We continually monitor the
difference between the cost and fair value of our investments. If any of our
investments experience a decline in fair value that is determined to be other
than temporary, based on analysis of relevant factors, we record a realized loss
in our Consolidated Statement of Operations. Management judgment is involved in
evaluating whether a decline in an investment's fair value is other than
temporary. New information and the passage of time can change these judgments.
We revise impairment judgments when new information becomes known, and record
any resulting impairment charges at that time. We manage our investment
portfolio to limit our exposure to any one issuer or industry, and largely limit
our investments to U.S. Government and Agency securities, state and municipal
securities, and corporate debt obligations that are investment grade.
LONG-LIVED ASSETS
As of December 31, 2002 and 2001, we had long-lived assets, including goodwill,
other intangible assets, and property, equipment and capitalized software, of
$4.4 billion and $3.6 billion, respectively. We review these assets for events
and changes in circumstances that would indicate we might not recover their
carrying value. In assessing the recoverability of our long-lived assets, we
must make assumptions regarding estimated future utility and cash flows and
other internal and external factors to determine the fair value of the
respective assets. If these estimates or their related assumptions change in the
future, we may be required to record impairment charges for these assets.
CONTINGENT LIABILITIES
Because of the nature of our businesses, we are routinely involved in various
disputes, legal proceedings and governmental audits and investigations. We
record liabilities for our estimates of the probable costs resulting from these
matters. Our estimates are developed in consultation with outside legal counsel
and are based upon an analysis of potential results, assuming a combination of
litigation and settlement strategies and considering our insurance coverages, if
any, for such matters. We do not believe any matters currently threatened or
pending will have a material adverse effect on our consolidated financial
position or results of operations. It is possible, however, that future results
of operations for any particular quarterly or annual period could be materially
affected by changes in our estimates or assumptions.
{36}
UnitedHealth Group
INFLATION
The current national health care cost inflation rate significantly exceeds the
general inflation rate. We use various strategies to lessen the effects of
health care cost inflation. This includes setting commercial premiums based on
anticipated health care costs and coordinating care with physicians and other
health care providers. Through contracts with physicians and other health care
providers, we emphasize preventive health care, appropriate use of health care
services consistent with clinical performance standards, education and closing
gaps in care.
We believe our strategies to mitigate the impact of health care cost
inflation on our operating results have been and will continue to be successful.
However, other factors including competitive pressures, new health care and
pharmaceutical product introductions, demands from physicians and other health
care providers and consumers, major epidemics, and applicable regulations may
affect our ability to control the impact of health care cost inflation. Because
of the narrow operating margins of our risk-based products, changes in medical
cost trends that were not anticipated in establishing premium rates can create
significant changes in our financial results.
LEGAL MATTERS
Because of the nature of our businesses, we are routinely party to a variety of
legal actions related to the design, management and offerings of our services.
We record liabilities for our estimates of probable costs resulting from these
matters. These matters include, but are not limited to: claims relating to
health care benefits coverage; medical malpractice actions; contract disputes;
and claims related to disclosure of certain business practices. Following the
events of September 11, 2001, the cost of business insurance coverage increased
significantly. As a result, we have increased the amount of risk that we
self-insure, particularly with respect to routine matters incidental to our
business.
In 1999, a number of class action lawsuits were filed against us and
virtually all major entities in the health benefits business. The suits are
purported class actions on behalf of certain customers and physicians for
alleged breaches of federal statutes, including the Employee Retirement Income
Security Act of 1974, as amended (ERISA), and the Racketeer Influenced Corrupt
Organization Act (RICO).
Although the results of pending litigation are always uncertain, we do not
believe the results of any such actions, currently threatened or pending,
including those described above, will, individually or in aggregate, have a
material adverse effect on our consolidated financial position or results of
operations.
{37}
UnitedHealth Group
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial instrument
caused by changes in interest rates and equity prices.
Approximately $6.2 billion of our cash and investments at December 31, 2002
was invested in fixed income securities. We manage our investment portfolio
within risk parameters approved by our board of directors; however, our fixed
income securities are subject to the effects of market fluctuations in interest
rates. Assuming a hypothetical and immediate 1% increase or decrease in interest
rates applicable to our fixed income portfolio at December 31, 2002, the fair
value of our fixed income investments would decrease or increase by
approximately $205 million.
At December 31, 2002, our UnitedHealth Capital business had approximately
$150 million of equity investments primarily in various public and non-public
companies concentrated in the areas of health care delivery and related
information technologies. Market conditions that affect the value of health care
or technology stocks will likewise impact the value of our equity portfolio.
CONCENTRATIONS OF CREDIT RISK
Investments in financial instruments such as marketable securities and accounts
receivable may subject UnitedHealth Group to concentrations of credit risk. Our
investments in marketable securities are managed under an investment policy
authorized by our board of directors. This policy limits the amounts that may be
invested in any one issuer and generally limits our investments to U.S.
Government and Agency securities, state and municipal securities and corporate
debt obligations that are investment grade. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of employer
groups that constitute our customer base. As of December 31, 2002, there were no
significant concentrations of credit risk.
{38}
UnitedHealth Group
CAUTIONARY STATEMENT REGARDING "FORWARD-LOOKING" STATEMENTS
The statements contained in Results of Operations and other sections of this
annual report to shareholders include forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). When
used in this report, the words and phrases "believes," "anticipates," "intends,"
"will likely result," "estimates," "projects" and similar expressions are
intended to identify such forward-looking statements. Any of these
forward-looking statements involve risks and uncertainties that may cause the
company's actual results to differ materially from the results discussed in the
forward-looking statements. Statements that are not strictly historical are
"forward-looking" and known and unknown risks may cause actual results and
corporate developments to differ materially from those expected. Except to the
extent otherwise required by federal securities laws, we do not undertake to
address or update each statement in future filings or communications regarding
our business or results, and do not undertake to address how any of these
factors may have caused results to differ from discussions or information
contained in previous filings or communications. In addition, any of the matters
discussed in this annual report may have affected our past as well as current
forward-looking statements about future results. Any or all forward-looking
statements in this report and in any other public statements we make may turn
out to be inaccurate or false. They can be affected by inaccurate assumptions we
might make or by known or unknown risks and uncertainties.
Many factors discussed below will be important in determining future
results. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially from those expressed in our prior
communications. Factors that could cause results and developments to differ
materially from expectations include, without limitation, (a) increases in
medical costs that are higher than we anticipated in establishing our premium
rates, including increased consumption of or costs of medical services; (b)
increases in costs associated with increased litigation, legislative activity
and government regulation and review of our industry, including costs associated
with compliance with proposed legislation related to the Patients' Bill of
Rights, e-commerce activities and consumer privacy issues; (c) heightened
competition as a result of new entrants into our market, mergers and
acquisitions of health care companies and suppliers, and expansion of physician
or practice management companies; (d) failure to maintain effective and
efficient information systems, which could result in the loss of existing
customers, difficulties in attracting new customers, difficulties in determining
medical costs estimates and establishing appropriate pricing, customer and
physician and health care provider disputes, regulatory violations, increases in
operating costs or other adverse consequences; (e) events that may negatively
affect our contract with AARP, including any failure on our part to service AARP
customers in an effective manner and any adverse events that directly affect
AARP or its business partners; (f) medical cost increases or benefit changes
associated with our remaining Medicare+Choice operations; (g) significant
deterioration in customer retention; (h) violations of debt covenants or a
significant downgrade in our debt ratings; (i) our ability to execute contracts
on favorable terms with physicians, hospitals and other service providers, and
(j) significant deterioration in economic conditions, including the effects of
acts of terrorism, particularly bioterrorism, or major epidemics. A further list
and description of these risks, uncertainties and other matters can be found in
our annual report on Form 10-K for the year ended December 31, 2002, and in our
periodic reports on Forms 10-Q and 8-K.
{39}
UnitedHealth Group
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
For the Year Ended December 31,
(in millions, except per share data) 2002 2001 2000
- ------------------------------------ ---------- ---------- ----------
REVENUES
Premiums $ 21,906 $ 20,683 $ 18,926
Services 2,894 2,490 1,964
Investment and Other Income 220 281 232
---------- ---------- ----------
Total Revenues 25,020 23,454 21,122
---------- ---------- ----------
MEDICAL AND OPERATING COSTS
Medical Costs 18,192 17,644 16,155
Operating Costs 4,387 3,979 3,520
Depreciation and Amortization 255 265 247
---------- ---------- ----------
Total Medical and Operating Costs 22,834 21,888 19,922
---------- ---------- ----------
EARNINGS FROM OPERATIONS 2,186 1,566 1,200
Gain on Disposition of UnitedHealth Capital Investments -- -- 27
Interest Expense (90) (94) (72)
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 2,096 1,472 1,155
Provision for Income Taxes (744) (559) (419)
---------- ---------- ----------
NET EARNINGS $ 1,352 $ 913 $ 736
---------- ---------- ----------
BASIC NET EARNINGS PER COMMON SHARE $ 4.46 $ 2.92 $ 2.27
---------- ---------- ----------
DILUTED NET EARNINGS PER COMMON SHARE $ 4.25 $ 2.79 $ 2.19
---------- ---------- ----------
BASIC WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 303.4 312.4 324.2
DILUTIVE EFFECT OF OUTSTANDING STOCK OPTIONS 14.7 14.4 12.3
---------- ---------- ----------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
ASSUMING DILUTION 318.1 326.8 336.5
---------- ---------- ----------
</Table>
See notes to consolidated financial statements.
