--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
Commission file number: 1-10864
------------------------
UNITED HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: (612) 936-1300
------------------------
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO __
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 2, 1998, was approximately $8,173,551,317* (based on the
last reported sale price of $61.1875 per share on March 2, 1998, on the New York
Stock Exchange).
As of March 16, 1998, 192,580,947 shares of the registrant's Common Stock,
$.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders of Registrant for the fiscal year ended
December 31, 1997. Certain information therein is incorporated by reference into
Part II hereof.
Proxy Statement for the Annual Meeting of Shareholders of Registrant to be
held on May 13, 1998. Certain information therein is incorporated by reference
into Part III hereof.
------------------------
*Only shares of common stock held beneficially by directors and executive
officers of the Company and persons or entities filing Schedules 13G received
by the Company have been excluded in determining this number.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
United HealthCare Corporation is a national leader offering health care
coverage and related services to help people achieve improved health and
well-being through all stages of life. The Company operates in all 50 states,
the District of Columbia, Puerto Rico and internationally. United HealthCare's
products and services reflect a number of core capabilities, including medical
information management, health benefit administration, care coordination, risk
assessment and pricing, health benefit design and provider contracting. With
these capabilities, United is able to provide comprehensive health care
management services through organized health systems and insurance products,
including health maintenance organizations ("HMOs"), point-of-service plans
("POS"), preferred provider organizations ("PPO") and managed indemnity
programs. The Company also offers specialized health care management services
and products such as behavioral health services, workers compensation and
disability services, utilization review services, specialized provider networks,
employee assistance programs, and knowledge and information services.
United HealthCare Corporation is a Minnesota corporation, incorporated in
January 1977. Unless the context otherwise requires, the terms "United," "United
HealthCare" or the "Company" refer to United HealthCare Corporation and its
subsidiaries. United's executive offices are located at 300 Opus Center, 9900
Bren Road East, Minnetonka, Minnesota 55343; telephone (612) 936-1300.
BUSINESS OPERATIONS
The Company operates in a single industry, the health and well-being
marketplace. In late 1997, the Company announced an internal realignment that
established functional business units for each of the Company's six key business
lines. These units include Health Plans, Insurance Services, Strategic Business
Services, Retirees and Senior Services, Specialized Care Services, and Knowledge
and Information. Although the Company's general management and various
operational aspects, including information systems and certain administrative
functions, remain interrelated, the realignment will allow each business unit to
focus fully on its specific set of customers and markets.
HEALTH PLANS
The Health Plans business unit operates organized health plans nationally
and internationally. As of December 31, 1997, United held a majority ownership
interest in health plans operating in approximately 40 markets nationwide and in
Puerto Rico. The Health Plans business unit is also engaged in a joint venture
that operates a health plan in the Republic of South Africa. The Company also
provides managed care consulting services in Germany and Hong Kong through this
business unit.
For health plans it owns, United assumes the risk for health care and
administrative costs in return for premium revenue. United's owned health plans
usually are licensed as HMOs or insurers. These plans provide comprehensive
health care coverage for a fixed fee or premium that usually does not vary with
the extent of medical services received by the member. Most of United's owned
health plans contract with independent providers of health care services to help
manage medical and hospital use, quality and costs. A few owned health plans
employ health care providers and directly deliver health care services to
members. United's health plans that employ health care providers strive for
cost-effective delivery of health care services by emphasizing appropriate use
of these services, promoting preventive health services, and encouraging the use
of clinically proven treatments and best medical practices. United also provides
administrative and other management services to a limited number of health plans
in which United has no ownership interest. United receives an administrative fee
for providing its services to these plans and generally assumes no
responsibility for health care costs.
HEALTH PLAN POINT-OF-SERVICE PRODUCTS. United HealthCare's point-of-service
products are one of the Company's most popular health plan coverage options.
Unlike some traditional HMO products which only
1
cover non-emergency services received from contracted providers,
point-of-service products also provide coverage, usually at a lower level, for
services received from non-contracted providers. Sometimes, this out-of-network
coverage is offered directly by the health plan, but more often it is provided
by an insurance policy "wrapped around" the health plan benefit contract. The
insurance policy usually is provided through one of United's insurance
subsidiaries.
HEALTH PLAN SELF-FUNDED PRODUCTS. United has developed self-funded products
for employers who want the cost containment aspects of an HMO-type product while
self-insuring the health care cost risk. United uses the provider networks it
has developed for its HMO or insurance products for its self-funded products,
many of which include a point-of-service feature. The provider contracts for
these products are with individual physicians or groups of physicians as well as
health care facilities and are generally on a standard fee-for-service basis.
With self-funded products, employers and other sponsoring groups have access to
a provider network and the administrative and care coordination services
associated with an HMO product, but the sponsoring company or group generally
bears the financial costs associated with the health care.
HEALTH PLAN MEDICARE PRODUCTS. Several of United's owned health plans
contract with the federal Health Care Financing Administration ("HCFA") to
provide coverage for Medicare-eligible individuals. In addition, several more
health plans are in the process of seeking such a contract. Under these
contracts, plans receive a fixed monthly payment from HCFA for each enrolled
individual and must provide at least the benefits that would be covered under
traditional Medicare. Typically, the plans provide a significantly higher level
of coverage and may, but often do not, charge an additional premium to the
members for the additional benefits. The health plans generally use a subset of
their commercial product provider network as the provider network for the
Medicare products. Any Medicare-eligible person in a plan's service area may
enroll in the Medicare product without underwriting or health screening.
Some of United's health plans also offer these Medicare products to or
through employer groups as a way of providing retiree health care coverage. In
addition, certain health plans market Medicare Select, a modification of a
Medicare supplemental insurance program that allows individuals to seek care
through HMOs or PPOs. Individuals with Medicare Select receive additional
benefits at a lower cost while retaining their traditional Medigap-type
coverage.
HEALTH PLAN MEDICAID PRODUCTS. Several of United's health plans offer
coverage to Medicaid-eligible individuals. These plans typically contract with a
state agency to provide such coverage and receive a fixed monthly payment for
each enrolled individual. The level of benefits generally is set by contract,
and few additional benefits are offered. Enrollment usually must be offered to
all eligible individuals without underwriting or health screening. Generally,
the provider network for commercial products is used, but some providers may
refuse to participate in the Medicaid product and the network may have a
different number or set of providers for other reasons.
