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<SEC-DOCUMENT>0000950131-96-001401.txt : 19960402
<SEC-HEADER>0000950131-96-001401.hdr.sgml : 19960402
ACCESSION NUMBER: 0000950131-96-001401
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 14
CONFORMED PERIOD OF REPORT: 19951231
FILED AS OF DATE: 19960401
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: UNITED HEALTHCARE CORP
CENTRAL INDEX KEY: 0000731766
STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324]
IRS NUMBER: 411321939
STATE OF INCORPORATION: MN
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-10864
FILM NUMBER: 96543125
BUSINESS ADDRESS:
STREET 1: 300 OPUS CENTER
STREET 2: 9900 BREN ROAD EAST
CITY: MINNETONKA
STATE: MN
ZIP: 55343
BUSINESS PHONE: 6129361300
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>FORM 10-K 405
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Commission file number: 0-13253
-------
UNITED HEALTHCARE CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1321939
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 OPUS CENTER
9900 BREN ROAD EAST
MINNETONKA, MINNESOTA 55343
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 936-1300
--------------
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
---------------------------- -----------------------------
(Title of Each Class) (Name of Each Exchange
on which Registered)
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. [x]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 11, 1996, was approximately $9,519,185,876* (based on the
last reported sale price of $63.50 per share on March 11, 1996, on the New York
Stock Exchange).
As of March 11, 1996, 175,520,725 shares of the registrant's Common Stock, par
value $.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Shareholders of Registrant to be held
on May 8, 1996. 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 and
received by the Company have been excluded in determining this number.
<PAGE>
PART I
ITEM 1. BUSINESS
-----------------
United HealthCare Corporation(SM) is a national leader in offering health
care coverage and related services through a broad continuum of products and
services. United served over 40 million covered lives at December 31, 1995.
United's products and services utilize a number of core capabilities, including
medical information management, health care delivery management, health benefit
administration, risk assessment and pricing, health benefit design and provider
contracting and risk sharing. With these capabilities, United is able to provide
comprehensive managed care services, such as health maintenance organization
("HMO"), insurance and self-funded health care coverage products, as well as
unbundled health care management and cost containment products such as mental
health and substance abuse services, utilization review services, specialized
provider networks and employee assistance programs. As part of its ongoing
acquisition program, United acquired The MetraHealth Companies, Inc.
("MetraHealth") on October 2, 1995. MetraHealth is a managed health care
coverage company and health insurer with over ten million covered lives at the
time of the acquisition. As a result of the MetraHealth acquisition, United
increased the geographic and product scope of its health care coverage business
and now has relationships with many of the country's largest companies.
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.
HEALTH PLANS, INSURANCE AND RELATED OPERATIONS
Health Plans. As of December 31, 1995, United had a majority ownership
interest in health plans in 24 states and Puerto Rico. With respect to these
owned health plan operations, United assumes the risk for health care and
administrative costs in return for the premium revenue it receives. United's
owned health plans are usually licensed as HMOs or insurers and 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. In
addition, these health plans enter into contractual arrangements with
independent providers of health care services to help manage medical and
hospital utilization, quality and costs. A few of the health plans employ health
care providers and directly deliver health care services to members. These plans
achieve cost-effective delivery of health care services by assuring appropriate
use of health care services, emphasizing preventive health services and
encouraging the reduction of unnecessary hospitalization and other medical
services. United also provides administrative and other management services to a
few health plans in which United has no ownership interest. With respect to
these managed health plan operations, United receives an administrative fee for
providing its services and generally assumes no responsibility for health care
costs.
Health Plan Point-of-Service Products. Point-of-service plans are one of
United's most popular and fastest growing health plan coverage options. Unlike
traditional closed-panel HMO products, which cover non-emergency services only
when rendered by contracted providers, the point-of-service plans also provide
coverage, usually at a lower level, for services received from non-contracting
providers. This out-of-network coverage is sometimes offered directly by the
health plan, but more often is provided by an insurance policy
1
<PAGE>
"wrapped around" the health plan benefit contract. The insurance policy is
usually sold by one of United's insurance subsidiaries.
Health Plan Self-Funded Products. United has developed HMO-like self-
funded products for employers who desire the cost containment aspects of an HMO
product and want to self-insure the health care cost risk. United uses the
provider networks it has developed in connection with its HMO products for these
self-funded products. Many of these self-funded products 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 standardized fee-for-service basis. These self-funded products
offer employers and other sponsoring groups access to a provider network and the
administrative and utilization review services associated with an HMO product,
but the risks of health care utilization generally are borne by the sponsoring
group.
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. Under these contracts the
plans receive a fixed payment each month from HCFA for each enrolled individual.
Several of United's health plans which do not currently have such a contract are
in the process of seeking one. Under these contracts, the health plans must
provide at least the benefits which would be covered under traditional Medicare
and typically provide a significantly higher level of coverage. The plans 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 may also offer these Medicare products to or
through employer groups as a method of providing retiree health care coverage.
In addition, certain health plans may market Medicare Select products which do
not substitute for traditional Medicare, but provide additional benefits for a
premium charged directly to the member.
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 are paid a fixed monthly payment for
each enrolled individual. The level of benefits is generally set by contract
and few additional benefits are offered. Enrollment must usually be offered to
all eligible individuals, without underwriting or health screening. Generally,
the same provider network as for commercial products is utilized, but some
providers may refuse to participate in the Medicaid product and the network may
otherwise have a different number or set of providers.
PPO and Indemnity Insurance and Self-Funded Products. Primarily through its
insurance and third-party administrator subsidiaries, United offers a variety of
health insurance and self-funded plan products and services, covering
approximately ten million persons. Many of the insurance and self-funded
products are marketed as point-of-service products or include a preferred
provider organization ("PPO") feature, under which a higher level of coverage is
available if certain providers are utilized. The insurance products are often
sold on an experience-rated basis, which means that the premiums may be adjusted
in the future based on actual past health care costs or that premiums may be
adjusted at the end of a specific time period (usually one year) with premium
returned to the customer or additional premium paid to United based on health
care costs in that time period. Much of the insurance business is sold to small
employers. This type of business has often been subject to sudden and
unpredictable changes in health care costs and generally has high administrative
and marketing expenses. This business is also usually sold for a fixed premium,
with no experience adjustments and is subject to extensive state regulation.
United's self-funded products are usually sold on an administrative fee basis
and in some cases United may agree to penalties or rewards related to
administrative service standards and/or health care costs.
Ancillary Insurance Products. Through its insurance subsidiaries, United
offers several health insurance products in conjunction with health plan
products. These products permit employers to replace multiple health care
policies and vendors with a single health care plan. These
2
<PAGE>
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. United's insurance
subsidiaries are licensed to sell group life, accidental death and
dismemberment, short-term disability and health insurance products in all 50
states, the District of Columbia, Puerto Rico and the Virgin Islands. In
connection with the MetraHealth acquisition, United entered into an agreement
with Metropolitan Life Insurance Company ("MetLife") under which United offers
MetLife's life, 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
mutual exclusivity and non-competition provisions.
The following tables provide information with respect to the enrollment in
the Company's various health plan and insurance products. The enrollment
numbers are provided as of December 31, 1995 and January 31, 1996 since a number
of the contracts for the Company's health care coverage products commence,
expire or renew, as the case may be, as of January 1 of each year.
ENROLLMENT BY PRODUCT TYPE
--------------------------
<TABLE>
<CAPTION>
PRODUCT ENROLLMENT AS OF 12/31/95 ENROLLMENT AS OF 1/31/96
- --------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH PLAN PRODUCTS /(1)/
Commercial 3,005,000 3,204,500
Medicare 147,800 153,300
Medicaid 352,100 353,900
---------- ----------
Total Health Plan Products 3,504,900 3,711,700
OTHER NETWORK BASED PRODUCTS /(2)/
Commercial 5,737,700 5,731,100
INDEMNITY
Commercial 4,367,400 4,053,700
---------- ----------
TOTAL 13,610,000 13,496,500
========== ==========
</TABLE>
(1) Includes various HMO and HMO point-of-service products as well as self-
funded programs utilizing a health plan network of providers.
(2) Includes insurance-based and self-funded PPO and point-of-service products.
3
<PAGE>
ENROLLMENT BY FUNDING MECHANISM AND PRODUCT TYPE
------------------------------------------------
<TABLE>
<CAPTION>
12/31/95 1/31/96
---------------------- ----------------------
PRODUCT FUNDED SELF-FUNDED FUNDED SELF-FUNDED
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Health Plan Products 3,261,900 243,000 3,444,500 267,200
Other Network Based
Products 699,300 5,038,400 792,500 4,938,600
Indemnity 982,600 3,384,800 924,500 3,129,200
--------- --------- --------- ---------
TOTAL 4,943,800 8,666,200 5,161,500 8,335,000
========= ========= ========= =========
</TABLE>
SPECIALTY MANAGED CARE SERVICES
Through its experience in providing comprehensive health care management
products and in response to increasing market demand for greater choice and
flexibility in the design of health care coverage products and funding
arrangements, United has utilized its core capabilities to create and sell
specialized products to facilitate the efficient delivery of health care
services. These products are offered through United's specialty managed care
services business units and independently of United's owned and managed health
plans and insurance operations. United also makes these products available to
or in connection with the products of its owned and managed health plans and
insurance operations where feasible.
With respect to its specialty managed care services, United receives fees
for the provision of services, primarily administrative in nature, and generally
assumes no responsibility for health care costs except in the case of its
behavioral health products. In connection with those products, United assumes
some responsibility for health care costs for the provision of mental
health/substance abuse services and thus recognizes premium-like revenue and
medical services expense.
United's specialty managed care products were available to a total of
approximately 40 million participant lives at December 31, 1995, many of whom
were not enrolled in one of United's owned health plans. One person may be
covered by more than one specialty managed care service and therefore may
account for more than one of these participant lives. United offers the
following specialty managed care services to HMOs, PPOs, insurers, providers,
Blue Cross/Blue Shield plans, third-party administrators, employers, labor
unions and/or government agencies.
Care Management and Benefit Administration Services. United's care
management programs offer customers unbundled cost and utilization review and
case management services. These services include prior, concurrent and
retrospective review of hospital admissions and certain ambulatory services,
second opinion programs, case management, specialist referrals and discharge
planning. These services emphasize patient and provider education as a means of
assisting clients in managing their health care costs.
United's Total Care Management programs offer those customers who may not
have geographic access to United's health plans an alternative to bundled
managed care services. These services include utilization management, medical
information and education, claims payment, provider networks, mental
health/substance abuse services and other related services. Use of these
services can provide health plan-like results to those clients who have members
outside health plan service areas.
Transplant Network. United's transplant network services programs offer
clients access to a network of health care facilities for transplant-related
services and transplant case management services.
4
<PAGE>
United negotiates fixed, competitive rates for high-cost, low-frequency health
care services such as organ and tissue transplants.
Workers Compensation and Disability Management Services. United's workers
compensation and disability management services tailor United's broad managed
care resources into products and services intended to apply managed care
concepts, such as utilization review 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 case 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. United has recently agreed to sell one of its subsidiaries
engaged in this business.
Demand Management Programs. United's demand management programs help
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(R) 24-hour nurseline and employee assistance programs provide
customers the opportunity to reduce the cost of medical care by early
identification of medical and human risks and the subsequent development of
problem-specific solutions that change behavior and reduce those risks. In
addition, these programs issue various publications to members as supplementary
tools for managing demand for services.
Geriatric Care Management Services. United also develops and provides
products and services for cost control and the management of health care for the
elderly. LinkAge(R) identifies for hospitals high-cost, high-risk patients upon
admission and provides the hospital with tools to perform focused case
management throughout the patient's hospital stay. United's EverCare(R) program
arranges for the provision of a broad spectrum of health care services to
institutionalized elderly individuals in nursing homes through contracts with a
physician-nurse practitioner team. EverCare is participating in a
demonstration project with HCFA to offer health care services to the
institutionalized elderly in nine separate locations throughout the country.
Through its Government Operations division, United provides administrative
services in regard to certain government health care programs. Most of this
business is Medicare Part B claims processing. One of United's insurance
subsidiaries is the sole carrier for the states of Minnesota, Virginia,
Mississippi and Connecticut. That subsidiary also serves as the fiscal
intermediary for Medicare Part A in Connecticut, Michigan and New York, and
handles all Medicare durable medical equipment claims for the 10 states in
HCFA's northeast region.
Behavioral Health Services. The specialty operations in United's
behavioral health services business unit include mental health and substance
abuse-related services. United's behavioral health subsidiaries provide
specialized provider networks and behavioral health care case management
services to certain of United's owned or managed health plans and to other
customers. Such services are provided by employed behavioral health care
professionals and by a network of contracted providers. Certain of these
services are sold on a capitated basis.
Third Party Administration Services. United provides third party
administrator ("TPA") services to employers who choose to utilize self-funding
to control health care costs and also desire customized health care plans and
administration. United's TPA services are available to employers of all sizes
in both single and multiple locations and include a fully integrated portfolio
of products.
International Business. United has begun exploring opportunities to sell
its products and services in foreign countries and anticipates utilizing various
arrangements such as joint ventures, as well as direct contracting. United has
entered into a joint venture to create a health plan in the Republic of South
Africa and has entered into an agreement to provide certain managed care
consulting services in Germany.
5
<PAGE>
The Center for Health Care Policy and Evaluation. As the research and
performance evaluation arm of United, the Center for Health Care
Policy and Evaluation (the "Center") studies the operations and populations of
enrolled health care systems. The Center's research studies and analytical
tools evaluate cost and quality of health care delivery -- illuminating common
problems such as uneven access to care, variations in treatment, patient non-
compliance with preventive care and other differences in the health care
characteristics of the studied population. United's health plans and
specialty organizations across the country use Center-developed tools and
methods to monitor and assess health care delivery to their members and clients.
The Center also works on behalf of other external organizations and clients to
provide research services and analytic software tools.
One of the Center's major software services EPIS(TM) is a specialized
medical management software system that provides clients with an integrated
picture of a health care system in many dimensions, replacing piecemeal reports
with a common reference point on cost, utilization, quality, access and
satisfaction.
EXPANSION AND DIVESTITURE OF OPERATIONS
United continually evaluates opportunities to expand its business and
considers whether to divest or cease offering the products of certain of its
businesses. These opportunities may include acquisitions or dispositions of a
specialty managed care services program or of insurance and health plan
operations. United also devotes significant attention to internal development of
new products and techniques for the containment of health care costs, the
measurement of the outcomes and efficiency of health care delivered and the
management of health care delivery systems.
United has engaged in an extensive acquisition program over the last few
years. The intensive acquisition program may affect United's ability to
integrate and manage its overall business effectively, which may increase costs,
affect membership, revenue and earnings growth and adversely affect United's
financial results. United's recent acquisition of MetraHealth poses significant
integration challenges, particularly since MetraHealth itself was the product of
a merger of businesses that were not yet fully integrated. Failure to
integrate MetraHealth successfully would likely materially adversely affect
United's financial results.
The acquisition of MetraHealth also may make United's revenues more
sensitive to fluctuations in overall health care cost trends, because the
proportion of the former MetraHealth revenues derived from indemnity insurance
business, which may have a lesser degree of health care cost control, is
relatively high, and because former MetraHealth revenues will constitute a
substantial portion of United's revenues.
On March 29, 1996, the Company acquired PHP, Inc., a North Carolina based
health plan to which United had previously provided administrative services. On
January 15, 1996, United executed an agreement to acquire the owner of the
remaining 51% equity interest in its Louisiana-based health plan, Community
Health Network. On February 1, 1996, the Company agreed to acquire HealthWise of
America, Inc. and its related health plan operations in Arkansas, Tennessee,
Maryland and Kentucky. On February 21, 1996, United executed an agreement to
purchase the owner of the remaining minority equity interest in its St. Louis,
Missouri-based health plans.
On March 1, 1996, United sold MetraHealth Care Plan of St. Louis, Inc., a
St. Louis, Missouri-based HMO acquired in October as part of MetraHealth
acquisition and which had 33,600 enrollees at January 31, 1996.
On March 1, 1996, the Company executed an Agreement and Plan of Merger,
with ActaMed Corporation, a Georgia corporation in which United has a minority
interest, pursuant to which ActaMed would acquire United's EDI Services
division.
6
<PAGE>
On March 19, 1996, the Company executed a stock purchase agreement to sell
its FOCUS Healthcare Management, Inc. subsidiary.
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 that it is in compliance in all material respects with the
various federal and state regulations applicable to its current operations. To
maintain such compliance, it may be necessary for United or a subsidiary to make
changes from time to time in its services, products, 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. Changes in
applicable laws and regulations are continually being considered and the
interpretation of existing laws and rules may also change from time to time.
Regulatory agencies generally have broad discretion in promulgating regulations
and in interpreting and enforcing laws and rules. While United is unable to
predict what regulatory changes may occur or the impact on United of any
particular change, United's operations and financial results could be negatively
affected by regulatory revisions. Certain proposed changes in Medicare and
Medicaid programs may increase the opportunities for United to enroll persons
under products developed for the Medicare and Medicaid eligible populations, but
other proposed changes also may limit the reimbursement available to United and
increase competition in those programs, which could adversely affect United's
financial results. The continued consideration and enactment of "anti-managed
care" laws and regulations, such as "any willing provider" laws and limits on
utilization management, by federal and state bodies may make it more difficult
for United to control medical costs and may adversely affect financial results.
A number of jurisdictions have enacted small group insurance and rating
reforms which generally limit the ability of insurer and health plans to use
risk selection as a method of controlling costs for small group business. These
laws may generally limit or eliminate use of preexisting conditions exclusions,
experience rating and industry class rating and may limit the amount of rate
increases from year to year. Under these laws, cost control through provider
contracting and managing care may become more important and United currently
believes its experience in these areas will allow it to compete effectively.
In addition to changes in applicable laws and rules, United is potentially
subject to governmental investigations and enforcement actions. These include
possible government actions relating to the federal Employee Retirement Income
Security Act ("ERISA"), which regulates insured and self-insured health coverage
plans offered by employers and United's services to such plans and employers,
the Federal Employees Health Benefit Plan ("FEHBP"), federal and state fraud and
abuse laws and laws relating to utilization management and the delivery of
health care. Any such government action could result in assessment of damages,
civil or criminal fines or penalties, or other sanctions, including exclusion
from participation in government programs. Although United is currently
involved in various government audits, such as under the FEHBP or relating to
services for ERISA plans, United does not believe the results of such current
audits will, individually or in the aggregate, have a material adverse effect on
United's financial results.
HMOs. All of the states in which United's health plans offer HMO products
have enacted statutes regulating the activities of those health plans. Most
states require periodic financial reports from HMOs licensed to operate in their
states and impose minimum capital or reserve requirements. Certain of United's
subsidiaries are required to retain for their own use cash generated from their
operations. In addition, certain of United's subsidiaries are required by state
regulatory agencies to maintain restricted cash reserves represented by
interest-bearing instruments which are held by trustees or state regulatory
agencies to ensure that adequate financial reserves are maintained. Some state
regulations enable agencies to review all contracts entered into by HMOs,
including management contracts, for reasonableness of fees charged
7
<PAGE>
and other provisions.
United's health plans which have Medicare risk contracts are subject to
regulation 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 rendered to the health
plan's members. To enter into Medicare risk contracts, a health plan must
either be federally qualified or be considered a Competitive Medical Plan under
HCFA's requirements. Health plans which 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 received by Medicare beneficiaries. PRO requirements relate to
quality assurance and utilization review procedures. United's health plans
which have Medicare cost contracts are subject to similar regulatory
requirements. In addition, these health plans are required to file certain cost
reimbursement reports with HCFA which are subject to audit and revision.
United's health plans which have Medicaid contracts are subject to both
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 in force or have proposed regulations relating
to fraud and abuse, physician incentive plans and provider referrals which may
affect United's operations.
Many of United's health plans have contracts with FEHBP. These
contracts are subject to extensive regulation, including complex rules relating
to the premiums charged. FEHBP has the authority to retroactively audit the
rates charged and frequently seeks premium refunds and other sanctions against
health plans participating in the program. United's health plans which have
contracted with FEHBP are subject to such audits and may be requested to make
such refunds.
Insurance Regulation. United's insurance subsidiaries are subject to
regulation by the Department of Insurance in each state in which the entity is
licensed. Regulatory authorities exercise extensive supervisory power over
insurance companies in regard to licensing; the amount of reserves which must be
maintained; the approval of forms of insurance policies used; the nature of, and
limitation on, an insurance company's investments; periodic examination of the
operations of insurance companies; the form and content of annual statements and
other reports required to be filed on the financial condition of insurance
companies; and the establishment of capital requirements for insurance
companies. United's insurance company subsidiaries are required to file
periodic statutory financial statements in each jurisdiction in which they are
licensed. Additionally, such companies are periodically examined by the
insurance departments of the jurisdiction in which they are licensed to do
business.
Insurance Holding Company Regulations. Certain of United's health plans
and each of United's insurance subsidiaries are subject to regulation under
state insurance holding company regulations. Such insurance holding company
laws and regulations generally require registration with the state Department of
Insurance and the filing of certain reports describing capital structure,
ownership, financial condition, certain intercompany transactions and general
business operations. Various notice and reporting requirements generally apply
to transactions between companies within an insurance holding company system,
depending on the size and nature of the transactions. Certain state insurance
holding company laws and regulations require prior regulatory approval or, in
certain circumstances, prior notice of, certain material intercompany transfers
of assets as well as certain transactions between the regulated companies, their
parent holding companies and affiliates, and acquisitions.
TPAs. Certain subsidiaries of United are also licensed as third-party
administrators ("TPAs") in states where such licensing is required for their
activities. TPA regulations, although differing greatly from state to state,
generally contain certain required administrative procedures, periodic reporting
obligations and minimum financial requirements.
8
<PAGE>
PPOs. Certain of United's subsidiaries' operations may be subject to PPO
regulation in a particular state. PPO regulations generally contain certain
network, contracting, financial and reporting requirements which vary from state
to state.
Utilization Review Regulations. A number of states have enacted laws
and/or adopted regulations governing the provision of utilization review
activities and these laws may apply to certain of United's operations.
Generally, these laws and regulations require compliance with specific standards
for the delivery of services, confidentiality, staffing, and policies and
procedures of private review entities, including the credentials required of
personnel.
MCOs. In recent years a number of states have enacted laws enabling self-
insured employers and/or insurance carriers to apply medical management and
other managed care techniques to the medical benefit portion of workers
compensation if such managed care is performed by a state certified managed
care organization ("MCO"). United, by itself or with its HMOs, has generally
sought MCO certification in the states where it is available and where it
markets managed care workers compensation products. MCO laws differ
significantly from state to state, but generally address network and utilization
review activities.
ERISA. The provision of goods and services to or through certain types of
employee health benefit plans is subject to ERISA. 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 is engaged in 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. If
such limitations were to be enacted, they might 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 may permit greater
state regulation of other aspects of those businesses' operations.