{40}
UnitedHealth Group
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
As of December 31,
(in millions, except share and per share data) 2002 2001
- ---------------------------------------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 1,130 $ 1,540
Short-Term Investments 701 270
Accounts Receivable, net of allowances of $132 and $127 835 856
Assets Under Management 2,069 1,903
Deferred Income Taxes 389 316
Other Current Assets 50 61
------------ ------------
Total Current Assets 5,174 4,946
Long-Term Investments 4,498 3,888
Property, Equipment and Capitalized Software, net of accumulated
depreciation and amortization of $456 and $314 955 847
Goodwill 3,363 2,723
Other Intangible Assets, net of accumulated amortization of $31 and $23 122 27
Other Assets 52 55
------------ ------------
TOTAL ASSETS $ 14,164 $ 12,486
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical Costs Payable $ 3,741 $ 3,460
Accounts Payable and Accrued Liabilities 1,459 1,209
Other Policy Liabilities 1,781 1,595
Commercial Paper and Current Maturities of Long-Term Debt 811 684
Unearned Premiums 587 543
------------ ------------
Total Current Liabilities 8,379 7,491
Long-Term Debt, less current maturities 950 900
Deferred Income Taxes and Other Liabilities 407 204
Commitments and Contingencies (Note 12)
------------ ------------
Shareholders' Equity
Common Stock, $0.01 par value - 1,500,000,000 shares authorized;
299,458,000 and 308,626,000 shares outstanding 3 3
Additional Paid-In Capital 173 39
Retained Earnings 4,104 3,805
Accumulated Other Comprehensive Income:
Net Unrealized Gains on Investments, net of tax effects 148 44
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 4,428 3,891
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,164 $ 12,486
------------ ------------
</Table>
See notes to consolidated financial statements.
{41}
UnitedHealth Group
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<Table>
<Caption>
Net
Common Stock Additional Unrealized Total
--------------- Paid-In Retained Gains on Shareholders' Comprehensive
(in millions) Shares Amount Capital Earnings Investments Equity Income
- ------------- ------ ------ ---------- -------- ----------- ------------- -------------
BALANCE AT DECEMBER 31, 1999 335 $ 3 $ 250 $ 3,445 $ 165 $ 3,863
Issuances of Common Stock,
and related tax benefits 13 -- 349 -- -- 349
Common Stock Repurchases (31) -- (599) (581) -- (1,180)
Comprehensive Income
Net Earnings -- -- -- 736 -- 736 $ 736
Other Comprehensive Income Adjustments
Change in Net Unrealized Gains
on Investments, net of tax effects -- -- -- -- (75) (75) (75)
------------
Comprehensive Income $ 661
------------
Common Stock Dividend -- -- -- (5) -- (5)
------ ------ -------- -------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 2000 317 3 -- 3,595 90 3,688
Issuances of Common Stock,
and related tax benefits 11 -- 474 -- -- 474
Common Stock Repurchases (19) -- (435) (694) -- (1,129)
Comprehensive Income
Net Earnings -- -- -- 913 -- 913 $ 913
Other Comprehensive Income Adjustments
Change in Net Unrealized Gains
on Investments, net of tax effects -- -- -- -- (46) (46) (46)
------------
Comprehensive Income $ 867
------------
Common Stock Dividend -- -- -- (9) -- (9)
------ ------ -------- -------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 2001 309 3 39 3,805 44 3,891
Issuances of Common Stock,
and related tax benefits 12 -- 905 -- -- 905
Common Stock Repurchases (22) -- (771) (1,044) -- (1,815)
Comprehensive Income
Net Earnings -- -- -- 1,352 -- 1,352 $ 1,352
Other Comprehensive Income Adjustments
Change in Net Unrealized Gains
on Investments, net of tax effects -- -- -- -- 104 104 104
------------
Comprehensive Income $ 1,456
------------
Common Stock Dividend -- -- -- (9) -- (9)
------ ------ -------- -------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 2002 299 $ 3 $ 173 $ 4,104 $ 148 $ 4,428
------ ------ -------- -------- ----------- ------------ ------------
</Table>
See notes to consolidated financial statements.
{42}
UnitedHealth Group
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
For the Year Ended December 31,
(in millions) 2002 2001 2000
- ------------- -------- -------- --------
OPERATING ACTIVITIES
Net Earnings $ 1,352 $ 913 $ 736
Noncash Items
Depreciation and Amortization 255 265 247
Deferred Income Taxes and Other 154 40 73
Net Change in Other Operating Items, net of effects
from acquisitions, sales of subsidiaries and changes
in AARP balances
Accounts Receivable and Other Current Assets 83 7 26
Medical Costs Payable 74 156 288
Accounts Payable and Accrued Liabilities 423 280 75
Other Policy Liabilities 70 131 87
Unearned Premiums 12 52 (11)
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES 2,423 1,844 1,521
-------- -------- --------
INVESTING ACTIVITIES
Cash Paid for Acquisitions, net of cash assumed and other effects (302) (92) (76)
Purchases of Property, Equipment and Capitalized Software (419) (425) (245)
Purchases of Investments (3,246) (2,088) (3,022)
Maturities and Sales of Investments 2,576 1,467 2,375
-------- -------- --------
CASH FLOWS USED FOR INVESTING ACTIVITIES (1,391) (1,138) (968)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from Common Stock Issuances 205 178 228
Proceeds from (Payments of) Commercial Paper, net (223) 275 (182)
Proceeds from Issuance of Long-Term Debt 400 250 400
Payments for Retirement of Long-Term Debt -- (150) --
Common Stock Repurchases (1,815) (1,129) (1,180)
Dividends Paid (9) (9) (5)
-------- -------- --------
CASH FLOWS USED FOR FINANCING ACTIVITIES (1,442) (585) (739)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (410) 121 (186)
-------- -------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,540 1,419 1,605
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,130 $ 1,540 $ 1,419
-------- -------- --------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Common Stock Issued for Acquisitions $ 567 $ 163 $ --
-------- -------- --------
</Table>
See notes to consolidated financial statements.
{43}
UnitedHealth Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 DESCRIPTION OF BUSINESS
UnitedHealth Group Incorporated (also referred to as "UnitedHealth Group," "the
company," "we," "us," and "our") is a national leader in forming and operating
orderly, efficient markets for the exchange of high quality health and
well-being services. Through strategically aligned, market-defined businesses,
we offer health care access, benefits and related administrative, technology and
information services designed to enable, facilitate and advance optimal health
care.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
We have prepared the consolidated financial statements according to accounting
principles generally accepted in the United States of America and have included
the accounts of UnitedHealth Group and its subsidiaries. We have eliminated all
significant intercompany balances and transactions.
USE OF ESTIMATES
These consolidated financial statements include certain amounts that are based
on our best estimates and judgments. These estimates require us to apply complex
assumptions and judgments, often because we must make estimates about the
effects of matters that are inherently uncertain and will change in subsequent
periods. The most significant estimates relate to medical costs, medical costs
payable, revenues, contingent liabilities and asset valuations, allowances and
impairments. We adjust these estimates each period, as more current information
becomes available. The impact of any changes in estimates is included in the
determination of earnings in the period in which the estimate is adjusted.
REVENUES
Premium revenues are derived from risk-based arrangements in which the premium
is fixed, typically for a one-year period, and we assume the economic risk of
funding health care services and related administrative costs. We recognize
premium revenues in the period in which eligible individuals are entitled to
receive health care services. We record premium payments we receive from our
customers prior to such period as unearned premiums.
Service revenues are primarily derived from services performed for
customers that self-insure the medical costs of their employees and their
dependents. Under service fee contracts, we recognize revenue in the period the
related services are performed based upon the fee charged to the customer. The
customers retain the risk of financing medical benefits for their employees and
their employees' dependents, and we administer the payment of customer funds to
physicians and other health care providers from customer-funded bank accounts.
Because we do not have the obligation for funding the medical expenses, nor do
we have responsibility for delivering the medical care, we do not recognize
gross revenue and medical costs for these contracts in our consolidated
financial statements.
MEDICAL COSTS AND MEDICAL COSTS PAYABLE
Medical costs include claims paid, claims processed but not yet paid, estimates
for claims received but not yet processed, and estimates for the costs of health
care services eligible individuals have received under risk-based arrangements,
but for which claims have not yet been submitted.
We develop our estimates of medical costs payable using actuarial methods
based upon historical claim submission and payment data, cost trends,
utilization of health care services, contracted service rates, customer and
product mix, and other relevant factors. The estimates may change as actuarial
methods change or as underlying historical data upon which estimates are based
are revised with more current information. We did not change actuarial methods
during 2002, 2001 and 2000.
{44}
UnitedHealth Group
We reflect adjustments to medical costs payable estimates in the operating
results of the period in which we identify the changes in estimates. Each
period, our operating results reflect revisions in estimates related to all
prior periods, based on actual claims processed and paid. Management believes
the amount of medical costs payable is reasonable and adequate to cover the
company's liability for unpaid claims as of December 31, 2002; however, actual
claim payments may differ from established estimates.
CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents are highly liquid investments with an original
maturity of three months or less. The fair value of cash and cash equivalents
approximates their carrying value because of the short maturity of the
instruments. Investments with a maturity of less than one year are classified as
short-term. We may sell investments classified as long-term before their
maturity to fund working capital or for other purposes. Because of regulatory
requirements, certain investments are included in long-term investments
regardless of their maturity date. We classify these investments as held to
maturity and report them at amortized cost. All other investments are classified
as available for sale and reported at fair value based on quoted market prices.