INSURANCE SERVICES
The Insurance Services business unit develops and sells PPO and managed
indemnity products nationwide. United's insurance subsidiaries are licensed to
sell their products in all 50 states, the District of Columbia, Puerto Rico,
Guam and the Virgin Islands. Through these insurance subsidiaries, United offers
Options PPO, a national PPO product. Options PPO combines access to United's
commercial health plan networks and certain specialty services with managed
indemnity coverage. Individuals covered under the Options PPO product have lower
out-of-pocket costs when they obtain covered services from contracted providers,
but also have the option to go outside of the network for covered services.
For customers with less than 50 employees United typically sells its
products on an insured basis for a fixed premium, with no experience adjustments
made to the premium. This type of business often has been subject to sudden and
unpredictable changes in health care costs and generally has high administrative
and
2
marketing expenses. In addition, these products are subject to extensive state
regulations. For larger customers, United sells these products on both an
insured and self-funded basis. The insured products often are sold on an
experience-rated basis, and the self-funded products usually are sold on an
administrative fee basis. In some cases, United's agreement with the customer
includes penalties or rewards related to administrative service standards and/or
health care costs.
United's insurance subsidiaries also offer several health insurance products
in conjunction with health plan products. These products help employers replace
multiple health care policies and vendors with a single health care plan. These
subsidiaries also offer reinsurance and other insured products on a selective
basis to most of United's health plans and to employers and other sponsoring
groups offering self-funded health care benefit plans. Under an agreement with
Metropolitan Life Insurance Company ("MetLife"), United offers MetLife's life,
dental, accidental death and dismemberment and short-term disability products to
United customers, and MetLife offers United's health care coverage products to
MetLife customers. This agreement with MetLife also contains certain exclusivity
and non-competition provisions.
STRATEGIC BUSINESS SERVICES
Strategic Business Services focuses on United HealthCare's business with
large employers. Its core competencies include sales and account management,
benefits administration and customer services, including government-related
operations, and care management.
Strategic Business Services provides sales and account management services
to over 200 customers, approximately 50% of which are Fortune 500 companies.
United's network-based medical and insurance products and specialized care
services are available to these customers, with various types of funding
arrangements. Strategic Business Services specializes in serving the managed
health care needs of large multi-site employers, and offers long-term strategic
health care coverage planning to its customers.
The operations unit of Strategic Business Services provides benefits
administration services and customer services to United HealthCare customers in
all market segments. Benefits administration services include enrollment,
eligibility, claims processing, and billing. Customer services include
telephonic information, provider directories and identification card production,
and oversight of the government operations and care management centers
divisions.
The government operations division provides Medicare Part A services for
hospitals and nursing homes in Connecticut, New York and Michigan and Medicare
Part B services for beneficiaries and providers in Connecticut, Minnesota,
Mississippi and Virginia. This division also provides specialized claims
processing services for durable medical equipment in 10 northeastern states.
This unit serves as the national Medicare Part B carrier for the Railroad
Retirement Board. In addition, at the request of the Office of Personnel
Management and HCFA, the government operations division contracts with all
insurance carriers involved in the administration of the Federal Employee Health
Benefit Plan ("FEHBP").
The care management centers division offers customers medical management
programs designed to improve patients' clinical outcomes, reduce medical
expenses, and increase consumer satisfaction. These services include utilization
review, review of hospital-based services, and the administration of high-impact
medical programs based upon customer-specific demographic and claims data.
RETIREES AND SENIOR SERVICES
The Retiree and Senior Services business unit includes the Company's
operations that target the market segment comprised of people age 50 and older.
These operations include Medigap and Medicare supplement products, United's
EverCare-Registered Trademark- program and the Company's United/AARP Division.
UNITED/AARP DIVISION. In early 1997, the Company finalized a 10 year
agreement with the American Association of Retired Persons ("AARP") to
underwrite Medicare and hospital supplement insurance
3
products effective January 1, 1998. During 1997, the Company coordinated the
transfer of the operations from AARP's existing vendor and prepared to implement
this contract. As of January 1, 1998, the Company's insurance subsidiaries
assumed the underwriting risk and claim administration associated with the
business.
EVERCARE-REGISTERED TRADEMARK-. United's EverCare-Registered Trademark-
program coordinates the provision of a broad spectrum of health care services
primarily to permanent nursing home residents through employed and contracted
physicians and nurse practitioners. EverCare is participating in a demonstration
project with HCFA to offer health care services to the elderly nursing home
residents in several separate locations throughout the country.
SPECIALIZED CARE SERVICES
United HealthCare's Specialized Care Services business unit includes several
business lines that focus on specific aspects of managing health care. For its
specialized care services, United generally receives fees for the services it
provides, which are primarily administrative in nature, and assumes no
responsibility for health care costs except for certain behavioral health
products. United assumes some responsibility for health care costs related to
providing mental health/substance abuse services.
The Company's specialized care services are sold to and through other United
business units as well as to independent entities such as HMOs, PPOs, insurers,
Blue Cross/Blue Shield plans, third-party administrators, employers, labor
unions and/or government agencies. United's specialized care services were
available to approximately 55 million participant lives at December 31, 1997,
many of whom were not enrolled in one of United's owned health plans. One person
may be covered by more than one specialty service and may be counted more than
once.
BEHAVIORAL HEALTH SERVICES. United's behavioral health services programs
manage mental health and substance abuse-related services through specialized
provider networks and behavioral health care managers. This unit's customers
include most of United's health plans, private and public sector employers and
government agencies. These services are provided by Company-employed behavioral
health care professionals and a national network of contracted providers. United
assumes the responsibility for health care costs related to some of these
services.
HEALTH INFORMATION AND PERSONAL CARE MANAGEMENT PROGRAMS. Optum-Registered
Trademark-, United's health information and personal care management program,
helps consumers make informed choices about their health and well-being by
focusing on preventive care, self-care, smart lifestyle options, and consumer
education. United's Optum-Registered Trademark- NurseLine and employee
assistance programs provide customers the opportunity to improve the quality and
reduce the cost of medical care by helping them identify medical and human risks
that could affect their health and well-being and develop problem-specific
solutions to change behavior and reduce those risks. In addition,
Optum-Registered Trademark- issues various publications to members that
emphasize health and wellness and explain how to use health care services most
effectively. In 1997, Optum-Registered Trademark- introduced Health Forums, a
customized health information service available via the Internet.
