RESULTS OF OPERATIONS
2001 FINANCIAL PERFORMANCE HIGHLIGHTS
2001 was a very strong year for UnitedHealth Group, as the company continued to
advance diversified business growth and productivity improvements. Financial
performance highlights include(1):
> Record revenues of $23.5 billion, an 11% increase over 2000.
> Record operating earnings of $1.6 billion, up 31% over 2000, with each
business segment delivering strong advances in year-over-year revenue and
operating earnings.
> Record net earnings of $913 million and diluted net earnings per common
share of $2.79, representing increases over 2000 of 30% and 33%,
respectively.
> Record operating cash flows of more than $1.8 billion, an increase of 21%
over 2000.
> Consolidated operating margin of 6.7%, up from 5.7% in 2000, driven by
productivity gains, effective care facilitation efforts, and favorable mix
shift from risk-based products to higher-margin, fee-based products.
> Return on shareholders' equity of 24.5%, up from 19.0% in 2000.
(1) Where applicable, 2000 results exclude the effects of separate
dispositions of UnitedHealth Capital investments, further described in
footnote 1 at the bottom of this page.
Following is a five-year summary of selected financial data:
Results of Operations should be read together with the accompanying Consolidated
Financial Statements and Notes.
(1) 2000 results include a $14 million net permanent tax benefit related to
the contribution of UnitedHealth Capital investments to the UnitedHealth
Foundation and a $27 million gain ($17 million after tax) related to a
separate disposition of UnitedHealth Capital investments. Excluding these
items, Net Earnings and Diluted Net Earnings per Common Share were $705
million and $2.10 per share for the year ended December 31, 2000.
(2) 1999 results include a net permanent tax benefit primarily related to the
contribution of UnitedHealth Capital investments to the UnitedHealth
Foundation. Excluding this benefit, Net Earnings and Diluted Net Earnings
per Common Share were $563 million and $1.59 per share.
(3) Excluding the operational realignment and other charges of $725 million,
$175 million of charges related to contract losses associated with certain
Medicare markets and other increases to commercial and Medicare medical
costs payable estimates, and the $20 million convertible preferred stock
redemption premium from 1998 results, Earnings From Operations and Net
Earnings Applicable to Common Shareholders would have been $858 million
and $509 million, or $1.31 Diluted Net Earnings per Common Share, and
Return on Shareholders' Equity would have been 11.9%.
(4) During 1998, we issued debt totaling $708 million and redeemed $500
million of convertible preferred stock.
na -- not applicable
PAGE 22 UnitedHealth Group
2001 RESULTS COMPARED TO 2000 RESULTS
CONSOLIDATED FINANCIAL RESULTS
REVENUES
Revenues include premium revenue from risk-based (insured) products, fees from
management, administrative and consulting services, and investment and other
income.
Consolidated revenues increased 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. Adjusted for the effects of these business and market
exits and excluding revenues from acquired businesses, consolidated revenues
increased approximately $3.0 billion, or 15%, over 2000. 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. Adjusted for the effect of
business and market exits and excluding revenues from acquired businesses,
premium revenues increased 13% over 2000. This increase was primarily driven by
average net premium yield increases in excess of 13% on UnitedHealthcare's
renewing commercial insured business.
FEE REVENUES Fee revenues in 2001 totaled $2.5 billion, an increase of $526
million, or 27%, over 2000. The overall increase in fee revenues is primarily
the result of record growth of 20% in Uniprise's multi-site, large-employer
customer base, growth in UnitedHealthcare's fee-based business, and Ovations'
Pharmacy Services business that began operations 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 largely offset by 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 combination of pricing, benefit designs 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 85.4% in 2000 to 85.3% in
2001. Excluding AARP business, the medical care ratio was 83.9% in both 2000 and
2001, as net premium yield 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
consumption patterns, benefit changes and product mix changes.
PAGE 23 UnitedHealth Group
OPERATING COSTS
Operating costs as a percentage of total revenues (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 our fastest-growing businesses
(Uniprise, Specialized Care Services, Ingenix and Ovations Pharmacy Services),
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 70 basis points to 16.0%. This decrease was principally driven by
productivity gains from process improvements, technology deployment and cost
management initiatives, primarily in the areas of claim processing and customer
billings and enrollment. 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 reflects additional costs to support product and
technology development initiatives and the 11% increase in consolidated revenues
in 2001, 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
UnitedHealth 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):
nm -- not meaningful
PAGE 24 UnitedHealth Group
Health Care Services
The Health Care Services segment consists of the UnitedHealthcare and Ovations
businesses. UnitedHealthcare provides health and well-being services on behalf
of local employers and consumers nationwide. Ovations offers health and
well-being services for Americans age 50 and older.
The Health Care Services segment posted record revenues of $20.5 billion in
2001, an increase of $1.8 billion, or 10%, over 2000. This increase resulted
from average net premium yield increases in excess of 13% on UnitedHealthcare's
renewing commercial insured 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. Adjusted for the effects of these actions and excluding
revenues from acquired businesses, Health Care Services' revenues increased by
13% on a year-over-year basis.
The Health Care Services segment 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 improved 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 positive 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 yield increases were generally well matched with
increases in overall medical benefit costs. UnitedHealthcare sets commercial
health plan premium rates based on anticipated benefit costs, including the
effects of medical cost inflation, consumption patterns, benefit changes,
product mix and market conditions.
UnitedHealthcare's commercial individuals served increased by 135,000, or
2%, from December 31, 2000 to December 31, 2001, consisting of an increase of
380,000 in the number of individuals served with fee-based products, partially
offset by a 245,000 decrease in individuals served by risk-based products. The
decrease in individuals served by risk-based products was driven by a
combination of 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.
The increase in fee-based customers was driven by customers converting from
risk-based products and new customer relationships established in 2001.
UnitedHealthcare's year-over-year Medicare enrollment decreased 15% because
of actions taken to better position this program for long-term success.
Effective January 1, 2001, UnitedHealthcare withdrew its Medicare+Choice product
from targeted counties affecting 56,000 individuals. Annual revenues in 2000
from the Medicare markets exited as of January 1, 2001, were approximately $320
million.
Effective January 1, 2002, UnitedHealthcare withdrew its
Medicare+Choice product from targeted counties affecting 57,000 individuals.
Annual revenues in 2001 from the Medicare markets exited as of January 1, 2002,
were approximately $370 million. These withdrawals are primarily in response to
insufficient Medicare program reimbursement rates in specific counties. These
actions will further reduce Medicare enrollment, but will preserve profit
margins in the long term. 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 membership, when and
as permitted by its contracts with the Centers for Medicare and Medicaid
Services (CMS), formerly known as the Health Care Financing Administration.
PAGE 25 UnitedHealth Group
The following table summarizes individuals served by UnitedHealthcare, by
major market segment and funding arrangement, as of December 31 (in thousands):
Uniprise
Uniprise provides health and well-being services, business-to-business
transaction processing services, consumer connectivity and technology support
for large employers and health plans. 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 large multi-site 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 their business to grow
revenues at a proportionately higher rate than associated expenses.