MANAGEMENT INFORMATION SYSTEMS
The Company's health plans, insurance, self-funded and specialty managed
care products use computer-based management information systems for various
purposes, including claims processing, 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 on-line access
to membership verification, claims and referral status and information regarding
hospital admissions and lengths of stay. In addition, these systems support
extensive analysis of cost and outcome data.
The Company continually evaluates, upgrades and enhances the computer
information systems which support its operations. System development efforts
relating to increased efficiency, capacity and flexibility are ongoing. The
Company's computer processing capabilities support multiple product delivery
systems with attendant tracking and processing for such systems, an integrated
database of information for increased reporting and research capabilities, and
use automated entry and edit capabilities to speed the capture and processing of
information. Over the past several years, the Company has upgraded its
mainframe computers, enhanced its existing software functionality and migrated
to various software database environments. This approach allows the Company to
preserve its investment in existing systems while, at the same time, enabling it
to exploit new technologies that help improve either the cost effectiveness of
the services provided, or allow for the introduction of new product
capabilities. Following the MetraHealth acquisition, the Company has begun an
extensive review of its information systems, including integration of multiple
systems. The Company has also agreed to outsource operation of a substantial
portion of its computer operations centers to a third party. Simplification and
integration of the many different systems now servicing the Company's business
is an important component of controlling
9
<PAGE>
administrative expenses and effectively managing United's operations. To the
extent that these integration efforts are not successful, the Company's
financial results may be adversely affected.
MARKETING
The Company's marketing strategy and implementation for its health plan,
insurance, self-funded and specialty and managed care products are defined and
coordinated by UHC's corporate marketing staff. Primary marketing
responsibility for each of the Company's health plans and specialty managed care
products resides with a marketing director and a direct sales force. In
addition, the Company's health plan, insurance, self-funded and specialty
managed care products are sold through independent insurance agents and brokers.
Marketing efforts are supported by ongoing market research that identifies and
grades prospective customers and establishes specific enrollment goals by
territory and employer. Marketing efforts are also supported by public
relations efforts and advertising programs that may employ television, radio,
newspapers, billboards, direct mail and telemarketing.
COMPETITION
The managed health care industry evolved primarily as a result of health
care buyers' concerns regarding rising health care costs. The industry's goal
is to infuse greater cost effectiveness and accountability into the health care
system through the development of managed care products, including health plans,
PPOs, and specialized services such as mental health or pharmacy benefit
programs, while increasing the accessibility and quality of health care
services. The industry in which United operates is highly competitive and
significant consolidation has occurred within the industry, creating stronger
competitors. At the same time, there are a number of new entrants to the
industry, which may also increase competitive pressures. The current
competitive markets in certain areas 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 HMO and PPO penetration of the health care market and the effects of
health care reforms increase nationwide, the Company expects that obtaining new
contracts for its HMO and PPO products with large employer and government groups
may increasingly become more difficult and that competition for smaller employer
groups will intensify. In addition, employers may increasingly choose to self-
insure the health care risk while seeking benefit administration and utilization
review services from third parties to assist them in controlling and reporting
health care costs.
The Company's health plan, insurance, self-funded and specialty managed
care coverage products compete for group and individual membership with other
health insurance plans, Blue Cross/Blue Shield plans, other health plans, HMOs,
PPOs, third party administrators and health care management companies, and
employers or groups which elect to self-insure. The Company also faces
competition from hospitals, health care facilities and other health care
providers who have combined and formed their own networks to contract directly
with employer groups and other prospective customers for the delivery of health
care services. The Company's ability to increase the number of persons covered
by its products or services or to increase its premiums and fees can be affected
by the number and strength of the Company's competitors in any particular 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 offering of innovative
products, product distribution systems, financial strength, and marketplace
reputation.
Further, the Company currently believes that factors that generally help
it in regard to competitors are 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, which provide more member
10
<PAGE>
choice, its point-of-service products and experience and its generally favorable
marketplace reputation. In a number of markets the Company may be at a
disadvantage in regard to 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.
EMPLOYEES
As of December 31, 1995, the Company employed approximately 28,500 persons;
approximately 200 of which were represented by a union. The Company believes
its employee relations are good.
11
<PAGE>
CAUTIONARY STATEMENTS
The following discussion contains certain cautionary statements regarding
United's business and results of operations which should be considered by
investors and others. These statements discuss matters which may in part be
discussed elsewhere in this Form 10-K and which may have been discussed in other
documents prepared by the Company pursuant to federal or state securities laws.
This discussion is intended to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. The following factors
should be considered in conjunction with any discussion of operations or results
by the Company or its representatives, including any forward-looking discussion,
as well as comments contained in press releases, presentations to securities
analysts or investors, or other communications by the Company.
In making these statements, the Company is not undertaking to address or
update each factor in future filings or communications regarding the Company's
business or results, and is not undertaking to address how any of these factors
may have caused changes to discussions or information contained in previous
filings or communications. In addition, any of the matters discussed below may
have affected United's past results and may affect future results, so that the
Company's actual results for first quarter 1996 and beyond may differ materially
from those expressed in prior communications.
Health Care Costs. A large portion of the revenue received by United is
expended to pay the costs of health care services or supplies delivered to its
members. The total health care costs incurred by United are affected by the
number of individual services rendered and the cost of each service. Much of the
Company's premium revenue is set in advance of the actual delivery of services
and the related incurring of the cost, usually on a prospective annual basis.
While United attempts to base the premiums it charges at least in part on its
estimate of expected health care costs over the fixed premium period,
competition, regulations and other circumstances may limit United's ability to
fully base premiums on estimated costs. In addition, many factors may and often
do cause actual health care costs to exceed that estimated and reflected in
premiums. These factors may include increased utilization of services, increased
cost of individual services, catastrophes, epidemics, seasonality, general
inflation, new mandated benefits or other regulatory changes and insured
population characteristics.
Marketing. The Company markets its products and services through both
employed sales people and independent sales agents. Although the Company has a
number of such sales employees and agents, if certain key sales employees or
agents or a large subset of such individuals were to leave the Company, its
ability to retain existing customers and members could be impaired. 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 such customers.
The managed care industry has recently received significant amounts of
negative publicity. Such general publicity, or any negative publicity regarding
United in particular, could adversely affect the Company's ability to sell its
products or services or could create regulatory problems for the Company.
Competition. In any of its geographic or product markets the Company
competes with a number of other entities, some of which may have certain
characteristics or capabilities which give them an advantage in competing with
the Company. The Company believes there are few barriers to entry in these
markets, so that the addition of new competitors can occur relatively easily.
Certain of the Company's customers may decide to perform for themselves
functions or services formerly provided by the Company, which would result in a
decrease in the Company's revenues. Certain of the Company's providers may
decide to market products and services to Company customers in competition with
the Company. In addition, significant merger and acquisition activity has
occurred in the industry in which the Company operates as well as in industries
which act as suppliers to the Company such as the hospital, physician,
pharmaceutical and medical device industries. This activity may create stronger
competitors and/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, its revenue growth, its
pricing flexibility, its control over medical cost trends and its marketing
expenses may all be adversely affected.
Provider Relations. One of the significant techniques United 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 of the geographic diversity of its health plans and the large number of
providers with which most of those health plans contract, United currently
believes it has a limited exposure to provider relations issues. In any
particular market, however, providers could refuse to contract with United,
demand higher payments or take other actions which 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 even monopolies. Many of these providers may
compete directly with the Company. If such providers refuse to contract with
United or utilize their market position to negotiate favorable contracts or
place United at a competitive disadvantage, United's ability to market products
or to be profitable in those areas could be adversely affected.
12
<PAGE>
Administration and Management. The level of administrative expense is a
partial determinant of United's profitability. While United attempts to
effectively manage such expenses, increases in staff-related and other
administrative expenses may occur from time-to-time due to business or product
start-ups or expansions, growth or changes in business, acquisitions, regulatory
requirements or other reasons. Such expense increases are not clearly
predictable and increases in administrative expenses may adversely affect
results.
United's business is significantly dependent on effective information
systems. United has many different information systems for its various
businesses. United is in the process of attempting to reduce the number of
systems and also upgrade and expand its information systems capabilities.
Failure to maintain an effective and efficient information system could result
in loss of existing customers and 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 party's failure to perform adequately.
United currently believes it has a relatively experienced, capable
management staff. Loss of certain managers or a number of such managers could
adversely affect United's ability to administer and manage its business. The
Company has made several large acquisitions in recent years, and has an active
ongoing acquisition program. Failure to effectively integrate acquired
operations could result in increased administrative costs or customer confusion
or dissatisfaction.
Government Programs and Regulation. The Company's business is heavily
regulated. The laws and rules governing the Company's business and
interpretations of those laws and rules are subject to frequent change.
Existing or future laws and rules could force United to change how it does
business and may restrict United's revenue and/or enrollment growth and/or
increase its health care and administrative costs. Regulatory approvals must be
obtained and maintained to market many of United's products and services. Delays
in obtaining or failure to obtain or maintain such approvals could adversely
affect United's revenue or the number of its members, or could increase costs.
A significant portion of United's revenues relate 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 program, are
generally subject to frequent change including changes which may reduce the
number of persons enrolled or eligible, reduce the revenue received by United or
increase the Company's administrative or health care costs under such programs.
Such changes have in the past and may in the future adversely affect United's
results and its willingness to participate in such programs.
The Company is also subject to various governmental audits and
investigations. Such activities 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 negatively affect the Company's reputation in
various markets and make it more difficult for the Company to sell its products
and services.
Litigation and Insurance. United is subject to a variety of legal actions
to which any corporation may be subject, including employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including for securities fraud, and
intellectual property related litigation. In addition, because of the nature of
its business, United incurs and likely will continue to incur potential
liability for claims related to its business, such as failure to pay for or
provide health care, poor outcomes for care delivered or arranged, provider
disputes, including disputes over withheld compensation, claims related to self-
funded business and improper copayment calculations. In some cases, substantial
non-economic or punitive damages may be sought. While United currently has
insurance coverage for some of these potential liabilities, others may not be
covered by insurance, the insurers may dispute coverage or the amount of
insurance may not be enough to 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.
Stock Market. Recently, the market prices of the securities of certain of
the publicly-held companies in the industry in which United operates have shown
volatility and sensitivity in response to many factors, including 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. There can be no
assurances regarding the level or stability of United's share price at any time
or of the impact of these or any other factors on the share price.
13
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
<TABLE>
<CAPTION>
FIRST ELECTED AS
NAME AGE POSITION EXECUTIVE OFFICER
- ---- --- -------- -----------------
<S> <C> <C> <C>
William W. McGuire, M.D. 47 Chairman, President, Chief Executive Officer 1988
and Director
James G. Carlson 43 Executive Vice President, Field Operations 1995
James A. Conto 40 Senior Vice President, Mergers & Acquisitions 1994
Elliot F. Gerson 43 Executive Vice President, National Accounts & 1995
Specialty Operations
David P. Koppe 39 Chief Financial Officer 1992
Sheila T. Leatherman 44 Executive Vice President 1993
Michael A. Mooney 42 Executive Vice President, Underwriting & 1996
Pricing
Jeannine M. Rivet 47 Executive Vice President, Health Services 1992
Kevin H. Roche' 45 General Counsel and Secretary 1992
Travers H. Wills 52 Chief Operating Officer 1992
Allen F. Wise 53 Executive Vice President, Administrative 1995
Services
</TABLE>
Executive officers of the Company are elected annually by the Board of Directors
and 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 United's Executive Vice President in October 1995. From
March to October 1995, Mr. Carlson was Executive Vice President of The
MetraHealth Companies, Inc. 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. Conto has been employed by the Company since 1985 and has served in his
present capacity since 1991. From 1985 to 1987, he was the Assistant Director of
HMO Financial Research, from 1987 to 1990, he was the Director of Internal Audit
and from 1990 to 1991 he was the Company's Director of Development.
Mr. Gerson became an Executive Vice President of United in October 1995.
Mr. Gerson was an Executive Vice President of The MetraHealth Companies, Inc.
from January 1995 to October 1995. Prior to joining The MetraHealth Companies,
Inc. Mr. Gerson held various executive positions with The Travelers Insurance
Group in Hartford, Connecticut, from 1991 to 1995, including President of The
Travelers Insurance Company, President of the Managed Care and Employee Benefits
Operations Division of The Travelers Corporation, Senior Vice President of the
Financial Services Department and Senior Vice President Agency Operations
Department for The Travelers Corporation.
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.
Ms. Leatherman currently serves as an Executive Vice President of United.
Ms. Leatherman joined the Company in 1989 and served as its Vice
President of Research and Development until June 1992 when she became President
of United's Center for Health Care Policy and Evaluation.
14
<PAGE>
Mr. Mooney has been employed by the Company since February 1985 and became
an Executive Vice President of United in January 1996. Prior to January 1996,
Mr. Mooney served in various capacities in United's underwriting department
including, most recently, Vice President, Underwriting.
Ms. Rivet has been employed by United since June 1990. She became an
Executive Vice President of the Company in October 1994. She served as the
Company's Senior Vice President, Health Plan Operations from September 1993 to
September 1994 and the Company's Vice President of Health Service Operations
from June 1990 to September 1993.
Mr. Roche' has served as the Secretary and General Counsel of the Company
since May 1989 when he joined the Company.
Mr. Wills has been employed by the Company since November 1992. From
November 1992 until June 1995, he served as United's Senior Vice President,
Specialty Operations. He has been the Company's Chief Operating Officer since
June 1995. 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.
Mr. Wise became an Executive Vice President of United in October 1995. From
October 1994 to October 1995, Mr. Wise was Executive Vice President of The
MetraHealth Companies, Inc. He was employed by Independence Blue Cross, a
Philadelphia, Pennsylvania-based HMO and Keystone Health Plan, a Philadelphia,
Pennsylvania-based HMO, as Chief Operating Officer and Director from 1991 to
1994.
ITEM 2. PROPERTIES
-------------------
As of December 31, 1995, the Company leased approximately 1.4 million
aggregate square feet of space for its principal administrative offices in
Hartford, Connecticut and the greater Minneapolis/St. Paul, Minnesota area. In
connection with its operations outside of the Minneapolis/St. Paul, Minnesota
and Hartford, Connecticut areas, as of December 31, 1995, the Company leased
approximately 4.2 million aggregate square feet for office space or space for
computer facilities and claims processing centers nationwide. Such space
corresponds to areas in which its health plans or managed care services
specialty programs operate or where it has a satellite administrative office.
The Company's leases expire at various dates through 2011. As of December 31,
1995, the Company owned approximately 333,000 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. While
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 results, the likelihood or outcome
of such 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.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
--------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
STOCK LISTING AND PRICES
United's common stock is traded on the New York Stock Exchange under the
symbol UNH. The following table shows the range of high and low sales prices for
the Company's common stock as reported on the New York Stock Exchange Composite
Tape for the calendar periods indicated through February 29, 1996. These
quotations represent prices between dealers and do not include retail markups,
markdowns or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1996
- ----
First Quarter 1996 (through February 29, 1996) $ 65.50 $ 62.50
1995
- ----
First Quarter $ 50.00 $ 41.75
Second Quarter 46.375 34.125
Third Quarter 49.25 40.00
Fourth Quarter 65.625 47.375
1994
- ----
First Quarter $ 47.50 $ 36.188
Second Quarter 50.75 37.25
Third Quarter 54.625 41.75
Fourth Quarter 55.25 40.625
</TABLE>
As of February 29, 1996, the Company had 5,537 shareholders of record.
DIVIDEND POLICY
The Company's dividend policy, established by its Board of Directors in
August 1990, requires the Board to review the Company's audited consolidated
financial statements following the end of each fiscal year and make a
determination as to the advisability of declaring a dividend on the Company's
outstanding shares of common stock. Shareholders of record on April 1, 1994,
received an annual dividend for 1994 of $0.03 per share, and shareholders of
record on April 3, 1995, received an annual dividend for 1995 of $0.03 per
share. On February 13, 1996, the Company's Board of Directors approved an annual
dividend for 1996 of $0.03 per share to holders of the Company's common stock.
This dividend will be paid on April 15, 1996 to shareholders of record at the
close of business on April 3, 1996.
16
<PAGE>
ITEM. 6. SELECTED FINANCIAL DATA
---------------------------------
Financial Highlights
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------
1995 1994 1993 1992 l991
- -------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Operating Results
- -------------------------------------------------------------------------------------------------------------------------
Revenues $5,670,878 $3,768,882 $3,115,202 $2,200,636 $1,416,120
Earnings from Operations $ 460,785/2/ $ 506,047 $ 336,351 $ 207,306 $ 142,724
Net Earnings Before
- -------------------------------------------------------------------------------------------------------------------------
Extraordinary Gain $ 285,964/2/ $ 288,139/1/ $ 212,078 $ 130,591 $ 89,398
Extraordinary Gain on Sale of
Subsidiary, net -- 1,377,075 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 285,964/2/ $1,665,214 $ 212,078 $ 130,591 $ 89,398
Convertible Preferred Stock Dividends 7,188 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Net Earnings Applicable to
Common Shareholders $ 278,776/2/ $1,665,214 $ 212,078 $ 130,591 $ 89,398
- -------------------------------------------------------------------------------------------------------------------------
Net Earnings Per Common Share
Net Earnings Before
Extraordinary Gain $ 1.57/2/ $ 1.64/1/ $ 1.23 $ 0.79 $ 0.60
Extraordinary Gain -- 7.86 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 1.57/2/ $ 9.50 $ 1.23 $ 0.79 $ 0.60
- -------------------------------------------------------------------------------------------------------------------------
Dividends Per Share
Common Stock $ 0.030 $ 0.030 $ 0.015 $ 0.0075 $ 0.0075
Convertible Preferred Stock $ 14.38 -- -- -- --
Weighted Average Number of
Common Shares Outstanding 177,443 175,209 171,739 166,091 148,105
- -------------------------------------------------------------------------------------------------------------------------
Consolidated Financial Position (at year end)
- -------------------------------------------------------------------------------------------------------------------------
Cash and Investments $3,078,395 $2,769,390 $1,169,433 $ 923,576 $ 516,174
Total Assets $6,160,986 $3,489,479 $1,787,354 $1,321,174 $ 801,473
Long-term Obligations $ 31,152 $ 24,275 $ 39,099 $ 24,132 $ 41,649
Shareholders' Equity $3,188,020 $2,795,456 $1,085,410 $ 822,903 $ 426,796
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Financial Highlights should be read in conjunction with Item 7 and Consolidated
Financial Statements and notes thereto included in this Form 10-K.
- -------------------------------------------------------------------------------
/1/ Excluding merger costs of $35.9 million ($22.3 million after income taxes,
or $0.13 per common share) incurred in connection with the Company's May
1994 acquisitions of Complete Health Services, Inc. and Ramsay-HMO, Inc.,
1994 net earnings before extraordinary gain would have been $310.4 million,
or $1.77 per common share.
/2/ Excluding fourth quarter restructuring charges of $153.8 million ($96.9
million after tax, or $0.55 per common share) associated with The
MetraHealth Companies, Inc. acquisition, 1995 earnings from operations and
net earnings would have been $614.6 million and $382.9 million, or $2.12 per
common share.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
---------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
-----------------------------------------------
Financial Review
The Company has completed several recent significant transactions which affect
the year-to-year comparability of its consolidated financial position and
results of operations. On May 27, 1994, the Company sold Diversified
Pharmaceutical Services, Inc. (Diversified), then a wholly owned subsidiary, to
SmithKline Beecham Corporation for $2.3 billion in cash. In connection with this
transaction, the Company recognized an extraordinary gain after transaction
costs and income tax effects of $1.38 billion. The results of Diversified
subsequent to the sale are not included in the consolidated financial results of
the Company.
On January 3, 1995, the Company acquired GenCare Health Systems, Inc.
(GenCare), a health plan based in St. Louis, Missouri, serving 230,000 members
at the time of acquisition. On February 28, 1995, the Company acquired Group
Sales and Services of Puerto Rico, Inc. (Group Sales), a health plan based in
San Juan, Puerto Rico, serving 135,000 members at the time of acquisition. On
October 2, 1995, the Company acquired The MetraHealth Companies, Inc.
(MetraHealth). MetraHealth was formed in January 1995 by combining the group
health care operations of Metropolitan Life Insurance Company and The Travelers
Insurance Group. At the time of acquisition, MetraHealth served over 10 million
individuals, including 5.9 million in network-based care programs, 469,000 of
whom were health plan members. Each of these acquisitions was accounted for as a
purchase transaction. Accordingly, only the post-acquisition results of GenCare,
Group Sales and MetraHealth are included in the Company's consolidated financial
results.
In connection with its acquisition of MetraHealth, the Company developed a
comprehensive plan to integrate the business activities of the combined
companies. The plan encompasses, among other matters, the disposition,
discontinuance and restructuring of certain businesses and product lines, and
the recognition of certain asset impairments. In the fourth quarter of 1995, the
Company recorded $153.8 million in restructuring charges associated with the
plan.
This Financial Review should be read in conjunction with the accompanying
Consolidated Financial Statements and notes thereto.
Summary Operating Information
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------------------------------------------
Amount or Percent Amount or Percent Amount or
Percent Increase Percent Increase Percent
- --------------------------------------------------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $5,670,878/1/ 51% $3,768,882/2/ 21% $3,115,202
Net Operating Earnings $ 382,864/1/ 23% $ 310,439/2/ 46% $ 212,078
- --------------------------------------------------------------------------------------------------------
Medical Costs to Premium Revenue 79.7% 78.3% 80.4%
SG&A Expenses to Total Revenues 18.2% 14.7% 15.8%
Total Operating Margin 8.1% 13.4% 10.8%
- --------------------------------------------------------------------------------------------------------
Enrollment (at year end)
Health Plan Products
Commercial 3,005/3/ 68% 1,791/3/ 18% 1,521/3/
Medicaid 352 24% 285 19% 239
Medicare 148 36% 109 11% 98
- --------------------------------------------------------------------------------------------------------
Total Health Plan Products 3,505 60% 2,185 18% 1,858
Other Network-Based Products 5,738/3/ -- 67/3/ -- --
Indemnity Products 4,367/3/ -- -- -- --
Total Enrollment 13,610 504% 2,252 21% 1,858
- --------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Amounts include post-acquisition operating results of GenCare Health
Systems, Inc. acquired on January 3, 1995, Group Sales and Services of
Puerto Rico, Inc. acquired on February 28, 1995, and The MetraHealth
Companies, Inc. acquired on October 2, 1995. Excludes fourth quarter 1995
restructuring charges of $153.8 million ($96.9 million after tax) associated
with the MetraHealth acquisition.
/2/ Amounts exclude post-disposition results of Diversified Pharmaceutical
Services, Inc., a subsidiary of the Company sold in May 1994, and the
associated extraordinary gain of $1.38 billion. Amounts also exclude merger
costs of $35.9 million ($22.3 million after tax) associated with the May
1994 acquisitions of Complete Health Services, Inc. and Ramsay-HMO, Inc. The
results of Complete Health and Ramsay are included in all periods presented
in accordance with pooling-of-interests accounting.