TRANSPLANT NETWORK. United's transplant network services programs offer
clients access to a network of health care facilities for transplant-related
services and transplant care management services. United negotiates fixed,
competitive rates for high-cost, low-frequency health care services such as
organ and tissue transplants.
WORKERS COMPENSATION AND DISABILITY SERVICES. United's workers compensation
and disability services tailor United's broad resources into products and
services that apply capabilities such as coordination and use of specialized
preferred provider networks, to workers compensation and casualty insurance
cases. These products and services include hospitalization and outpatient
surgery pre-certification and care management, access to provider networks,
specialized programs such as carpal tunnel and back injury case management, and
review of imaging (CAT scans and MRI) services.
4
KNOWLEDGE AND INFORMATION
United's Knowledge and Information business unit builds upon the Company's
heritage of using its large database and expertise to provide knowledge and
information services to providers, drug and device manufacturers, the
government, payors, employers and other interested organizations.
Applied HealthCare Informatics, Inc. ("AHI") was formed in 1996 to combine
some of the Company's existing information-related businesses and capabilities.
AHI's operations have expanded since then as a result of several acquisitions as
well as internal growth. AHI provides products and services to United's health
plans and other businesses and to external customers in the following areas:
data collection and warehousing; data analysis and reporting; health information
publications, database products, outcomes and effectiveness research; health
services delivery evaluation and improvement; appropriateness of care programs;
and the creation of information management tools.
United's Knowledge and Information business unit also includes the Center
for Health Care Policy and Evaluation, United's longstanding health care
information and research unit; and its Global Consulting division, which
explores opportunities to sell the Company's products and services in foreign
countries.
EXPANSION AND DIVESTITURE OF OPERATIONS
United continually evaluates expansion opportunities and often considers
whether to divest or stop offering certain of its businesses or products.
Expansion opportunities may include acquiring or disposing of a specialized care
services program or of insurance and health plan operations. United also devotes
significant attention to developing new products and techniques for managing
health care costs, measuring the outcomes and efficiency of health care
delivered, and coordinating and managing health care delivery systems. As part
of its expansion efforts, in 1997 the Company earmarked $100 million from the
Company's corporate usable cash reserves to invest in and help develop small but
promising ventures.
During 1997, the Company completed several acquisitions and also sold or
terminated certain lines of business and ceased offering some products, all as
part of its ongoing emphasis on its strategic focus. In addition, United has an
ongoing extensive acquisition program. Numerous acquisitions may affect United's
ability to integrate and manage its overall business effectively. Integration
activities relating to acquisitions may increase costs, affect membership,
affect revenue and earnings growth and adversely affect United's financial
results.
GOVERNMENT REGULATION
United's primary business, offering health care coverage and health care
management services, is heavily regulated at both the federal and state level.
United believes it complies in all material respects with the various federal
and state regulations that apply to its current operations. To maintain
compliance, United or a subsidiary may make occasional changes in its services,
products, organizational or capital structure, or marketing methods.
Government regulation of health care coverage products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Regulatory
agencies generally have broad discretion to issue regulations and interpret and
enforce laws and rules. Changes in applicable laws and regulations are
continually being considered, and the interpretation of existing laws and rules
also may change periodically. These regulatory revisions could affect United's
operations and financial results. Certain proposed changes in Medicare and
Medicaid programs may improve opportunities to enroll people under products
developed for the senior populations. Other proposed changes may limit available
reimbursement and increase competition in those programs, with adverse effects
on United's financial results. Also, it may be more difficult for United to
control medical costs if federal and state bodies continue to consider and enact
significant and sometimes onerous managed care laws and regulations. Examples of
such laws are medical malpractice liability laws for health plans; mandates
requiring health plans to offer point-of-service plans
5
and other benefits such as direct access and formulary restrictions; limits on
contractual terms with providers, including termination provisions;
implementation of a mandatory third party review process for certain coverage
denials and other laws and limits on utilization management.
HIPPAA. The Health Insurance Portability and Accountability Act of 1996
("HIPAA") may represent the most significant federal reform of employee benefits
law since the enactment of the Employee Retirement Income Security Act ("ERISA")
in 1974. HIPAA's federal standards apply to both the group and individual health
insurance markets, including self-insured employee benefit plans. Some of
HIPAA's significant provisions include guarantees of the availability of health
insurance for certain employees and individuals; limits on the use of
preexisting condition exclusions; prohibitions against discriminating on the
basis of health status; and requirements which make it easier to continue
coverage in cases where an employee is terminated or changes employers. While
United currently believes that it is in material compliance with the
requirements of HIPAA, the law is far reaching and complex, and the federal
agencies involved in the enforcement of HIPAA's provisions have been slow to
provide guidance regarding HIPAA's requirements in the form of final rules and
regulations. Consequently, United's efforts to measure, monitor, and adjust its
business practices to comply with HIPAA are ongoing. Further, significant
enforcement responsibilities for HIPAA's provisions have been given to the
states. It is likely that United will encounter different interpretations of
HIPAA's provisions in the different states as well as varying enforcement
philosophies which may inhibit United's ability to standardize its products and
services across state lines. Ultimately, under HIPAA and other state laws, cost
control through provider contracting and coordinating care may become more
important, and United believes its experience in these areas will allow it to
compete effectively.
FRAUD AND ABUSE. Health care fraud and abuse have become a top priority for
the nation's law enforcement entities. The funding of such law enforcement
efforts has increased dramatically in the past few years and is expected to
continue. The focus of these efforts has been directed at participants in
federal government health care programs such as Medicare, Medicaid and FEHBP.
United participates extensively in these programs. The regulations and
contractual requirements applicable to participants in these programs are
extremely complex and ever changing. In light of this environment, United has
re-emphasized its regulatory compliance efforts for these programs; however, the
programs are subject to highly technical rules. When combined with law
enforcement intolerance for any level of noncompliance, these rules mean that
compliance efforts in this arena continue to be challenging.