Specialized Care Services
Specialized Care Services is an expanding portfolio of health and well-being
companies, each serving a specialized market need with a unique blend of
benefits, networks, services and resources. 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, its mental health benefit
business, and an increase in specialized services purchased by customers
serviced by 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 is 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
Ingenix is a leader in the field of health care data analysis and application,
serving pharmaceutical companies, health insurers and payers, health care
providers, large employers and governments. Revenues were $447 million in 2001,
an increase of $72 million, or 19%, over 2000. This increase reflects 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
Corporate includes investment income derived from cash and investments not
assigned to operating segments, companywide costs for certain core process
improvement initiatives, net expenses from charitable contributions to the
UnitedHealth Foundation and eliminations of intersegment transactions. The
decrease of $20 million in 2001 corporate expenses reflects lower companywide
process improvement expenses in 2001 compared to 2000, as certain process
improvement initiatives were completed in 2001.
PAGE 26 UnitedHealth Group
2000 RESULTS COMPARED TO 1999 RESULTS
CONSOLIDATED FINANCIAL RESULTS
Revenues
Consolidated revenues increased in 2000 to $21.1 billion. Balanced growth across
all business segments was partially offset by targeted pullbacks and exits from
certain geographic and Medicare markets. Adjusted for the effects of these
market transitions, consolidated revenues increased approximately $2.2 billion,
or 12%, over 1999. Following is a discussion of 2000 consolidated revenue trends
for each revenue component.
Premium Revenues Consolidated premium revenues in 2000 totaled $18.9 billion, an
increase of $1.4 billion, or 8%, compared with 1999. This increase was driven by
two primary factors: premium yield increases on UnitedHealthcare's renewing
commercial insured business and growth in the number of individuals served.
These increases were partially offset by withdrawals from certain geographic and
Medicare markets. Adjusted for the effect of these market withdrawals, premium
revenues increased 12% over 1999.
Fee Revenues Fee revenues in 2000 totaled $2.0 billion, an increase of $171
million, or 10%, over 1999. This increase resulted from record growth in
Uniprise's multi-site customer base, growth in UnitedHealthcare's fee-based
business, modest price increases, and acquisitions and growth in the Specialized
Care Services and Ingenix businesses.
Investment and Other Income Investment and other income in 2000 totaled $232
million, an increase of $13 million over 1999. Higher interest yields on
investments in 2000 compared with 1999 were largely offset by $34 million of net
realized capital losses in 2000. Net realized capital losses were $6 million in
1999.
Medical Costs
The consolidated medical care ratio decreased from 85.7% in 1999 to 85.4% in
2000. Excluding AARP business, on a year-over-year basis, the medical care ratio
decreased 30 basis points to 83.9%. Year-over-year medical care ratios decreased
because commercial net premium yield increases exceeded the increase in total
benefit costs.
On an absolute dollar basis, medical costs increased $1.1 billion, or 7%,
over 1999. The increase was driven by growth in the number of individuals served
with insured products, medical cost inflation, increased consumption patterns,
benefit changes and product mix changes.
Operating Costs
The operating cost ratio was 16.7% in 2000, compared with 17.1% in 1999. Using a
revenue mix comparable to 1999, the 2000 operating cost ratio would have
decreased 80 basis points to 16.3%. This decrease was primarily driven by
productivity gains from process improvements, technology deployment and cost
management initiatives, and by further leveraging our fixed costs.
On an absolute dollar basis, operating costs increased by $177 million, or
5%, over 1999. This increase reflects additional costs to support product and
technology development initiatives and the 8% increase in consolidated revenues
in 2000, partially offset by productivity and technology improvements discussed
above.
Depreciation and Amortization
Depreciation and amortization was $247 million in 2000 and $233 million in 1999.
This increase resulted primarily from higher levels of capital expenditures to
support business growth and technology enhancements, as well as amortization of
goodwill and other intangible assets related to acquisitions.
PAGE 27 UnitedHealth Group
Income Taxes
The 2000 income tax provision includes nonrecurring tax benefits primarily
related to the contribution of UnitedHealth Capital investments to the
UnitedHealth Foundation. Excluding nonrecurring tax benefits, our effective
income tax rate was 37.5% in 2000 and 37.0% in 1999.
BUSINESS SEGMENTS
The following summarizes the operating results of our business segments for the
years ended December 31 (in millions):
nm -- not meaningful
HEALTH CARE SERVICES
The Health Care Services segment posted revenues of $18.7 billion in 2000, an
increase of $1.1 billion, or 6%, over 1999. This increase was primarily due to
premium yield increases on UnitedHealthcare's renewing commercial insured
business and growth of approximately 7% in the number of individuals served in
continuing markets, partially offset by targeted pullbacks in certain geographic
and Medicare markets. Adjusted for the effects of these market changes, Health
Care Services' revenues increased by 10% on a year-over-year basis.
The Health Care Services segment contributed earnings from operations of
$739 million in 2000, an increase of $161 million, or 28%, over 1999. This
increase was primarily the result of improved margins on UnitedHealthcare's
commercial business and lower operating costs as a percentage of revenues,
driven by process improvement, technology deployment and cost management
initiatives. Health Care Services' operating margin increased to 4.0% in 2000
from 3.3% in 1999.
UnitedHealthcare's commercial medical care ratio improved to 84.1% in 2000
from 84.6% in 1999, as net premium yield increases exceeded increases in medical
costs.
PAGE 28 UnitedHealth Group
The following table summarizes individuals served by UnitedHealthcare, by
major market segment and funding arrangement, as of December 31 (in thousands):
(1) Excludes individuals served through UnitedHealthcare platforms located in
Puerto Rico and Pacific Coast regions. As of December 31, 2000, UnitedHealthcare
had substantially transitioned from these markets. Including these markets,
commercial individuals served at December 31, 1999, were 5,650 for insured
products and 1,885 for fee-based products.
UNIPRISE
Uniprise had revenues of $2.1 billion in 2000, an increase of $275 million, or
15%, over 1999. This increase was driven primarily by continued growth in
Uniprise's large multi-site customer base, which had an 11% increase in
individuals served, as well as changes in funding arrangements selected by
certain customers and price increases on fee-based business. Uniprise served 6.7
million and 6.0 million individuals as of December 31, 2000 and 1999,
respectively. Uniprise's earnings from operations grew by $67 million, or 30%,
over 1999 as a result of increased revenues. Operating margin improved to 13.5%
in 2000 from 11.9% in 1999. Uniprise has expanded its operating margin by
improving productivity through process improvement initiatives, increased
deployment of technology and further leveraging of fixed costs.
SPECIALIZED CARE SERVICES
Specialized Care Services' revenues were $974 million in 2000, an increase of
$248 million, or 34%, over 1999. This increase was driven primarily by an
increase in the number of individuals served by United Behavioral Health, and
the acquisitions of Dental Benefit Providers, Inc. in June 1999 and National
Benefit Resources, Inc. in November 1999. Earnings from operations of $174
million increased by 36% compared with 1999, in line with 2000 revenue growth.