We exclude unrealized gains and losses on investments available for sale
from earnings and report it as a separate component of shareholders' equity, net
of income tax effects. We continually monitor the difference between the cost
and estimated fair value of our investments. If any of our investments
experiences a decline in value that is determined to be other than temporary,
based on analysis of relevant factors, we record a realized loss in Investment
and Other Income in our Consolidated Statement of Operations. To calculate
realized gains and losses on the sale of investments, we use the specific cost
of each investment sold.
ASSETS UNDER MANAGEMENT
We administer certain aspects of AARP's insurance program (see Note 4). Pursuant
to our agreement, AARP assets are managed separately from our general investment
portfolio and are used to pay costs associated with the AARP program. These
assets are invested at our discretion, within investment guidelines approved by
AARP. At December 31, 2002, the assets were invested in marketable debt
securities. We do not guarantee any rates of investment return on these
investments and, upon transfer of the AARP contract to another entity, we would
transfer cash equal in amount to the fair value of these investments at the date
of transfer to that entity. Because the purpose of these assets is to fund the
medical costs payable, the rate stabilization fund liabilities and other related
liabilities associated with the AARP contract, assets under management are
classified as current assets, consistent with the classification of these
liabilities. Interest earnings and realized investment gains and losses on these
assets accrue to AARP policyholders through the rate stabilization fund. As
such, they are not included in our earnings. Interest income and realized gains
and losses related to assets under management are recorded as an increase to the
AARP rate stabilization fund and were $102 million and $113 million in 2002 and
2001, respectively. Assets under management are reported at their fair market
value, and unrealized gains and losses are included directly in the rate
stabilization fund associated with the AARP program. As of December 31, 2002 and
2001, the AARP investment portfolio and rate stabilization fund included net
unrealized gains of $117 million and $56 million, respectively.
PROPERTY, EQUIPMENT AND CAPITALIZED SOFTWARE
Property, equipment and capitalized software is stated at cost, net of
accumulated depreciation and amortization. Capitalized software consists of
certain costs incurred in the development of internal-use software, including
external direct costs of materials and services and payroll costs of employees
devoted to specific software development.
{45}
UnitedHealth Group
We calculate depreciation and amortization using the straight-line method
over the estimated useful lives of the assets. The useful lives for property,
equipment and capitalized software are: from three to seven years for furniture,
fixtures and equipment; from 35 to 40 years for buildings; the shorter of the
useful life or remaining lease term for leasehold improvements; and from three
to nine years for capitalized software. The weighted-average useful life of
property, equipment and capitalized software at December 31, 2002, was
approximately five years.
The net book value of property and equipment was $490 million and $421
million as of December 31, 2002 and 2001, respectively. The net book value of
capitalized software was $465 million and $426 million as of December 31, 2002
and 2001, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the amount by which the purchase price and transaction costs
of businesses we have acquired exceed the estimated fair value of the net
tangible assets and separately identifiable intangible assets of these
businesses. We adopted FAS No. 142, "Goodwill and Other Intangible Assets," on
January 1, 2002. Under FAS No. 142, goodwill and intangible assets with
indefinite useful lives are not amortized, but are tested at least annually for
impairment. Intangible assets with discrete useful lives are amortized on a
straight-line basis over their estimated useful lives.
LONG-LIVED ASSETS
We review long-lived assets, including property, equipment, capitalized software
and intangible assets, for events or changes in circumstances that would
indicate we might not recover their carrying value. We consider many factors,
including estimated future utility and cash flows associated with the assets, to
make this decision. An impairment charge is recorded for the amount by which the
asset carrying value exceeds the estimated fair value. We record assets held for
sale at the lower of their carrying amount, or fair value, less any costs for
the final settlement.
OTHER POLICY LIABILITIES
Other policy liabilities include the rate stabilization fund associated with the
AARP program (see Note 4) and customer balances related to experience-rated
insurance products. Customer balances represent excess customer payments and
deposit accounts under experience-rated contracts. At the customer's option,
these balances may be refunded or used to pay future premiums or claims under
eligible contracts.
INCOME TAXES
Deferred income tax assets and liabilities are recognized for the differences
between the financial and income tax reporting bases of assets and liabilities
based on enacted tax rates and laws. The deferred income tax provision or
benefit generally reflects the net change in deferred income tax assets and
liabilities during the year, excluding any deferred income tax assets and
liabilities of acquired businesses. The current income tax provision reflects
the tax consequences of revenues and expenses currently taxable or deductible on
various income tax returns for the year reported.
CUSTOMER ACQUISITION COSTS
Costs related to the acquisition and renewal of customer contracts, including
sales commissions, enrollment materials and customer set-up costs, are charged
to expense as incurred. Our insurance contracts typically have a one-year term
and may be cancelled upon 30 days notice by either the company or the customer.
{46}
UnitedHealth Group
STOCK-BASED COMPENSATION
We account for activity under our stock-based employee compensation plans under
the recognition and measurement principles of APB (Accounting Principles Board)
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, we do
not recognize compensation expense in connection with employee stock option
grants because we grant stock options at exercise prices not less than the fair
value of our common stock on the date of grant.
The following table shows the effect on net earnings and earnings per share
had we applied the fair value expense recognition provisions of FAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation.
<Table>
<Caption>
For the Year Ended December 31,
(in millions, except per share data) 2002 2001 2000
- ------------------------------------ ------------ ------------ ------------
NET EARNINGS
As Reported $ 1,352 $ 913 $ 736
Compensation Expense, net of tax effect (101) (82) (76)
------------ ------------ ------------
Pro Forma $ 1,251 $ 831 $ 660
------------ ------------ ------------
BASIC NET EARNINGS PER COMMON SHARE
As Reported $ 4.46 $ 2.92 $ 2.27
Pro Forma $ 4.12 $ 2.66 $ 2.04
------------ ------------ ------------
DILUTED NET EARNINGS PER COMMON SHARE
As Reported $ 4.25 $ 2.79 $ 2.19
Pro Forma $ 3.93 $ 2.54 $ 1.96
------------ ------------ ------------
WEIGHTED-AVERAGE FAIR VALUE PER SHARE OF
OPTIONS GRANTED $ 28 $ 23 $ 14
------------ ------------ ------------
</Table>
Information on our stock-based compensation plans and data used to calculate
compensation expense in the table above are described in more detail in Note 10.
NET EARNINGS PER COMMON SHARE
We compute basic net earnings per common share by dividing net earnings by the
weighted-average number of common shares outstanding during the period. We
determine diluted net earnings per common share using the weighted-average
number of common shares outstanding during the period, adjusted for potentially
dilutive shares that might be issued upon exercise of common stock options.
DERIVATIVE FINANCIAL INSTRUMENTS
As part of our risk management strategy, we enter into interest rate swap
agreements to manage our exposure to interest rate risk. The differential
between fixed and variable rates to be paid or received is accrued and
recognized over the life of the agreements as an adjustment to interest expense
in the Consolidated Statements of Operations. Our existing interest rate swap
agreements convert a portion of our interest rate exposure from a fixed to a
variable rate and are accounted for as fair value hedges. Additional information
on our existing interest rate swap agreements is included in Note 8.
RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2003, we adopted FAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. Its adoption did not have a material impact on our
consolidated financial position or results of operations.
{47}
UnitedHealth Group
In June 2002, the Financial Accounting Standards Board (FASB) issued FAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." FAS
No. 146 requires companies to recognize a liability for costs associated with
exit or disposal activities when they are incurred, rather than at the date of a
commitment to an exit or disposal plan. FAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The adoption of this
statement on January 1, 2003 did not have a material impact on our consolidated
financial position or results of operations.
In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." FAS No. 148 provides alternative transition methods for companies that
make a voluntary change to the fair-value-based method of accounting for
stock-based employee compensation. In addition, FAS No. 148 amends the
disclosure requirements of FAS No. 123 to require disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. We
have adopted the disclosure provisions of FAS No. 148 in these consolidated
financial statements, and its adoption had no impact on our consolidated
financial position or results of operations.
RECLASSIFICATIONS
Certain 2000 and 2001 amounts in the consolidated financial statements have been
reclassified to conform to the 2002 presentation. These reclassifications have
no effect on net earnings or shareholders' equity as previously reported.
3 ACQUISITIONS
Effective September 30, 2002, we acquired AmeriChoice Corporation (AmeriChoice),
a leading organization engaged in facilitating health care benefits and services
for Medicaid beneficiaries in the states of New York, New Jersey and
Pennsylvania. We are integrating our existing Medicaid business with AmeriChoice
within the Health Care Services reporting segment, creating efficiencies from
the consolidation of health care provider networks, technology platforms and
operations. We issued 5.3 million shares of our common stock with a fair value
of approximately $480 million in exchange for 93.5% of the outstanding
AmeriChoice common stock. We also issued vested stock options with a fair value
of approximately $15 million in exchange for outstanding stock options held by
AmeriChoice employees and paid cash of approximately $82 million, mainly to pay
off existing AmeriChoice debt. The purchase price and costs associated with the
acquisition of approximately $577 million exceeded the preliminary estimated
fair value of the net tangible assets acquired by approximately $528 million.