AUDITS AND INVESTIGATIONS. United also is potentially subject to
governmental audits, investigations and enforcement actions. These include
possible government actions relating to ERISA, which regulates insured and
self-insured health coverage plans offered by employers and United's services to
such plans and employers; FEHBP; federal and state fraud and abuse laws; state
insurance or licensing laws; and laws relating to utilization management and the
delivery of health care. Any such government actions could result in assessment
of damages, civil or criminal fines or penalties, or other sanctions, including
exclusion from participation in government programs. United is currently
involved in various government investigations, audits and reviews, some of which
are under FEHBP, ERISA, and the authority of state departments of insurance.
United does not believe the results of current audits, individually or in the
aggregate, will have a material adverse effect on its financial results.
HMOS. All of the states in which United's health plans offer HMO products
regulate the activities of those health plans. Most states require periodic
financial reports from entities licensed to operate as HMOs in their states and
impose minimum capital or reserve requirements. Some of United's health plan and
insurance subsidiaries must maintain specified capital levels to support their
operations. In addition, state regulatory agencies require some United health
plans and insurance subsidiaries to maintain restricted cash reserves
represented by interest-bearing instruments, which are held by trustees or state
regulatory agencies to ensure that each subsidiary maintains adequate financial
reserves. Some state
6
regulations allow agencies to review all contracts entered into by HMOs,
including management contracts and agreements between affiliates, for
reasonableness of fees charged and other provisions.
United's health plans that have Medicare risk contracts are regulated by
HCFA. HCFA has the right to audit health plans operating under Medicare risk
contracts to determine each health plan's compliance with HCFA's contracts and
regulations and the quality of care being given to the health plan's members. To
enter into Medicare risk contracts, a health plan must be either federally
qualified or considered a Competitive Medical Plan under HCFA's requirements.
Health plans that offer a Medicare risk product also must comply with
requirements established by peer review organizations ("PROs"), which are
organizations under contract with HCFA to monitor the quality of health care
Medicare beneficiaries receive. PRO requirements relate to quality assurance and
utilization review procedures. United's health plans that have Medicare cost
contracts are subject to similar regulatory requirements. In addition, these
health plans must file certain cost reimbursement reports with HCFA, which are
subject to audit and revision.
United's health plans that have Medicaid contracts are subject to federal
and state regulation regarding services to be provided to Medicaid enrollees,
payment for those services, and other aspects of the Medicaid program. Both
Medicare and Medicaid have, or have proposed, regulations relating to fraud and
abuse, physician incentive plans, and provider referrals that could affect
United's operations.
Many of United's health plans have contracts with FEHBP. These contracts are
subject to extensive regulation, including complex rules regarding premiums
charged. FEHBP is authorized to audit the rates charged retroactively and seek
premium refunds or institute other sanctions against health plans that
participate in the program, depending on the outcome of such audits.
INSURANCE REGULATION. United's insurance subsidiaries and most of the
Company's health plans are regulated by the department of insurance or
equivalent agency in each state or other jurisdiction in which the entity is
licensed. Regulatory authorities have extensive supervisory power regarding:
licensing; the amount of reserves that must be maintained; the approval of
insurance policy forms; the nature of, and limits on, insurance company
investments; periodic examination of insurance company operations; the form and
content of annual statements and other required reports on the financial
condition of insurance companies; and the capital requirements for insurance
companies. United's insurance company subsidiaries must file periodic statutory
financial statements in each jurisdiction in which they are licensed.
Additionally, these companies are periodically examined by the insurance
departments or equivalent agencies of the jurisdictions in which they are
licensed to do business.
INSURANCE HOLDING COMPANY REGULATIONS. Many of United's health plans and
each of United's insurance subsidiaries are regulated under state insurance
holding company regulations. Insurance holding company laws and regulations
generally require registration with the state department of insurance and the
filing of certain reports that describe capital structure, ownership, financial
condition, certain intercompany transactions and general business operations.
Various notice, reporting and pre-approval requirements generally apply to
transactions between companies within an insurance holding company system,
depending on the size and nature of the transactions. Some state insurance
holding company laws and regulations require prior regulatory approval or, in
certain circumstances, prior notice of acquisitions, and certain material
intercompany transfers of assets, as well as certain transactions between the
regulated companies and their parent holding companies or affiliates.
TPAS. Certain subsidiaries of United also are licensed as third-party
administrators ("TPAs") where required. TPA regulations differ greatly from
state to state, but generally contain certain required administrative
procedures, periodic reporting obligations and minimum financial requirements.
PPOS. Some United subsidiaries or products may be subject to PPO regulation
in a particular state. PPO regulations generally contain network, contracting,
financial and reporting requirements, which vary from state to state.
7
UTILIZATION REVIEW REGULATIONS. Many states have enacted laws and/or
adopted regulations governing utilization review activities, and these laws may
apply to some United operations. Generally, these laws and regulations set
specific standards for delivery of services, confidentiality, staffing and
policies and procedures of private review entities, including the credentials
required of personnel.
MCOS. Many states have enacted laws that allow self-insured employers
and/or insurance carriers to use a state-certified managed care organization
("MCO") to apply medical management and other managed care techniques to the
medical benefit portion of workers' compensation. United's subsidiaries
generally have sought MCO certification in states where it is available and
where they market managed care workers compensation products. MCO laws differ
significantly from state to state, but generally address network and utilization
review activities.
ERISA. ERISA regulates how goods and services are provided to or through
certain types of employee health benefit plans. ERISA is a complex set of laws
and regulations that is subject to periodic interpretation by the United States
Department of Labor. ERISA places controls on how United's business units may do
business with employers covered by ERISA, particularly employers that maintain
self-funded plans. The Department of Labor has an ongoing ERISA enforcement
program, which may result in additional constraints on how ERISA-governed
benefit plans conduct their activities. There recently have been legislative
attempts to limit ERISA's preemptive effect on state laws. Such limitations
could increase United's liability exposure under state law-based suits relating
to employee health benefits offered by United's health plans and specialty
businesses and permit greater state regulation of other aspects of those
businesses' operations.