Specialized Care Services' operating margin improved from 17.6% in 1999 to 17.9%
in 2000.
INGENIX
Ingenix had revenues of $375 million in 2000, an increase of $117 million, or
45%, over 1999. This increase was driven by organic growth of $54 million and
acquisitions made in 1999 that expanded the company's clinical research and
development, clinical marketing and health information services. Earnings from
operations of $32 million increased 28% over 1999. Operating margin decreased to
8.5% in 2000 from 9.7% in 1999, principally as a result of increased goodwill
amortization expense associated with acquisitions.
CORPORATE
The decrease of $24 million in 2000 earnings reflects a decline in the level of
unassigned cash and investments and associated investment income, primarily due
to share repurchases and incremental process improvement costs in 2000.
PAGE 29 UnitedHealth Group
OPERATIONAL REALIGNMENT AND OTHER CHARGES
In conjunction with a comprehensive operational realignment initiated in 1998,
we developed and approved an implementation plan (the Plan). We recognized
corresponding charges to operations of $725 million in the second quarter of
1998, which reflected the estimated costs to be incurred under the Plan. The
charges included costs associated with asset impairments; employee terminations;
disposing of or discontinuing business units, product lines and contracts; and
consolidating and eliminating certain claim processing and customer service
operations and associated real estate obligations.
We completed our operational realignment plan in 2001. Actual costs incurred
executing the Plan exceeded estimates by approximately $4 million, which has
been included in 2001 operating costs in the Consolidated Statements of
Operations. These excess costs were incurred in the fourth quarter of 2001.
Activities associated with the Plan resulted in the reduction of approximately
5,100 positions, affecting approximately 5,800 people.
As of December 31, 2000, we had completed all planned business dispositions
and market exits pursuant to the Plan. Accordingly, our 2001 financial
statements do not include the operating results of exited businesses or markets.
Our Consolidated Statements of Operations include results for businesses
disposed of and markets exited in connection with our operational realignment as
follows: $312 million in revenues and $9 million in earnings from operations in
2000, and $689 million in revenues and $41 million of losses from operations in
1999. These amounts do not include operating results from the counties where
UnitedHealthcare withdrew its Medicare product offerings effective January 1,
2001, and January 1, 2000. Annual revenues for 2000 from the counties exited
effective January 1, 2001, were approximately $320 million. Annual revenues for
1999 from the counties exited effective January 1, 2000, were approximately $230
million.
The operational realignment and other charges did not cover certain aspects
of the Plan, including new information systems, data conversions, process
re-engineering, temporary duplicate staffing costs as we consolidated processing
and service centers, and employee relocation and training. These costs were
expensed as incurred or capitalized, as appropriate. During 2001, 2000 and 1999,
we incurred expenses of approximately $20 million, $57 million and $52 million,
respectively, related to these activities.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 2001
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 overall constraints 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).
Much 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 marketable debt securities,
to improve our overall income return. Factors we consider in making these
investment decisions include our board of directors' approved policy, regulatory
limitations, return objectives, tax implications, risk tolerance and maturity
dates. Even our long-term investments are available for sale to meet 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.
PAGE 30 UnitedHealth Group
Our non-regulated businesses also generate cash from operations.
Additionally, 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.
Cash generated from operating activities, our primary source of liquidity,
is principally attributable to net earnings, excluding depreciation and
amortization. As such, any future decline in our profitability would likely 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 2001, we generated cash from operations of more than $1.8 billion, an
increase of $323 million, or 21%, over 2000. The increase in operating cash
flows primarily resulted from an increase of $195 million in net income
excluding depreciation and amortization expense and working capital improvements
of approximately $111 million.
We maintained a strong financial condition and liquidity position, with cash
and investments of $5.7 billion at December 31, 2001. Total cash and investments
increased by $645 million since December 31, 2000, primarily resulting from
strong cash flows from operations partially offset by common stock repurchases.
As further described under "Regulatory Capital and Dividend Restrictions,"
many of our subsidiaries are subject to various government regulations that
restrict the timing and amount of dividends and other distributions that may be
paid to their parent companies. At December 31, 2001, approximately $660 million
of our $5.7 billion of cash and investments was held by non-regulated
subsidiaries. Of this amount, approximately $260 million was segregated for
future regulatory capital needs and $230 million was available for general
corporate use, including acquisitions and share repurchases. The remaining $170
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, 2001 and 2000, we had commercial paper and debt
outstanding of $1.6 billion and $1.2 billion, respectively. Proceeds from the
net increase of $375 million in total commercial paper and debt will be used for
general corporate purposes, which may include working capital, business
acquisitions, capital expenditures and share repurchases.
Our debt-to-total-capital ratio was 28.9% and 24.7% as of December 31, 2001
and 2000, 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.
Commercial paper outstanding at December 31, 2001, totaled $684 million,
with interest rates ranging from 1.9% to 2.7%. In November 2001, we issued $100
million of floating-rate notes due November 2003 and $150 million of
floating-rate notes due November 2004. The interest rates on the notes are reset
quarterly to
PAGE 31 UnitedHealth Group
the three-month LIBOR (London Interbank Offered Rate) 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, 2001, the applicable rates on the notes were
2.4% and 2.7%, respectively. A portion of the proceeds from these borrowings was
used to repay $150 million of floating-rate notes that matured in November 2001.
In January 2002, we issued $400 million of 5.2% fixed-rate notes due January
2007. Proceeds from this borrowing will be used 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 to convert a portion of our interest
rate exposure from a fixed rate 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.
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 2002. We also have the capacity to issue approximately $200
million of extendible commercial notes (ECNs). As of December 31, 2001 and 2000,
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 could adversely affect our borrowing capacity and
costs.
The remaining issuing capacity of all securities covered by our shelf
registration statement for common stock, preferred stock, debt securities and
other securities is $450 million, after giving effect to the $400 million
fixed-rate notes issued in January 2002. We may publicly offer such securities
from time to time at prices and terms to be determined at the time of offering.
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
2001, we repurchased 19.6 million shares at an aggregate cost of approximately
$1.1 billion. Through December 31, 2001, we had repurchased approximately 112.5
million shares for an aggregate cost of $3.7 billion since the program began in
November 1997. As of December 31, 2001, we had board of directors' authorization
to purchase up to an additional 8.8 million shares of our common stock.
In February 2002, the board of directors authorized us to repurchase up to an
additional 30 million shares of common stock under the program.
As part of our share repurchase activities, we have entered into agreements
with an independent third party to purchase shares of our common stock, where
the number of shares we purchase, if any, depends upon market conditions and
other contractual terms. As of December 31, 2001, we had conditional agreements
to purchase up to 6.1 million shares of our common stock at various times and
prices through 2003, at an average price of approximately $58 per share.
During 2001 and 2000, we invested $425 million and $245 million,
respectively, in property, equipment and capitalized software. These investments
were made to support business growth, operational efficiency, service
improvements and technology enhancements.