This has been assigned to goodwill in the amount of $472 million, and
finite-lived intangible assets, primarily customer contracts, in the amount of
$56 million. The weighted-average useful life of the finite-lived intangible
assets is estimated to be approximately 11 years. We will acquire the remaining
minority interest after five years at a value based on a multiple of the
earnings of the combined Medicaid business. We have the option to acquire the
minority interest at an earlier date if specific events occur, such as the
termination or resignation of key AmeriChoice employees. The results of
operations for AmeriChoice since the acquisition date have been included in our
Consolidated Statements of Operations. The pro forma effects of the AmeriChoice
acquisition on our consolidated financial statements were not material.
Our preliminary estimate of the fair value of the tangible
assets/(liabilities) as of the acquisition date is as follows:
<Table>
<Caption>
(in millions)
- -------------
Cash and Cash Equivalents $ 32
Accounts Receivable and Other Current Assets 38
Long-Term Investments 151
Property, Equipment and Capitalized Software 21
Medical Costs Payable (129)
Other Current Liabilities (64)
------------
Net Tangible Assets Acquired $ 49
------------
</Table>
{48}
UnitedHealth Group
In October 2001, our Specialized Care Services business segment acquired
Spectera, Inc. (Spectera), a leading vision care benefits company in the United
States, to expand the breadth of service offerings we extend to our customers.
We paid $37 million in cash, and issued 1.5 million shares of common stock with
a fair value of $106 million in exchange for all outstanding shares of Spectera.
The purchase price and related acquisition costs of approximately $146 million
exceeded the estimated fair value of net assets acquired by $126 million. Under
the purchase method of accounting, we assigned this amount to goodwill. The
results of operations for Spectera since the acquisition date are included in
our Consolidated Statements of Operations. The pro forma effects of the Spectera
acquisition on our consolidated financial statements were not material.
For the years ended December 31, 2002, 2001 and 2000, aggregate
consideration paid or issued for smaller acquisitions accounted for under the
purchase method was $267 million, $134 million and $76 million, respectively.
These acquisitions were not material to our consolidated financial statements.
4 AARP
In January 1998, we initiated a 10-year contract to provide insurance products
and services to members of AARP. Under the terms of the contract, we are
compensated for transaction processing and other services as well as for
assuming underwriting risk. We are also engaged in product development
activities to complement the insurance offerings under this program. Premium
revenues from our portion of the AARP insurance offerings were approximately
$3.7 billion in 2002, $3.6 billion in 2001 and $3.5 billion in 2000.
The underwriting gains or losses related to the AARP business are directly
recorded as an increase or decrease to a rate stabilization fund (RSF). The
primary components of the underwriting results are premium revenue, medical
costs, investment income, administrative expenses, member service expenses,
marketing expenses and premium taxes. Underwriting gains and losses are recorded
as an increase or decrease to the RSF and accrue to AARP policyholders, unless
cumulative net losses were to exceed the balance in the RSF. To the extent
underwriting losses exceed the balance in the RSF, we would have to fund the
deficit. Any deficit we fund could be recovered by underwriting gains in future
periods of the contract. To date, we have not been required to fund any
underwriting deficits. The RSF balance is reported in Other Policy Liabilities
in the accompanying Consolidated Balance Sheets. We believe the RSF balance is
sufficient to cover potential future underwriting or other risks associated with
the contract.
The following AARP program-related assets and liabilities are included in
our Consolidated Balance Sheets:
<Table>
<Caption>
Balance as of December 31,
(in millions) 2002 2001
- ------------- ---------- ----------
Assets Under Management $ 2,045 $ 1,882
Accounts Receivable $ 294 $ 281
Medical Costs Payable $ 893 $ 867
Other Policy Liabilities $ 1,299 $ 1,180
Accounts Payable and Accrued Liabilities $ 147 $ 116
---------- ----------
</Table>
The effects of changes in balance sheet amounts associated with the AARP program
accrue to AARP policyholders through the RSF balance. Accordingly, we do not
include the effect of such changes in our Consolidated Statements of Cash Flows.
{49}
UnitedHealth Group
5 CASH, CASH EQUIVALENTS AND INVESTMENTS
As of December 31, the amortized cost, gross unrealized gains and losses, and
fair value of cash, cash equivalents and investments were as follows (in
millions):
<Table>
<Caption>
Gross Gross
Amortized Unrealized Unrealized Fair
2002 Cost Gains Losses Value
- ---- ------------ ------------ ------------ ------------
Cash and Cash Equivalents $ 1,130 $ -- $ -- $ 1,130
Debt Securities -- Available for Sale 4,742 238 (8) 4,972
Equity Securities -- Available for Sale 150 5 (5) 150
Debt Securities -- Held to Maturity 77 -- -- 77
------------ ------------ ------------ ------------
Total Cash and Investments $ 6,099 $ 243 $ (13) $ 6,329
------------ ------------ ------------ ------------
2001
- ----
Cash and Cash Equivalents $ 1,540 $ -- $ -- $ 1,540
Debt Securities -- Available for Sale 3,806 121 (20) 3,907
Equity Securities -- Available for Sale 201 16 (46) 171
Debt Securities -- Held to Maturity 80 -- -- 80
------------ ------------ ------------ ------------
Total Cash and Investments $ 5,627 $ 137 $ (66) $ 5,698
------------ ------------ ------------ ------------
</Table>
As of December 31, 2002 and 2001, respectively, debt securities consisted of
$1,439 million and $1,073 million in U.S. Government and Agency obligations,
$2,475 million and $1,684 million in state and municipal obligations, and $1,135
million and $1,230 million in corporate obligations. At December 31, 2002, we
held $677 million in debt securities with maturities of less than one year,
$1,442 million in debt securities maturing in one to five years, and $2,930
million in debt securities with maturities of more than five years.
During 2001 and 2000, respectively, we contributed UnitedHealth Capital
investments valued at approximately $22 million and $52 million to the United
Health Foundation, a non-consolidated, not-for-profit organization. The realized
gains of approximately $18 million in 2001 and $51 million in 2000 were offset
by related contribution expenses of $22 million in 2001 and $52 million in 2000.
The net expenses of $4 million in 2001 and $1 million in 2000 are included in
Investment and Other Income in the accompanying Consolidated Statements of
Operations.
In a separate disposition of UnitedHealth Capital investments during 2000,
we realized a gain of $27 million.
We recorded realized gains and losses on sales of investments, excluding
the UnitedHealth Capital dispositions described above, as follows:
<Table>
<Caption>
For the Year Ended December 31,
(in millions) 2002 2001 2000
- ------------- ---------- ---------- ----------
Gross Realized Gains $ 57 $ 30 $ 12
Gross Realized Losses (75) (19) (46)
---------- ---------- ----------
Net Realized Gains (Losses) $ (18) $ 11 $ (34)
---------- ---------- ----------
</Table>
{50}
UnitedHealth Group
6 GOODWILL AND OTHER INTANGIBLE ASSETS
We adopted FAS No. 142, "Goodwill and Other Intangible Assets," on January 1,
2002. Under FAS No. 142, goodwill and intangible assets with indefinite useful
lives are not amortized. The following table shows net earnings and earnings per
common share adjusted to reflect the adoption of the non-amortization provision
of FAS No. 142 as of the beginning of the respective periods:
<Table>
<Caption>
For the Year Ended December 31,
(in millions, except per share data) 2002 2001 2000
- ------------------------------------ ------------ ------------ ------------
NET EARNINGS
Reported Net Earnings $ 1,352 $ 913 $ 736
Goodwill Amortization, net of tax effects -- 89 85
------------ ------------ ------------
Adjusted Net Earnings $ 1,352 $ 1,002 $ 821
------------ ------------ ------------
BASIC NET EARNINGS PER COMMON SHARE
Reported Basic Net Earnings per Share $ 4.46 $ 2.92 $ 2.27
Goodwill Amortization, net of tax effects -- 0.29 0.26
------------ ------------ ------------
Adjusted Basic Net Earnings per Share $ 4.46 $ 3.21 $ 2.53
------------ ------------ ------------
DILUTED NET EARNINGS PER COMMON SHARE
Reported Diluted Net Earnings per Share $ 4.25 $ 2.79 $ 2.19
Goodwill Amortization, net of tax effects -- 0.28 0.25
------------ ------------ ------------
Adjusted Diluted Net Earnings per Share $ 4.25 $ 3.07 $ 2.44
------------ ------------ ------------
</Table>
Changes in the carrying amount of goodwill, by operating segment, during the
year ended December 31, 2002, were as follows:
<Table>
<Caption>
Health Care Specialized Consolidated
(in millions) Services Uniprise Care Services Ingenix Total
- ------------- ------------ ------------ ------------- ------------ ------------
Balance at January 1, 2002 $ 1,166 $ 698 $ 322 $ 537 $ 2,723
Acquisitions and Subsequent Payments 527 -- 41 75 643
Dispositions -- -- -- (3) (3)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 $ 1,693 $ 698 $ 363 $ 609 $ 3,363
------------ ------------ ------------ ------------ ------------
</Table>
The weighted-average useful life, gross carrying value, accumulated amortization
and net carrying value of other intangible assets as of December 31, 2002 and
2001 were as follows:
<Table>
<Caption>
December 31, 2002 December 31, 2001
--------------------------------------- ---------------------------------------
Weighted- Gross Net Gross Net
Average Carrying Accumulated Carrying Carrying Accumulated Carrying
(in millions) Useful Life Value Amortization Value Value Amortization Value
- ------------- ------------ ---------- ------------ --------- ---------- ------------ ---------
Customer Contracts and
Membership Lists 14 years $ 64 $ (1) $ 63 $ -- $ -- $ --
Patents, Trademarks
and Technology 10 years 58 (24) 34 28 (19) 9
Non-compete Agreements
and Other 7 years 31 (6) 25 22 (4) 18
------------ ---------- ------------ --------- ---------- ------------ ---------
Total 10 years $ 153 $ (31) $ 122 $ 50 $ (23) $ 27
------------ ---------- ------------ --------- ---------- ------------ ---------
</Table>
Amortization expense relating to other intangible assets was $9 million in 2002.