MANAGEMENT INFORMATION SYSTEMS
The Company's health plans, insurance, self-funded and specialty products
use computer-based management information systems for various purposes,
including claims processing, eligibility, billing, utilization management,
underwriting, marketing and sales tracking, general accounting, medical cost
trending, managed care reporting and financial planning. These systems also
support member, group and provider service functions, including online access to
membership verification, claims and referral status, and information regarding
hospital admissions and lengths of stay. In addition, these systems support
extensive analyses of cost and outcome data.
The Company continually evaluates, upgrades and enhances the computer
information systems that support its operations. System development efforts to
increase efficiency, capacity and flexibility are ongoing and often include the
integration and consolidation of multiple systems resulting from acquisition
activity. The Company's computer processing capabilities support tracking and
processing of multiple-product delivery systems, an integrated database of
information for increased reporting and research capabilities, and automated
entry and edit capabilities to speed data capture and processing. Over the past
several years, the Company has upgraded its computer systems, integrated
multiple systems, enhanced its software functionality, and migrated to various
software database environments. This approach allows the Company to preserve its
investment in existing systems. It also allows the Company to exploit new
technologies to help improve the cost effectiveness of the services provided or
introduce new product capabilities. The Company has outsourced the operations of
a substantial portion of its data center operations and support, and certain
data network and voice communication services to third parties. Simplifying and
integrating the many different systems now servicing the Company's business is
an important component of controlling administrative expenses and effectively
managing United's operations. To the extent these integration efforts are not
successful, the Company's financial results may be adversely affected.
United has an overall project plan for the Company's Year 2000 readiness
initiative that is broken into many sub-projects for administrative ease.
Sub-projects in the Year 2000 plan will identify hardware and software that are
part of the Company's mainframe, non-mainframe, telecommunications, and other
8
related equipment, that need to be replaced, converted or upgraded to achieve
Year 2000 compliance. In certain instances, the hardware and/or software
replacement will be the responsibility of United HealthCare's outsource
providers. The Company's budget for its Year 2000 initiative is currently set at
approximately $40.5 million.
The Year 2000 effort is resource intensive, and United HealthCare is
managing this effort to minimize disruption of current systems development and
expansion activities. The Company has prioritized conversions by the importance
of the system to United's core business, the applicable event horizon (when the
system will encounter problems), and the adequacy of alternatives. As
appropriate, the Company will fix, retire, rewrite or replace applications that
are not compliant. A significant portion of the Company's existing software will
"sunset" or be eliminated prior to the end of 1999. The Company anticipates
substantial completion of its Year 2000 initiative by the end of 1998.
MARKETING
The Company's marketing strategy is defined and coordinated by each
functional business unit's dedicated marketing staff. Within these business
units, primary marketing responsibility generally resides with a marketing
director and a direct sales force. In addition, several of the business units
rely upon independent insurance agents and brokers to sell some of the Company's
health plan, insurance, self-funded and specialized care products. Marketing
efforts also include public relations efforts and advertising programs that may
use television, radio, newspapers, magazines, billboards, direct mail and
telemarketing.
COMPETITION
The managed health care industry evolved primarily because of health care
buyers' concerns about rising health care costs. The industry has brought
greater cost effectiveness and accountability into the health care system
through managed care products, including health plans, PPOs, and specialized
services such as mental health or pharmacy benefit programs. The industry also
has helped increase the accessibility and quality of health care services.
United operates in a highly competitive environment. Significant
consolidation has occurred within the managed care industry, creating stronger
and more diverse competitors. At the same time, new competitors have entered the
marketplace, which also may increase competitive pressures. In certain areas,
current competition may limit United's ability to price its products at levels
United believes appropriate. These competitive factors could adversely affect
United's financial results.
As managed health care penetration of the health care market and the effects
of health care reforms continue to increase nationwide, the Company expects it
may become increasingly difficult to obtain new contracts for its health plans
with large employer and government groups. The Company also expects competition
for smaller employer groups to intensify. In addition, employers increasingly
may choose to self-insure the health care risk, while seeking benefit
administration and utilization review services from third parties to help them
control and report health care costs.
The Company's health plans, insurance services, strategic business services,
and specialized care services compete for group and individual membership with
other health insurance plans, Blue Cross/Blue Shield plans, health plans, HMOs,
PPOs, third party administrators, health care management companies, and
employers or groups that elect to self-insure. The Company also faces
competition from hospitals, health care facilities, and other health care
providers who have formed their own networks to contract directly with employer
groups and other prospective customers for the delivery of health care services.
The number and strength of the Company's competitors varies for each particular
business unit and geographic area. The Company believes that the principal
competitive factors affecting the Company and its products include price, the
level and quality of products and service, provider network capabilities, market
share, the
9
offering of innovative products, product distribution systems, efficient
administration operations, financial strength and marketplace reputation.
The Company currently believes that its competitive strengths include the
breadth of its product line, its geographic scope and diversity, the strength of
its underwriting and pricing practices and staff, its significant market
position in certain geographic areas, the strength of its distribution network,
its financial strength, its generally large provider networks that provide more
member choice, its point-of-service products and experience, and its generally
favorable marketplace reputation. In some markets, however, the Company may be
at a disadvantage because of competitors with larger market shares, broader
networks, narrower networks (which may allow greater cost control and lower
prices) or a more-established marketplace name and reputation. The Company
believes its recent operational realignment will allow the individual business
units to more effectively compete in their respective markets.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 29,600 people;
approximately 230 of which were represented by a union. The Company believes its
employee relations are good.
CAUTIONARY STATEMENTS
The Business section and other sections of this Form 10-K, and the
Management's Discussion and Analysis of Financial Condition and Results of
Operation and other sections of the Company's annual report to shareholders
incorporated by reference in this document, contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"). When used in this Form 10-K and in filings by the Company with the
Securities and Exchange Commission, in the Company's press releases,
presentations to securities analysts or investors, and in oral statements made
by or with the approval of an authorized executive officer of the Company, 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.
The following discussion contains certain cautionary statements regarding
the Company's business that investors and others should consider. This
discussion is intended to take advantage of the "safe harbor" provisions of the
PSLRA. In making these cautionary statements, the Company is not committed to
addressing or updating each factor in future filings or communications regarding
the Company's business or results, or addressing 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
below may have affected the Company's past, as well as current, forward-looking
statements about future results. The Company's actual results in the future may
differ materially from those expressed in prior communications.