PAGE 32 UnitedHealth Group
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
We have various contractual obligations and commercial commitments to make
future payments including debt agreements, lease obligations, stock repurchase
contracts and data center service agreements. The following table summarizes our
future obligations under these contracts due by period as of December 31, 2001
(in millions):
(1) Debt payments could be accelerated upon violation of debt covenants. We
believe the likelihood of a debt covenant violation is remote.
(2) Reflects maximum potential purchases under stock repurchase contracts. In
the event of certain termination events, including a default on our debt or
credit agreements or a downgrade of our debt ratings below investment grade,
we could be required to immediately settle our remaining obligations under
the contracts. We may elect to settle the contracts by issuing common stock
in lieu of cash. We believe the likelihood of a debt covenant violation or a
downgrade of our debt rating below investment grade is remote.
Currently, we do not have any other material definitive commitments that require
cash resources; however, we continually evaluate opportunities to expand our
operations. This includes internal development of new products and programs and
may include acquisitions.
AARP
In January 1998, we began providing services under a 10-year contract to provide
insurance products and services to members of AARP. Under the terms of the
contract, we are compensated for claim administration and other services as well
as for assuming underwriting risk. We are also engaged in product development
activities to complement the insurance offerings under this program. Premium
revenues from our portion of the AARP insurance offerings were approximately
$3.5 billion during 2001, 2000 and 1999.
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. 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.
PAGE 33 UnitedHealth Group
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
We conduct our operations through our wholly-owned subsidiaries. These companies
are subject to standards established by the National Association of Insurance
Commissioners (NAIC) that, among other things, require them 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 intention of maintaining 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 level regulators
require. As of December 31, 2001, our regulated subsidiaries had aggregate
statutory capital and surplus of approximately $2.0 billion, more than $1.1
billion above the $850 million of required aggregate capital and surplus.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those policies that require the application of
management's most challenging, subjective or complex judgments, often as a
result of the need to make estimates about the effect 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 that 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.
MEDICAL COSTS
A substantial portion of our medical costs payable balance is based on
estimates. This balance includes estimates for the costs of health care services
people have received, 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 actuarial methods based upon
historical claim submission and payment data, cost trends, customer and product
mix, seasonality, utilization of health care services, contracted service rates
and other relevant factors. The estimates may change as actuarial methods change
or as underlying facts upon which estimates are based change. We did not change
actuarial methods during 2001, 2000 and 1999.
Management believes the amount of medical costs payable is adequate to cover
the company's liability for unpaid claims as of December 31, 2001; however,
actual claim payments may differ from established estimates. Assuming a
hypothetical 1% difference between our December 31, 2001 estimates of medical
costs payable and actual costs payable, 2001 earnings from operations would
increase or decrease by approximately $20 million and basic and diluted net
earnings per common share would increase or decrease by approximately $0.04 per
share. Adjustments to medical costs payable estimates are reflected in operating
results in the period in which the change in estimate is identified.
PAGE 34 UnitedHealth Group
REVENUES
Our revenue is principally derived from health care insurance premiums. Premium
revenues are recognized in the period enrolled members are entitled to receive
health care services. Customers are typically billed monthly at a contracted
rate per enrolled member multiplied by the number of members eligible to receive
services, as recorded in our records. Because employer groups generally provide
us with changes to their eligible member population one month in arrears, each
billing includes an adjustment for prior month changes in member status that
were not reflected in our billing. We estimate the amount of future adjustments
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. Estimates of revenue adjustments
and uncollectible accounts receivable are revised each period, and changes are
recorded in the period they become known.
INVESTMENTS
As of December 31, 2001, we had approximately $4.2 billion of investments,
primarily held in marketable debt securities. Our investments are principally
classified as available for sale and are recorded at their fair values as of the
date reported. Unrealized investment gains and losses are excluded from earnings
and reported 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 we believe is
other than temporary, we record a realized loss in our Consolidated Statements
of Operations. Management judgment is involved in evaluating whether a decline
in an investment's fair value is other than temporary. The discovery of new
information and the passage of time can change these judgments. Revisions of
impairment judgments are made when new information becomes known, and any
resulting impairment adjustments are made 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, 2001 and 2000, we had long-lived assets, including goodwill,
other intangible assets, and property, equipment and capitalized software of
$3.7 billion and $3.2 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 cash flows and other 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 estimate of 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 for
such matters. We do not believe any matters currently threatened or pending will
have a material adverse effect on our consolidated financial position. It is
possible, however, that future results of operations for any particular
quarterly or annual period could be materially affected by changes in our
assumptions or the effectiveness of our strategies related to these proceedings.
PAGE 35 UnitedHealth Group
INFLATION
The 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,
our health plans emphasize preventive health care, appropriate use of specialty
and hospital services, education and closing gaps in care.
We believe our strategies to mitigate the impact of health care cost
inflation 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, and applicable regulations may affect our ability
to control the impact of health care cost inflation. Changes in medical cost
trends that were not anticipated in establishing premium rates, because of the
narrow operating margins of our insurance products, 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.
These matters include: claims relating to health care benefits coverage; medical
malpractice actions; allegations of anti-competitive and unfair business
activities; disputes over compensation and termination of contracts including
those with physicians and other health care providers; disputes related to our
administrative services, including actions alleging claim administration errors
and failure to disclose rate discounts and other fee and rebate arrangements;
disputes over benefit copayment calculations; claims related to disclosure of
certain business practices; and claims relating to customer audits and contract
performance.
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, including those
described above, currently threatened or pending will, individually or in
aggregate, have a material adverse effect on our results of operations or
financial position.
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 $5.5 billion of our cash and investments at December 31, 2001,
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, 2001, the fair
value of our fixed income investments would decrease or increase by
approximately $160 million.
At December 31, 2001, we had approximately $170 million of equity
investments 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.
PAGE 36 UnitedHealth Group
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, Agency and municipal securities and corporate debt obligations that
are investment grade. Concentrations of credit risk with respect to accounts
receivable are limited to the large number of employer groups that constitute
our customer base. As of December 31, 2001, there were no significant
concentrations of credit risk.
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 or phrases "believes," "anticipates," "intends,"
"will likely result," "estimates," "projects" or similar expressions are
intended to identify such forward-looking statements. Any of these
forward-looking statements involve risks and uncertainties that may cause the
company's actual results to differ materially from the results discussed in the
forward-looking statements. Statements that are not strictly historical are
"forward-looking" 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, in making these statements we are
not undertaking to address or update each statement in future filings or
communications regarding our business or results, and are not undertaking 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 use 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) 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; (e) medical cost increases or benefit changes associated with our
remaining Medicare+Choice operations; (f) significant deterioration in customer
retention; and (g) significant deterioration in economic conditions, including
the effects of acts of terrorism, particularly bioterrorism. A further list and
description of these risks, uncertainties and other matters can be found in the
company's annual report on Form 10-K for the year ended December 31, 2001, and
in its periodic reports on Forms 10-Q and 8-K (if any).