/3/ Amounts include both fully insured and self-funded enrollment. End of year
self-funded enrollment was as follows: Commercial Health Plan Product --
243,000 in 1995, 123,000 in 1994, and 62,000 in 1993; Other Network-Based
Products -- 5,038,000 in 1995 and 67,000 in 1994; Indemnity Products --
18
<PAGE>
3,385,000 in 1995.
19
<PAGE>
Results of Operations
- -------------------------------------------------------------------------------
The Company again achieved record operating results in 1995. Net operating
earnings (excluding restructuring charges in 1995 and merger costs and gains on
the sale of subsidiaries in 1994 and 1993) were $382.9 million in 1995, $310.4
million in 1994 and $212.0 million in 1993. Total revenues of $5.67 billion in
1995 were also a record, up from $3.77 billion in 1994 and $3.12 billion in
1993.
Revenues
Premium revenues in 1995 of $4.93 billion increased $1.55 billion, or 46%,
compared to 1994. Excluding the effects of the Company's 1995 acquisitions of
GenCare, Group Sales and MetraHealth, the increase in 1995 premium revenues over
1994 was 19%, reflecting year-over-year enrollment growth of 21% and an average
premium rate increase on renewing commercial groups of approximately 1% to 2%.
The Company's year-over-year enrollment growth (excluding the effects of the
1995 acquisitions) slightly exceeded the corresponding growth in premium
revenues due to changes in customer mix. Much of the new commercial enrollment
growth has been in the small group product which is generally characterized as
having lower benefits (and therefore lower premiums) than the Company's other
commercial products.
Premium revenues in 1994 were $3.38 billion, a 21% increase over 1993,
reflecting year-over-year enrollment growth of 18% and an average premium rate
increase on renewing commercial groups of approximately 4%.
Commercial premium rates are established by the Company based on anticipated
health care costs. The Company has been able to effectively manage health care
costs and maintain the effective rate at which its health care costs have grown
within the commercial line of business to low single-digit percentage increases.
Following this strategy, the Company currently expects premium rate increases on
renewing commercial groups in 1996 to increase slightly over those realized in
1995.
Competition for commercial enrollment in certain of the Company's health plan
markets has increased in recent years. However, the Company has continued to
follow its strategy of pricing its commercial products in accordance with
anticipated health care costs. Depending on the level of future competition or
other external factors beyond the Company's control, there can be no assurance
that the Company's recent enrollment growth trends will continue or that the
Company will be able to maintain pricing consistent with health care cost
trends.
As a result of its acquisition of MetraHealth, the Company had approximately
983,000 enrollees at December 31, 1995, in fully insured non-network-based
indemnity products, primarily from small group employers. These products do not
have similar health care cost containment measures as the Company's network-
based products and, accordingly, are priced differently. In response to
increased medical costs associated with these products in early 1995, the
Company instituted rate increases ranging from 15% to 25% during the second half
of 1995. As a result, the Company expects enrollment in the non-network-based
products to decrease during 1996. To the extent practicable, the Company will
attempt to convert these enrollees to its network-based managed care products.
While the 1995 rate increases were based on the Company's estimate of health
care cost trends within the non-network-based products, there can be no
assurance that these rate increases will be consistent with future health care
cost experience.
Management services and fee revenues in 1995 of $579.7 million more than
doubled over 1994 comparable revenues. Prior to the MetraHealth acquisition,
these revenues were primarily comprised of administrative fees relating to
services performed on behalf of the Company's managed health plans and fees
generated by the Company's specialty managed care services.
The Company had approximately 8,666,000 enrollees in self-funded products at
December 31, 1995, most of which related to the former MetraHealth business.
Under these funding arrangements, the Company receives a fee for the provision
of administrative services and generally assumes no financial responsibility for
health care costs associated with these products. The Company recorded $216.2
million in management services and fee revenues in the fourth quarter of 1995
related to the former MetraHealth self-funded products.
Investment and other income was $159.8 million in 1995, $118.0 million in
1994, and $62.8 million in 1993. Investment and other income increased each year
primarily due to the investment of cash generated from operations and, from May
1994, the investment of the net proceeds from the Diversified sale.
Operating Expenses
The combination of the Company's pricing strategy and its medical management
efforts are reflected in its medical expense ratio (the percent of premium
revenues expensed as medical costs). The medical expense ratio improved from
80.4% in 1993 to 78.3% in 1994, and then increased slightly to 78.6% through the
first nine months of 1995. This increase in the medical expense ratio is largely
a reflection of declines in Medicaid premium rates in certain markets and the
Company's strategic decision to selectively increase Medicaid provider
reimbursements. For the full year 1995, the medical expense ratio increased to
79.7%, due primarily to the Company's acquisition of MetraHealth in October. The
former MetraHealth products have a higher medical expense ratio as compared to
the Company's previous products.
20
<PAGE>
Selling, general and administrative expenses as a percent of total revenues
(the SG&A ratio) followed a similar trend. The SG&A ratio improved from 15.8% in
1993 to 14.7% in 1994, and then increased to 18.2% in 1995. The SG&A ratio
actually decreased through the first nine months of 1995 to 14.4% from 15.2% for
the comparable 1994 period. Contributing to this decrease from the 1994 period
was a change in the terms of the Company's management agreement with the
Minneapolis, Minnesota, based Medica health plan in August 1994. Under the new
Medica agreement, the Company transferred cost responsibility for certain
management contract expenses and employees to Medica. The Company's selling,
general and administrative expenses decreased accordingly, matched with a
corresponding decrease in management services revenues. With the MetraHealth
acquisition, the SG&A ratio substantially increased in the fourth quarter of
1995 because a greater proportion of the former MetraHealth business consists of
fee-based, self-funded products rather than products which generate full premium
revenue.
Depreciation and amortization was $94.5 million in 1995, $64.1 million in
1994, and $50.6 million in 1993. Depreciation and amortization increased each
year due to higher levels of capital expenditures in support of the growth in
business and, in 1995, amortization of goodwill and other intangible assets
related to the acquisition of GenCare, Group Sales and MetraHealth.
Restructuring charges of $153.8 million recorded in the fourth quarter of 1995
include $102.3 million for activities under the Company's integration plan and
$51.5 million for asset impairment. The restructuring charges do not cover
certain aspects of the plan, including new information systems, anticipated
operating losses from businesses to be discontinued, employee relocation, and
training. These costs will be recognized in future periods as incurred.
The charges reflect management's best estimates of the cost to be incurred in
executing the restructuring plan. These estimates will continue to be refined
until the plan is complete.
Government Regulation
- -------------------------------------------------------------------------------
The Company's primary business, offering health care coverage and health care
management services, is heavily regulated at both the federal and state level.
Changes in applicable laws and regulations are continually being considered.
While the Company is unable to predict what regulatory changes may occur or the
impact on the Company of any particular change, the Company's operations and
financial results could be negatively affected by regulatory revisions. Certain
proposed changes in Medicare and Medicaid programs may increase the
opportunities for the Company to enroll persons under products developed for the
Medicare and Medicaid eligible populations, but proposed changes also may limit
the reimbursement available to the Company and increase competition in those
programs, which could adversely affect the Company's financial results. The
continued consideration and enactment of "anti-managed care" laws and
regulations, such as "any willing provider" laws and limits on utilization
management, by federal and state bodies may make it more difficult for the
Company to control medical costs and may adversely affect financial results.
In addition to changes in applicable laws and rules, the Company is
potentially subject to governmental investigations and enforcement actions.
These include possible government actions relating to the federal Employee
Retirement Income Security Act (ERISA), which regulates health coverage plans
offered by employers, and the Company's dealings with self-funded employer
health plans, the Federal Employees Health Benefit Plan (FEHBP), federal and
state fraud and abuse laws, and laws relating to utilization management and the
delivery of health care. Any such government action could result in assessment
of damages, civil or criminal fines or penalties, or other sanctions, including
exclusion from participation in government programs. Although the Company is
currently involved in various government audits, such as under the FEHBP or
relating to services for ERISA plans, the Company believes that it is in
compliance in all material respects with the various federal and state
regulations applicable to its current operations and does not believe the
results of such audits will have a material adverse effect on the Company's
financial positon or results of operations.
21
<PAGE>
Inflation
- -------------------------------------------------------------------------------
Although the general rate of inflation has remained relatively stable and health
care cost inflation has declined in recent years, the total health care cost
inflation rate still exceeds the general inflation rate. The Company uses
various strategies to mitigate the negative effects of health care cost
inflation, including setting commercial premiums based on its anticipated health
care costs, risk-sharing arrangements with the Company's various health care
providers, and other health care cost containment measures. Specifically, the
Company's health plans attempt to control medical and hospital costs through
contractual arrangements primarily with independent providers of health care
services. Cost-effective delivery of health care services by such health care
providers is achieved by the reduction of unnecessary hospitalizations,
appropriate use of specialty referral services, and emphasizing preventive
health services. While the Company currently believes its strategies to mitigate
health care cost inflation will continue to be successful, competitive
pressures, demands from providers and customers, applicable regulations or other
factors may adversely affect the Company's ability to control the impact of
health care cost increases. In addition, certain non-network-based products of
the former MetraHealth business do not have similar health care cost containment
measures as the Company's network-based managed care products. As a result, the
Company is subject to more health care cost inflation risk with these products.
- -------------------------------------------------------------------------------
Financial Condition and Liquidity
- -------------------------------------------------------------------------------
The Company's cash and investments increased from $2.77 billion at December 31,
1994, to $3.08 billion at December 31, 1995. The increase in cash and
investments is primarily the result of cash generated from operations of $434.3
million, offset by cash used for the purchases of GenCare ($515.4 million),
Group Sales ($22.0 million) and MetraHealth ($1.09 billion), net of cash and
investments of $1.49 billion assumed with these acquisitions.
The Company generally invests a large portion of its cash resources in high
quality, long-term investments. At December 31, 1994, the Company had working
capital of $1.24 billion, a current ratio of 2.9, as a substantial portion of
the Diversified proceeds remained invested in short-term instruments while the
Company evaluated longer-term investment opportunities. As a result of the 1995
acquisitions and the application of the Company's investment strategy, the
Company's working capital decreased to $433.1 million at December 31, 1995, a
current ratio of 1.2.
Under applicable state regulations, certain of the Company's subsidiaries are
required to retain cash generated from their operations. After giving effect to
these restrictions, the Company had approximately $745.2 million in cash and
investments available for general corporate use at December 31, 1995.
In connection with the Company's acquisition of MetraHealth, the former owners
of MetraHealth are eligible to receive up to an additional $350.0 million if
MetraHealth achieves certain 1995 operating results, as defined. Any
consideration payable for this 1995 earnout may, at the Company's sole
discretion, be in the form of cash, convertible debt, convertible preferred
stock, or straight debt. Moreover, if the Company's post-acquisition combined
net earnings for 1996 and 1997 reaches certain specified levels, certain of
MetraHealth's former owners will be eligible to receive up to an additional
$175.0 million in cash for each of those years.
As described more fully in Note 3 to the consolidated financial statements,
the Company has agreed to acquire in separate transactions PHP, Inc. (PHP) and
HealthWise of America, Inc. (HealthWise). These transactions will be effected
through the exchange of shares of the Company's common stock for all the
outstanding shares of PHP and HealthWise and, with the exception of transaction
costs, will not require the use of cash.
The Company currently believes its available cash resources will be sufficient
to meet its current operating requirements and internal development and
integration initiatives. There currently are no other material definitive
commitments for future use of the Company's available cash resources; however,
management continually evaluates opportunities to expand its operations, which
includes internal development of new products and programs and may include
additional acquisitions.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------
(in thousands, except per share data)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Premiums $4,931,355 $3,376,238 $2,782,399
Management Services and Fees 579,707 274,616 270,027
Investment and Other Income 159,816 118,028 62,776
- ---------------------------------------------------------------------------------------------
Total Revenues 5,670,878 3,768,882 3,115,202
- ---------------------------------------------------------------------------------------------
Operating Expenses
Medical Costs 3,930,933 2,643,107 2,236,588
Selling, General and Administrative Costs 1,030,906 555,649 491,635
Depreciation and Amortization 94,458 64,079 50,628
Restructuring Charges 153,796 -- --
- ---------------------------------------------------------------------------------------------
Total Operating Expenses 5,210,093 3,262,835 2,778,851
- ---------------------------------------------------------------------------------------------
Earnings from Operations 460,785 506,047 336,351
Interest Expense (771) (2,163) (3,046)
Merger Costs -- (35,940) (14,860)
Gain on Sale of Subsidiary -- -- 14,982
- ---------------------------------------------------------------------------------------------
Earnings Before Income Taxes, Minority Interests
and Extraordinary Gain 460,014 467,944 333,427
Provision for Income Taxes (170,205) (177,822) (119,379)
Minority Interests in Net Earnings of
Consolidated Subsidiaries (3,845) (1,983) (1,970)
- ---------------------------------------------------------------------------------------------
Net Earnings Before Extraordinary Gain 285,964 288,139 212,078
Extraordinary Gain on Sale of Subsidiary,
net of income taxes of $808,758 -- 1,377,075 --
- ---------------------------------------------------------------------------------------------
Net Earnings 285,964 1,665,214 212,078
Convertible Preferred Stock Dividends 7,188 -- --
- ---------------------------------------------------------------------------------------------
Net Earnings Applicable to Common Shareholders $ 278,776 $1,665,214 $ 212,078
- ---------------------------------------------------------------------------------------------
Net Earnings Per Common Share Before Extraordinary
Gain $1.57 $1.64 $1.23
Extraordinary Gain Per Common Share -- 7.86 --
- ---------------------------------------------------------------------------------------------
Net Earnings Per Common Share $1.57 $9.50 $1.23
- ---------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares
Outstanding 177,443 175,209 171,739
- ---------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
23
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
- --------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 940,110 $1,519,049
Short-term investments 863,815 135,287
Accounts receivable, net of allowances of $27,184 and $12,433 550,313 167,369
Assets under management 309,170 --
Other 203,713 86,510
- --------------------------------------------------------------------------------------------------------------
Total Current Assets 2,867,121 1,908,215
Long-term Investments 1,274,470 1,115,054
Goodwill, net of accumulated amortization of $62,066 and $32,651 1,727,042 278,949
Property and Equipment, net of accumulated depreciation of $149,514 and $110,834 267,652 162,597
Intangible and Other Assets, net of accumulated amortization of $14,137 and $22,513 24,701 24,664
- --------------------------------------------------------------------------------------------------------------
Total Assets $6,160,986 $3,489,479
- --------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Medical costs payable $1,156,421 $ 443,559
Other policy liabilities 457,528 --
Accounts payable 79,796 27,032
Accrued expenses 566,770 122,993
Unearned premiums 173,481 70,718
- --------------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,433,996 664,302
Long-term Obligations and Minority Interests 38,970 29,721
Convertible Preferred Stock 500,000 --
Commitments and Contingencies (Note 9)
- --------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.01 par value -- 500,000,000 shares authorized;
175,215,000 and 172,831,000 issued and outstanding 1,752 1,728
Additional paid-in capital 822,429 752,472
Retained earnings 2,358,640 2,085,056
Deferred compensation -- (35)
Net unrealized holding gains (losses) on investments available for sale,
net of income tax effects 5,199 (43,765)
- --------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 3,188,020 2,795,456
- --------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $6,160,986 $3,489,479
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
24
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Net Unrealized
Holding Gains
(Losses) on
Common Stock Additional Investments
---------------- Paid-in Retained Deferred Available
Shares Amount Capital Earnings Compensation for Sale Total
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 166,073 $1,661 $607,105 $ 214,508 $(371) $ -- $ 822,903
Issuance of Common Stock Pursuant to
Stock Plans and Related Tax Benefits 3,027 30 52,254 -- 26 -- 52,310
Amortization -- -- -- -- 237 -- 237
Cash Dividend
Common Stock ($0.015 per share) -- -- -- (2,118) -- -- (2,118)
Net Earnings -- -- -- 212,078 -- -- 212,078
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 169,100 1,691 659,359 424,468 (108) -- 1,085,410
Issuance of Common Stock Pursuant to
Stock Plans and Related Tax Benefits 3,731 37 93,113 -- -- -- 93,150
Change in Net Unrealized Holding
Losses on Investments Available
for Sale, net of income tax effects -- -- -- -- -- (43,765) (43,765)
Amortization -- -- -- -- 73 -- 73
Cash Dividend
Common Stock ($0.03 per share) -- -- -- (4,626) -- -- (4,626)
Net Earnings -- -- -- 1,665,214 -- -- 1,665,214
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 172,831 1,728 752,472 2,085,056 (35) (43,765) 2,795,456
Issuance of Common Stock Pursuant to
Stock Plans and Related Tax Benefits 2,384 24 69,957 -- -- -- 69,981
Change in Net Unrealized Holding Gains
on Investments Available for Sale,
net of income tax effects -- -- -- -- -- 48,964 48,964
Amortization -- -- -- -- 35 -- 35
Cash Dividend
Common Stock ($0.03 per share) -- -- -- (5,192) -- -- (5,192)
Convertible Preferred Stock
($14.38 per share) -- -- -- (7,188) -- -- (7,188)
Net Earnings -- -- -- 285,964 -- -- 285,964
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 175,215 $1,752 $822,429 $2,358,640 $ -- $ 5,199 $3,188,020
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
25
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
(in thousands)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Earnings $ 285,964 $ 1,665,214 $ 212,078
Non Cash Items
Depreciation and amortization 94,458 64,079 50,628
Non-cash restructuring charges 141,137 -- --
Gain on sales of subsidiaries, net -- (1,377,075) (14,982)
Other (5,724) (4,267) (1,444)
Net Change in Other Operating Items, net of effects from
acquisitions and sales of subsidiaries
Accounts receivable and other current assets (25,079) (24,486) (45,493)
Medical costs payable 98,231 (17,931) 91,391
Accounts payable (25,854) (84,324) 4,884
Accrued expenses (144,163) 105,757 45,070
Unearned premiums 15,305 (710) 7,886
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities 434,275 326,257 350,018
- -----------------------------------------------------------------------------------------------------------------
Investing Activities
Cash Received from Sales of Subsidiaries, net of cash surrendered
and other effects -- 2,298,819 18,412
Cash Paid for Income Taxes and Transaction Costs Related to Sale
of Subsidiary -- (836,253) --
Cash Paid for Acquisitions, net of cash assumed and other effects (969,392) (51,442) (102,177)
Net Purchases of Property and Equipment (109,230) (79,609) (68,086)
Purchases of Investments Available for Sale (3,268,664) (1,334,654) --
Maturities/Sales of Investments Available for Sale 3,306,140 956,808 --
Purchases of Investments Held to Maturity (20,522) (20,205) --
Maturities of Investments Held to Maturity 14,957 8,005 --
Purchases of Long-term Investments -- -- (964,314)
Maturities/Sales of Long-term Investments /1/ -- -- 607,170
Net Maturities of Short-term Investments /1/ -- -- 109,284
Other 961 (2,373) (12,519)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from (Used for) Investing Activities (1,045,750) 939,096 (412,230)
- -----------------------------------------------------------------------------------------------------------------
Financing Activities
Net Proceeds from Stock Option Exercises 41,374 48,609 22,024
Payment of Long-term Obligations (3,646) (18,547) (10,464)
Common Stock Dividends Paid (5,192) (4,626) (2,118)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities 32,536 25,436 9,442
- -----------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (578,939) 1,290,789 (52,770)
Cash and Cash Equivalents, Beginning of Period 1,519,049 228,260 281,030
- -----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 940,110 $ 1,519,049 $ 228,260
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
/1/ Does not include the reclassification of the current maturities of
long-term investments to short-term investments of $126.6 million
in 1993, which are non cash transactions. Also does not include the
reclassification of $11.0 million of long-term investments to
restricted investments in 1993.
26
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
1 Description of Business
- -------------------------------------------------------------------------------
United HealthCare Corporation (the Company) is a national leader in offering
health care management services. The Company serves over 40 million covered
lives through a broad continuum of health care coverage products and services in
all 50 states and Puerto Rico. The Company utilizes a number of core
capabilities, including medical information management, health benefit
administration, risk assessment and pricing, health benefit design, provider
contracting and risk sharing and health care delivery management. The Company
provides both comprehensive managed care services, such as health maintenance
organizations, insurance and self-funded health care coverage products, and
unbundled health care management and cost containment products such as
behavioral health services, utilization review services, specialized provider
networks and employee assistance programs. On October 2, 1995, the Company
completed its acquisition of the MetraHealth Companies, Inc. (MetraHealth), a
managed health care coverage company and health insurer (see Note 3). As a
result of the MetraHealth acquisition, the Company increased the national scope
of its health care coverage business and now has relationships with many of the
country's largest companies. The acquisition of MetraHealth enhanced the
Company's ability to offer a full range of health care coverage products to all
types of customers.
- -------------------------------------------------------------------------------
2 Summary of Significant Accounting Policies
- -------------------------------------------------------------------------------
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
These financial statements include some amounts that are based on management's
best estimates and judgments. The most significant estimates relate to medical
costs payable and other policy liabilities, intangible asset valuations and
integration and restructuring reserves relating to the Company's recent
acquisitions. These estimates are subject to adjustment as more accurate
information becomes available and any such adjustment could be significant.
Revenue Recognition
Premium revenues are recognized in the period in which enrolled members are
entitled to receive health care services. Premiums received prior to such period
are recorded as unearned premiums. Management services and fee revenues are
recognized in the period the related services are performed.
Medical Costs
Medical costs includes claims paid, claims in process and pending, and estimated
unreported claims and charges by physicians, hospitals and other health care
providers for services rendered to enrolled members during the period. Medical
cost adjustments to prior period estimates are reflected in the current period.
Cash and Cash Equivalents and Investments
Cash and cash equivalents are highly liquid investments with an original
maturity of three months or less. The fair value of cash and cash equivalents
approximates carrying value because of the short maturity of the instruments.
Investments with a maturity of less than one year are classified as short-term.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No.115). The cumulative effect of adopting this
statement was not significant.
Following the criteria set forth in SFAS No. 115, the Company classifies
investments held by trustees or agencies pursuant to state regulatory
requirements as held to maturity based on the Company's ability and intent to
hold these investments to maturity. Such investments are presented at amortized
cost. All other investments are classified as available for sale and are
reported at fair value based on quoted market prices, with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity, net of income tax effects. For purposes of calculating
realized gains and losses on the sale of investments available for sale, the
amortized cost of each investment sold is used. The Company has no investments
it classifies as trading securities.
27
<PAGE>
Assets Under Management
In connection with its 1995 acquisition of MetraHealth, the Company is
administering certain aspects of the health care operations of MetraHealth's
predecessor companies related to business expected to be conveyed to the Company
during 1996 pursuant to agreements effected in conjunction with the initial
formation of MetraHealth. Upon conveyance to the Company, the associated assets
will be invested in marketable securities in accordance with the Company's
investment policy.
Other Policy Liabilities
Other policy liabilities principally relate to experience-rated indemnity
products written by MetraHealth or its predecessor companies and are primarily
comprised of retrospective rate credit reserves and customer balances.