HEALTH CARE COSTS. The Company uses a large portion of its revenue to pay
the costs of health care services or supplies delivered to its members. Total
health care costs incurred by the Company are affected by the number of
individual services rendered and the cost of each service. Much of the Company's
premium revenue is priced before services are delivered and the related costs
are incurred, usually on a prospective annual basis. Although the Company tries
to base the premiums it charges in part on its estimate of future health care
costs over the fixed premium period, competition, regulations and other
circumstances may limit the Company's ability to fully base premiums on
estimated costs. In addition, many factors may, and often do, cause actual
health care costs to exceed what was estimated and reflected in premiums. These
factors may include increased use of services, increased cost of individual
services, catastrophes, epidemics, the introduction of new or costly treatments,
general inflation, new mandated benefits or other regulatory changes, and
insured population characteristics. In addition, the Company's
10
earnings reported for any particular quarter include estimates of covered
services incurred by the Company's enrollees during that period for which claims
have not been received or processed. Because these are estimates, the Company's
earnings may be adjusted later to reflect the actual costs.
In addition, the Company's operating results may be affected by seasonal
changes in the level of health care use during the calendar year. Although there
are no assurances, per member medical costs generally have been higher in the
first half of each year than the second half.
INDUSTRY FACTORS. The managed care industry frequently receives significant
amounts of negative publicity. This publicity has contributed to increased
legislative activity, regulation and review of industry practices. These factors
may adversely affect the Company's ability to market its products or services,
may require the Company to change its products and services, and may increase
the regulatory burdens under which the Company operates, further increasing the
costs of doing business and adversely affecting profitability.
COMPETITION. In many of its geographic or product markets, the Company
competes with a number of other entities, some of which may have certain
characteristics or capabilities that give them an advantage in competing with
the Company. United believes that barriers to entry in these markets are not
substantial, so the addition of new competitors can occur relatively easily.
Certain Company customers may decide to perform functions or services provided
by United for themselves, which would decrease Company revenues. Certain Company
providers may decide to market products and services to Company customers in
competition with United. In addition, significant merger and acquisition
activity has occurred in the industry in which the Company operates as well as
in industries that act as suppliers to the Company, such as the hospital,
physician, pharmaceutical and medical device industries. This activity may
create stronger competitors or result in higher health care costs. To the extent
that there is strong competition or that competition intensifies in any market,
the Company's ability to retain or increase customers or providers, or maintain
or increase its revenue growth, its pricing flexibility, its control over
medical cost trends and its marketing expenses may be adversely affected.
AARP CONTRACT. In early 1997, the Company finalized its contract
arrangements with the American Association of Retired Persons ("AARP"). Under
that long-term contract the Company provides Medicare supplemental and hospital
indemnity health insurance products to AARP members. As a result of this
agreement, the number of members served by the Company, products offered, and
services provided has grown significantly. The success of the AARP arrangement
will depend, in part, on the Company's ability to service these new members,
develop additional products and services, price the products and services
competitively, and respond effectively to federal and state regulatory changes.
GOVERNMENT PROGRAMS AND REGULATION. The Company's business is heavily
regulated on federal, state and local levels. The laws and rules governing the
Company's business and interpretations of those laws and rules are subject to
frequent change. Broad latitude is given to the agencies administering those
regulations. Existing or future laws and rules could force the Company to change
how it does business, restrict the Company's revenue and enrollment growth,
increase its health care and administrative costs and capital requirements, and
increase its liability for medical malpractice or other actions. The Company
must obtain and maintain regulatory approvals to market many of its products and
services. Delays in obtaining or failure to obtain or maintain these approvals
could adversely affect the Company's revenue or the number of its members, or
could increase costs. A significant portion of the Company's revenues relates to
federal, state and local government health care coverage programs. These types
of programs, such as the federal Medicare program and the federal and state
Medicaid programs, generally are subject to frequent change, including changes
that reduce the number of persons enrolled or eligible, reduce the amount of
reimbursement or payment levels, or may reduce or increase the Company's
administrative or health care costs under such programs. Such changes have
adversely affected the Company's results and willingness to participate in such
programs in the past and may also do so in the future.
11
The Company also is subject to various governmental reviews, audits and
investigations. Such oversight could result in the loss of licensure or the
right to participate in certain programs, or the imposition of fines, penalties
and other sanctions. In addition, disclosure of any adverse investigation or
audit results or sanctions could damage the Company's reputation in various
markets and make it more difficult for the Company to sell its products and
services. The National Association of Insurance Commissioners (the "NAIC") has
proposed rules that will require certain capitalization levels for health care
coverage provided by insurance companies, HMOs and other risk-bearing health
care entities. The requirements would take the form of risk-based capital rules.
Currently, similar risk-based capital rules apply only to insurance companies.
Depending on the nature and extent of any new minimum capitalization
requirements ultimately adopted, there could be an increase in the capital
required for certain of the Company's subsidiaries, and there may be some
potential for disparate treatment of competing products. If the NAIC fails to
act, some form of federal solvency regulation of companies providing
Medicare-related benefit programs may be issued.
PROVIDER RELATIONS. One of the significant techniques the Company uses to
manage health care costs and utilization and monitor the quality of care being
delivered is contracting with physicians, hospitals and other providers. Because
the Company's health plans are so geographically diverse and most of those
health plans contract with a large number of providers, the Company currently
believes its exposure to provider relations issues is limited. In any particular
market, however, providers could refuse to contract, demand higher payments, or
take other actions that could result in higher health care costs, less desirable
products for customers and members, or difficulty meeting regulatory or
accreditation requirements. In some markets, certain providers, particularly
hospitals, physician/hospital organizations or multi-specialty physician groups,
may have significant market positions or near monopolies. In addition, physician
or practice management companies, which aggregate physician practices for
administrative efficiency and marketing leverage, continue to expand. These
providers may compete directly with the Company. If these providers refuse to
contract with the Company, use their market position to negotiate favorable
contracts, or place the Company at a competitive disadvantage, those activities
could adversely affect the Company's ability to market products or to be
profitable in those areas.