PAGE 37 UnitedHealth Group
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
PAGE 38 UnitedHealth Group
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements
PAGE 39 UnitedHealth Group
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
See notes to consolidated financial statements.
PAGE 40 UnitedHealth Group
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
PAGE 41 UnitedHealth Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] DESCRIPTION OF BUSINESS
UnitedHealth Group Incorporated (also referred to as "UnitedHealth Group," "the
company," "we," "us," "our") is a national leader in forming and operating
orderly, efficient markets for the exchange of high quality health and
well-being services. Through independent but strategically aligned,
market-defined businesses, we offer health care access and coverage 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 and have included the
accounts of UnitedHealth Group and its subsidiaries. We have eliminated all
significant intercompany balances and transactions.
USE OF ESTIMATES
These financial statements include some amounts that are based on our estimates
and judgments. The most significant estimates relate to medical costs, medical
costs payable, contingent liabilities, and asset valuations, allowances and
impairments. We adjust these estimates as more current information becomes
available, and any adjustment could have a significant impact on our
consolidated operating results. The impact of any changes in estimates is
included in the determination of earnings in the period in which the change in
estimate is identified.
REVENUES
We recognize premium revenues in the period in which enrolled members are
entitled to receive health care services. We record premium payments received
from our customers prior to such period as unearned premiums. We recognize fee
revenues in the period the related services are performed. Premium revenues
related to Medicare and Medicaid programs as a percentage of total premium
revenues were 17% in 2001 and 2000, and 21% in 1999.
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 people have received, 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, customer
and product mix, seasonality, utilization of health care services, contracted
service rates and other relevant factors. The estimates may change as actuarial
methods change or as underlying facts upon which estimates are based change. We
did not change actuarial methods during 2001, 2000 and 1999. Management believes
the amount of medical costs payable is adequate to cover the company's liability
for unpaid claims as of December 31, 2001; however, actual claim payments may
differ from established estimates. Adjustments to medical costs payable
estimates are reflected in operating results in the period in which the change
in estimate is identified.
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.
PAGE 42 UnitedHealth Group
Because of regulatory restrictions, certain investments are included in
long-term investments regardless of their maturity date. These investments are
classified as held to maturity and are reported at amortized cost. All other
investments are classified as available for sale and reported at fair value
based on quoted market prices. We have no investments classified as trading
securities.
Unrealized gains and losses on investments available for sale are excluded
from earnings and reported as a separate component of shareholders' equity, net
of income tax effects. We continually monitor the difference between the cost
and estimated fair value of our investments. If any of our investments
experience a decline in value that we believe is other than temporary, we record
a realized loss in Investment and Other Income in our Consolidated Statements 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 5). 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, 2001, 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, cash
equal in amount to the fair value of these investments would be transferred to
that entity. Because the purpose of these assets is to fund the medical costs
payable and rate stabilization fund 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 and, as such, 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 $113
million and $91 million in 2001 and 2000, respectively. Assets under management
are reported at their fair market value, and unrealized gains and losses are
included in the rate stabilization fund associated with the AARP program. As of
December 31, 2001 and 2000, the AARP investment portfolio included net
unrealized gains of $56 million and $19 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 material and service costs and payroll costs of employees fully
devoted to specific software development.
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; the shorter of five years or the 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, 2001, was approximately five years.
The net book value of property and equipment was $421 million and $303
million as of December 31, 2001 and 2000, respectively. The net book value of
capitalized software was $426 million and $254 million as of December 31, 2001
and 2000, respectively.
PAGE 43 UnitedHealth Group
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the amount by which the purchase price and transaction costs
of businesses we have acquired exceeds the estimated fair value of the net
tangible assets and identifiable intangible assets of these businesses. Goodwill
and other intangible assets are amortized on a straight-line basis over useful
lives ranging from three years to 40 years, with a weighted-average useful life
of 32 years at December 31, 2001.
The two most significant components of goodwill and other intangible assets
are: 1) goodwill of $2.2 billion at December 31, 2001, and $2.1 billion at
December 31, 2000, net of accumulated amortization; and 2) employer group
contracts, supporting infrastructure, distribution networks and institutional
knowledge of $512 million at December 31, 2001, and $530 million at December 31,
2000, net of accumulated amortization.
LONG-LIVED ASSETS
We review long-lived assets, including goodwill and other intangible assets, and
property, equipment and capitalized software, for events or changes in
circumstances that would indicate we might not recover their carrying value. We
consider many factors, including estimated future cash flows associated with the
assets, to make this decision. 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 5) and customer balances related to experience-rated
insurance products.
Customer balances represent premium payments we have received that exceed
what customers owe based on actual claim experience, and deposit accounts that
have accumulated 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. The current income tax provision reflects the tax
consequences of revenues and expenses currently taxable or deductible on various
income tax returns for the year reported.
STOCK-BASED COMPENSATION
We do not recognize compensation expense in connection with employee stock
option grants because we grant stock options at exercise prices that equal or
exceed the fair market value of the stock on the date the options are granted.
Information on what our stock-based compensation expenses would have been had we
calculated those expenses using the fair market values of outstanding stock
options is included in Note 9.
PAGE 44 UnitedHealth Group
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 the dilutive
effect of common stock equivalents, consisting of shares that might be issued
upon exercise of common stock options.
DERIVATIVE FINANCIAL INSTRUMENTS
As part of our risk management strategy, we may 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 141,
business combinations initiated after June 30, 2001, must be accounted for using
the purchase method of accounting. Under SFAS No. 142, amortization of goodwill
and indefinite-lived intangible assets will cease, and the carrying value of
these assets will instead be evaluated for impairment using a fair-value-based
test, applied at least annually. We adopted SFAS No. 142 on January 1, 2002,
completed the initial impairment tests of goodwill as required by SFAS No. 142,
and determined that our goodwill is not impaired. The following table shows net
earnings and earnings per common share adjusted to reflect the adoption of the
non-amortization provisions of SFAS No. 142 as of the beginning of the
respective periods:
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. We must adopt the standard on January 1, 2003. We
do not expect the adoption of SFAS No. 143 will have any impact on our financial
position or results of operations.
PAGE 45 UnitedHealth Group
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets," which provides new accounting and financial
reporting guidance for the impairment or disposal of long-lived assets and the
disposal of segments of a business. We adopted the standard on January 1, 2002,
and its adoption did not have any impact on our financial position or results of
operations.
RECLASSIFICATIONS
Certain 1999 and 2000 amounts in the consolidated financial statements have been
reclassified to conform to the 2001 presentation. These reclassifications have
no effect on net earnings or shareholders' equity as previously reported.
[3] ACQUISITIONS
In October 2001, our Specialized Care Services business segment acquired
Spectera, Inc. (Spectera), a leading vision care benefit company in the United
States, to expand the breadth of service offerings we extend to our customers.