Estimated future amortization expense relating to other intangible assets for
the years ending December 31 are as follows:
<Table>
<Caption>
(in millions) 2003 2004 2005 2006 2007
- ------------- -------- -------- ------- -------- --------
$ 15 $ 14 $ 14 $ 12 $ 12
</Table>
{51}
UnitedHealth Group
7 MEDICAL COSTS PAYABLE
The following table shows the components of the change in medical costs payable
for the years ended December 31, excluding amounts related to the AARP business:
<Table>
<Caption>
For the Year Ended December 31,
(in millions) 2002 2001 2000
- ------------- --------- --------- ---------
MEDICAL COSTS PAYABLE, BEGINNING OF PERIOD $ 2,593 $ 2,411 $ 2,124
ACQUISITIONS(1) 180 17 --
REPORTED MEDICAL COSTS
Current Year 14,860 14,367 12,996
Prior Years (70) (30) (15)
--------- --------- ---------
Total Reported Medical Costs 14,790 14,337 12,981
--------- --------- ---------
CLAIM PAYMENTS
Payments for Current Year (12,435) (11,933) (10,711)
Payments for Prior Years (2,280) (2,239) (1,983)
--------- --------- ---------
Total Claim Payments (14,715) (14,172) (12,694)
--------- --------- ---------
MEDICAL COSTS PAYABLE, END OF PERIOD $ 2,848 $ 2,593 $ 2,411
--------- --------- ---------
</Table>
(1) Represents the medical costs payable balance as of the applicable
acquisition date. Subsequent changes in estimates related to acquired medical
costs payable are recorded as adjustments to Goodwill.
Amounts relating to the AARP business have been excluded since the underwriting
gains or losses related to this contract are recorded as an increase or decrease
to a rate stabilization fund, which is more fully described in Note 4. Medical
costs payable balances relating to the AARP business were $893 million, $867
million, $855 million and $791 million as of December 31, 2002, 2001, 2000 and
1999, respectively. Medical costs relating to the AARP business were $3,402
million, $3,307 million and $3,174 million for the years ended December 31,
2002, 2001 and 2000, respectively.
{52}
UnitedHealth Group
8 COMMERCIAL PAPER AND DEBT
Commercial paper and debt consisted of the following as of December 31 (in
millions):
<Table>
<Caption>
2002 2001
------------------------ -------------------------
Carrying Fair Carrying Fair
(in millions) Value Value Value Value
---------- --------- ---------- ----------
Commercial Paper $ 461 $ 461 $ 684 $ 684
Floating-Rate Notes
due November 2003 100 100 100 100
6.6% Senior Unsecured Notes
due December 2003 250 260 250 266
Floating-Rate Notes
due November 2004 150 150 150 150
7.5% Senior Unsecured Notes
due November 2005 400 450 400 433
5.2% Senior Unsecured Notes
due January 2007 400 423 -- --
--------- --------- --------- ---------
Total Commercial Paper and Debt 1,761 1,844 1,584 1,633
Less Current Maturities (811) (821) (684) (684)
--------- --------- --------- ---------
Long-Term Debt, less current maturities $ 950 $ 1,023 $ 900 $ 949
--------- --------- --------- ---------
</Table>
As of December 31, 2002, our outstanding commercial paper had interest rates
ranging from 1.4% to 1.5%. The interest rates on the floating-rate notes are
reset quarterly to the three-month LIBOR plus 0.3% for the notes due November
2003 and to the three-month LIBOR plus 0.6% for the notes due November 2004. As
of December 31, 2002, the applicable rates on the notes were 1.7% and 2.0%,
respectively.
In January 2002, we issued $400 million of 5.2% fixed-rate notes due
January 2007. We used proceeds from this borrowing to repay commercial paper and
for general corporate purposes including working capital, capital expenditures,
business acquisitions and share repurchases. When we issued these notes, we
entered into interest rate swap agreements that qualify as fair value hedges to
convert a portion of our interest rate exposure from a fixed to a variable rate.
The interest rate swap agreements have an aggregate notional amount of $200
million maturing January 2007. The variable rates approximate the six-month
LIBOR and are reset on a semiannual basis in arrears. At December 31, 2002, the
rate used to accrue interest expense on these swaps was approximately 1.4%.
We have credit arrangements for $900 million that support our
commercial paper program. These credit arrangements include a $450 million
revolving facility that expires in July 2005, and a $450 million, 364-day
facility that expires in July 2003. We also have the capacity to issue
approximately $200 million of extendible commercial notes (ECNs). As of December
31, 2002 and 2001, we had no amounts outstanding under our credit facilities or
ECNs.
Our debt agreements and credit facilities contain various covenants,
the most restrictive of which require us to maintain a debt-to-total-capital
ratio below 45% and to exceed specified minimum interest coverage levels. We are
in compliance with the requirements of all debt covenants.
Maturities of commercial paper and debt for the years ending December
31 are as follows:
<Table>
<Caption>
(in millions) 2003 2004 2005 2006 2007
- ------------- ------ ------ ------ ------ ------
$ 811 $ 150 $ 400 $ -- $ 400
</Table>
We made cash payments for interest of $86 million, $91 million and $68 million
in 2002, 2001 and 2000, respectively.
{53}
UnitedHealth Group
9 SHAREHOLDERS' EQUITY
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
We conduct a significant portion of our operations through companies that are
subject to standards established by the National Association of Insurance
Commissioners (NAIC). These standards, among other things, require these
subsidiaries to maintain specified levels of statutory capital, as defined by
each state, and restrict the timing and amount of dividends and other
distributions that may be paid to their parent companies. Generally, the amount
of dividend distributions that may be paid by a regulated subsidiary, without
prior approval by state regulatory authorities, is limited based on the entity's
level of statutory net income and statutory capital and surplus. At December 31,
2002, approximately $280 million of our $6.3 billion of cash and investments was
held by non-regulated subsidiaries. Of this amount, approximately $130 million
was available for general corporate use, including acquisitions and share
repurchases. The remaining $150 million consists primarily of public and
non-public equity securities held by UnitedHealth Capital, our investment
capital business.
The agencies that assess our creditworthiness also consider capital
adequacy levels when establishing our debt ratings. Consistent with our intent
to maintain our senior debt ratings in the "A" range, we maintain an aggregate
statutory capital and surplus level for our regulated subsidiaries that is
significantly higher than the minimum level regulators require. As of December
31, 2002, our regulated subsidiaries had aggregate statutory capital and surplus
of approximately $2.5 billion, which is significantly more than the aggregate
minimum regulatory requirements.
STOCK REPURCHASE PROGRAM
Under our board of directors' authorization, we maintain a common stock
repurchase program. Repurchases may be made from time to time at prevailing
prices, subject to restrictions on volume, pricing and timing. During 2002, we
repurchased 22.3 million shares for an aggregate of $1.8 billion. As of December
31, 2002, we had board of directors' authorization to purchase up to an
additional 16.5 million shares of our common stock.
As a limited part of our share repurchase activities, we had entered
into purchase agreements with an independent third party to purchase shares of
our common stock at various times and prices. In May 2002, the share purchase
agreements were terminated, and we elected to receive shares of our common stock
from the third party as settlement consideration. The favorable settlement
amount was not material and was recorded through additional paid-in capital. We
currently have no outstanding purchase agreements with respect to our common
stock.
PREFERRED STOCK
At December 31, 2002, we had 10 million shares of $0.001 par value preferred
stock authorized for issuance, and no preferred shares issued and outstanding.
{54}
UnitedHealth Group
10 STOCK-BASED COMPENSATION PLANS
During 2002, our shareholders voted to consolidate our three primary stock-based
compensation plans into one new plan. As of December 31, 2002, 29.0 million
shares remained available under that plan for future grants of stock-based
awards including, but not limited to, incentive or non-qualified stock options,
stock appreciation rights and restricted stock. No shares are available for
grants from our other plans.