LITIGATION AND INSURANCE. The Company may be a party to a variety of legal
actions that affect any business, such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, and shareholder suits, including securities fraud and
intellectual property related litigation. In addition, because of the nature of
its business, the Company is subject to a variety of legal actions relating to
its business operations. These could include: claims relating to the denial of
health care benefits; medical malpractice actions; provider disputes over
compensation and termination of provider contracts; disputes related to
self-funded business, including actions alleging claim administration errors and
the failure to disclose network rate discounts and other fee and rebate
arrangements; disputes over copayment calculations; and claims relating to
customer audits and contract performance. Recent court decisions and legislative
activity may increase the Company's exposure for any of these types of claims.
In some cases, substantial noneconomic or punitive damages may be sought. The
Company currently has insurance coverage for some of these potential
liabilities. Other potential liabilities may not be covered by insurance,
insurers may dispute coverage, or the amount of insurance may not cover the
damages awarded. In addition, certain types of damages, such as punitive
damages, may not be covered by insurance, and insurance coverage for all or
certain forms of liability may become unavailable or prohibitively expensive in
the future.
INFORMATION SYSTEMS. The Company's business depends significantly on
effective information systems, and the Company has many different information
systems for its various businesses. The Company's information systems require an
ongoing commitment of resources to maintain and enhance existing systems and
develop new systems in order to keep pace with continuing changes in information
processing technology, evolving industry standards, and changing customer
preferences. As a result of the Company's acquisition activities, the Company is
reducing the number of systems and upgrading and expanding its
12
information systems capabilities. Failure to maintain effective and efficient
information systems could cause loss of existing customers, difficulty in
attracting new customers, customer and provider disputes, regulatory problems,
increases in administrative expenses or other adverse consequences. In addition,
the Company may from time to time obtain significant portions of its
systems-related or other services or facilities from independent third parties,
which may make the Company's operations vulnerable to such third parties'
failure to perform adequately.
THE YEAR 2000. The Company is in the process of modifying its computer
systems to accommodate the Year 2000. The Company currently expects to complete
this modification enough in advance of the Year 2000 to avoid adverse impacts on
its operations. The Company is expensing the costs incurred to make these
modifications. If the Company is unable to complete its Year 2000 modifications
in a timely manner or other companies with which the Company does business fail
to complete their Year 2000 modifications in a timely manner, such
non-compliance could adversely affect the Company's operations.
ADMINISTRATION AND MANAGEMENT. Efficient and cost-effective administration
of the Company's operations is essential to the Company's profitability and
competitive positioning. While the Company attempts to effectively manage such
expenses, staff-related and other administrative expenses may rise from time to
time due to business or product start-ups or expansions, growth or changes in
business, acquisitions, regulatory requirements or other reasons. These expense
increases are not clearly predictable and may adversely affect results. The
Company believes it currently has an experienced, capable management and
technical staff. The market for management and technical personnel, including
information systems professionals, in the health care industry is very
competitive. Loss of certain managers or a number of such managers could
adversely affect the Company's ability to administer and manage its business.
MARKETING. The Company markets its products and services through both
employed salespeople and independent sales agents. Although the Company has many
sales employees and agents, the departure of certain key sales employees or
agents or a large subset of such individuals could impair the Company's ability
to retain existing customers and members. In addition, certain of the Company's
customers or potential customers consider rating, accreditation or certification
of the Company by various private or governmental bodies or rating agencies
necessary or important. Certain of the Company's health plans or other business
units may not have obtained or may not desire or be able to obtain or maintain
such accreditation or certification, which could adversely affect the Company's
ability to obtain or retain business with these customers.
ACQUISITIONS. The Company has made several large acquisitions in recent
years and has an active ongoing acquisition program. These acquisitions may
entail certain risks and uncertainties and may affect ongoing business
operations because of unknown liabilities, unforeseen administrative needs or
increased efforts to integrate the acquired operations. Failure to identify
liabilities, anticipate additional administrative needs or effectively integrate
acquired operations could result in reduced revenues, increased administrative
and other costs, or customer confusion or dissatisfaction.
DATA AND PROPRIETARY INFORMATION. Many of the products that are part of
United HealthCare's knowledge and information-related business depend
significantly on the integrity of the data on which they are based. If the
information contained in the Company's databases were found or perceived to be
inaccurate, or if such information were generally perceived to be unreliable,
commercial acceptance of the Company's database-related products would be
adversely and materially affected. Furthermore, the use by United HealthCare's
knowledge and information-related business of patient data is regulated at
federal, state and local levels. These laws and rules are changed frequently by
legislation or administrative interpretation. These restrictions could adversely
affect revenues from these products and, more generally, affect United
HealthCare's business, financial condition and results of operations.
The success of United HealthCare's knowledge and information-related
business also depends significantly on its ability to maintain proprietary
rights to its products. United relies on its agreements
13
with customers, confidentiality agreements with employees, trade secrets,
copyrights and patents to protect its proprietary rights. United cannot assure
that these legal protections and precautions will prevent misappropriation of
United HealthCare's proprietary information. In addition, substantial litigation
regarding intellectual property rights exists in the software industry, and
United HealthCare expects software products to be increasingly subject to
third-party infringement claims as the number of products and competitors in
this industry segment grows. Such litigation could have an adverse effect on the
ability of United HealthCare's knowledge and information-related business to
market and sell its products and on United's business, financial condition and
results of operations.
STOCK MARKET. The market prices of the securities of the Company and
certain of the publicly held companies in the industry in which the Company
operates have shown volatility and sensitivity in response to many factors,
including general market trends, public communications regarding managed care,
legislative or regulatory actions, health care cost trends, pricing trends,
competition, earnings or membership reports of particular industry participants,
and acquisition activity. United HealthCare cannot assure the level or stability
of the Company's share price at any time or predict the impact the foregoing or
any other factors may have on the share price.
14
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Board of Directors elects executive officers annually. The
Company's executive officers serve until their successors are duly elected and
qualified.
Dr. McGuire became a director of the Company in February 1989 and the
chairman of the board in May 1991. Dr. McGuire became an executive vice
president of United in November 1988, was appointed the Company's chief
operating officer in May 1989, the Company's president in November 1989, and the
Company's chief executive officer in February 1991.