Retrospective rate credit reserves represent premiums received in excess of
claims and expenses charged under eligible contracts. Reserves established for
closed policy years are based on actual experience while reserves for open years
are based on estimates of premiums, claims and expenses incurred.
Customer balances consist principally of deposit accounts and reserves which
have accumulated under certain experience-rated contracts. At the customer's
option, these balances may be returned to the customer or may be used to pay
future premiums or claims under certain eligible contracts.
Long-Lived Assets
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121). Following
the criteria set forth in SFAS No. 121, long-lived assets to be held are
reviewed by the Company for events or changes in circumstances which would
indicate that the carrying value may not be recoverable. In making this
determination, the Company considers a number of factors, including estimated
future undiscounted cash flows associated with the long-lived asset. Assets held
for sale are recorded at the lower of the carrying amount or fair value, less
any costs associated with its disposition. The principles of SFAS No. 121 were
applied in determining the restructuring charges recorded in the fourth quarter
of 1995 (see Note 4).
Goodwill
Goodwill represents costs in excess of net assets of businesses acquired which
are amortized on a straight-line basis over periods not exceeding 40 years. The
Company periodically evaluates whether events and circumstances have occurred
which may affect the estimated useful life or the recoverability of the
remaining balance of its goodwill.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful life of the respective assets
ranging from 3 to 30 years.
Intangible and Other Assets
Intangible and other assets consist principally of costs incurred in connection
with the development of computer software applications to support the management
services provided by the Company. These costs are amortized using the straight-
line method over their estimated useful lives or five years, whichever is
shorter.
Income Taxes
Deferred income tax assets and liabilities are recognized for the differences
between financial and income tax reporting basis of assets and liabilities based
on enacted tax rates and laws. The deferred income tax provision or benefit
generally reflects the net change in deferred income tax assets and liabilities
during the year. The current income tax provision reflects the tax consequences
of revenues and expenses currently taxable or deductible on the Company's
various income tax returns for the year reported.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No.109, "Accounting for Income Taxes." The cumulative
effect of adopting this statement and its impact on the Company's consolidated
results of operations was not significant.
Net Earnings Per Common Share
Net earnings per common share is determined using the weighted average number of
common shares outstanding during the period, adjusted for the dilutive effect of
outstanding stock options. The convertible preferred stock is not considered a
common stock equivalent for purposes of determining primary earnings per share.
Reclassifications
Certain 1994 and 1993 amounts in the consolidated financial statements have been
reclassified to conform with the 1995 presentation. These reclassifications had
no effect on net earnings or shareholders' equity as previously reported.
28
<PAGE>
- -------------------------------------------------------------------------------
3 Acquisitions and Dispositions
- -------------------------------------------------------------------------------
Acquisitions
On February 1, 1996, the Company signed a definitive agreement to acquire
HealthWise of America, Inc. (HealthWise), a health care management company based
in Nashville, Tennessee, currently serving 144,000 members in several states.
Terms of the agreement call for the Company to issue approximately 4.3 million
shares of common stock in exchange for all the outstanding shares of HealthWise.
Completion of the merger, which is subject to regulatory and other approvals, is
expected in the second quarter of 1996. At such time, the transaction will be
accounted for as a pooling of interests.
On November 28, 1995, the Company signed a definitive agreement to acquire
PHP, Inc. (PHP), a health plan based in Greensboro, North Carolina, currently
serving 117,000 members. Terms of the agreement call for the Company to issue
approximately 2.4 million shares of common stock in exchange for all the
outstanding shares of PHP. Completion of the merger, which is subject to
regulatory and other approvals, is expected in the first quarter of 1996. At
such time, the transaction will be accounted for as a purchase.
The Company acquired MetraHealth on October 2, 1995. MetraHealth was formed in
January 1995 by combining the group health care operations of Metropolitan Life
Insurance Company and The Travelers Insurance Group. At the time of acquisition,
MetraHealth served over 10 million individuals, including 5.9 million in
network-based care programs, 469,000 of whom were health plan members. The
acquisition was accounted for using the purchase method of accounting, whereby
the purchase price has been allocated to assets and liabilities based on their
estimated fair values at the date of acquisition. The purchase price and costs
associated with the acquisition exceeded the estimated fair value of net assets
acquired by $992.2 million which have been allocated to certain identified
intangible assets and goodwill. These identified intangible assets and goodwill
are being amortized on a straight-line basis over useful lives deemed
appropriate by management based on their best current judgment. The purchase
price allocation and the useful lives assigned to intangible assets and goodwill
may be adjusted upon completion of the final valuations of MetraHealth's assets
and liabilities and the effect of any such adjustment could be significant.
The total purchase price of the acquisition was $1.09 billion in cash and
$500.0 million of convertible preferred stock, for a total consideration at
closing of $1.59 billion. In addition, the former owners of MetraHealth are
eligible to receive up to an additional $350.0 million if MetraHealth achieves
certain 1995 operating results, as defined. Any consideration payable for this
1995 earnout in excess of the initial $1.59 billion may, at the Company's sole
discretion, be in the form of cash, convertible debt, convertible preferred
stock, or straight debt. Moreover, if the Company's post-acquisition combined
net earnings for 1996 and 1997 reaches certain specified levels, certain of
MetraHealth's former owners will be eligible to receive up to an additional
$175.0 million in cash for each of those years. Any additional consideration
paid pursuant to these arrangements will be reflected as additional goodwill.
On January 3, 1995, the Company completed its acquisition of GenCare Health
Systems, Inc. (GenCare), a health plan based in St. Louis, Missouri, which
served 230,000 members at the time of acquisition. The total purchase price of
the acquisition was $515.4 million in cash. The acquisition was accounted for
using the purchase method of accounting. The purchase price and costs associated
with the acquisition exceeded the estimated fair value of net assets acquired by
$476.0 million.
Had the MetraHealth and GenCare acquisitions occurred on January 1, 1994,
combined unaudited pro forma results for the years ended December 31, 1995 and
1994, would have been: revenues -- $8.71 and $8.21 billion; net earnings before
restructuring charges and extraordinary gain -- $449.6 and $399.9 million and
net earnings per common share before restructuring charges and extraordinary
gain -- $2.53 and $2.28.
On May 31, 1994, the Company's acquisition of Complete Health Services, Inc.
(Complete Health) was completed. Complete Health, based in Birmingham, Alabama,
owned or operated health plans in Alabama, Louisiana, Tennessee, Arkansas,
Georgia, Mississippi and Florida which served 272,000 members at the time of
acquisition. In connection with the transaction, the Company issued 5,038,000
shares of common stock in exchange for all the outstanding common and preferred
shares of Complete Health.
Also on May 31, 1994, the Company's acquisition of Ramsay-HMO, Inc. (Ramsay)
was completed. Ramsay, based in Coral Gables, Florida, owned and operated a
predominantly staff model health plan serving 177,000 members in South and
Central Florida at the time of acquisition. In connection with the transaction,
the Company issued 11,176,000 shares of common stock in exchange for all the
outstanding common shares of Ramsay.
In connection with the Complete Health and Ramsay acquisitions, the Company
incurred nonrecurring, non-operating merger costs of $35.9 million. Each
acquisition was accounted for as a pooling of interests and, accordingly, the
Company's consolidated financial statements and notes thereto include the
results of Complete Health and Ramsay for all periods presented.
29
<PAGE>
On August 31, 1993, the Company acquired HMO America, Inc. (HMOA), the parent
company of a health plan in Chicago, Illinois, which served 290,000 members at
the time of acquisition. In connection with the transaction, the Company issued
13,128,000 shares of common stock in exchange for all the outstanding common and
preferred shares of HMOA and incurred nonrecurring, non-operating merger costs
of $14.9 million. The acquisition was accounted for as a pooling of interests
and, accordingly, the Company's consolidated financial statements and notes
thereto include the results of HMOA for all periods presented.
Effective January 29, 1993, the Company acquired all of the issued and
outstanding common stock of Western Ohio Health Care Corporation, a health plan
in Dayton, Ohio, which served 182,600 members at the time of acquisition. The
total purchase price of the acquisition was $100.1 million in cash. The
acquisition was accounted for using the purchase method of accounting and
resulted in cost in excess of net assets acquired of $76.3 million.
Dispositions
On May 27, 1994, the Company completed the sale of 100% of the outstanding
common stock of Diversified Pharmaceutical Services, Inc. (Diversified), then a
wholly owned subsidiary of the Company, to SmithKline Beecham Corporation
(SmithKline), the U.S. operating subsidiary of London-based SmithKline Beecham
plc., a pharmaceutical manufacturer. In connection with the sale, the Company
received $2.3 billion in cash and recognized a $1.38 billion extraordinary gain
after transaction costs and income taxes. Under a six-year management services
agreement, SmithKline will pay the Company a management fee for certain
administrative and management services to be provided by the Company to
Diversified and for exclusive rights among pharmaceutical and medical diagnostic
companies to access certain data utilized in Diversified's ongoing business.
During the same six-year period, Diversified and SmithKline also will provide
the Company, subject to competitive cost and quality considerations, the
Diversified drug benefit management services that the Company requires in its
health plan and other operations. At the end of the six-year period, the parties
will consider continuation of the contract.
Had the Diversified sale occurred on January 1, 1993, combined unaudited pro
forma results for the years ended December31, 1994 and 1993, excluding the
extraordinary gain on such sale, would have been: revenues -- $3.74 billion and
$3.08 billion; net earnings -- $275.5 million and $192.5 million; net earnings
per common share -- $1.57 and $1.12. These pro forma results include the
estimated effects on the Company's operations of the management services
agreement between the Company and SmithKline but do not take into consideration
any reinvestment of the net proceeds from the sale. These pro forma results also
include non-operating merger costs related to the Complete Health and Ramsay
acquisitions.
On July 30, 1993, the Company completed the sale of its 26,800 member United
HealthCare of Iowa, Inc. subsidiary, for which it received $19.8 million. As a
result of the transaction, a one time, non-operating gain of $15.0 million was
recognized in 1993.
- -------------------------------------------------------------------------------
4 Restructuring Charges
- -------------------------------------------------------------------------------
In connection with its acquisition of MetraHealth, the Company developed a
comprehensive plan to integrate the business activities of the combined
companies (the Plan). The Plan encompasses, among other matters, the
disposition, discontinuance and restructuring of certain businesses and product
lines, and the recognition of certain asset impairments. In the fourth quarter
of 1995, the Company recorded $153.8 million in restructuring charges associated
with the Plan.
The restructuring charges include $102.3 million for activities under the Plan
which are expected to be completed through 1996 and $51.5 million for asset
impairment. The restructuring charges do not cover certain aspects of the Plan,
including new information systems, anticipated operating losses from businesses
to be discontinued, employee relocation and training. These costs will be
recognized in future periods as incurred.
The charges included $24.0 million for severance and outplacement costs which
are based on the projected impact of the Plan on employment levels. The Company
expects approximately 800 positions to be eliminated over the next 12 months
under the restructuring efforts. During the fourth quarter of 1995, 96 positions
were eliminated which resulted in severance and outplacement payments of $2.4
million.
Also included in the restructuring charges is a $58.1 million provision
representing costs associated with the termination of certain contracts and the
elimination of certain products, networks and systems related to changes in
strategies resulting from the MetraHealth acquisition. Expenditures related to
these activities of $8.7 million were incurred during the fourth quarter of
1995.
The restructuring charges also included a $20.2 million provision for property
and lease discontinuances at certain office locations, resulting primarily from
various exit strategies and payment of portions of non-cancelable lease
obligations. During the fourth quarter of 1995, the Company paid $1.5 million
related to the closing of three office locations.
The restructuring charges reflect management's best estimates of the costs to
be incurred in executing the Plan. These estimates will continue to be refined
until the Plan is complete.
30
<PAGE>
5 Cash and Investments
As of December 31, 1995 and 1994, the amortized cost, gross unrealized holding
gains and losses, and fair value of the Company's cash and investments were as
follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1995 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 940,110 $ -- $ -- $ 940,110
- --------------------------------------------------------------------------------------------
Investments Available for Sale
U.S. Government and Agency 665,904 6,187 (11,465) 660,626
State and State Agency 263,922 3,310 (82) 267,150
Municipalities and Local Agency 251,631 3,077 (213) 254,495
Corporate Bonds 868,855 8,839 (1,400) 876,294
Other 35,111 -- -- 35,111
- --------------------------------------------------------------------------------------------
Total Investments Available for Sale 2,085,423 21,413 (13,160) 2,093,676
- --------------------------------------------------------------------------------------------
Investments Held to Maturity
U.S. Government and Agency 26,030 357 (43) 26,344
State and State Agency 5,991 90 -- 6,081
Municipalities and Local Agency 1,258 98 -- 1,356
Corporate Bonds 9,273 -- (7) 9,266
Other 2,057 76 -- 2,133
- --------------------------------------------------------------------------------------------
Total Investments Held to Maturity 44,609 621 (50) 45,180
- --------------------------------------------------------------------------------------------
Total Cash and Investments $3,070,142 $22,034 $(13,210) $3,078,966
- --------------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1994 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $1,519,049 $ -- $ -- $1,519,049
- --------------------------------------------------------------------------------------------
Investments Available for Sale
U.S. Government and Agency 393,776 19 (48,923) 344,872
State and State Agency 414,079 158 (10,404) 403,833
Municipalities and Local Agency 408,433 262 (9,932) 398,763
Corporate Bonds 48,320 14 (1,787) 46,547
Other 34,404 1 (1) 34,404
- --------------------------------------------------------------------------------------------
Total Investments Available for Sale 1,299,012 454 (71,047) 1,228,419
- --------------------------------------------------------------------------------------------
Investments Held to Maturity
U.S. Government and Agency 11,876 14 (413) 11,477
State and State Agency 4,801 1 (121) 4,681
Municipalities and Local Agency 1,262 43 -- 1,305
Corporate Bonds 2,573 -- -- 2,573
Other 1,410 -- -- 1,410
- --------------------------------------------------------------------------------------------
Total Investments Held to Maturity 21,922 58 (534) 21,446
- --------------------------------------------------------------------------------------------
Total Cash and Investment $2,839,983 $512 $ (71,581) $2,768,914
- --------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
As of December 31, 1995, the contractual maturities of the Company's cash and
investments were as follows (in thousands):
<TABLE>
<CAPTION>
Years to Maturity
Less Than One to Over Five to Over Ten
One Year Five Years Ten Years Years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At Amortized Cost:
Cash and Cash Equivalents $ 940,110 $ -- $ -- $ --
Investments Available for Sale 862,082 847,127 284,325 91,889
Investments Held to Maturity 17,369 25,291 1,864 85
- ------------------------------------------------------------------------------------
Total Cash and Investments $1,819,561 $872,418 $286,189 $91,974
- ------------------------------------------------------------------------------------
At Fair Value:
Cash and Cash Equivalents $ 940,110 $ -- $ -- $ --
Investments Available for Sale 863,815 858,105 286,607 85,149
Investments Held to Maturity 17,455 25,682 1,970 73
- ------------------------------------------------------------------------------------
Total Cash and Investments $1,821,380 $883,787 $288,577 $85,222
- ------------------------------------------------------------------------------------
</TABLE>
Mortgage backed securities which do not have a single maturity date have been
presented in the above tables based on their estimated maturity dates.
At December 31, 1995, approximately $2.29 billion of the Company's cash and
investments were restricted under various state regulations which require
certain of the Company's subsidiaries to retain cash generated from their
operations. In addition, investments of $44.6 million at December 31, 1995, were
held by trustees or state regulatory agencies to ensure adequate financial
reserves exist as required by state regulatory agencies. Investment income
earned on these investments accrues to the Company.
- --------------------------------------------------------------------------------
6 Convertible Preferred Stock
- --------------------------------------------------------------------------------
The Company has 10,000,000 shares of $0.001 par value preferred stock authorized
for issuance. In conjunction with its acquisition of MetraHealth, the Company
designated a series of 500,000 shares as 5.75% Series A Convertible Preferred
Stock ("Preferred Stock"). This Preferred Stock was issued to certain former
shareholders of MetraHealth as a portion of the total consideration of the
MetraHealth acquisition (see Note 3).
Preferred Stock dividends are fully cumulative and are payable quarterly at
the rate of 5.75% per annum from available funds. The dividends related to 1995
were paid in January 1996.
At the option of the shareholders, the Preferred Stock may be redeemed anytime
after October 1, 1998, at certain defined redemption rates. Each shareholder has
the right to convert the Preferred Stock into shares of the Company's common
stock at predetermined conversion prices at any time. The Preferred Stock is
subject to mandatory redemption no later than October 1, 2005.
- --------------------------------------------------------------------------------
7 Shareholders' Equity
- --------------------------------------------------------------------------------
Dividends
On February 13, 1996, the Company's Board of Directors approved an annual
dividend for 1996 of $0.03 per share to holders of the Company's common stock.
This dividend will be paid on April 15, 1996, to shareholders of record at the
close of business on April 3, 1996.
Regulatory Requirements
The Company's regulated subsidiaries must comply with certain minimum capital or
tangible net equity requirements in each of the states in which they operate.
As of December 31, 1995, all of the Company's regulated subsidiaries were in
compliance with these requirements.
Stock Grants and Options
The Company has stock and incentive plans (Stock Plans) for the benefit of all
eligible employees of the Company and its subsidiaries. As of December 31, 1995,
the Stock Plans allow for the future granting of up to 1,032,000 shares as
incentive or non-qualified stock options, stock appreciation rights, restricted
stock awards and performance awards to employees of the Company.
In 1995 the Company adopted the Non-Employee Director Stock Option Plan (the
1995 Plan) to benefit individuals on the Company's Board of Directors who are
not employees of the Company. Up to 350,000 shares of the Company's common stock
may be issued under the terms of the 1995 Plan. As of December 31, 1995, up to
245,000 non-qualified stock options were available for future grants under the
1995 Plan.
32
<PAGE>
Stock Option Transactions
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------
(shares in thousands)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, beginning of year 11,509 12,692 10,292
Granted 6,792 3,392 5,462
Exercised (2,168) (3,509) (2,615)
Forfeited (1,206) (1,066) (447)
- ------------------------------------------------------------------------------------------
Outstanding, end of year 14,927 11,509 12,692
- ------------------------------------------------------------------------------------------
Exercisable 4,542 3,554 4,361
Price Range:
Exercisable Shares $0.88--53.88 $0.88--49.50 $0.61--28.44
Exercised Shares $1.00--44.38 $0.61--38.63 $0.30--15.53
- ------------------------------------------------------------------------------------------
</TABLE>
The Company recorded $28.6 million, $44.5 million and $30.3 million in 1995,
1994 and 1993, respectively, to additional paid-in capital to reflect the tax
benefit received by the Company upon the exercise of non-qualified stock options
and the vesting of restricted stock.
Employee Stock Ownership Plan
The Company has an unleveraged Employee Stock Ownership Plan (ESOP) for the
benefit of all eligible employees of the Company and its subsidiaries. Company
contributions to the ESOP are made at the discretion of the Board of Directors.
Contributions of $1.25 million, $2.0 million and $1.0 million in the years ended
December 31, 1995, 1994 and 1993, respectively, have been made to the ESOP.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (ESPP) enables employees of the
Company to subscribe for shares of common stock on semiannual offering dates at
a purchase price which is the lesser of 85% of the fair market value of the
shares on the first day or the last day of the semiannual period. Employee
contributions to the ESPP were $7.0 million, $5.8 million and $3.3 million for
1995, 1994 and 1993. Pursuant to the ESPP, 216,000, 145,000 and 67,000 shares
were issued to employees during 1995, 1994 and 1993. As of December 31, 1995,
39,000 shares are available for future issuances. The Company's Board of
Directors has approved the reservation of 4 million additional shares to be
issued under the ESPP, subject to shareholder approval at the Company's annual
meeting in May 1996.
- --------------------------------------------------------------------------------
8 Income Taxes
- --------------------------------------------------------------------------------
Components of the Provision for Income Taxes
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
(in thousands)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $182,483 $166,893 $106,575
State 26,724 22,495 19,469
- ------------------------------------------------------------------------------
Total Current 209,207 189,388 126,044
Deferred (39,002) (11,566) (6,665)
- ------------------------------------------------------------------------------
Total Provision $170,205 $177,822 $119,379
- ------------------------------------------------------------------------------
</TABLE>
Reconciliation of Statutory to
Effective Income Tax Rate
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
State income taxes, net of
federal benefit 3 3 4
Tax-exempt investment income (3) (2) (2)
Intangible Amortization 2 1 1
Other, net -- 1 (2)
- -------------------------------------------------------------------------------
Effective Income Tax Rate 37% 38% 36%
- -------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
Components of Deferred Income Tax
Assets and Liabilities
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
- -----------------------------------------------------------------------
<S> <C> <C>
Deferred Income Tax Assets:
Severance and deferred compensation $ 24,743 $ 1,710
Impaired assets reserves 23,099 --
Development costs 18,455 --
Medical costs payable 16,702 15,790
Facility consolidation reserves 16,562 --
Unearned premiums 10,771 759
Depreciation 8,930 209
Other restructuring reserves 7,565 --
Loss reserve discounting 7,411 2,619
Intangible amortization 6,501 --
Bad debt allowance 4,433 4,093
Accrued expenses 4,238 1,701
Self insurance 4,170 833
Other 2,667 5,957
Federal tax carryovers 1,130 2,291
Unrealized losses on investments
available for sale -- 26,825
Integration expenses -- 9,159
- -----------------------------------------------------------------------
Total Deferred Income Tax Assets 157,377 71,946
- -----------------------------------------------------------------------
Valuation Allowance (1,130) (2,291)
- -----------------------------------------------------------------------
Deferred Income Tax Liabilities:
Development costs -- (9,426)
Unrealized gains on investments
available for sale (3,055) --
- -----------------------------------------------------------------------
Total Deferred Income Tax Liabilities (3,055) (9,426)
- -----------------------------------------------------------------------
Net Deferred Income Tax Assets $153,192 $60,229
- -----------------------------------------------------------------------
</TABLE>
Deferred income tax assets, net of the valuation allowance, are included in
other current assets and deferred income tax liabilities are included in other
long-term obligations in the accompanying consolidated balance sheets. The
change in net deferred income taxes is primarily the result of the deferred
income tax benefit for the year ended December 31, 1995, the income tax effects
of net unrealized holding gains on investments available for sale and net
deferred income taxes assumed with the Company's 1995 acquisitions.
Income taxes paid were $189.7 million, $935.0 million ($801.7 million
attributable to the sale of Diversified), and $90.8 million in 1995, 1994 and
1993.
The Company's consolidated income tax returns for fiscal years 1993, 1992 and
1991 are currently under examination by the Internal Revenue Service. The
Company believes any adjustments which may result from this examination would
not have a significant impact on its consolidated operating results or financial
position.
34
<PAGE>
- ------------------------------------------------------------------------------
9 Commitments and Contingencies
- ------------------------------------------------------------------------------
Leases
The Company leases facilities, computer hardware and other equipment under
long-term operating leases which are noncancellable and expire on various dates
through 2011. Rent expense under all operating leases was $61.0 million, $41.4
million and $33.0 million for 1995, 1994 and 1993.