Stock options are granted at an exercise price not less than the fair
value of our common stock on the date of grant. They generally vest ratably over
four years and may be exercised up to 10 years from the date of grant. Activity
under our stock plans is summarized in the table below (shares in thousands):
<Table>
<Caption>
2002 2001 2000
----------------------------- --------------------------- --------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------- ---------------- -------- ---------------- -------- ----------------
Outstanding at Beginning of Year 38,337 $ 29 38,810 $ 22 44,080 $ 19
Granted 12,517 $ 75 8,139 $ 53 8,516 $ 30
Assumed in Acquisitions 457 $ 60 194 $ 19 -- $ --
Exercised (6,614) $ 27 (7,716) $ 20 (12,331) $ 17
Forfeited (1,496) $ 40 (1,090) $ 25 (1,455) $ 20
-------- ------- -------- ------- ------- -------
Outstanding at End of Year 43,201 $ 42 38,337 $ 29 38,810 $ 22
-------- ------- -------- ------- ------- -------
Exercisable at End of Year 20,696 $ 24 19,585 $ 21 17,367 $ 20
-------- ------- -------- ------- ------- -------
<Caption>
As of December 31, 2002 Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------
Weighted-Average
Number Remaining Weighted-Average Number Weighted-Average
Range of Exercise Prices Outstanding Option Term (years) Exercise Price Exercisable Exercise Price
- ------------------------ ----------- -------------------- ---------------- ------------- ------------------
$ 0 - $20 4,358 4.5 $ 17 4,219 $ 18
$21 - $40 19,597 6.3 $ 24 14,724 $ 23
$41 - $70 13,833 8.5 $ 61 1,631 $ 54
$71 - $100 5,413 9.6 $ 83 122 $ 83
------- ---- ------- ------- ------
$ 0 - $100 43,201 7.3 $ 42 20,696 $ 24
------- ---- ------- ------- ------
</Table>
To determine compensation expense under the fair value method, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The principal assumptions we used in applying the
Black-Scholes model were as follows:
<Table>
<Caption>
2002 2001 2000
------ ------ ------
Risk-Free Interest Rate 2.5% 3.7% 5.0%
Expected Volatility 40.2% 45.9% 49.0%
Expected Dividend Yield 0.1% 0.1% 0.1%
Expected Life in Years 4.5 4.8 4.5
</Table>
Information regarding the effect on net earnings and net earnings per common
share had we applied the fair value expense recognition provisions of FAS No.
123 is included in Note 2.
Effective August 1, 2002, our employee stock ownership plan was merged
into our existing 401(k) plan. We also maintain an employee stock purchase plan.
Activity related to these plans was not significant in relation to our
consolidated financial results in 2002, 2001 and 2000.
{55}
UnitedHealth Group
11 INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
<Table>
<Caption>
Year Ended December 31, (in millions) 2002 2001 2000
- -------------------------------------- ------ ------ ------
Current Provision
Federal $ 675 $ 524 $ 330
State and Local 57 45 38
------ ------ ------
Total Current Provision 732 569 368
Deferred Provision (Benefit) 12 (10) 51
------ ------ ------
Total Provision for Income Taxes $ 744 $ 559 $ 419
------ ------ ------
</Table>
The reconciliation of the tax provision at the U.S. Federal Statutory Rate to
the provision for income taxes is as follows:
<Table>
<Caption>
Year Ended December 31, (in millions) 2002 2001 2000
- ------------------------------------- ------ ------ ------
Tax Provision at the U.S. Federal Statutory Rate $ 734 $ 515 $ 404
State Income Taxes, net of federal benefit 33 29 29
Tax-Exempt Investment Income (26) (21) (17)
Non-deductible Amortization -- 29 27
Charitable Contributions -- -- (18)
Other, net 3 7 (6)
------ ------ ------
Provision for Income Taxes $ 744 $ 559 $ 419
------ ------ ------
</Table>
The components of deferred income tax assets and liabilities are as follows:
<Table>
<Caption>
As of December 31, (in millions) 2002 2001
- -------------------------------- ------ ------
Deferred Income Tax Assets
Accrued Expenses and Allowances $ 252 $ 206
Unearned Premiums 47 65
Medical Costs Payable and Other Policy Liabilities 60 84
Net Operating Loss Carryforwards 61 39
Other 30 30
------ ------
Subtotal 450 424
Less: Valuation Allowances (39) (39)
------ ------
Total Deferred Income Tax Assets 411 385
------ ------
Deferred Income Tax Liabilities
Capitalized Software Development (176) (150)
Net Unrealized Gains on Investments (82) (31)
Depreciation & Amortization (54) (22)
------ ------
Total Deferred Income Tax Liabilities (312) (203)
------ ------
Net Deferred Income Tax Assets $ 99 $ 182
------ ------
</Table>
Valuation allowances are provided when it is considered more likely than not
that deferred tax assets will not be realized. The valuation allowances relate
to future tax benefits on certain federal, state and foreign net operating loss
carryforwards. Federal net operating loss carryforwards expire beginning in 2017
through 2022, and state net operating loss carryforwards expire beginning in
2005 through 2022.
{56}
UnitedHealth Group
We made cash payments for income taxes of $458 million in 2002, $384 million
in 2001 and $352 million in 2000. We increased additional paid-in capital and
reduced income taxes payable by $133 million in both 2002 and 2001, and by $116
million in 2000 to reflect the tax benefit we received upon the exercise of
non-qualified stock options.
The company, together with its wholly-owned subsidiaries, files a
consolidated federal income tax return. Internal Revenue Service examinations
for the 1999 and 1998 tax years have been completed and did not have a
significant impact on our consolidated operating results or financial position.
12 COMMITMENTS AND CONTINGENCIES
LEASES
We lease facilities, computer hardware and other equipment under long-term
operating leases that are noncancelable and expire on various dates through
2025. Rent expense under all operating leases was $132 million in 2002, $135
million in 2001 and $132 million in 2000.
At December 31, 2002, future minimum annual lease payments, net of sublease
income, under all noncancelable operating leases were as follows:
<Table>
<Caption>
(in millions) 2003 2004 2005 2006 2007 Thereafter
----------- ---- ---- ---- ---- ---- ----------
$109 $ 94 $ 85 $ 75 $ 67 $ 190
</Table>
SERVICE AGREEMENTS
We have three separate contracts for certain data center operations and support,
and network and voice communication services, which expire in 2005 and 2006.
Expenses incurred in connection with these agreements were $201 million in 2002,
$196 million in 2001 and $182 million in 2000.
LEGAL MATTERS
Because of the nature of our businesses, we are routinely party to a variety of
legal actions related to the design, management and offerings of our services.
We record liabilities for our estimate of probable costs resulting from these
matters. These matters include, but are not limited to: claims relating to
health care benefits coverage; medical malpractice actions; contract disputes;
and claims related to disclosure of certain business practices. Following the
events of September 11, 2001, the cost of business insurance coverage increased
significantly. As a result, we have increased the amount of risk that we
self-insure, particularly with respect to routine matters incidental to our
business.
In 1999, a number of class action lawsuits were filed against us and
virtually all major entities in the health benefits business. The suits are
purported class actions on behalf of certain customers and physicians for
alleged breaches of federal statutes, including the Employee Retirement Income
Security Act of 1974, as amended (ERISA), and the Racketeer Influenced Corrupt
Organization Act (RICO).
Although the results of pending litigation are always uncertain, we do not
believe the results of any such actions currently threatened or pending,
including those described above, will, individually or in aggregate, have a
material adverse effect on our consolidated financial position or results of
operations.
{57}
UnitedHealth Group
GOVERNMENT REGULATION
Our business is regulated at federal, state, local and international levels. The
laws and rules governing our business are subject to frequent change, and
agencies have broad latitude to administer those regulations. State legislatures
and Congress continue to focus on health care issues as the subject of proposed
legislation. Existing or future laws and rules could force us to change how we
do business, restrict revenue and enrollment growth, increase our health care
and administrative costs and capital requirements, and increase our liability
related to coverage interpretations or other actions. Further, we must obtain
and maintain regulatory approvals to market many of our products.
We are also subject to various ongoing governmental investigations, audits
and reviews, and we record liabilities for our estimate of probable costs
resulting from these matters. Although the results of pending matters are always
uncertain, we do not believe the results of any of the current investigations,
audits or reviews, individually or in the aggregate, will have a material
adverse effect on our consolidated financial position or results of operations.
13 SEGMENT FINANCIAL INFORMATION
Factors used in determining our reportable business segments include the nature
of operating activities, existence of separate senior management teams, and the
type of information presented to the company's chief operating decision-maker to
evaluate our results of operations.
Our accounting policies for business segment operations are the same as
those described in the Summary of Significant Accounting Policies (see Note 2).
Transactions between business segments principally consist of customer service
and transaction processing services that Uniprise provides to UnitedHealthcare
and Ovations, certain product offerings sold to Uniprise and UnitedHealthcare
customers by Specialized Care Services, and sales of medical benefits cost,
quality and utilization data and predictive modeling to UnitedHealthcare,
Ovations and Uniprise by Ingenix. These transactions are recorded at
management's best estimate of fair value, as if the services were purchased from
or sold to third parties. All intersegment transactions are eliminated in
consolidation. Assets and liabilities that are jointly used are assigned to each
segment using estimates of pro-rata usage. Cash and investments are assigned
such that each segment has minimum specified levels of regulatory capital or
working capital for non-regulated businesses. The "Corporate and Eliminations"
column includes costs associated with company-wide process improvement
initiatives, net expenses from charitable contributions to the United Health
Foundation and eliminations of intersegment transactions. In accordance with
accounting principles generally accepted in the United States of America,
segments with similar economic characteristics may be combined. The financial
results of UnitedHealthcare, Ovations and AmeriChoice have been combined in the
Health Care Services segment column in the tables presented on the next page
because these businesses have similar economic characteristics and have similar
products and services, types of customers, distribution methods and operational
processes, and operate in a similar regulatory environment, typically within the
same legal entity. Substantially all of our operations are conducted in the
United States.