We paid $37 million in cash, accrued $25 million for additional consideration
due, and issued 1.2 million shares of common stock with a value of $81 million
in exchange for all outstanding shares of Spectera. The purchase price and
related acquisition costs of approximately $146 million exceeded the preliminary
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
Spectera's operations since the acquisition date are included in our 2001
Consolidated Statement of Operations. The pro forma effects of the Spectera
acquisition on our consolidated financial statements were not material. In
February 2002, the $25 million of accrued consideration was satisfied by issuing
an additional 335,000 shares of our common stock.
In September 1999, our Ingenix business segment acquired Worldwide Clinical
Trials, Inc. (WCT), a leading clinical research organization. We paid $214
million in cash in exchange for all outstanding shares of WCT, and we accounted
for the purchase using the purchase method of accounting. Only the
post-acquisition results of WCT are included in our consolidated financial
statements. The purchase price and other acquisition costs exceeded the
estimated fair value of net assets acquired by $214 million, which was assigned
to goodwill and is being amortized over its estimated useful life of 30 years.
The pro forma effects of the WCT acquisition on our consolidated financial
statements were not material.
In June 1999, our Specialized Care Services business segment acquired
Dental Benefit Providers, Inc. (DBP), one of the largest dental benefit
management companies in the United States. We paid $105 million in cash, and we
accounted for the acquisition using the purchase method of accounting. The
purchase price and other acquisition costs exceeded the estimated fair value of
net assets acquired by $105 million, which was assigned to goodwill and is being
amortized over its estimated useful life of 40 years. The pro forma effects of
the DBP acquisition on our consolidated financial statements were not material.
For the years ended December 31, 2001, 2000 and 1999, consideration paid or
issued for smaller acquisitions accounted for under the purchase method, which
were not material to our consolidated financial statements, was $134 million,
$76 million and $15 million, respectively.
PAGE 46 UnitedHealth Group
[4] OPERATIONAL REALIGNMENT AND OTHER CHARGES
In conjunction with a comprehensive operational realignment initiated in 1998,
we developed and approved an implementation plan (the Plan). We recognized
corresponding charges to operations of $725 million in the second quarter of
1998, which reflected the estimated costs to be incurred under the Plan. The
charges included costs associated with asset impairments; employee terminations;
disposing of or discontinuing business units, product lines and contracts; and
consolidating and eliminating certain claim processing and customer service
operations and associated real estate obligations.
We completed our operational realignment plan in 2001. Actual costs
incurred executing the Plan exceeded estimates by approximately $4 million,
which has been included in 2001 operating costs in the Consolidated Statements
of Operations. These excess costs were incurred in the fourth quarter of 2001.
Activities associated with the Plan resulted in the reduction of approximately
5,100 positions, affecting approximately 5,800 people.
As of December 31, 2000, we had completed all planned business dispositions
and market exits pursuant to the Plan. Accordingly, our 2001 financial
statements do not include the operating results of exited businesses or markets.
Our Consolidated Statements of Operations include results for businesses
disposed of and markets exited in connection with our operational realignment as
follows: $312 million in revenues and $9 million in earnings from operations in
2000, and $689 million in revenues and $41 million of losses from operations in
1999. These amounts do not include operating results from the counties where
UnitedHealthcare withdrew its Medicare product offerings effective January 1,
2001, and January 1, 2000. Annual revenues for 2000 from the counties exited
effective January 1, 2001, were approximately $320 million. Annual revenues for
1999 from the counties exited effective January 1, 2000, were approximately $230
million.
The operational realignment and other charges did not cover certain aspects
of the Plan, including new information systems, data conversions, process
re-engineering, temporary duplicate staffing costs as we consolidated processing
and service centers, and employee relocation and training. These costs were
expensed as incurred or capitalized, as appropriate. During 2001, 2000 and 1999,
we incurred expenses of approximately $20 million, $57 million and $52 million,
respectively, related to these activities.
The table below is a roll-forward of accrued operational realignment and
other charges, which are included in Accounts Payable and Accrued Liabilities in
the accompanying Consolidated Balance Sheets (in millions):
--------
(1) Consists of noncancelable lease obligations for which definitive subleases
have been finalized. These amounts have been transferred to other liability
accounts as they are fixed and determinable obligations.
PAGE 47 UnitedHealth Group
[5] AARP
In January 1998, we began providing services under a 10-year contract to provide
insurance products and services to members of AARP. Under the terms of the
contract, we are compensated for claim administration and other services as well
as for assuming underwriting risk. We are also engaged in product development
activities to complement the insurance offerings under this program. Premium
revenues from our portion of the AARP insurance offerings were approximately
$3.5 billion during 2001, 2000 and 1999.
The underwriting gains or losses related to the AARP business are recorded
as an increase or decrease to a rate stabilization fund (RSF). The primary
components of the underwriting results are premium revenue, medical costs,
investment income, administrative expenses, member service expenses, marketing
expenses and premium taxes. Underwriting gains and losses are charged 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. 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.
When we entered the contract, we assumed the policy and other policy
liabilities related to the AARP program, and we received cash and premium
receivables from the previous insurance carrier equal to the carrying value of
these liabilities as of January 1, 1998. The following AARP program-related
assets and liabilities are included in our Consolidated Balance Sheets (in
millions):
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.
PAGE 48 UnitedHealth Group
[6] CASH, CASH EQUIVALENTS AND INVESTMENTS
As of December 31, the amortized cost, gross unrealized holding gains and
losses, and fair value of cash, cash equivalents and investments were as follows
(in millions):
As of December 31, 2001, debt securities consisted of $1,073 million in U.S.
Government and Agency obligations, $1,684 million in state and municipal
obligations, and $1,230 million in corporate obligations. At December 31, 2001,
we held $306 million in debt securities with maturities less than one year,
$1,475 million in debt securities maturing in one to five years, and $2,206
million in debt securities with maturities of more than five years.
During 2001, 2000 and 1999, respectively, we contributed UnitedHealth
Capital investments valued at approximately $22 million, $52 million and $50
million to the UnitedHealth Foundation, a non-consolidated, not-for-profit
organization. The realized gain of approximately $18 million in 2001, $51
million in 2000 and $49 million in 1999 was offset by the related contribution
expense of $22 million in 2001, $52 million in 2000 and $50 million in 1999. The
net expense of $4 million in 2001 and $1 million in both 2000 and 1999 is
included in Investment and Other Income in the accompanying Consolidated
Statements of Operations.
In a separate disposition of UnitedHealth Capital investments during 2000,
we realized a gain of $27 million.
We recorded realized gains and losses on the sale of investments, excluding
the UnitedHealth Capital dispositions described above, as follows (in millions):
PAGE 49 United Health Group
[7] COMMERCIAL PAPER AND DEBT
Commercial paper and debt consisted of the following as of December 31 (in
millions):
As of December 31, 2001, our outstanding commercial paper had interest rates
ranging from 1.9% to 2.7%. In November 2001, we issued $100 million of
floating-rate notes due November 2003 and $150 million of floating-rate notes
due November 2004. The interest rates on the notes are reset quarterly to the
three-month LIBOR (London Interbank Offered Rate) 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, 2001, the applicable rates on the notes were 2.4% and
2.7%, respectively. A portion of the proceeds from these borrowings was used to
repay the $150 million of floating-rate notes that matured in November 2001.