At December 31, 1995, future minimum annual lease payments under all
noncancellable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 Thereafter
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$85,119 $62,952 $54,489 $38,380 $14,110 $20,699
- ------------------------------------------------------------------------------
</TABLE>
Service Agreements
On November 16, 1995, a subsidiary of the Company signed a 10-year contract with
a third party for information technology services. Under terms of the contract
the third party will assume responsibility for the subsidiary's data center
operations and support. Future payments under the contract are estimated to be
$540.0 million; however, the actual timing and amount of payments will vary
based on usage.
Legal Proceedings
The Company is involved in legal actions which arise in the ordinary course of
its business. Although the outcomes of any such legal actions cannot be
predicted, in the opinion of management, the resolution of any currently pending
or threatened actions will not have a material adverse effect upon the
consolidated financial position or results of operations of the Company.
Business Risks
Certain factors relating to the industry in which the Company operates and the
Company's business should be carefully considered. The Company's primary
business, offering health care coverage and health care management services, is
heavily regulated at both the federal and state levels. While the Company is
unable to predict what regulatory changes may occur or the impact on the Company
of any particular change, the Company's operations and financial results could
be negatively affected.
Recent trends in health care prices and utilization have moderated, but there
can be no assurance that they will not again increase at a more rapid pace. If
health care costs do begin to increases more rapidly, there can be no assurance
that the Company will be able to meet its goal of maintaining price increases at
least sufficient to cover increases in health care costs.
Also, the Company operates in a highly competitive industry which has seen
significant consolidation over the past few years. The current competitive
markets in certain areas may limit the Company's ability to price its products
at levels the Company believes appropriate. These competitive factors could
adversely affect the Company's financial results.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of investments in marketable securities and
commercial premiums receivable. The Company's investments in marketable
securities are managed by professional investment managers within guidelines
established by the board of directors which, as a matter of policy, limit the
amounts which may be invested in any one issuer. Concentrations of credit risk
with respect to commercial premiums receivable are limited due to the large
number of employer groups comprising the Company's customer base. As of December
31, 1995, the Company had no significant concentrations of credit risk.
35
<PAGE>
- -------------------------------------------------------------------------------
10 Recently Issued Accounting Standards
- -------------------------------------------------------------------------------
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123), effective for fiscal years beginning after
December 15, 1995, encourages, but does not require, companies to adopt a fair
value based method of accounting for employee stock options. It also allows
companies to continue to measure compensation cost under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25),
and present pro forma disclosures of net earnings and earnings per share as if a
fair value based method of accounting had been applied. The Company will adopt
SFAS No. 123 in 1996 and expects to elect to continue to measure compensation
cost under APB No. 25 and comply with the pro forma disclosure requirements. As
a result, SFAS No. 123 will not have a material impact on the Company's results
of operations or financial position. The Company's stock option plans are
generally fixed plans, as defined under APB No. 25, and accordingly, stock
options issued under the Company's plans have no intrinsic value at the grant
date.
- -------------------------------------------------------------------------------
11 Quarterly Financial Data (unaudited)
- -------------------------------------------------------------------------------
The following is a summary of unaudited quarterly results of operations (in
thousands, except per share data) for the years ended December 31, 1995 and
1994:
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------------------------
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
1995
Revenues $1,103,835 $1,157,945 $1,215,536 $2,193,562
Operating Expenses 960,744 1,014,064 1,064,968 2,170,317/2/
Net Earnings 89,432 89,879 93,670 12,983/2/
Net Earnings Applicable to Common Shareholders 89,432 89,878 93,670 5,796
Net Earnings Per Common Share $ 0.51 $ 0.51 $ 0.53 $ 0.03/2/
Weighted Average Number of Common Shares Outstanding 176,403 176,304 177,070 179,478
- ------------------------------------------------------------------------------------------------------------------
1994
Revenues $ 903,556 $ 939,465 $ 956,834 $ 969,027
Operating Expenses 788,847 816,812 825,370 831,806
Net Earnings Before Extraordinary Gain 70,398 52,656/1/ 80,842 84,243
Extraordinary Gain on Sale of Subsidiary, net -- 1,377,075 -- --
Net Earnings 70,398 1,429,731 80,842 84,243
Net Earnings Per Share
Earnings Before Extraordinary Gain 0.40 0.30/1/ 0.46 0.48
Extraordinary Gain -- 7.85 -- --
Net Earnings Per Share $ 0.40 $ 8.15 $ 0.46 $ 0.48
Weighted Average Number of Common Shares Outstanding 174,507 175,490 176,038 176,573
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Excluding merger costs of $35.9 million ($22.3 million after income taxes,
or $0.13 per common share) incurred in connection with the Company's May
1994 acquisitions of Complete Health Services, Inc. and Ramsay-HMO, Inc.,
1994 net earnings per share before extraordinary gain would have been $74.9
million, or $0.43 per common share.
/2/ Excluding fourth quarter restructuring charges of $153.8 million ($96.9
million after tax, or $0.54 per common share) associated with The
MetraHealth Companies, Inc. acquisition, net earnings for the three month
period ending December 31, 1995 would have been $109.9 million, or $0.57 per
common share.
- -------------------------------------------------------------------------------
36
<PAGE>
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To the Shareholders and Directors of
United HealthCare Corporation:
We have audited the accompanying consolidated balance sheets of United
HealthCare Corporation (a Minnesota Corporation) and Subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 did not audit the 1993 financial
statements of Complete Health Services, Inc. or Ramsay-HMO, Inc., companies
acquired during 1994, in transactions accounted for as poolings of interests, as
discussed in Note 3. Such statements are included in the consolidated financial
statements of United HealthCare Corporation and reflect total revenues of 18.9
percent in 1993, of the related consolidated total. The aforementioned financial
statements were audited by other auditors whose reports have been furnished to
us and our opinion, insofar as it relates to amounts included for those
entities, is based soley upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of United HealthCare Corporation and Subsidiaries as of
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota
February 29, 1996
REPORT OF MANAGEMENT
The management of United HealthCare Corporation is responsible for the integrity
and objectivity of the consolidated financial statements and other financial
information contained in this annual report. The consolidated financial
statements and related information were prepared in accordance with generally
accepted accounting principles and include some amounts that are based on
management's best estimates and judgments.
To meet its responsibility, management depends on its accounting systems and
related internal accounting controls. These systems are designed to provide
reasonable assurance, at an appropriate cost, that financial records are
reliable for use in preparing financial statements and that assets are
safeguarded. Qualified personnel throughout the organization maintain and
monitor these internal accounting controls on an ongoing basis. Internal
auditors review the accounting practices, systems of internal control, and
compliance therewith.
The Audit Committee of the Board of Directors, composed entirely of directors
who are not employees of the Company, meets periodically and privately with the
Company's independent public accountants and its internal auditors, as well as
management, to review accounting, auditing, internal control, financial
reporting and other matters.
William W. McGuire, M.D.
President, Chairman and Chief Executive Officer
David P. Koppe
Chief Financial Officer
- --------------------------------------------------------------------------------
37
<PAGE>
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
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held May 8, 1996, 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 as to executive officers of the Company is
set forth 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 8, 1996, 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 8, 1996, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
Information with respect to certain relationships and related transactions
appearing under the heading "Certain Relationships and Transactions" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held May 8, 1996, is incorporated herein by reference.
38
<PAGE>
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:
Consolidated Statements of Operations for the Three Years Ended
December 31, 1995.
Consolidated Balance Sheets at December 31, 1995 and 1994.
Consolidated Statements of Changes in Shareholders' Equity for the
Three Years Ended December 31, 1995.
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1995.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
(a) 2. Financial Statement Schedules
------------------------------
None
(a) 3. Exhibits
--------
3(a) Copy of the Company's Second Restated Articles of Incorporation.
3(b) Copy of the Company's Restated Bylaws, as amended. (Incorporated by
reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1991).
4 Certificate of Designations for 5.75% Series A Convertible Preferred
Stock (See Exhibit 3(a)).
*10(a) Employment Agreement dated as of January 1, 1993, between United
HealthCare Corporation and William W. McGuire, M.D. (Incorporated by
reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993).
*10(b) Employment Agreement dated as of January 6, 1996 between United
HealthCare Corporation and William W. McGuire, M.D.
*10(c) United HealthCare Corporation 1985 Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10(b) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993).
*10(d) United HealthCare Corporation 1987 Supplemental Stock Option Plan.
(Incorporated by reference to Exhibit 10(d) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993).
39
<PAGE>
*10(e) United HealthCare Corporation 1988 Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10(e) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992).
*10(f) United HealthCare Corporation 1990 Stock and Incentive Plan, as
amended. (Incorporated by reference to Exhibit 10(f) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992).
*10(g) United HealthCare Corporation Amended and Restated 1991 Stock and
Incentive Plan (Incorporated by reference to Exhibit 99 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1993).
*10(h) United HealthCare Corporation 1996 Executive Savings Plan.
*10(i) United HealthCare Corporation 1996 Management Incentive Compensation
Plan.
10(j) Employment Agreement, dated as of November 1, 1994, between United
HealthCare Corporation and Jeannine Rivet. (Incorporated by reference
to Exhibit 10(k) to the Company's Annual Report on Form 10-K for the
year-ended December 31, 1994).
*10(k) Restated Employment Agreement dated as of May 27, 1994, between United
HealthCare Corporation and Travers H. Wills. (Incorporated by
reference to Exhibit 99.1 to the Company's Interim Report on Form 8-K
dated May 27, 1994).
10(l) Employment Agreement dated as of November 1, 1994, between United
HealthCare Corporation and Kevin H. Roche. (Incorporated by reference
to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
10(m) Employment Agreement dated as of November 1, 1994, between United
HealthCare Corporation and Michael Mooney.
*10(n) Employment Agreement dated as of December 1, 1994, between United
HealthCare Corporation and David P. Koppe. (Incorporated be reference
to Exhibit 10(q) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
10(o) Employment Agreement dated as of November 1, 1994 between United
HealthCare Corporation and Sheila T. Leatherman. (Incorporated by
reference to Exhibit 10(r) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
10(p) Employment Agreement dated as of November 1, 1994, between United
HealthCare Corporation and James Conto. (Incorporated by reference to
Exhibit 10(s) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
*10(q) Employment Agreement effective as of October 2, 1995 between United
HealthCare Corporation and James G. Carlson (Incorporated by reference
to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995).
10(r) Employment Agreement effective as of October 2, 1995 between United
HealthCare Corporation and Elliot Gerson (Incorporated by reference
to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995).
*10(s) Employment Agreement effective as of October 2, 1995 between United
HealthCare Corporation
40
<PAGE>
and Allen Wise (Incorporated by reference to Exhibit 10(c) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995).
+10(t) Information Technology Services Agreement between The MetraHealth
Companies, Inc. and Integrated Systems Solutions Corporation dated as
of November 1, 1995.
10(u) Agreement and Plan of Merger By and Among United HealthCare
Corporation, UHC Blue Acquisition, Inc., GenCare Health Systems, Inc.
and General American Life Insurance Company dated as of September 11,
1994. (Incorporated by reference to Exhibit 2 to Company's Schedule
13-D in connection with issuer GenCare Health Systems, Inc., filed
September 21, 1994).
*10(v) United HealthCare Corporation Nonemployee Director Stock Option Plan.
(Incorporated by reference to Exhibit 10(x) to the Company's Annual
Report on Form 10-K for year ended December 31, 1994).
10(w) Letter Agreement between The MetraHealth Companies, Inc. and Kennett
L. Simmons dated as of October 2, 1995.
*10(x) Consulting Agreement between The MetraHealth Companies, Inc. and
Kennett L. Simmons dated as of October 2, 1995.
11 Statement regarding computation of per share earnings.
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants.
24 Powers of Attorney.
27 Financial Data Schedule. (E.D.G.A.R. version only)
+Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of Exhibit 10(t) have been deleted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
41
<PAGE>
Exhibit Number Description
- -------------- -----------
* Denotes 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
-------------------
The following reports on Form 8-K were filed during the fourth quarter of
1995 and through March 29, 1996:
The Company filed a Current Report on Form 8-K dated October 2, 1995. The
items reported on this filing were Items 2 and 7 concerning the Company's
acquisition of The MetraHealth Companies, Inc.
The Company filed a Current Report on Form 8-K dated November 2, 1995.
The only item reported on this filing was Item 5 concerning the Company's
announcement of its financial results for the quarter ended September 30,
1995.
The Company filed a Current Report on Form 8-K dated February 1, 1996. The
only item reported on this filing was Item 5 concerning the Company's
acquisition of HealthWise of America, Inc.
The Company filed a Current Report on Form 8-K dated February 29, 1996.
The only item reported on this filing was Item 5 concerning the Company's
announcement of its financial results for the quarter and year ended
December 31, 1995.
(c) See Exhibits listed in Item 14 hereof and the Exhibits attached as a
separate section of this Report.
42
<PAGE>
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 29, 1996
UNITED HEALTHCARE CORPORATION
By: /s/ William W. McGuire, M.D.
----------------------------
William W. McGuire, M.D.
Chief Executive Officer
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.
By /s/ William W. McGuire, M.D. Dated: March 29, 1996
----------------------------
William W. McGuire, M.D.
Director, Chief Executive Officer
(principal executive officer)
By /s/ David P. Koppe Dated: March 29, 1996
----------------------------
David P. Koppe
Chief Financial Officer
(principal financial and
accounting officer)
By * Dated: March 29, 1996
----------------------------
William C. Ballard, Jr.
Director
By * Dated: March 29, 1996
----------------------------
Richard T. Burke
Director
By * Dated: March 29, 1996
----------------------------
James A. Johnson
Director
By * Dated: March 29, 1996
----------------------------
Thomas H. Kean
Director
43
<PAGE>
By * Dated: March 29, 1996
----------------------------
Douglas W. Leatherdale
Director
By * Dated: March 29, 1996
----------------------------
Elizabeth J. McCormack
Director
By * Dated: March 29, 1996
----------------------------
James L. Seiberlich
Director
By * Dated: March 29, 1996
----------------------------
William G. Spears
Director
By * Dated: March 29, 1996
----------------------------
Kennett L. Simmons
Director
By * Dated: March 29, 1996
----------------------------
Gail R. Wilensky
Director
*By /s/ William W. McGuire, M.D. Dated: March 29, 1996
----------------------------
William W. McGuire, M.D.
As Attorney-in-Fact
44
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Number Description Page Number
- -------------- ----------- -----------
<S> <C> <C>
3(a) Copy of the Company's Second Restated Articles of
Incorporation. --
3(b) Copy of the Company's Restated Bylaws, as amended.
(Incorporated by reference to Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1991).
4 Certificate of Designations for 5.75% Series A Convertible
Preferred Stock (See Exhibit 3(a)).
*10(a) Employment Agreement dated as of January 1, 1993, between
United HealthCare Corporation and William W. McGuire, M.D.
(Incorporated by reference to Exhibit 10(a) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993).
*10(b) Employment Agreement dated as of January 6, 1996 between --
United HealthCare Corporation and William W. McGuire, M.D.
*10(c) United HealthCare Corporation 1985 Stock Option Plan, as
amended. (Incorporated by reference to Exhibit 10(b) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
*10(d) United HealthCare Corporation 1987 Supplemental Stock Option
Plan. (Incorporated by reference to Exhibit 10(d) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993).
*10(e) United HealthCare Corporation 1988 Stock Option Plan, as
amended. (Incorporated by reference to Exhibit 10(e) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992).
*10(f) United HealthCare Corporation 1990 Stock and Incentive Plan, as
amended. (Incorporated by reference to Exhibit 10(f) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992).
*10(g) United HealthCare Corporation Amended and Restated 1991 Stock
and Incentive Plan (Incorporated by reference to Exhibit 99 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993).
*10(h) United HealthCare Corporation 1996 Executive Savings Plan.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
*10(i) United HealthCare Corporation 1996 Management Incentive --
Compensation Plan.
10(j) Employment Agreement, dated as of November 1, 1994, between
United HealthCare Corporation and Jeannine Rivet. (Incorporated
by reference to Exhibit 10(k) to the Company's Annual Report on
Form 10-K for the year-ended December 31, 1994).
*10(k) Restated Employment Agreement dated as of May 27, 1994,
between United HealthCare Corporation and Travers H. Wills.
(Incorporated by reference to Exhibit 99.1 to the Company's
Interim Report on Form 8-K dated May 27, 1994).
10(l) Employment Agreement dated as of November 1, 1994, between
United HealthCare Corporation and Kevin H. Roche. (Incorporated
by reference to Exhibit 10(n) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
10(m) Employment Agreement dated as of November 1, 1994, between --
United HealthCare Corporation and Michael Mooney.
*10(n) Employment Agreement dated as of December 1, 1994, between
United HealthCare Corporation and David P. Koppe. (Incorporated
be reference to Exhibit 10(q) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
10(o) Employment Agreement dated as of November 1, 1994 between
United HealthCare Corporation and Sheila T. Leatherman.
(Incorporated by reference to Exhibit 10(r) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1994).
10(p) Employment Agreement dated as of November 1, 1994, between
United HealthCare Corporation and James Conto. (Incorporated
by reference to Exhibit 10(s) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
*10(q) Employment Agreement effective as of October 2, 1995 between
United HealthCare Corporation and James G. Carlson
(Incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995).
10(r) Employment Agreement effective as of October 2, 1995 between
United HealthCare Corporation and Elliot Gerson (Incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995).
*10(s) Employment Agreement effective as of October 2, 1995 between
United HealthCare Corporation and Allen Wise (Incorporated by
reference to Exhibit 10(c) to the Company's Quarterly Report on
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Form 10-Q for the quarter ended September 30, 1995).
+10(t) Information Technology Services Agreement between The --
MetraHealth Companies, Inc. and Integrated Systems Solutions
Corporation dated as of November 1, 1995.
10(u) Agreement and Plan of Merger By and Among United HealthCare
Corporation, UHC Blue Acquisition, Inc., GenCare Health Systems,
Inc. and General American Life Insurance Company dated as of
September 11, 1994. (Incorporated by reference to Exhibit 2 to
Company's Schedule 13-D in connection with issuer GenCare
Health Systems, Inc., filed September 21, 1994.)
*10(v) United HealthCare Corporation Nonemployee Director Stock
Option Plan. (Incorporated by reference to Exhibit 10(x) to the
Company's Annual Report on Form 10-K for year ended December
31, 1994).
10(w) Letter Agreement between The MetraHealth Companies, Inc. and --
Kennett L. Simmons dated as of October 2, 1995.
*10(x) Consulting Agreement between The MetraHealth Companies, Inc. --
and Kennett L. Simmons dated as of October 2, 1995.
11 Statement regarding computation of per share earnings. --
21 Subsidiaries of the Registrant. --
23 Consent of Independent Public Accountants. --
24 Powers of Attorney.
27 Financial Data Schedule. (E.D.G.A.R. version only) --
</TABLE>
+Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of Exhibit 10(t) have been deleted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.A
<SEQUENCE>2
<DESCRIPTION>COMPANY'S SECOND RESTATED ARTICLES
<TEXT>
<PAGE>
SECOND RESTATED
ARTICLES OF INCORPORATION
OF
UNITED HEALTHCARE CORPORATION
1. The name of the corporation is United HealthCare Corporation, a
Minnesota corporation.
2. The document entitled "Second Restated Articles of Incorporation of
United HealthCare Corporation" marked Exhibit A and attached hereto,
contains the full text of amendments to the articles of incorporation of
United HealthCare Corporation.
3. The date of adoption of the amendment by the board of directors of such
corporation was February 10, 1994. The date of adoption of the
amendment by the shareholders of such corporation was May 11, 1994.
4. With the exception of the provisions contained under Article 3(a), the
amendment merely restates the existing articles as amended and correctly
sets forth without change the corresponding provisions of the articles
as previously restated. The shareholders of the Company adopted Article
3(a) as an amendment to the existing Articles of Incorporation at their
Annual Meeting of Shareholders for 1994 held on May 11, 1994.
5. The amendment restates the articles in their entirety and the restated
articles supersede the original articles and all amendments to them.
6. The amendment has been adopted pursuant to Chapter 302A of the Minnesota
Business Corporation Act.
IN WITNESS WHEREOF, the undersigned, the secretary of United
HealthCare Corporation, being duly authorized on behalf of the Corporation,
has executed this document this 13th day of May, 1994.
/s/ Kevin H. Roche'
-----------------------
Kevin H. Roche'
Secretary
<PAGE>
SECOND RESTATED
ARTICLES OF INCORPORATION
OF
UNITED HEALTHCARE CORPORATION
1. The name of this corporation shall be United HealthCare
Corporation.
2. The address of the registered office of this corporation is
9900 Bren Road East, Minnetonka, Hennepin County, Minnesota 55343.
3. (a) Authorized Classes of Stock. The total number of
shares of capital stock which this corporation is authorized to issue is
510,000,000 shares, including 500,000,000 shares of Common Stock, $.01 par
value, and 10,000,000 shares of Preferred Stock, $.001 par value. Shares
of each class of stock of the corporation may be issued for such
consideration and for such corporate purposes as the Board of Directors may
from time to time determine.
(b) Serial Preferred Stock. The Board of Directors of the
corporation is hereby authorized to issue from time to time one or more series
of the Preferred Stock and, with respect to each such series, to fix by
resolution of a majority of the whole Board of Directors the relative rights and
preference of each series. The authority of the Board of Directors with respect
to each series shall include, but not be limited to, the determination or fixing
of the following:
(i) The number of shares constituting such series and the
designation of such series.
(ii) The dividend rate of such series, the conditions and dates
upon which such dividends shall be payable, the relation which such
dividends shall bear to the dividends payable on any other classes or
series of the corporation's capital stock, and whether such dividends
shall be cumulative or non-cumulative.
(iii) Whether the shares of such series shall be subject to
redemption by the corporation at the option of either the corporation
or the holder or both, or upon the happening of a specified event, and
the terms and conditions of such redemption.
(iv) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series.
<PAGE>
(v) Whether or not the shares of such series shall be
convertible into, or exchangeable for, shares of any other class, and
the terms of such conversion or exchange.
(vi) The restrictions, if any, on the issue or reissue of any
additional Preferred Stock, including increases or decreases in the
number of shares of any series subsequent to the issue of shares of
that series.
(vii) The rights of the holders of the shares of such series
upon the voluntary/involuntary liquidation, dissolution or winding up
of the corporation.
(viii) Any right to vote with holders of shares of any series
or class.
(c) Common Stock. The holders of the Common Stock shall have and
possess all rights as stockholders of the corporation, except if such rights may
be limited by the preferences, rights, limitations, and restrictions of the
Preferred Stock.
(d) Pre-emptive Rights. No holders of shares of any class or
series of this corporation shall have any pre-emptive rights to subscribe for
any shares of any class or series of stock of this corporation, whether now or
hereafter authorized, or for any obligations convertible into shares of any
class or series of stock of this corporation, whether now or hereafter
authorized.
(e) Cumulative Voting. No holders of shares of any class or
series of this corporation shall have any right to cumulate votes for the
election of the Board of Directors.