{58}
UnitedHealth Group
The following tables present segment financial information as of and for the
years ended December 31, 2002, 2001 and 2000 (in millions):
<Table>
<Caption>
Health Care Specialized Corporate
2002 Services Uniprise Care Services Ingenix and Eliminations Consolidated
- ---- ----------- -------- ------------- ------- ---------------- ------------
Revenues -- External Customers $ 21,465 $ 2,083 $ 897 $ 355 $ -- $ 24,800
Revenues -- Intersegment -- 603 598 136 (1,337) --
Investment and Other Income 179 27 14 -- -- 220
----------- -------- ------------- ------- ---------------- ------------
Total Revenues $ 21,644 $ 2,713 $ 1,509 $ 491 $ (1,337) $ 25,020
----------- -------- ------------- ------- ---------------- ------------
Earnings From Operations $ 1,336 $ 509 $ 286 $ 55 $ -- $ 2,186
Total Assets(1) $ 10,522 $ 1,914 $ 974 $ 902 $ (537) $ 13,775
Net Assets(1) $ 4,379 $ 1,097 $ 602 $ 763 $ (517) $ 6,324
Purchases of Property, Equipment
and Capitalized Software $ 129 $ 159 $ 59 $ 72 $ -- $ 419
Depreciation and Amortization $ 102 $ 69 $ 36 $ 48 $ -- $ 255
----------- -------- ------------- ------- ---------------- ------------
2001
Revenues -- External Customers $ 20,259 $ 1,841 $ 734 $ 339 $ -- $ 23,173
Revenues -- Intersegment -- 587 504 108 (1,199) --
Investment and Other Income 235 34 16 -- (4) 281
----------- -------- ------------- ------- ---------------- ------------
Total Revenues $ 20,494 $ 2,462 $ 1,254 $ 447 $ (1,203) $ 23,454
----------- -------- ------------- ------- ---------------- ------------
Earnings From Operations $ 944 $ 374 $ 214 $ 48 $ (14) $ 1,566
Total Assets(1) $ 9,014 $ 1,737 $ 848 $ 771 $ (200) $ 12,170
Net Assets(1) $ 3,408 $ 1,020 $ 514 $ 646 $ (158) $ 5,430
Purchases of Property, Equipment
and Capitalized Software $ 152 $ 171 $ 33 $ 69 $ -- $ 425
Depreciation and Amortization $ 101 $ 81 $ 33 $ 50 $ -- $ 265
----------- -------- ------------- ------- ---------------- ------------
2000
Revenues -- External Customers $ 18,502 $ 1,595 $ 503 $ 290 $ -- $ 20,890
Revenues -- Intersegment -- 520 461 85 (1,066) --
Investment and Other Income 194 25 10 -- 3 232
----------- -------- ------------- ------- ---------------- ------------
Total Revenues $ 18,696 $ 2,140 $ 974 $ 375 $ (1,063) $ 21,122
----------- -------- ------------- ------- ---------------- ------------
Earnings From Operations $ 739 $ 289 $ 174 $ 32 $ (34) $ 1,200
Total Assets(1) $ 8,118 $ 1,578 $ 525 $ 730 $ (133) $ 10,818
Net Assets(1) $ 3,085 $ 978 $ 276 $ 617 $ (113) $ 4,843
Purchases of Property, Equipment
and Capitalized Software $ 88 $ 94 $ 28 $ 35 $ -- $ 245
Depreciation and Amortization $ 100 $ 75 $ 25 $ 47 $ -- $ 247
----------- -------- ------------- ------- ---------------- ------------
</Table>
(1) Total Assets and Net Assets exclude, where applicable, debt and accrued
interest of $1,775 million, $1,603 million and $1,222 million, income
tax-related assets of $389 million, $316 million and $235 million, and income
tax-related liabilities of $510 million, $252 million and $168 million as of
December 31, 2002, 2001 and 2000, respectively.
{59}
UnitedHealth Group
14 QUARTERLY FINANCIAL DATA (UNAUDITED)
<Table>
<Caption>
For the Quarter Ended
---------------------------------------------------
(in millions, except per share data) March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2002
Revenues $6,013 $ 6,078 $6,247 $6,682
Medical and Operating Expenses $5,531 $ 5,555 $5,675 $6,073(1)
Earnings From Operations $ 482 $ 523 $ 572 $ 609(1)
Net Earnings $ 295 $ 325 $ 353 $ 379(1)
Basic Net Earnings per Common Share $ 0.96 $ 1.07 $ 1.17 $ 1.26(1)
Diluted Net Earnings per Common Share $ 0.92 $ 1.01 $ 1.12 $ 1.20(1)
-------- ------- ------------ -----------
2001
Revenues $5,680 $ 5,813 $5,941 $6,020
Medical and Operating Expenses $5,315 $ 5,429 $5,545 $5,599
Earnings From Operations $ 365 $ 384 $ 396 $ 421
Net Earnings $ 212 $ 223 $ 231 $ 247
Basic Net Earnings per Common Share $ 0.67 $ 0.71 $ 0.75 $ 0.79
Diluted Net Earnings per Common Share $ 0.64 $ 0.68 $ 0.71 $ 0.76
-------- ------- ------------ -----------
</Table>
(1) Includes an estimated $40 million ($26 million after tax effect), or $0.08
diluted net earnings per common share, of favorable medical costs estimate
development from prior periods.
{60}
UnitedHealth Group
REPORT OF MANAGEMENT
The management of UnitedHealth Group is responsible for the integrity and
objectivity of the consolidated financial information contained in this annual
report. The consolidated financial statements and related information were
prepared according to accounting principles generally accepted in the United
States of America and include some amounts that are based on management's best
estimates and judgments.
To meet its responsibility, management depends on its accounting
systems and related internal accounting controls. These systems are designed to
provide reasonable assurance, at an appropriate cost, that financial records are
reliable for use in preparing financial statements and that assets are
safeguarded. Qualified personnel throughout the organization maintain and
monitor these internal accounting controls on an ongoing basis.
The Audit Committee of the board of directors, composed entirely of
directors who are not employees of the company, meets periodically and privately
with the company's independent auditors and management to review accounting,
auditing, internal control, financial reporting and other matters.
WILLIAM W. MCGUIRE, MD
Chairman and Chief Executive Officer
STEPHEN J. HEMSLEY
President and Chief Operating Officer
PATRICK J. ERLANDSON
Chief Financial Officer
{61}
UnitedHealth Group
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of UnitedHealth Group Incorporated:
We have audited the accompanying consolidated balance sheet of UnitedHealth
Group Incorporated and Subsidiaries as of December 31, 2002, and the related
statements of operations, changes in shareholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of UnitedHealth Group Incorporated and
Subsidiaries as of December 31, 2001, and for each of the two years in the
period ended December 31, 2001, were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those
consolidated financial statements in their report dated January 24, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company at December 31,
2002, and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 2 to the consolidated financial statements,
effective January 1, 2002, the Company changed its method of accounting for
goodwill and other intangible assets.
As discussed above, the consolidated financial statements of
UnitedHealth Group Incorporated as of December 31, 2001 and 2000, and for each
of the two years in the period ended December 31, 2001, were audited by other
auditors who have ceased operations. As described in Notes 6 and 7, these
consolidated financial statements have been revised to (i) include the
transitional disclosures required by Statement of Financial Accounting Standards
(Statement) No. 142, Goodwill and Other Intangible Assets, which, as described
in Note 2, was adopted by the Company as of January 1, 2002, and (ii) include
disclosure of the components of the change in medical costs payable consistent
with Statement of Position 94-5, Disclosures of Certain Matters in the Financial
Statements of Insurance Enterprises. Our audit procedures with respect to the
disclosures in Note 6 with respect to 2001 and 2000 included (i) agreeing the
previously reported net income to the previously issued consolidated financial
statements and the adjustments to reported net income representing amortization
expense (including any related tax effects) recognized in those periods related
to goodwill, intangible assets that are no longer being amortized, deferred
credits related to an excess over cost, equity method goodwill, and changes in
amortization periods for intangible assets that will continue to be amortized as
a result of initially applying Statement No. 142 (including any related tax
effects) to the Company's underlying records obtained from management, and (ii)
testing the mathematical accuracy of the reconciliation of adjusted net income
to reported net income, and the related earnings-per-share amounts. Our audit
procedures with respect to the disclosures in Note 7 with respect to 2001 and
2000 included (i) agreeing the previously reported beginning and end of year
medical costs payable to the previously issued consolidated financial
statements, (ii) agreeing the previously reported medical costs to the
previously issued consolidated financial statements (iii) agreeing paid claims
payments and prior years medical costs change in medical costs payable to
supporting documentation of claims payment detail and (iv) testing the
mathematical accuracy of the components of the change in medical costs payable.
In our opinion, the disclosures for 2001 and 2000 in Notes 6 and 7 are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 and 2000 consolidated financial statements of the Company
other than with respect to such disclosures and, accordingly, we do not express
an opinion or any other form of assurance on the 2001 and 2000 consolidated
financial statements taken as a whole.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
January 23, 2003
{62}
UnitedHealth Group
INDEPENDENT AUDITORS' REPORT
The following audit report of Arthur Andersen LLP, our former independent
auditors, is a copy of the original report dated January 24, 2002, rendered by
Arthur Andersen LLP on our consolidated financial statements included in our
Annual Report on Form 10-K filed on April 1, 2002, and has not been reissued by
Arthur Andersen LLP since that date.