Mr. Carlson became an executive vice president of United in October 1995 and
President of the Company's Health Plans business unit in November 1997. From
March to October 1995, Mr. Carlson was executive vice president of The
MetraHealth Companies, Inc. ("MetraHealth"). Mr. Carlson was president and chief
executive officer of HealthSpring, Inc., a developer of primary care physician
practices, from July 1992 to March 1995. From April 1975 to July 1992, Mr.
Carlson was an employee of Prudential Insurance Company. Mr. Carlson's last
position with Prudential Insurance Company was vice president of Group
Insurance.
Mr. Hemsley joined the Company as a senior executive vice president in June
1997. Mr. Hemsley previously was managing partner, strategy and planning, for
Arthur Andersen LLP. He was a member of the Andersen Worldwide and Arthur
Andersen Executive Committee and Executive Council, the Chairman's Advisory
Council and Partner Income Committee. In addition, Mr. Hemsley served as chief
financial officer for Arthur Andersen. He had been with that firm for 23 years.
Mr. Koppe became the Company's chief financial officer in December 1994. He
has been employed by the Company since June 1983 and served as the Company's
vice president and treasurer from May 1989 to January 1996. Mr. Koppe also
served as the Company's controller from May 1989 until October 1994.
Mr. Lubben became the Company's general counsel and secretary in October
1996. Prior to joining United, he was a partner in the law firm of Dorsey &
Whitney LLP. Mr. Lubben first became associated with Dorsey & Whitney in 1977.
Mr. McDonough became an executive vice president of the Company in February
1997 and the chief executive officer of the Strategic Business Services business
unit in November 1997. From October 1995 through February 1997, he was the
Company's senior vice president, Claim Services. From August 1995 to October
1995, he was employed by MetraHealth as senior vice president, Claim Services.
From July 1993 through July 1995, he was the president of Harrington Services
Corporation, and from February 1988 to July 1993, he was the chief operating
officer of Jardine Group Services Corporation. Mr. McDonough has resigned from
the Company effective April 1, 1998.
15
Mr. Wills has been employed by the Company since November 1992. From
November 1992 until October 1995, he served as United's senior vice president,
Specialty Operations. He has served as the Company's chief operating officer
since October 1995, as a senior executive vice president since June 1997, and
the chief executive officer of the Company's Health Plans business unit since
November 1997. From 1968 to 1992, Mr. Wills was employed by CIGNA Corporation, a
multi-line insurance company, in various capacities, most recently as president
of MCC Companies, a mental health/substance abuse subsidiary of CIGNA.
16
ITEM 2. PROPERTIES
As of December 31, 1997, the Company leased approximately 1.2 million
aggregate square feet of space for its principal administrative offices in
Hartford, Connecticut and the greater Minneapolis/St. Paul, Minnesota area.
Outside of the Minneapolis/St. Paul, Minnesota and Hartford, Connecticut areas,
as of December 31, 1997, the Company leased approximately 5.6 million aggregate
square feet for office space or space for computer facilities and claims
processing centers nationwide and approximately 15,000 aggregate square feet
outside of the United States. Such space accommodates health plans, managed care
services, specialty programs or satellite administrative offices. The Company's
leases expire at various dates through January 31, 2008. As of December 31,
1997, the Company owned approximately 670,000 aggregate square feet of space for
administrative offices in various states and its staff model clinic operations
in Florida.
ITEM 3. LEGAL PROCEEDINGS
Because of the nature of its business, United is subject to suits relating
to the failure to provide or pay for health care or other benefits, poor
outcomes for care delivered or arranged under United's programs, nonacceptance
or termination of providers, failure to return withheld amounts from provider
compensation, failure of a self-funded plan serviced by United to pay benefits,
improper copayment calculations and other forms of legal actions. Some of these
suits may include claims for substantial non-economic or punitive damages.
United does not believe that any such actions, or any other types of actions,
currently threatened or pending will, individually or in the aggregate, have a
material adverse effect on United's financial position or results of operations.
However, the likelihood or outcome of current or future suits cannot be
accurately predicted, and they could adversely affect United's financial
results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained under the heading "Investor Information" in the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1997, is incorporated herein by reference.
ITEM. 6. SELECTED FINANCIAL DATA
The information contained under the heading "Financial Highlights" in the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1997, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information contained under the heading "Financial Review" in the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1997, is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Of the $4.0 billion of cash and investments held by the Company at December
31, 1997, approximately $750 million were cash and cash equivalents and $65
million were securities that were being held to maturity. The remaining $3.2
billion available for sale (non-trading) securities represent investment grade,
fixed income securities, substantially all from domestic issuers.
17
Because of the Company's investment policies, the primary market risk
associated with the Company's non-trading portfolio is interest rate risk. With
respect to this risk, a reasonably possible near-term rise in interest rates
could negatively affect the fair value of the Company's non-trading portfolio;
however, because the Company considers it unlikely that the Company would need
or choose to substantially liquidate its non-trading portfolio, the Company
believes that such an increase in interest rates would not have a material
impact on future earnings or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements together with the Report of
Independent Public Accountants thereon appearing on pages 20 through 34 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1997, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held May
13, 1998, is incorporated herein by reference.
Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K, information regarding executive officers of the
Company is provided in Part I of this Form 10-K under separate caption.
ITEM 11. EXECUTIVE COMPENSATION
The information included under the heading "Executive Compensation" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held May 13, 1998, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held May 13, 1998, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions that
appears under the heading "Certain Relationships and Transactions" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held May 13, 1998, is incorporated herein by reference.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included
in the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1997 and are incorporated herein by reference:
Consolidated Statements of Operations for the three years ended December
31, 1997.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Changes in Shareholders' Equity as of December
31, 1997, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1997.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
(a) 2. FINANCIAL STATEMENT SCHEDULES
None
(a) 3. EXHIBITS
19
20
------------------------
+ Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of these Exhibits have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a request
for confidential treatment.
* Denotes management contracts and compensation plans in which certain
directors and named executive officers participate and which are being filed
pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
(c) See Exhibits listed in Item 14 hereof and the Exhibits attached as a
separate section of this Report.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
22
23
EXHIBITS INDEX
24
25