(f) Shareholder Approval. Shares of any class or series of the
corporation may be issued to the holders of shares of another class or series of
the corporation, whether to effect a share dividend or split or otherwise,
without the authorization or approval of the holders of shares of any class or
series of the corporation, except as otherwise provided in the designation of
any series of Preferred Stock.
4. (a) The board of directors of this corporation shall be divided
into three classes, Class I, Class II and Class III, as nearly equal in number
as possible, with the term of office of Class I expiring at the annual meeting
of shareholders of this corporation in 1984, of Class II expiring at the annual
meeting of shareholders in 1985 and of Class III expiring at the annual meeting
of shareholders in 1986. At each annual meeting of shareholders, directors
chosen to succeed those whose terms then expire shall be elected for a term of
office expiring at the third succeeding annual meeting of shareholders after
their election.
(b) No director of this corporation shall be removed from office
with or without cause without (i) the affirmative vote of the holders of not
less than 66-2/3 percent of the outstanding shares of Common Stock of this
corporation, or (ii)
<PAGE>
the affirmative vote of 66-2/3 percent of the directors in office at the
time such vote is taken.
(c) This Article 4 may not be amended, altered, changed or
repealed without the affirmative vote of the holders of not less than 66-2/3
percent of the outstanding shares of Common Stock of this corporation.
5. (a) The affirmative vote of the holders of not less than 66-2/3
percent of the outstanding shares of capital stock of this corporation entitled
to vote generally in the election of directors shall be required for approval or
authorization of any Business Combination (as hereinafter defined) of this
corporation with any Related Person; provided, however, that the 67 percent
voting requirement shall not apply if:
(i) The Continuing Directors of this corporation (as hereinafter
defined) by a two-thirds vote (A) have expressly approved in advance
the acquisition of outstanding shares of Common Stock of this
corporation that caused the Related Person to become a Related Person,
or (B) have approved the Business Combination prior to the Related
Person involved in the Business Combination having become a Related
Person;
(ii) The Business Combination is solely between this corporation
and another corporation, one hundred percent of the capital stock of
which is owned, directly or indirectly, by this corporation; or
(iii) The Business Combination is a merger or consolidation and
the cash or fair market value as determined by this corporation's
board of directors, of the property, securities and other
consideration to be received per share by holders of the Common Stock
in the Business Combination is not less than the highest per share
price (with appropriate adjustments for recapitalizations and for
stock splits, stock dividends and like distributions, if any) paid by
the Related Person in acquiring any of its holdings of this
corporation's Common Stock.
(b) The term "Business Combination" shall mean (i) any merger or
consolidation of this corporation or a subsidiary thereof with or into a Related
Person, (ii) any sale, lease, exchange, transfer or other disposition, in one
transaction or a series of related transactions, of all or any Substantial Part
(as hereinafter defined) of the assets either of this corporation (including
without limitation any voting securities of a subsidiary thereof) or of a
subsidiary thereof, to a Related Person, (iii) any merger or consolidation of a
Related Person with or into this corporation or a subsidiary thereof, (iv) any
sale, lease, exchange, transfer or other disposition, in one transaction or a
series of related transactions, of all or any Substantial Part of the assets of
a Related Person to this corporation or a subsidiary thereof, (v) the issuance
of any securities of this corporation or a subsidiary thereof to a Related
Person, (vi) any reclassification of securities, recapitalization or other
transaction that would have the effect of increasing the voting power of a
Related Person and (vii) any agreement, contract or other
<PAGE>
arrangement providing for any of the transactions described in this
definition of Business Combination.
(c) The term "Related Persons" shall mean and include any
individual, corporation, partnership or other person or entity which, together
with its "Affiliates" and "Associates" (as defined by Rule 12b-2 under the
Securities Exchange Act of 1934), "Beneficially Owns" (as defined by Rule 13d-3
under the Securities Exchange Act of 1934) in the aggregate 20 percent or more
of the outstanding Common Stock of this corporation, and any Affiliate or
Associate of any such individual corporation, partnership or other person or
entity.
(d) The term "Substantial Part" shall mean more than 30 percent
of the fair market value of the total assets of the corporation in question, as
of the end of its most recent fiscal year ending prior to the time the
determination is being made.
(e) Without limitation, any shares of Common Stock of this
corporation that any Related Person has the right to acquire pursuant to any
agreement, or upon exercise of conversion rights, warrants or options or
otherwise, shall be deemed beneficially owned by the Related Person.
(f) For the purposes of subparagraph (3) of this Article Five the
term "other consideration to be received" shall include, without limitation,
Common Stock of this corporation retained by its existing stockholders in the
event of a Business Combination in which this corporation is the surviving
corporation.
(g) The term "Continuing Director" shall mean a director who was
a member of the board of directors of this corporation immediately prior to the
time that the Related Person involved in a Business Combination became a Related
Person.
(h) This Article 5 may not be amended, altered, changed or
repealed without the affirmative vote of the holders of not less than 66-2/3
percent of the outstanding shares of capital stock of this corporation entitled
to vote generally in the election of directors.
6. An action required or permitted to be taken at a meeting of
the Board of Directors of the corporation may be taken by a written action,
signed, or counterparts of a written action signed in the aggregate, by all
of the directors unless the action need not be approved by the shareholders
of the corporation, in which case the action may be taken by a written
action signed, or counterparts of a written action signed in the aggregate,
by the number of directors that would be required to take the same action
at a meeting of the Board of Directors of the corporation at which all of
the directors were present.
7. The provisions of Section 302A.671 of the Minnesota Statutes
shall not apply to this corporation.
<PAGE>
8. A director of this corporation shall not be personally
liable to the corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its
shareholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) under Sections
302A.559 or 80A.23 of the Minnesota Statutes; (iv) for any transaction from
which the director derived an improper personal benefit; or (v) for any act
or omission occurring prior to the date when this Article 8 became
effective.
If the Minnesota Business Corporation Act is hereafter amended to
authorize the further elimination or limitation of the liability of a
director, then the liability of a director of the corporation shall be
eliminated or limited to the fullest extent permitted by the Minnesota
Business Corporation Act, as so amended.
Any repeal or modification of the foregoing provisions of this
Article 8 by the shareholders of the corporation shall not adversely affect
any right or protection of a director of the corporation existing at the
time of such repeal or modification.
Attached to these Restated Articles is a copy of the the Certificate of
Designation filed with the Minnesota Secretary of State on February 19,
1988 with respect to the resolution adopted by the Board of Directors on
November 11, 1987 establishing the Series A, Series B & Series C
Convertible Preferred Stock, which also continues in effect as part of the
Restated Articles.
<PAGE>
CERTIFICATE OF DESIGNATION OF
RIGHTS AND PREFERENCES
OF
CONVERTIBLE PREFERRED STOCK
OF
UNITED HEALTHCARE CORPORATION
I, Kennett L. Simmons, being first duly sworn, do hereby certify
that I am the Vice Chairman and Chief Operating Officer of United
HealthCare Corporation (the "Corporation"), a Minnesota corporation, and
that the following resolution was adopted by the Board of Directors of the
Corporation at a meeting held on November 11, 1987:
RESOLVED, that pursuant to the authority granted to the Board of
Directors of the Corporation under Section 3 of the Restated Articles of
Incorporation of the Corporation, the Board of Directors hereby designates
three series of preferred stock, par value $.001 per share, of the
Corporation, to consist of an aggregate of 100,000 shares, and hereby fixes
and determines the powers, preferences, and rights of the shares of such
series and the qualifications, limitations, or restrictions thereof in
addition to those relating to all series of preferred stock as set forth in
Section 3 of the Restated Articles of Incorporation of the Corporation as
follows:
Section 1. Designation of Series of Preferred Stock.
- ---------- -----------------------------------------
Thirty-three thousand three hundred and thirty-four (33,334)
shares of the Preferred Stock, $.001 par value, authorized by the
Corporation's Articles of Incorporation are hereby designated "Series A
Preferred Stock," thirty-three thousand three hundred and thirty-three
(33,333) shares of the Preferred Stock authorized by the Corporation's
Articles of Incorporation are hereby designated "Series B Preferred Stock,"
and thirty-three thousand three hundred and thirty-three (33,333) shares of
the Preferred Stock authorized by the Corporation's Articles of
Incorporation are hereby designated "Series C Preferred Stock, each having
the powers, preferences, rights, qualifications, limitations and
restrictions specified herein. Except as set forth below, the powers,
preferences, rights, qualifications, limitations and restrictions of the
Series A Preferred Stock, the Series B Preferred Stock, and the Series C
Preferred Stock (which shall be collectively referred to as the "Preferred
Shares") shall be identical.
The Preferred Shares, together with the 300,000,000 authorized
shares of Common Stock, $.01 par value, of the Corporation (the "Common
Stock") and the balance of the Preferred Stock of the Corporation, are
sometimes hereinafter collectively referred to as the "Capital Stock."
Section 2. Voting Rights.
- ---------- --------------
<PAGE>
(a) General. Each holder of Preferred Shares shall have one
-------
vote on all matters submitted to the shareholders for each share of Common
Stock which such holder of Preferred Shares would be entitled to receive
upon the conversion of the Preferred Shares pursuant to the provisions of
section 5. In addition, each holder of Preferred Shares shall have the
special voting rights which are described in section 2(b). Except as
otherwise provided herein, and except as otherwise required by agreement or
law, the Preferred Shares and the shares of Common Stock of the Corporation
shall vote as a single class on all matters submitted to stockholders.
(b) Special Voting Rights. Without the affirmative vote of the
---------------------
holders (acting together as a class) of at least a majority of the
Preferred Shares at the time outstanding given in person or by proxy at any
annual meeting, or at such special meeting called for that purpose, or, if
permitted by law, in writing without a meeting, this Corporation shall not:
(i) authorize or issue any (A) additional Preferred Shares or (B) shares of
stock having priority over the Preferred Shares or ranking on a parity
therewith as to the payment of dividends or as to the payment or
distribution of assets upon the liquidation or dissolution, voluntary or
involuntary, of this Corporation; or (ii) alter or amend the rights or
preferences of Preferred Shares as stated in these Articles of
Incorporation.
Section 3. Dividends.
- ---------- ----------
(a) Dividends on the Preferred Shares shall not begin to accrue
until January 1, 1994. Dividends on the Series A Preferred Stock shall
accrue commencing on January 1, 1994 and shall be cumulative thereafter,
whether or not earned. After January 1, 1994, the holders of the Series A
Preferred Stock shall be entitled to receive, when and as declared by the
Board of Directors, out of the assets of the Corporation legally available
therefor, cash dividends at the rate of $5.213 per share until January 1,
1998 and thereafter at the rate of $6.95 per share, such dividends to be
payable quarterly not later than the last business day of each March, June,
September, and December. Dividends on the Series B Preferred Stock shall
begin to accrue on January 1, 1995 and shall be cumulative thereafter,
whether or not earned. After January 1, 1995, the holders of the Series B
Preferred Stock shall be entitled to receive, when and as declared by the
Board of Directors, out of the assets of the Corporation legally available
therefor, cash dividends at the rate of $5.213 per share until January 1,
1999 and thereafter, at the rate of $6.95 per share, such dividends to be
payable quarterly not later than the last business day of each March, June,
September, and December. Dividends on the Series C Preferred Stock shall
begin to accrue on January 1, 1996 and shall be cumulative thereafter,
whether or not earned. After January 1, 1996, the holders of the Series C
Preferred Stock shall be entitled to receive, when and as declared by the
Board of Directors, out of the assets of the Corporation legally available
therefor, cash dividends at the rate of $5.213 per share until January 1,
-2-
<PAGE>
1999 and thereafter, at the rate of $6.95 per share, such dividends to be
payable quarterly not later than the last business day of each March, June,
September, and December.
(b) In no event shall any dividend be paid or declared, nor
shall any distribution be made on the shares of Common Stock, nor shall any
shares of Common Stock be purchased, redeemed, or otherwise acquired by the
Corporation for value, unless all dividends on the Preferred Shares for all
past quarterly dividend periods and for the then current quarterly dividend
period shall have been paid or declared and a sum sufficient for the
payment thereof set apart for payment.
(c) In the event that any six quarterly cumulative dividends,
whether consecutive or not, upon the Preferred Shares shall be in arrears,
the holders of the Preferred Shares shall have the right, at the next
meeting of shareholders called for election of directors, to elect a
majority of the members of the Board of Directors out of the number fixed
by the by-laws, and the holders of the Preferred Shares shall continue to
have such right until all unpaid dividends upon the Preferred Shares shall
have been paid in full.
Section 4. Liquidation Right and Preference.
- ---------- ---------------------------------
In the event of the liquidation, dissolution, or winding up of
the Corporation, whether voluntary or involuntary, or in the event of the
sale of all or substantially all of its assets to another corporation, the
holders of the Preferred Shares shall be entitled to receive in cash, out
of the assets of this Corporation, an amount equal to the Redemption Price
per share as provided in section 6 hereof, for each outstanding Preferred
Share, before any payment shall be made or any assets distributed to the
holders of shares of Common Stock or any other class of shares of this
Corporation ranking junior to the Preferred Shares. In the event of any
capital reorganization or reclassification of the capital stock of the
Corporation, or consolidation or merger of this Corporation with another
corporation, each holder of the Preferred Shares shall, at its option
exercisable by written notice to this Corporation within fifteen (15) days
after receipt from this Corporation of written notice of such transaction,
be entitled to receive, on a priority basis, cash, securities, or other
property payable or issuable in such transaction with a value of the
Redemption Price per share as provided in section 6 hereof, for each
outstanding Preferred Share, before any payment or distribution shall be
made to the holders of the shares of Common Stock. If, upon any
liquidation or dissolution of this Corporation or the sale by this
Corporation of all or substantially all of its assets or such
reorganization or consolidation or merger, the assets of the Corporation
are insufficient to pay the Redemption Price per share as provided in
section 6 hereof, the holders of such Preferred Shares shall share pro rata
in any such distribution in proportion to the full amounts to which they
would otherwise be respectively entitled. Following such payment to the
holders of the Preferred Shares upon such
-3-
<PAGE>
liquidation, dissolution, sale, reorganization, consolidation, or merger, the
holders of the shares of Common Stock shall then be entitled, to the exclusion
of the holders of the Preferred Shares, to share ratably in all the assets of
this Corporation thereafter remaining.
Section 5. Conversion Rights.
- ---------- ------------------
(a) Optional Conversion. Each Preferred Share shall be
-------------------
convertible at the option of the holder thereof into shares of Common Stock
of this Corporation in accordance with the provisions and subject to the
adjustments provided for in section 5(b), although each Preferred Share
called for redemption by this Corporation shall cease to be convertible on
and after the redemption date if provision shall have been made for its
payment. In order to exercise the conversion privilege, a holder of the
Preferred Shares shall surrender the certificate to the Corporation at its
principal office, duly endorsed to the Corporation and accompanied by
written notice to the Corporation that the holder elects to convert a
specified portion or all of such shares. Preferred Shares converted at the
option of the holder shall be deemed to have been converted on the day of
surrender of the certificate representing such shares for conversion in
accordance with the foregoing provisions, and at such time the rights of
the holder of such Preferred Shares, as such holder, shall cease and such
holder shall be treated for all purposes as the record holder of the shares
of Common Stock issuable upon conversion. As promptly as practicable on or
after the conversion date, the Corporation shall issue and mail or deliver
to such holder a certificate or certificates for the number of shares of
Common Stock issuable upon conversion, computed to the nearest one
hundredth of a full share, and a certificate or certificates for the
balance of the Preferred Shares surrendered, if any, not so converted into
shares of Common Stock.
(b) Conversion Price and Adjustments. The number of shares of
--------------------------------
Common Stock issuable in exchange for Preferred Shares upon conversion
shall be equal to the number of whole shares obtained by dividing the
Redemption Price as provided for in section 6 by the conversion price then
in effect (the "Conversion Price"). The Conversion Price shall initially
be $4.50, but shall be subject to adjustment from time to time as
hereinafter provided:
(i) In case this Corporation shall at any time subdivide or
split its outstanding shares of Common Stock into a greater number of
shares or declare any dividend payable in shares of Common Stock, the
Conversion Price in effect immediately prior to such subdivision, split, or
dividend shall be proportionately decreased, and conversely, in case the
outstanding shares of Common Stock of this Corporation shall be combined
into a smaller number of shares, the Conversion Price in effect immediately
prior to such combination shall be proportionately increased.
(ii) If and whenever this Corporation shall issue or sell
any of its shares of Common Stock for a consideration per share less than
-4-
<PAGE>
the Conversion Price then in effect, or shall issue any options, warrants,
convertible securities or other rights for the purchase of such shares at a
consideration per share of less than the Conversion Price then in effect
(other than shares of Common Stock issuable under options and warrants
outstanding on the date the Preferred Shares are originally issued or other
options or rights for the purchase of shares of Common Stock pursuant to
Stock Option, Stock Purchase, or Restricted Stock Plans of the Company in
effect on the date the Preferred Shares are originally issued), the
Conversion Price in effect immediately prior to such issuance or sale shall
be adjusted and shall be equal to (i) the Conversion Price then in effect,
multiplied by (ii) a fraction, the numerator of which shall be an amount
equal to the sum of (A) the number of this Corporation's shares of Common
Stock outstanding immediately prior to such issuance or sale multiplied by
the Conversion Price then in effect, and (B) the total consideration
payable to this Corporation upon such issuance or sale of such shares and
such purchase rights and upon the exercise of such purchase rights, and the
denominator of which shall be the amount determined by multiplying (aa) the
number of shares of Common Stock outstanding immediately after such
issuance or sale plus the number of the shares of Common Stock issuable
upon the exercise of any purchase rights thus issued, by (bb) the
Conversion Price then in effect. If any options or purchase rights that
are taken into account in any such adjustment of the Conversion Price
subsequently expire without exercise, the Conversion Price shall be
recomputed by deleting such options or purchase rights.
(iii) The anti-dilution provisions of this section 5(b) may be
waived by the affirmative vote of the holders (acting together as a class) of at
least fifty percent (50%) of the then outstanding Preferred Shares.
(iv) If the Corporation takes any other action, or if any other
event occurs, which does not come within the scope of the provisions of sections
5(b)(i), 5(b)(ii), or 5(b)(iii), but which should result in an adjustment in the
Conversion Price and/or the number of shares issuable upon conversion of the
Preferred Shares in order to fairly protect the conversion rights of the holders
of the Preferred Shares, an appropriate adjustment in such conversion rights
shall be made by the Corporation.
(v) In case any shares of Common Stock or options, warrants,
convertible securities, or other rights to purchase shares of Common Stock shall
be issued or sold for cash, the consideration received therefor shall be deemed
to be the amount received by the Corporation therefor, without deducting
therefrom any expenses incurred or any underwriting commissions or concessions
paid or allowed by the Corporation in connection with such issuance or sale. In
case any shares of Common Stock or options, warrants, convertible securities, or
other rights to purchase shares of Common Stock shall be issued or sold for
consideration other than cash, the amount of the consideration other than
-5-
<PAGE>
cash received by the Corporation shall be deemed to be the fair value of such
consideration as determined by the Board of Directors of the Corporation,
without deducting therefrom any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Corporation in connection with
such issuance or sale.
(c) Notice of Conversion Price Adjustment. Upon any adjustment
-------------------------------------
of the Conversion Price, then and in each such case the Corporation shall
give written notice thereof, by first-class mail, postage prepaid,
addressed to the registered holders of the Preferred Shares at the
addresses of such holders as shown on the books of this Corporation, which
notice shall state the Conversion Price resulting from such adjustment and
the increase or decrease, if any, in the number of shares receivable at
such price upon the conversion of the Preferred Shares, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
(d) Rights to Preconversion Distributions. The holders of
-------------------------------------
Preferred Shares shall have the following rights to certain properties
received by the holders of shares of Common Stock:
(i) In case this Corporation shall declare a dividend or
distribution upon its shares of Common Stock payable (other than in cash
out of earnings or surplus or other than in shares of Common Stock), then
thereafter each holder of Preferred Shares upon the conversion thereof will
be entitled to receive the number of shares of Common Stock into which such
Preferred Shares shall be converted, and, in addition and without payment
therefor, the property which such holder would have received as a dividend
if continuously since the record date for any such dividend or distribution
such holder (A) had been the record holder of the number of shares of
Common Stock then received, and (B) had retained all dividends or
distributions in stock or securities payable in respect of such shares of
Common Stock or in respect of any stock or securities paid as dividends or
distributions and originating directly or indirectly from such shares of
Common Stock.
(ii) Subject to the provisions of section 4 regarding
liquidation rights, if any capital reorganization or reclassification of
the capital stock of this Corporation, or consolidation or merger of this
Corporation with another corporation, or the sale of all or substantially
all of its assets to another corporation shall be effected in such a way
that holders of shares of Common Stock shall be entitled to receive stock,
securities, or assets with respect to or in exchange for shares of Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger, or sale, lawful and adequate provision shall be made
whereby the holders of Preferred Shares shall thereafter have the right to
receive, in lieu of the shares of Common Stock of this Corporation
immediately theretofore receivable upon the conversion of such Preferred
Shares, such shares of stock, securities or assets as may be issued or
payable with respect to or in exchange for a
-6-
<PAGE>
number of outstanding shares of Common Stock equal to the number of shares of
Common Stock immediately theretofore receivable upon the conversion of such
Preferred Shares had such reorganization, reclassification, consolidation,
merger, or sale not taken place, and in any such case appropriate provision
shall be made with respect to the rights and interests of the holders of the
Preferred Shares to the end that the provisions hereof (including without
limitation provisions for adjustments of the Conversion Price and of the number
of shares receivable upon the conversion of such Preferred Shares) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities, or assets thereafter receivable upon the conversion of such
Preferred Shares. This Corporation shall not effect any such consolidation,
merger, or sale, unless prior to the consummation thereof the surviving
corporation (if other than this Corporation), the corporation resulting from
such consolidation or the corporation purchasing such assets shall assume by
written instrument executed and mailed to the registered holders of the
Preferred Shares at the last address of such holders appearing on the books of
the Corporation, the obligation to deliver to such holders such shares of stock,
securities, or assets as, in accordance with the foregoing provisions, such
holders may be entitled to receive.
(e) Notice of Certain Events. In case any time:
------------------------
(i) this Corporation shall pay any dividend payable in
stock upon its shares of Common Stock or make any distribution (other than
regular cash dividends) to the holders of its shares of Common Stock; or
(ii) this Corporation shall offer for subscription pro rata
to the holders of its shares of Common Stock any additional shares of stock
of any class or other rights; or
(iii) there shall be any capital reorganization, reclassification
of the capital stock of this Corporation, or consolidation or merger of this
Corporation with, or sale of all or substantially all of its assets, to another
corporation; provided, however, that this provision shall not be applicable to
the merger or consolidation of this Corporation with or into another corporation
if, following such merger or consolidation, the shareholders of this Corporation
immediately prior to such merger or consolidation own at least 80% of the equity
of the combined entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation; then, in any one or more of
said cases, this Corporation shall give written notice, by first-class
mail, postage prepaid, addressed to the holders of the Preferred Shares at
the addresses of such holders as shown on the books of this Corporation, of
the date on which (A) the books of this Corporation shall close or a record
shall be taken for such dividend, distribution, or
-7-
<PAGE>
subscription rights, or (B) such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, or winding up shall take
place, as the case may be. Such notice shall also specify the date as of which
the holders of record of shares of Common Stock shall participate in such
dividend, distribution, or subscription rights, or shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding up, as the case may be. Such written notice shall be
given at least twenty (20) days prior to the action in question and not less
than twenty (20) days prior to the record date or the date on which this
Corporation's transfer books are closed in respect thereto.