In January 2002, we issued $400 million of 5.2% fixed-rate notes due
January 2007. Proceeds from this borrowing will be used 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.
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 2002. We also have the capacity to issue approximately $200
million of extendible commercial notes (ECNs). As of December 31, 2001 and 2000,
we had no amounts outstanding under our credit facilities or ECNs.
Our debt agreements and credit facilities contain various covenants, the
most restrictive of which 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, excluding the impact of the debt issued
in January 2002, for the years ending December 31 are as follows (in millions):
We made cash payments for interest of $91 million, $68 million and $43 million
in 2001, 2000 and 1999, respectively.
PAGE 50 UnitedHealth Group
[8] SHAREHOLDERS' EQUITY
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
We conduct our operations through our wholly-owned subsidiaries. These companies
are subject to standards established by the National Association of Insurance
Commissioners (NAIC) that, among other things, require them 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, 2001, approximately $660 million
of our $5.7 billion of cash and investments was held by non-regulated
subsidiaries. Of this amount, approximately $260 million was segregated for
future regulatory capital needs and $230 million was available for general
corporate use, including acquisitions and share repurchases. The remaining $170
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
intention of maintaining 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 level regulators require. As of December
31, 2001, our regulated subsidiaries had aggregate statutory capital and surplus
of approximately $2.0 billion, more than $1.1 billion above the $850 million of
required aggregate capital and surplus.
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 2001, we
repurchased 19.6 million shares for an aggregate of $1.1 billion. Through
December 31, 2001, we had repurchased approximately 112.5 million shares for an
aggregate cost of $3.7 billion since the program began in November 1997. As of
December 31, 2001, we had board of directors' authorization to purchase up to an
additional 8.8 million shares of our common stock. In February 2002, the board
of directors authorized us to repurchase up to an additional 30 million shares
of common stock under the program.
As part of our share repurchase activities, we have entered into agreements
with an independent third party to purchase shares of our common stock, where
the number of shares we purchase, if any, depends upon market conditions and
other contractual terms. As of December 31, 2001, we had conditional agreements
to purchase up to 6.1 million shares of our common stock at various times and
prices through 2003, at an average price of approximately $58 per share.
PREFERRED STOCK
At December 31, 2001, we had 10 million shares of $0.001 par value preferred
stock authorized for issuance, and no preferred shares issued and outstanding.
DIVIDENDS
On February 12, 2002, the board of directors approved an annual dividend for
2002 of $0.03 per share. The dividend will be paid on April 17, 2002, to
shareholders of record at the close of business on April 1, 2002.
[9] STOCK-BASED COMPENSATION PLANS
The company maintains various stock and incentive plans for the benefit of
eligible employees and directors. As of December 31, 2001, employee stock and
incentive plans allowed for the future granting of up to 29.6 million shares as
incentive or non-qualified stock options, stock appreciation rights, restricted
stock awards and performance awards. Our non-employee director stock option plan
allowed for future granting of 710,000 non-qualified stock options as of
December 31, 2001.
PAGE 51 UnitedHealth Group
Stock options are granted at an exercise price not less than the fair
market value of the common stock at the date of grant. They generally vest over
four years and may be exercised up to 10 years from the date of grant. Activity
under our various stock plans is summarized in the table below (shares in
thousands):
We do not recognize compensation expense in connection with stock option grants
because we grant stock options at exercise prices that equal or exceed the fair
market value of the stock at the time options are granted. If we had determined
compensation expense using fair market values for the stock options, net
earnings per common share would have been reduced to the following pro forma
amounts:
To determine compensation cost under the fair value method, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. Principal assumptions we used in applying the
Black-Scholes model were as follows:
We also maintain a non-leveraged employee stock ownership plan and an employee
stock purchase plan. Activity related to these plans was not significant in
relation to our consolidated financial results in 2001, 2000 and 1999.
PAGE 52 UnitedHealth Group
[10] INCOME TAXES
Components of the Provision (Benefit) for Income Taxes
Reconciliation of the Tax Provision at the U.S. Federal Statutory Rate to the
Provision for Income Taxes
Components of Deferred Income Tax Assets and Liabilities
Valuation allowances are provided when it is considered unlikely that deferred
tax assets will be realized. The valuation allowance primarily relates to future
tax benefits on certain purchased domestic and foreign net operating loss
carryforwards.
We made cash payments for income taxes of $384 million in 2001, $352
million in 2000 and $214 million in 1999. We increased additional paid-in
capital and reduced income taxes payable by $133 million in 2001, $116 million
in 2000 and $23 million in 1999 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. Tax returns for fiscal years 1998 and
1999 are currently being examined by the Internal Revenue Service. We do not
believe any adjustments that may result will have a significant impact on our
consoli-
PAGE 53 UnitedHealth Group
dated operating results or financial position. Examinations for the 1996
and 1997 tax years have been completed and did not have a significant impact on
our consolidated operating results or financial position.
[11] COMMITMENTS AND CONTINGENCIES
LEASES
We lease facilities, computer hardware and other equipment under long-term
operating leases that are noncancelable and expire on various dates through
2011. Rent expense under all operating leases was $135 million in 2001, $132
million in 2000 and $129 million in 1999.
At December 31, 2001, future minimum annual lease payments, net of sublease
income, under all noncancelable operating leases were as follows (in millions):
SERVICE AGREEMENTS
In 1995 and 1996, we entered into three separate contracts for certain data
center operations and support, and network and voice communication services,
each with an approximate term of 10 years. Expenses incurred in connection with
these agreements were $196 million in 2001, $182 million in 2000 and $172
million in 1999.
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.
These matters include: claims relating to health care benefits coverage; medical
malpractice actions; allegations of anti-competitive and unfair business
activities; disputes over compensation and termination of contracts including
those with physicians and other health care providers; disputes related to our
administrative services, including actions alleging claim administration errors
and failure to disclose rate discounts and other fee and rebate arrangements;
disputes over benefit copayment calculations; claims related to disclosure of
certain business practices; and claims relating to customer audits and contract
performance.
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, including those
described above, currently threatened or pending will, individually or in
aggregate, have a material adverse effect on our results of operations or
financial position.
GOVERNMENT REGULATION
Our business is regulated domestically at federal, state and local levels, and
internationally. 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 governmental reviews, audits and
investigations. However, we do not believe the results of any of the current
audits, individually or in the aggregate, will have a material adverse effect on
our financial position or results of operations.
[12] SEGMENT FINANCIAL INFORMATION
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.