To the Shareholders and
Directors of UnitedHealth Group Incorporated:
We have audited the accompanying consolidated balance sheets of UnitedHealth
Group Incorporated (a Minnesota Corporation) and Subsidiaries as of December 31,
2001 and 2000, 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, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of UnitedHealth Group
Incorporated and its Subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
January 24, 2002
{63}
UnitedHealth Group
CORPORATE AND BOARD OF DIRECTORS
BUSINESS LEADERS
<Table>
UnitedHealth Group WILLIAM C. BALLARD, JR. DONNA E. SHALALA, PHD
Of Counsel President
WILLIAM W. MCGUIRE, MD Greenebaum, Doll & McDonald University of Miami
Chairman and Chief Executive Officer Louisville, Kentucky, law firm Director since 2001.
Director since 1993.
STEPHEN J. HEMSLEY WILLIAM G. SPEARS
President and Chief Operating Officer RICHARD T. BURKE Managing Partner
Former Chief Executive Officer Spears Grisanti & Brown LLC
PATRICK J. ERLANDSON and Governor New York City-based investment
Chief Financial Officer Phoenix Coyotes counseling and management firm
National Hockey League team Director since 1991.
DAVID J. LUBBEN Director since 1977.
General Counsel GAIL R. WILENSKY, PHD
STEPHEN J. HEMSLEY Senior Fellow
JAMES B. HUDAK President and Project HOPE
Chief Executive Officer Chief Operating Officer International health foundation
UnitedHealth Technologies UnitedHealth Group Director since 1993.
Director since 2000.
REED V. TUCKSON, MD Audit Committee
Senior Vice President JAMES A. JOHNSON WILLIAM C. BALLARD, JR.
Consumer Health and Vice Chairman JAMES A. JOHNSON
Medical Care Advancement Perseus, LLC DOUGLAS W. LEATHERDALE
Private merchant banking ROBERT L. RYAN
L. ROBERT DAPPER and investment firm
Senior Vice President Director since 1993. Compensation and
Human Capital Human Resources Committee
THOMAS H. KEAN
TRACY L. BAHL President THOMAS H. KEAN
Senior Vice President Drew University MARY O. MUNDINGER
Chief Marketing Officer Director since 1993. WILLIAM G. SPEARS
JOHN S. PENSHORN DOUGLAS W. LEATHERDALE Compliance and
Director of Capital Markets Former Chairman and Government Affairs Committee
Communications and Strategy Chief Executive Officer
The St. Paul Companies, Inc. RICHARD T. BURKE
UnitedHealthcare Insurance and related services DONNA E. SHALALA
Director since 1983. GAIL R. WILENSKY
ROBERT J. SHEEHY
Chief Executive Officer WILLIAM W. MCGUIRE, MD Executive Committee
Chairman and
Ovations Chief Executive Officer WILLIAM C. BALLARD, JR.
UnitedHealth Group DOUGLAS W. LEATHERDALE
LOIS QUAM Director since 1989. WILLIAM W. MCGUIRE
Chief Executive Officer WILLIAM G. SPEARS
MARY O. MUNDINGER, RN, DRPH
Uniprise Dean and Centennial Professor in Nominating Committee
Health Policy, School of Nursing, and
R. CHANNING WHEELER Associate Dean, Faculty of Medicine WILLIAM C. BALLARD, JR.
Chief Executive Officer Columbia University THOMAS H. KEAN
Director since 1997. DOUGLAS W. LEATHERDALE
Specialized Care Services WILLIAM G. SPEARS
ROBERT L. RYAN
RONALD B. COLBY Senior Vice President and
Chief Executive Officer Chief Financial Officer
Medtronic, Inc.
Ingenix Medical technology company
Director since 1996.
JEANNINE M. RIVET
Executive Vice President
UnitedHealth Group and
Chief Executive Officer
Ingenix
AmeriChoice
ANTHONY WELTERS
Chief Executive Officer
</Table>
{64}
UnitedHealth Group
Financial performance at a glance
<Table>
<Caption>
GROWTH & PROFITS -- CONSOLIDATED(1)
(in millions, except per share data) 2002 2001 2000
- ----------------------------------- ---------- ---------- ----------
Revenues $ 25,020 $ 23,454 $ 21,122
Earnings From Operations $ 2,186 $ 1,566 $ 1,200
Operating Margin 8.7% 6.7% 5.7%
Return on Net Assets 37.5% 30.7% 25.5%
Net Earnings $ 1,352 $ 913 $ 705
Net Margin 5.4% 3.9% 3.3%
Diluted Net Earnings per Share $ 4.25 $ 2.79 $ 2.10
</Table>
<Table>
<Caption>
GROWTH & PROFITS -- BY SEGMENT
(in millions) 2002 2001 2000
- ------------------------------ ---------- ---------- ----------
HEALTH CARE SERVICES
Revenues $ 21,644 $ 20,494 $ 18,696
Earnings From Operations $ 1,336 $ 944 $ 739
Operating Margin 6.2% 4.6% 4.0%
Return on Net Assets 35.7% 29.2% 24.6%
UNIPRISE
Revenues $ 2,713 $ 2,462 $ 2,140
Earnings From Operations $ 509 $ 374 $ 289
Operating Margin 18.8% 15.2% 13.5%
Return on Net Assets 47.9% 37.2% 30.6%
SPECIALIZED CARE SERVICES
Revenues $ 1,509 $ 1,254 $ 974
Earnings From Operations $ 286 $ 214 $ 174
Operating Margin 19.0% 17.1% 17.9%
Return on Net Assets 50.7% 59.1% 68.8%
INGENIX
Revenues $ 491 $ 447 $ 375
Earnings From Operations $ 55 $ 48 $ 32
Operating Margin 11.2% 10.7% 8.5%
Return on Net Assets 7.6% 7.5% 5.2%
</Table>
<Table>
<Caption>
CAPITAL ITEMS(1)
(in millions, except per share data) 2002 2001 2000
- ----------------------------------- -------- -------- --------
Cash Flows From Operating Activities $ 2,423 $ 1,844 $ 1,521
Capital Expenditures $ 419 $ 425 $ 245
Consideration Paid or Issued for Acquisitions $ 869 $ 255 $ 76
Debt-to-Total-Capital Ratio 28.5% 28.9% 24.7%
Return on Shareholders' Equity 33.0% 24.5% 19.0%
Year-End Market Capitalization $ 25,005 $ 21,841 $ 19,470
Year-End Common Share Price $ 83.50 $ 70.77 $ 61.38
-------- -------- --------
</Table>
(1) Excludes nonrecurring items in 2000, as described in footnote 1 at the
bottom of page 19.
{65}
UnitedHealth Group
INVESTOR INFORMATION
Market Price of Common Stock
The following table shows the range of high and low sales prices for the
company's stock as reported on the New York Stock Exchange for the calendar
periods shown through February 28, 2003. These prices do not include commissions
or fees associated with purchasing or selling this security.
<Table>
<Caption>
High Low
-------- -------
2003
First Quarter
Through February 28, 2003 $ 88.75 $ 78.40
-------- -------
2002
First Quarter $ 76.80 $ 67.85
Second Quarter $ 97.89 $ 75.13
Third Quarter $ 96.30 $ 81.48
Fourth Quarter $ 101.00 $ 75.04
-------- -------
2001
First Quarter $ 64.36 $ 50.50
Second Quarter $ 67.40 $ 52.50
Third Quarter $ 70.00 $ 58.80
Fourth Quarter $ 72.80 $ 62.42
-------- -------
</Table>
As of February 28, 2003, the company had 12,811 shareholders of record.
Account Questions
Our transfer agent, Wells Fargo, can help you with a variety of
shareholder-related services, including:
Change of address
Lost stock certificates
Transfer of stock to another person
Additional administrative services
You can call our transfer agent at (800) 468-9716 or locally at (651) 450-4064.
You can write them at:
Wells Fargo Shareowner Services
P.O. Box 64854
Saint Paul, Minnesota 55164-0854
Or you can e-mail our transfer agent at:
stocktransfer@wellsfargo.com
Investor Relations
You can contact UnitedHealth Group Investor Relations any time to order, without
charge, financial documents, such as the annual report and Form 10-K. You can
write to us at:
Investor Relations, MN008-T930
UnitedHealth Group
P.O. Box 1459
Minneapolis, Minnesota 55440-1459
Annual Meeting
We invite UnitedHealth Group shareholders to attend our annual meeting, which
will be held on Wednesday, May 7, 2003, at 10 a.m., at UnitedHealth Group
Center, 9900 Bren Road East, Minnetonka, Minnesota.
Dividend Policy
UnitedHealth Group's board of directors established the company's dividend
policy in August 1990. The policy requires the board to review the company's
audited financial statements following the end of each fiscal year and decide
whether it is advisable to declare a dividend on the outstanding shares of
common stock.
Shareholders of record on April 2, 2001, received an annual dividend for 2001
of $0.03 per share. Shareholders of record on April 1, 2002, received an annual
dividend for 2002 of $0.03 per share. On February 11, 2003, the board of
directors approved an annual dividend for 2003 of $0.03 per share. The dividend
will be paid on April 17, 2003, to shareholders of record at the close of
business on April 1, 2003. We expect to continue paying comparable cash
dividends in the future.
Stock Listing
The company's common stock is traded on the New York Stock Exchange under the
symbol UNH.
Information Online
You can view our annual report and obtain more information about UnitedHealth
Group and its businesses via the Internet at:
www.unitedhealthgroup.com
{66}
UnitedHealth Group