(f) Definition of Common Shares. As used in this section 5 the
---------------------------
term "shares of Common Stock" shall mean and include this Corporation's
currently authorized shares of Common Stock, $.01 par value, and shall also
include any capital stock of any class of this Corporation hereafter
authorized which shall have the right to vote on all matters submitted to
the shareholders of this Corporation and shall not be limited to a fixed
sum or percentage in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution, or winding up of this
Corporation; provided that the shares receivable pursuant to conversion of
the Preferred Shares shall include shares designated as shares of Common
Stock of this Corporation as of the date of issuance of such Preferred
Shares, or, in case of any reclassification of the outstanding shares
thereof, the stock, securities, or assets provided for in section
(5)(d)(ii) above.
(g) The shares of Common Stock issued upon the conversion of the
Preferred Shares shall, upon issuance, be duly authorized and issued, fully
paid, and nonassessable shares of Common Stock of the Corporation. There
shall be at all times authorized, and reserved for the purpose of issue or
transfer upon conversion of the Preferred Shares, a sufficient number of
shares of Common Stock to provide such conversion of the Preferred Shares.
Section 6. Redemption Rights.
- --------- -----------------
The Preferred Shares are subject to redemption at the election of
the Corporation, in whole or in part, on or after the second anniversary of
the date of the original issuance of the Preferred Shares, or upon such
earlier date as the Corporation's net worth shall exceed $90,000,000 and
its annual net income shall exceed $17,000,000, at a redemption price (the
"Redemption Price") which shall equal the sum of $100 per share, plus
$1.625 per share for each fiscal quarter during which the Preferred Shares
to be redeemed are outstanding after January 1, 1988, up to a maximum of
$39.00 per share for Preferred Shares outstanding through the fourth fiscal
quarter of 1993, plus the amount of all accrued but unpaid dividends.
-8-
<PAGE>
The Corporation shall give notice by mail of redemption to the
holders of record of Preferred Shares at least thirty (30) days prior to
each of such dates of redemption. The notice (a) shall specify the date of
redemption and the number of shares to be redeemed from each holder
(subject to reduction due to conversion of Preferred Shares by such holder
before the date of redemption) and (b) shall be addressed to each holder at
such holder's address as shown on the records of this Corporation. On or
after the date fixed for redemption, each holder of Preferred Shares called
for redemption shall surrender the certificate or certificates evidencing
such shares to this Corporation at the place designated in such notice and
shall thereupon be entitled to receive payment. If less than all of the
shares represented by any such surrendered certificate or certificates are
redeemed, this Corporation shall issue a new certificate for the unredeemed
shares. All Preferred Shares which are in any manner redeemed or acquired
by this Corporation shall be retired and cancelled and none of such shares
shall be reissued.
Section 7. Approval of Certain Transactions.
- --------- --------------------------------
Unless Warburg, Pincus Capital Company, L.P. ("Warburg, Pincus")
shall consent to the following transactions, for as long as Warburg, Pincus
or an affiliate owns the Preferred Shares (but not the shares of Common
Stock issued upon conversion of the Preferred Shares) the Corporation will
(a) not issue additional shares of the Preferred Stock including the
Preferred Shares; (b) not issue shares of Common Stock in an amount greater
than 15 percent of the outstanding shares of Common Stock except pursuant
to (i) a bona fide public offering or (ii) an employee benefit plan of the
Corporation; (c) not repurchase shares of Common Stock or preferred stock
(except for the Preferred Shares); (d) not make or incur any loan or
capitalized lease obligation in excess of $10,000,000 or mortgage, pledge,
or otherwise grant a security interest in a material portion of the
Corporation's assets (except in connection with amendments to the
Corporation's existing revolving credit agreement or the replacement of
such credit agreement); (e) not enter into business lines outside of
managed health care and related businesses; or (f) not enter into any
material transactions with a holder of 5 percent or more of the outstanding
shares of the Corporation's Common Stock other than in the ordinary course
of business and on terms not less favorable than would result from an arms-
length transaction.
-9-
<PAGE>
IN WITNESS WHEREOF, The Corporation has caused this certificate
to be duly executed on its behalf by its undersigned President this 19th
day of February, 1988.
/s/ Kennett L. Simmons
-----------------------------
Kennett L. Simmons,
Vice Chairman and Chief
Operating Officer
United HealthCare Corporation
STATE OF MINNESOTA )
) SS
COUNTY OF HENNEPIN )
Subscribed and sworn to before me this 19th day of February,
1988.
/s/ Carla E. Colburn
--------------------
Notary Public
(Notarial Seal)
CARLA E. COLBURN
NOTARY PUBLIC-MINNESOTA
HENNEPIN COUNTY
MY COMMISSION EXPIRES JANUARY 12, 1992
STATE OF MINNESOTA
DEPARTMENT OF STATE
FILED
FEB 19 1988
/s/ Joan Anderson Growe
Secretary of State
-10-
<PAGE>
UNITED HEALTHCARE CORPORATION
-----------------------------
CERTIFICATE OF DESIGNATIONS
FOR
5.75% SERIES A CONVERTIBLE PREFERRED STOCK
__________________
(Pursuant to Minnesota Statutes,
Section 302A.401, Subd. 3(b))
___________________
The undersigned, being the President of United HealthCare Corporation (the
"Corporation"), a corporation organized and existing under the Minnesota
Business Corporation Act, in accordance with the provisions of Minnesota
Statutes, Section 302A.401, Subd. 3(b), does hereby certify that:
1. The Second Restated Articles of Incorporation of the Corporation (the
"Articles of Incorporation") fix the total number of shares of all classes of
capital stock that the Corporation shall have the authority to issue at five
hundred million (500,000,000) shares of common stock, par value $.01 per share,
and ten million (10,000,000) shares of preferred stock, par value $.001 per
share ("Preferred Stock"). An aggregate of 10,000,000 shares of Preferred Stock
remain available for issuance.
2. The Articles of Incorporation expressly grant to the Board of
Directors of the Corporation (the "Board of Directors") authority to provide for
the issuance from time to time of one or more series of the Preferred Stock,
and, with respect to each such series, to fix by resolution of a majority of the
whole Board of Directors the number of shares to be included in each such series
and to fix the designation, powers, preferences and rights of the shares of each
such series and the qualifications, limitations or restrictions thereof.
3. Pursuant to the authority conferred upon the Board of Directors by the
Articles of Incorporation, the Board of Directors on June 21, 1995, in
accordance with Minnesota Statutes, Section 302A.401, Subd. 3, duly adopted the
following resolution establishing a series of shares of the Corporation's
Preferred Stock, to be designated as its 5.75% Series A Convertible Preferred
Stock:
<PAGE>
RESOLVED, that an issue of a series of Preferred Stock is hereby provided
for, and the number of shares to be included in such series is established, and
the designation, powers, preferences and rights, and qualifications, limitations
or restrictions thereof, of such series are fixed hereby as follows:
1. DESIGNATION AND NUMBER OF SHARES. The designation of such series
shall be 5.75% Series A Convertible Preferred Stock (the "Convertible Preferred
Stock"), and the number of shares constituting such series shall be 500,000.
2. PAR VALUE; PREEMPTIVE RIGHTS. As provided in Article 3(a) of the
Corporation's Articles of Incorporation, the Convertible Preferred Stock shall
have a par value of $.001 per share. Holders of Convertible Preferred Stock
shall not be entitled to any preemptive rights to acquire shares of any class or
series of capital stock of the Corporation.
3. RANK. The Convertible Preferred Stock shall rank, with respect to
rights to receive dividends and rights to receive distributions upon the
liquidation, winding up or dissolution of the Corporation (whether voluntary or
involuntary): (a) senior to the Corporation's Common Stock, par value $.01 per
share (the "Common Stock"), and senior to any class or series of preferred stock
issued by the Corporation whose terms provide specifically that such class or
series will rank junior to the Convertible Preferred Stock with respect to
rights to receive payment of dividends or liquidation preference or whose terms
fail to specify the ranking of such class or series relative to the Convertible
Preferred Stock with respect to rights to receive payment of dividends or
liquidation preference (together with the Common Stock, the "Junior Stock"), (b)
on a parity with any class or series of preferred stock issued by the
Corporation whose terms provide specifically that such series will rank on a
parity with the Convertible Preferred Stock with respect to rights to receive
payment of dividends and liquidation preference (the "Parity Stock") and (c)
junior to any class or series of preferred stock issued by the Corporation whose
terms provide specifically that such class or series will rank senior to the
Convertible Preferred Stock with respect to rights to receive payment of
dividends or liquidation preference (the "Senior Stock"), which Senior Stock may
be issued by the Corporation only with the requisite consent of the holders of
the shares of Convertible Preferred Stock in accordance with Section 7(c)(i)
hereof.
4. DIVIDENDS AND DISTRIBUTIONS; METHOD OF PAYMENT. (a) The holders of
shares of Convertible Preferred Stock shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available for such
purpose, dividends at the rate per annum of 5.75% of the Liquidation Preference
(as defined in Section 8 hereof) of such share. Such dividends shall be fully
cumulative, shall accumulate from the date of original issuance of the
Convertible Preferred Stock, and shall be payable quarterly in arrears in cash
on each January 1, April 1, July 1 and October 1, commencing January 1, 1996
(provided, that if any such date is not a
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Business Day, then such dividend shall be payable without interest on the next
succeeding Business Day), to holders of record as they appear on the stock books
of the Corporation on such record dates as shall be fixed by the Board of
Directors. Such record dates shall be not more than 60 nor less than 10 days
preceding the respective dividend payment dates. The amount of dividends payable
per share of Convertible Preferred Stock for each full quarterly dividend period
shall be computed by dividing the annual dividend amount by four. The amount of
dividends payable for the initial dividend period and for any other period
shorter than a full quarterly dividend period shall be computed on the basis of
a 360-day year of twelve 30-day months.
Dividends on account of arrears for any past dividend periods may be
declared and paid at any time, without reference to any regular dividend payment
date, to holders of record of Convertible Preferred Stock on such date, not
exceeding 45 days preceding the payment date thereof, as may be fixed in advance
by the Board of Directors.
If at any time any dividend on any outstanding Senior Stock issued with the
requisite consent of the holders of the shares of Convertible Preferred Stock in
accordance with Section 7(c)(i) hereof shall be in default, in whole or in part,
no dividend shall be paid or declared and set apart for payment on the
Convertible Preferred Stock unless and until all accumulated and unpaid
dividends with respect to any such Senior Stock shall have been paid or declared
and set apart for payment, without interest.
Full dividends shall not be paid or declared and set apart for payment on
any Parity Stock for any period unless full cumulative dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the
Convertible Preferred Stock for all dividend periods terminating on or prior to
the date of payment of such full cumulative dividends. Full dividends shall not
be paid or declared and set apart for payment on the Convertible Preferred Stock
for any period unless full cumulative dividends have been, or contemporaneously
are, paid or declared and set apart for payment on any Parity Stock for all
dividend periods terminating on or prior to the date of payment of such full
cumulative dividends. When dividends are not paid in full upon the Convertible
Preferred Stock and any Parity Stock, the Corporation may make dividend payments
on account of arrears on the Convertible Preferred Stock or any such Parity
Stock, provided that the Corporation shall make such payments ratably upon all
outstanding shares of Convertible Preferred Stock and such Parity Stock in
proportion to the respective amounts of dividends in arrears upon all such
outstanding shares of Convertible Preferred Stock and Parity Stock to the date
of such dividend payment.
So long as any Convertible Preferred Stock shall be outstanding, the
Corporation shall not declare any dividends on the Common Stock or any other
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Junior Stock, or make any payment on account of, or set apart money for, a
sinking fund or other similar fund or agreement for the purchase, redemption or
other retirement of any shares of Junior Stock, or make any distribution in
respect thereof, whether in cash or property or in obligations or stock of the
Corporation, other than a distribution consisting solely of Junior Stock (such
dividends, payments, setting apart and distributions being herein called "Junior
Stock Payments"), unless the following conditions shall be satisfied at the date
of such declaration in the case of any such dividend, or the date of such
setting apart in the case of any such fund, or the date of such payment or
distribution in the case of any other Junior Stock Payment:
(i) full cumulative dividends shall have been paid or declared and set
apart for payment on all outstanding shares of Convertible Preferred Stock
through the last quarterly dividend payment date established pursuant to this
Section 4(a) that immediately precedes such dividend, setting apart, payment or
distribution; and
(ii) the Corporation shall not be in default or in arrears with respect to
any redemption (whether optional or mandatory) of any shares of Convertible
Preferred Stock.
Holders of shares of Convertible Preferred Stock shall not be entitled to
any dividend, whether payable in cash, property or stock, in excess of full
cumulative dividends on such shares. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment that is in
arrears.
(b) The Corporation may pay dividends pursuant to this Section 4 and any
redemption payments pursuant to Sections 5 and 6 hereof to holders of record of
Convertible Preferred Stock by checks payable to such holders in money of the
United States; provided, however, that in the case of any Convertible Preferred
Stock held by MetLife HealthCare Holdings, Inc. or any affiliate thereof, the
Corporation shall make all payments due with respect to such Convertible
Preferred Stock by crediting, before 12:00 noon local time at the location of
such holders' respective bank accounts, by bank wire transfer of immediately
available funds, such holders' accounts in such banks in the United States as
may be designated and specified in writing to the Corporation by such holders at
least two Business Days in advance of such payment.
5. REDEMPTION AT OPTION OF THE CORPORATION. The Corporation may not
redeem the Convertible Preferred Stock prior to October 1, 1998. On or after
October 1, 1998, the Corporation, at its option, may redeem shares of
Convertible Preferred Stock, as a whole or in part, at any time or from time to
time, at the following redemption prices per share (expressed as a percentage of
the Liquidation
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Preference (as defined in Section 8 hereof)), if redeemed during the 12-month
period beginning with October 1 of the year indicated:
Year Redemption Price
---- ----------------
1998 104.025%
1999 103.450
2000 102.875
2001 102.300
2002 101.725
2003 101.150
2004 100.575
and thereafter at a price of $1,000 per share, plus, in each case, accumulated
but unpaid dividends thereon to but excluding the date fixed for redemption (the
"Redemption Price").
Notice of any redemption pursuant to this Section 5 shall be given by the
Corporation by first class mail, postage prepaid, not less than 30 or more than
90 days prior to the date fixed for redemption (the "Redemption Date"), to each
holder of record of the shares to be redeemed, at such holder's address as shown
on the stock register of the Corporation. Each such notice shall state: (a) the
Redemption Date; (b) the number of shares of Convertible Preferred Stock to be
redeemed and, if less than all such shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (c) the
Redemption Price; (d) the place or places where certificates for such shares are
to be surrendered for payment of the Redemption Price; (e) the then effective
Conversion Price (as defined in Section 9(a) hereof); (f) that the right of
holders of Convertible Preferred Stock called for redemption to exercise their
conversion rights pursuant to Section 9 hereof shall cease and terminate as to
such shares at the close of business on the Redemption Date (provided that there
is no default in payment of the Redemption Price); (g) that payment of the
Redemption Price will be made upon presentation and surrender of certificates
representing the shares of Convertible Preferred Stock called for redemption;
(h) that accumulated but unpaid dividends to the Redemption Date on the shares
to be redeemed will be paid on the Redemption Date; and (i) that dividends on
the shares to be redeemed will cease to accrue on the Redemption Date. If a
notice is mailed to a holder in the manner provided above within the time
prescribed, it is duly given with respect to such holder. Notice having been
mailed as aforesaid, from and after the Redemption Date (unless default shall be
made by the Corporation in providing money for the payment of the Redemption
Price) dividends on the shares of Convertible Preferred Stock so called for
redemption shall cease to accrue, and such shares shall no longer be deemed to
be outstanding, and all rights of the holders thereof as shareholders of the
Corporation
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by virtue of the ownership of such shares (except the right to receive from the
Corporation the Redemption Price without interest) shall cease. Upon surrender
in accordance with such notice of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of Directors shall so
require and the notice shall so state), the Corporation shall redeem such shares
at the Redemption Price.
If less than all the then outstanding shares of Convertible Preferred
Stock are to be redeemed, the Corporation shall effect such redemption pro rata
(as nearly as practicable) among all holders of Convertible Preferred Stock. If
fewer than all the shares represented by a surrendered certificate or
certificates are redeemed, the Corporation shall issue a new certificate
representing the unredeemed shares. Notwithstanding the foregoing, the
Corporation shall not redeem less than all the outstanding shares of Convertible
Preferred Stock pursuant to this Section 5, or purchase or acquire any shares of
Convertible Preferred Stock otherwise than pursuant to a purchase or exchange
offer made on the same terms to all holders of shares of Convertible Preferred
Stock, unless full cumulative dividends shall have been paid upon all
outstanding shares of Convertible Preferred Stock for all past dividend periods.
6. MANDATORY REDEMPTION. On October 1, 2005 (the "Mandatory Redemption
Date"), the Corporation shall redeem all of the Convertible Preferred Stock then
outstanding at a price per share equal to the Redemption Price of such share.
Notice of such redemption shall be given by the Corporation by first class mail,
postage prepaid, not less than 30 or more than 90 days prior to the Mandatory
Redemption Date, to each holder of record of the shares to be redeemed, at such
holder's address as shown on the stock register of the Corporation. Each such
notice shall state: (a) the Mandatory Redemption Date; (b) the Redemption
Price; (c) the place or places where certificates for such shares are to be
surrendered for payment of the Redemption Price; (d) the then effective
Conversion Price; (e) that the right of holders of Convertible Preferred Stock
to exercise their conversion rights pursuant to Section 9 hereof shall cease and
terminate at the close of business on the Mandatory Redemption Date (provided
that there is no default in payment of the Redemption Price); (f) that payment
of the Redemption Price will be made upon presentation and surrender of
certificates representing the shares of Convertible Preferred Stock; (g) that
accumulated but unpaid dividends to the Mandatory Redemption Date will be paid
on the Mandatory Redemption Date; and (h) that on and after the Mandatory
Redemption Date, dividends will cease to accumulate on the Convertible Preferred
Stock. If a notice is mailed to a holder in the manner provided above within
the time prescribed, it is duly given with respect to such holder.
On or after the Mandatory Redemption Date, each holder of the shares of
outstanding Convertible Preferred Stock (other than shares which have been duly
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surrendered for conversion at or before the close of business on the Mandatory
Redemption Date) shall surrender the certificate or certificates evidencing such
shares to the Corporation at the place designated in the redemption notice and
shall thereupon be entitled to receive payment of the Redemption Price. If, on
the Mandatory Redemption Date, funds necessary for the redemption shall be
available therefor and shall have been irrevocably deposited or set aside, then,
notwithstanding that the certificates evidencing any shares to be redeemed shall
not have been surrendered, the dividends with respect to such shares shall cease
to accumulate on and after the Mandatory Redemption Date, such shares shall no
longer be deemed to be outstanding, the holders thereof shall cease to be
shareholders of the Corporation by virtue of the ownership of such shares, and
all rights whatsoever with respect to such shares (except the right of the
holders thereof to receive the Redemption Price without interest upon surrender
of their certificates) shall terminate.
7. VOTING.
(a) No General Voting Rights. Except as otherwise provided in this Section
7 or as otherwise required by law, the Convertible Preferred Stock shall have no
voting rights.
(b) Voting Rights Upon Arrearages. If (i) the equivalent of six or more
quarterly dividends (whether or not consecutive) payable on shares of
Convertible Preferred Stock (whether or not earned or declared) shall be in
arrears, or (ii) the Corporation shall have failed to pay in full any mandatory
redemption payment required by Section 6 hereof or (iii) the Corporation shall
have failed to pay in full the applicable optional redemption payment scheduled
to be paid on any Redemption Date established by the Corporation in accordance
with Section 5 hereof, then the number of directors then constituting the Board
of Directors shall be increased by two, and the holders of shares of Convertible
Preferred Stock (voting separately as a class to the exclusion of holders of any
other shares of capital stock of the Corporation) shall be entitled to elect the
two additional directors of the Corporation at any annual meeting of
shareholders or special meeting held in place thereof, or at a special meeting
of the holders of the Convertible Preferred Stock called as hereinafter provided
or, if permitted under the Articles of Incorporation and applicable law, by the
written consent of such holders. Such rights shall remain vested until all
dividends and mandatory and optional redemption payments in arrears on the
Convertible Preferred Stock then outstanding shall have been paid and any
dividends on the Convertible Preferred Stock for the current quarterly dividend
period shall have been paid or declared and set apart for payment, at which time
such rights shall terminate (but subject always to the same provisions for the
vesting of such voting rights in the case of any similar future arrearages in
six or more quarterly dividends, in any mandatory redemption payment required by
Section 6 hereof or in any optional redemption payment scheduled to be paid on
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any Redemption Date established by the Corporation in accordance with Section 5
hereof). Upon the termination of such voting rights, the terms of office of all
persons elected as directors by the holders of the Convertible Preferred Stock
shall forthwith terminate and the number of directors then constituting the
Board of Directors shall be reduced accordingly.
At any time after such voting rights shall have been so vested in the
holders of shares of Convertible Preferred Stock, the Secretary of the
Corporation may, and upon the written request of the holders at least 10% of all
outstanding shares of Convertible Preferred Stock (addressed to the Secretary at
the principal office of the Corporation) shall, call a special meeting of the
holders of the Convertible Preferred Stock for the election of the two directors
to be elected by them as herein provided, such call to be made by notice similar
to that provided in the By-Laws of the Corporation for a special meeting of the
shareholders or as required by law. If any such special meeting required to be
called as above provided shall not be called by the Secretary within 20 days
after receipt of any such request, then the holders of at least 10% of the
outstanding shares of Convertible Preferred Stock may call such meeting at the
expense of the Corporation, upon the notice above provided, and for that purpose
shall have access to the stock books of the Corporation. The directors elected
at any such special meeting shall hold office until the next annual meeting of
the shareholders or special meeting held in lieu thereof if such office shall
not have previously terminated as above provided. If any vacancy shall occur
among the directors elected by the holders of the Convertible Preferred Stock,
the remaining director elected by the holders of the Convertible Preferred Stock
(or the successor of such remaining director) may choose a successor who shall
hold office for the unexpired term in respect of which such vacancy occurred.
Any director who has been elected by the holders of shares of Convertible
Preferred Stock may be removed at any time, with or without cause, only by a
majority of the votes to which the holders of the outstanding shares of
Convertible Preferred Stock (voting separately as a class to the exclusion of
holders of any other shares of capital stock of the Corporation) are entitled.