PAGE 54 UnitedHealth Group
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 claim processing services Uniprise provides to UnitedHealthcare, 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 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 companywide costs associated with core process
improvement initiatives, net expenses from charitable contributions to the
UnitedHealth Foundation, and eliminations of intersegment transactions. In
accordance with accounting principles generally accepted in the United States,
segments with similar economic characteristics may be combined. The financial
results of UnitedHealthcare and Ovations have been combined in the Health Care
Services segment column in the tables presented on this page because both
businesses have similar products and services, types of customers, distribution
methods and operational processes, and both operate in a similar regulatory
environment (in millions):
--------
(1) Total Assets and Net Assets exclude, where applicable, debt and accrued
interest of $1,603 million, $1,222 million and $1,002 million, income
tax-related assets of $316 million, $235 million and $163 million, and income
tax-related liabilities of $252 million, $168 million and $167 million as of
December 31, 2001, 2000 and 1999, respectively.
PAGE 55 UnitedHealth Group
[13] QUARTERLY FINANCIAL DATA (UNAUDITED)
-------
(1) Includes a $14 million, net permanent tax benefit related to the
contribution of UnitedHealth Capital investments to the UnitedHealth Foundation.
Excluding this benefit, Net Earnings and Diluted Net Earnings per Common Share
were $160 million and $0.48 per share, respectively.
(2) Includes a $27 million gain ($17 million after tax) related to the
disposition of UnitedHealth Capital investments. Excluding this gain, Net
Earnings and Diluted Net Earnings per Common Share were $193 million and $0.58
per share, respectively.
PAGE 56 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 and include some amounts that are based on management's best estimates
and judgments.
To meet its responsibility, management depends on its accounting systems
and related internal accounting controls. These systems are designed to provide
reasonable assurance, at an appropriate cost, that financial records are
reliable for use in preparing financial statements and that assets are
safeguarded. Qualified personnel throughout the organization maintain and
monitor these internal accounting controls on an ongoing basis.
The Audit Committee of the board of directors, composed entirely of
directors who are not employees of the company, meets periodically and privately
with the company's independent public accountants and management to review
accounting, auditing, internal control, financial reporting and other matters.
WILLIAM W. MCGUIRE, MD
Chairman and Chief Executive Officer
STEPHEN J. HEMSLEY
President and Chief Operating Officer
PATRICK J. ERLANDSON
Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and
Directors of UnitedHealth Group Incorporated:
We have audited the accompanying consolidated balance sheets of UnitedHealth
Group Incorporated (a Minnesota Corporation) and Subsidiaries as of December 31,
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
PAGE 57 UnitedHealth Group
CORPORATE AND BUSINESS LEADERS
UNITEDHEALTH GROUP
WILLIAM W. MCGUIRE, MD
Chairman and Chief Executive Officer
STEPHEN J. HEMSLEY
President and Chief Operating Officer
PATRICK J. ERLANDSON
Chief Financial Officer
DAVID J. LUBBEN
General Counsel
JEANNINE M. RIVET
Executive Vice President
JAMES B. HUDAK
Chief Executive Officer
UnitedHealth Technologies
REED V. TUCKSON, MD
Senior Vice President
Consumer Health and
Medical Care Advancement
L. ROBERT DAPPER
Senior Vice President
Human Capital
JOHN S. PENSHORN
Director of Capital Markets Communications and Strategy
UNITEDHEALTHCARE
ROBERT J. SHEEHY
Chief Executive Officer
OVATIONS
LOIS QUAM
Chief Executive Officer
UNIPRISE
R. CHANNING WHEELER
Chief Executive Officer
SPECIALIZED CARE SERVICES
RONALD B. COLBY
Chief Executive Officer
INGENIX
JEANNINE M. RIVET
Chief Executive Officer
BOARD OF DIRECTORS
WILLIAM C. BALLARD, JR.
Of Counsel
Greenebaum, Doll & McDonald
Louisville, Kentucky, law firm
RICHARD T. BURKE
Former Chief Executive Officer
and Governor
Phoenix Coyotes
National Hockey League team
STEPHEN J. HEMSLEY
President and
Chief Operating Officer
UnitedHealth Group
JAMES A. JOHNSON
Vice Chairman
Perseus, LLC
Private merchant banking
and investment firm
THOMAS H. KEAN
President
Drew University
DOUGLAS W. LEATHERDALE
Former Chairman and
Chief Executive Officer
The St. Paul Companies, Inc.
Insurance and related services
WILLIAM W. MCGUIRE, MD
Chairman and
Chief Executive Officer
UnitedHealth Group
WALTER F. MONDALE
Partner
Dorsey & Whitney LLP
Minneapolis, Minnesota, law firm
MARY O. MUNDINGER, RN, DRPH
Dean and Centennial Professor in Health Policy, School of Nursing, and Associate
Dean, Faculty of Medicine Columbia University
ROBERT L. RYAN
Senior Vice President and
Chief Financial Officer
Medtronic, Inc.
Medical technology company
DONNA E. SHALALA, PHD
President
University of Miami
WILLIAM G. SPEARS
Managing Partner
Spears Grisanti &
Brown LLC
New York City-based investment
counseling and management firm
GAIL R. WILENSKY, PHD
Senior Fellow
Project HOPE
International health foundation
AUDIT COMMITTEE
WILLIAM C. BALLARD, JR.
JAMES A. JOHNSON
DOUGLAS W. LEATHERDALE
ROBERT L. RYAN
COMPENSATION AND HUMAN RESOURCES COMMITTEE
THOMAS H. KEAN
MARY O. MUNDINGER
WILLIAM G. SPEARS
COMPLIANCE AND GOVERNMENT AFFAIRS COMMITTEE
RICHARD T. BURKE
WALTER F. MONDALE
GAIL R. WILENSKY
EXECUTIVE COMMITTEE
WILLIAM C. BALLARD, JR.
DOUGLAS W. LEATHERDALE
WILLIAM W. MCGUIRE
WILLIAM G. SPEARS
NOMINATING COMMITTEE
WILLIAM C. BALLARD, JR.
THOMAS H. KEAN
DOUGLAS W. LEATHERDALE
WILLIAM W. MCGUIRE
WILLIAM G. SPEARS
PAGE 58 UnitedHealth Group
FINANCIAL PERFORMANCE AT A GLANCE
-------------------------------------------------------------------------------
(1) Excludes nonrecurring items in 1999 and 2000, as described in footnotes 1
and 2 at the bottom of page 22.
PAGE 59 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 25, 2002. These prices do not include commissions
or fees associated with purchasing or selling this security.
As of February 25, 2002, the company had 12,970 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 15, 2002, at 10 a.m., at UnitedHealth Group
Center, 9900 Bren Road East, Minnetonka, Minnesota.
DIVIDEND POLICY
UnitedHealth Group's dividend policy was established by its board of directors
in August 1990. The policy requires the board to review the company's audited
financial statements following the end of each fiscal year and decide whether it
is advisable to declare a dividend on the outstanding shares of common stock.
Shareholders of record on April 2, 2001, received an annual dividend for
2001 of $0.03 per share. On February 12, 2002, the board of directors approved
an annual dividend for 2002 of $0.03 per share. The dividend will be paid on
April 17, 2002, to shareholders of record at the close of business on April 1,
2002.
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