At all meetings of shareholders at which any holders of Convertible
Preferred Stock shall be entitled to vote for the election or removal of
directors as a single class, the holders of a majority of the outstanding shares
of Convertible Preferred Stock shall be necessary to constitute a quorum,
whether present in person or by proxy, for the election by such single class of
its designated directors. In the absence of a quorum, a majority of the holders
present in person or by proxy shall have power to adjourn the meeting until a
quorum shall be present.
(c) Other Voting Rights. Without the consent or affirmative vote of the
holders of at least 66-2/3% of the outstanding shares of Convertible Preferred
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Stock (or such greater number as required by the Articles of Incorporation or
applicable law), voting separately as a class to the exclusion of holders of any
other shares of capital stock of the Corporation (either in writing without a
meeting, if permitted by the Articles of Incorporation and applicable law, or by
vote at any meeting called for that purpose), the Corporation may not:
(i) create, authorize, issue, or increase the authorized amount of, any
Senior Stock or any obligation or security convertible or exchangeable into
Senior Stock, or reclassify any of its authorized stock into Senior Stock; or
(ii) amend, alter or repeal (by any means whatsoever, including, without
limitation, by merger, consolidation or Fundamental Change (as defined in
Section 9(g)(iii) hereof)) any provision of the Articles of Incorporation, any
amendment or supplement thereto or this Certificate of Designations (or any
similar document relating to any series or class of preferred stock of the
Corporation), if such action would (a) increase or decrease the aggregate number
of authorized shares of Convertible Preferred Stock, (b) increase or decrease
the par value of such shares or (c) amend, alter, repeal or change the powers,
rights, privileges or preferences of the holders of shares of Convertible
Preferred Stock so as to affect them adversely, provided, however, that the
creation, issuance or increase in the amount of authorized shares of any series
of Parity Stock or Junior Stock will not be deemed to adversely affect such
powers, rights, privileges or preferences of the Convertible Preferred Stock.
For purposes of the foregoing provisions of this Section 7, each share of
Convertible Preferred Stock shall have one vote per share. The foregoing
provisions of this Section 7 shall not apply if, at or prior to the time when
the act with respect to which such vote would otherwise be required shall be
effected, all outstanding shares of Convertible Preferred Stock shall have been
redeemed or called for redemption and sufficient funds shall have been
irrevocably deposited in trust to effect such redemption and all other steps
necessary or desirable to effect such redemption shall have been taken.
8. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the holders
of Convertible Preferred Stock shall be entitled to receive out of the assets of
the Corporation available for distribution to shareholders, before any
distribution of assets shall be made to the holders of the Common Stock or of
any other shares of Junior Stock, a liquidating distribution in an amount equal
to $1,000 per share (the "Liquidation Preference") plus an amount equal to any
accrued and accumulated but unpaid dividends thereon to the date of final
distribution to such holders, whether or not declared, without interest. The
holders of the Convertible Preferred Stock shall not be entitled to receive the
Liquidation Preference and such accrued dividends, however, until the
liquidation preference of any outstanding Senior
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Stock issued with the requisite consent of the holders of the shares of
Convertible Preferred Stock in accordance with Section 7(c)(i) hereof shall have
been paid (or a sum set aside therefor sufficient to provide for payment) in
full.
If, upon any voluntary or involuntary liquidation, dissolution or winding
up of the Corporation, the assets available for distribution are insufficient to
pay in full the amounts payable with respect to the Convertible Preferred Stock
and any other outstanding shares of Parity Stock, the holders of the Convertible
Preferred Stock and of such other Parity Stock shall share ratably in any
distribution of assets of the Corporation in proportion to the full respective
preferential amounts to which they are entitled.
After payment to the holders of the Convertible Preferred Stock of the full
preferential amounts provided for in this Section 8, the holders of the
Convertible Preferred Stock shall not be entitled to any further participation
in any distribution of assets by the Corporation.
For purposes of this Section 8, neither a consolidation or merger of the
Corporation with or into another person nor a sale or transfer of all or
substantially all of the assets of the Corporation will be deemed a liquidation,
dissolution or winding up of the Corporation.
9. CONVERSION RIGHTS.
(a) General. Each holder of a share of Convertible Preferred Stock shall
have the right, at the option of such holder, at any time to convert, upon the
terms and provisions of this Section 9, one or more shares of Convertible
Preferred Stock into fully paid and nonassessable shares of Common Stock of the
Corporation (and such other securities and property as such holder may be
entitled to as hereinafter provided). Such conversion of shares of Convertible
Preferred Stock to shares of Common Stock shall be made at a conversion rate of
one share of Convertible Preferred Stock for a number of shares of Common Stock
equal to (x) $1,000 divided by (y) the conversion price applicable per share of
Common Stock at the time of conversion (the "Conversion Price"). The Conversion
Price shall initially be $49.477. The Conversion Price shall be adjusted in
certain instances as provided below.
(b) Mechanics of Conversion. In order to convert shares of Convertible
Preferred Stock into Common Stock, the holder or holders thereof shall surrender
the certificate or certificates evidencing such shares of Convertible Preferred
Stock at the office of the transfer agent for the Convertible Preferred Stock,
which certificate or certificates shall be duly endorsed to the Corporation or
in blank, or accompanied by proper instruments of transfer, accompanied by (i) a
written notice to the Corporation that the holder elects so to convert all or a
specified
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number of such shares of Convertible Preferred Stock and specifying the name or
names (with address or addresses) in which a certificate or certificates
evidencing shares of Common Stock are to be issued and (ii) if required pursuant
to Section 9(k) hereof, an amount sufficient to pay any transfer or similar tax
(or evidence reasonably satisfactory to the Corporation demonstrating that such
taxes have been paid). If more than one share of Convertible Preferred Stock
shall be surrendered for conversion at one time by the same holder, the number
of full shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Convertible Preferred
Stock so surrendered.
Shares of Convertible Preferred Stock shall be deemed to have been
converted immediately prior to the close of business on the day of the surrender
of such shares for conversion in accordance with the foregoing provisions, and
the person or persons entitled to receive the Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such Common Stock at such time. As promptly as practicable on or after the
surrender of a certificate or certificates for conversion and the receipt of the
notice relating thereto (and in any event within five Business Days thereafter,
unless such conversion is in connection with an underwritten public offering of
Common Stock, in which event concurrently with such conversion), the Corporation
shall deliver or cause to be delivered to the person or persons entitled to
receive the same: (i) a certificate or certificates for the number of full
shares of Common Stock issuable upon such conversion; (ii) any cash owed in lieu
of any fraction of a share, determined in accordance with Section 9(j) hereof;
(iii) if less than the full number of shares of Convertible Preferred Stock
evidenced by the surrendered certificate or certificates is being converted, a
new certificate or certificates, of like tenor, for the number of shares
evidenced by such surrendered certificate or certificates less the number of
shares being converted; and (iv) an amount in cash equal to the full cumulative
dividends accrued but unpaid on such shares of Convertible Preferred Stock
through the last quarterly dividend payment date established pursuant to Section
4 hereof that immediately precedes the effective date of conversion. If for any
reason the Corporation is unable to pay any accrued dividends on the Convertible
Preferred Stock being converted, the Corporation will pay such dividends to the
converting holder as soon thereafter as funds of the Corporation are legally
available for such payment. At the request of any such converting holder, the
Corporation shall deliver to such holder a due bill or other appropriate
instrument evidencing the Corporation's obligation to such holder. A payment or
adjustment shall not be made by the Corporation upon any conversion on account
of any dividends on the Common Stock issued upon conversion.
In case shares of Convertible Preferred Stock are called for redemption
under Section 5 or Section 6 hereof, the right to convert such shares shall
cease and terminate at the close of business on the date fixed for redemption,
unless default shall be made in payment of the Redemption Price.
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(c) Adjustments to Conversion Price. The Conversion Price shall be adjusted
from time to time as follows:
(i) In case the Corporation shall pay or make a dividend or other
distribution on any class of capital stock of the Corporation in Common
Stock, the Conversion Price in effect at the close of business on the date
fixed for the determination of shareholders entitled to receive such
dividend or other distribution shall be reduced to a price determined by
multiplying such Conversion Price by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination and of which the
denominator shall be the sum of such number of shares and the total number
of shares constituting such dividend or other distribution, such reduction
to become effective at the opening of business on the day following the
date fixed for such determination. In the event that such dividend or
distribution is not so paid or made, the Conversion Price shall be
readjusted to be the Conversion Price which would then be in effect if such
date fixed for the determination of shareholders entitled to receive such
dividend or other distribution had not been fixed.
(ii) In case the Corporation shall issue rights or warrants to all
holders of its outstanding shares of Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible
into (which for purposes of this paragraph (ii) shall also mean
exchangeable for) Common Stock) at a price per share less than the Current
Market Price (as defined in Section 13 hereof) of Common Stock on the date
fixed for the determination of shareholders entitled to receive such rights
or warrants, the Conversion Price in effect at the close of business on the
date fixed for such determination shall be reduced to a price determined by
multiplying such Conversion Price by a fraction of which the numerator
shall be the total number of shares of Common Stock outstanding at the
close of business on the date fixed for such determination plus the number
of shares of Common Stock which the aggregate of the offering price of the
total number of shares of Common Stock so offered for subscription or
purchase (or the aggregate conversion price of the convertible securities
so offered) would purchase at such Current Market Price and of which the
denominator shall be the number of shares of Common Stock outstanding at
the close of business on the date fixed for such determination plus the
total number of additional shares of Common Stock so offered for
subscription or purchase (or into which the convertible securities so
offered are convertible), such reduction to
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become effective at the opening of business on the day following the date
fixed for such determination. To the extent that shares of Common Stock are
not delivered after the expiration of such rights or warrants, the
Conversion Price shall be readjusted to the Conversion Price which would
then be in effect had the adjustments made upon the issuance of such rights
or warrants been made on the basis of delivery of only the number of shares
of Common Stock actually delivered. In the event that such rights or
warrants are not so issued, the Conversion Price shall be readjusted to be
the Conversion Price which would then be in effect if the date fixed for
the determination of shareholders entitled to receive such rights or
warrants had not been fixed.
(iii) In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Conversion Price in
effect at the close of business on the date upon which such subdivision
becomes effective shall be proportionately reduced, and, conversely, in
case outstanding shares of Common Stock shall each be combined into a
smaller number of shares of Common Stock, the Conversion Price in effect at
the close of business on the date upon which such combination becomes
effective shall be proportionately increased, such reduction or increase,
as the case may be, to become effective at the opening of business on the
day following the date upon which such subdivision or combination becomes
effective.
(iv) In case the Corporation shall, by dividend or otherwise, at any
time distribute to all holders of its Common Stock shares of any class of
capital stock (other than a dividend or distribution for which an
adjustment is provided in paragraph (i) of this Section 9(c)) or evidences
of its indebtedness or assets other than cash (including securities, but
excluding any rights or warrants for which an adjustment is provided in
paragraph (ii) of this Section 9(c)) then, in each such case, the
Conversion Price shall be reduced to a price determined by multiplying the
Conversion Price in effect at the close of business on the date fixed for
the determination of shareholders entitled to receive such distribution by
a fraction of which the numerator shall be the Current Market Price per
share of the Common Stock on the date fixed for such determination less the
then fair market value (as reasonably determined in good faith by the Board
of Directors) on such date of the portion of the shares, evidences of
indebtedness or assets so to be distributed applicable to one share of
Common Stock and of which the denominator shall be such Current Market
Price per share of the Common Stock, such reduction to
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become effective at the opening of business on the day following the date
fixed for the determination of shareholders entitled to receive such
distribution. In the event that such dividend or distribution is not so
paid or made, the Conversion Price shall be readjusted to be the Conversion
Price which would then be in effect if such date fixed for the
determination of shareholders entitled to receive such dividend or other
distribution had not been fixed.
(v) The reclassification (including any reclassification upon a
consolidation or merger in which the Corporation is the continuing
corporation, but not including any transactions for which an adjustment is
provided in paragraph (d) or (f) of this Section 9) of Common Stock into
securities other than Common Stock shall be deemed to involve (i) a
distribution of securities other than Common Stock to all holders of Common
Stock (and the effective date of such reclassification shall be deemed to
be "the date fixed for the determination of shareholders entitled to
receive such distribution" and "the date fixed for such determination," as
the case may be, within the meaning of paragraph (iv) of this Section 9(c))
and (ii) a subdivision or combination, as the case may be, of the number of
shares of Common Stock outstanding immediately prior to such
reclassification into the number of shares of Common Stock outstanding
immediately thereafter (and the effective date of such reclassification
shall be deemed to be "the date upon which such subdivision becomes
effective," and "the date upon which such subdivision or combination
becomes effective," as the case may be, within the meaning of paragraph
(iii) of this Section 9(c)).
(vi) In case the Corporation shall, by dividend or otherwise, at any
time distribute to all holders of its Common Stock cash (including by way
of a redemption, tender offer or exchange offer to the extent, if any, that
it is treated for Federal income tax purposes as a distribution governed by
Section 301 of the Internal Revenue Code of 1986, as amended (the "Code"),
but excluding (x) any quarterly cash dividend on the Common Stock to the
extent the aggregate cash dividend per share of Common Stock in any fiscal
quarter does not exceed the greater of (a) the amount per share of Common
Stock of the next immediately preceding quarterly cash dividend on the
Common Stock to the extent such preceding quarterly dividend did not
require any adjustment of the Conversion Price pursuant to this paragraph
(x) (as adjusted to reflect subdivisions or combinations of the Common
Stock), and (b) 3.75% of the Current Market Price of the Common Stock on
the Trading Day (as defined in Section 13 hereof) next preceding the date
of declaration of such dividend and (y) any dividend or
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distribution in connection with the liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary), then, in each such
case, the Conversion Price shall be reduced to a price determined by
multiplying the Conversion Price in effect at the close of business on such
record date by a fraction of which the numerator shall be the Current
Market Price per share of the Common Stock on such record date less the
amount of cash so distributed (to the extent not otherwise distributed as
provided above) applicable to one share of Common Stock and of which the
denominator shall be such Current Market Price per share of the Common
Stock, such reduction to become effective at the opening of business on the
day following such record date.
(vii) In case of the consummation of a redemption, tender offer or
exchange offer made by the Corporation or any subsidiary of the Corporation
for all or any portion of the Common Stock (except to the extent that such
redemption, tender offer or exchange offer is treated for Federal income
tax purposes as a distribution governed by Section 301 of the Code and
paragraph (vi) of this Section 9(c) applies) that involves the payment by
the Corporation or such subsidiary of consideration per share of Common
Stock having a fair market value (as reasonably determined in good faith by
the Board of Directors) at the last time (the "Expiration Time") tenders or
exchanges may be made pursuant to such tender or exchange offer (as it
shall have been amended) that exceeds by more than 10% the Current Market
Price of the Common Stock on the Trading Day next preceding the date of the
first public announcement by the Corporation of the commencement of such
tender or exchange offer (the "Announcement Date"), the Conversion Price
shall be reduced so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the
Expiration Time by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding (including any tendered or exchanged
shares) at the Expiration Time multiplied by the Current Market Price of
the Common Stock on the Trading Day next preceding the Announcement Date
and of which the denominator shall be the sum of (x) the fair market value
(determined as aforesaid) of the aggregate consideration payable to
shareholders based on the acceptance (up to any maximum specified in the
terms of the tender or exchange offer) of all shares validly tendered or
exchanged and not withdrawn as of the Expiration Time (the shares deemed so
accepted, up to any such maximum, being referred to as the "Purchased
Shares") and (y) the product of the number of shares of Common Stock
outstanding (less any Purchased Shares) on the Expiration Time and the
Current Market Price of the Common Stock on the Trading Day
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<PAGE>
next preceding the Announcement Date, such reduction to become effective
immediately prior to the opening of business on the day following the
Expiration Time.
(viii) Notwithstanding any other provision of this Section 9, no
adjustment in the Conversion Price shall be required unless such adjustment
would require an increase or decrease of at least 1% in the Conversion
Price; provided, however, that any adjustments which by reason of this
paragraph (viii) are not required to be made shall be carried forward and
taken into account in determining whether any subsequent adjustment shall
be required. Once the cumulative effect of any such adjustments that are
carried forward would result in an increase or decrease of at least 1% in
the Conversion Price, then the Conversion Price shall be changed to reflect
all adjustments called for by this Section 9 and not previously made.
(ix) Notwithstanding any other provision of this Section 9, no
adjustment to the Conversion Price shall reduce the Conversion Price below
the then par value per share of the Common Stock, and any such purported
adjustment shall instead reduce the Conversion Price to such par value.
(x) Whenever the Conversion Price is adjusted as provided herein, the
Corporation shall compute the adjusted Conversion Price in accordance with
this Section 9 and shall prepare a certificate signed by the Treasurer of
the Corporation setting forth the adjusted Conversion Price and showing in
reasonable detail the facts upon which such adjustment is based, and the
corporation shall mail a copy of such certificate as soon as practicable to
the holders of record of the shares of Convertible Preferred Stock.
(xi) In any case in which this Section 9 shall require that an
adjustment shall become effective on the day following a record date for an
event, the Corporation may defer until the occurrence of such event (i)
issuing to the holder of any share of Convertible Preferred Stock, if such
share is converted after such record date and before the occurrence of such
event, the additional Common Stock issuable upon such conversion by reason
of the adjustment required by such event over and above Common Stock
issuable upon such conversion before giving effect to such adjustment and
(ii) paying to such holders any amount in cash in lieu of a fractional
share of Common Stock pursuant to paragraph (j) of this Section 9;
provided, that, upon request of any such holder, the Corporation shall
deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to
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<PAGE>
receive such additional Common Stock and such cash, upon the occurrence of
the event requiring such adjustment; and provided, further, that the
failure of such event to occur shall relieve the Corporation of the
obligation to make an additional distribution upon conversion by reason of
the adjustment required by the occurrence of such event.
(xii) The Corporation may make such reductions in the Conversion
Price, in addition to those required by this Section 9, as the Board of
Directors considers to be advisable in order that any event treated for
Federal income tax purposes as a dividend or distribution of stock (or
rights to acquire stock) shall not be taxable to the recipients. The
Corporation at any time or from time to time, as permitted by applicable
law and to the extent the Board of Directors determines that such reduction
would be in the best interests of the Corporation, may reduce the
Conversion Price by any amount for any period of time, if the period is at
least twenty (20) days and if the reduction is irrevocable during the
period.
(xiii) Whenever the Conversion Price is reduced by the Corporation
pursuant to paragraph (xii) of this Section 9(c), the Corporation shall
mail to holders of the Convertible Preferred Stock a notice of the
reduction. The Corporation shall mail such notice by first class mail,
postage prepaid, at least fifteen (15) days before the date the reduced
Conversion Price takes effect, to each holder of record of shares of
Convertible Preferred Stock at such holder's address as shown on the stock
register of the Corporation. The notice shall state the reduced Conversion
Price and the period it will be in effect. If a notice is mailed to a
holder in the manner provided above within the time prescribed, it is duly
given with respect to such holder.
(d) Reclassification, Consolidation, Merger or Sale of Assets. In the event
that the Corporation shall be a party to any transaction (including without
limitation any (i) recapitalization or reclassification of the Common Stock
(other than a change in par value, or from par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination of the
Common Stock), (ii) any consolidation or merger of the Corporation with or into
any other person or any merger of another person into the Corporation (other
than a merger which does not result in a reclassification, conversion, exchange
or cancellation of outstanding shares of Common Stock of the Corporation), (iii)
any sale or transfer of all or substantially all of the assets of the
Corporation, or (iv) any compulsory share exchange) pursuant to which the Common
Stock shall be exchanged for, converted into, acquired for or constitute solely
the right to receive other securities, cash or other property, then appropriate
provision shall be made as part of the terms of such transaction whereby (1) in
the case of any Non-Stock Fundamental Change (as
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defined in paragraph (g) of this Section 9) and subject to funds being legally
available therefor at the time of such conversion, the holder of each share of
Convertible Preferred Stock then outstanding shall thereafter have the right to
convert such share only into the kind and amount of securities, cash and other
property receivable upon such recapitalization, reclassification, consolidation,
merger, sale, transfer or share exchange by a holder of the number of shares of
Common Stock into which such share of Convertible Preferred Stock might have
been converted immediately prior to such transaction, after giving effect, in
the case of any Non-Stock Fundamental Change, to any adjustment in the
Conversion Price required by the provisions of paragraph (f) of this Section 9,
and (2) in the case of a Common Stock Fundamental Change (as defined in
paragraph (g) of this Section 9), the holder of each share of Convertible
Preferred Stock then outstanding shall thereafter have the right to convert such
share only into common stock of the kind received by holders of Common Stock as
a result of such Common Stock Fundamental Change in an amount determined
pursuant to the provisions of paragraph (f) of this Section 9. The Corporation
or the person formed by such consolidation or resulting from such merger or
which acquired such assets or which acquired the Corporation's shares, as the
case may be, shall make provisions in its certificate or articles of
incorporation or other constituent document to establish such right. Such
certificate or articles of incorporation or other constituent document shall
provide for adjustments which, for events subsequent to the effective date of
such certificate or articles of incorporation or other constituent document,
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Section 9. The above provisions shall similarly apply to successive
transactions of the type described in this paragraph.
(e) Prior Notice of Certain Events. In case at any time:
(i) the Corporation shall (1) declare any dividend or any other
distribution on its Common Stock (including, without any limitation, any
distribution described in paragraph (iv) or (vi) of Section 9(c) hereof),
other than (A) a dividend payable solely in shares of Common Stock or (B)
any regular quarterly dividend payable solely in cash for which no
adjustment to the Conversion Price is required by Section 9(c)(vi) hereof
or (2) declare or authorize a redemption or repurchase of any of the then
outstanding shares of Common Stock or any other Junior Stock; or
(ii) the Corporation shall authorize the granting to all holders of
Common Stock of rights or warrants to subscribe for or purchase any shares
of stock of any class or of any other rights or warrants; or
(iii) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock), or of
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<PAGE>
any consolidation or merger to which the Corporation is a party and for
which approval of any shareholders of the Corporation shall be required, or
of the sale or transfer of all or substantially all of the assets of the
Corporation or of any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or other property; or
(iv) of the voluntary or involuntary liquidation, dissolution or
winding up of the Corporation;
then, in any such case, the Corporation shall cause to be mailed to the holders
of record of the Convertible Preferred Stock, at their last addresses as they
shall appear upon the stock transfer books of the Corporation, at least twenty
(20) days prior to the applicable record date or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution, redemption, repurchase or granting
of rights or warrants or, if a record is not to be taken, the date as of which
the holders of Common Stock of record to be entitled to such dividend,
distribution, redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger, sale, transfer,
share exchange, liquidation, dissolution or winding up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, liquidation, dissolution
or winding up. No failure to mail such notice or any defect therein or in the
mailing thereof shall affect the validity of the corporate action required to be
specified in such notice.
(f) Adjustments in Case of Fundamental Changes. Notwithstanding any other
provision in this Section 9 to the contrary, if any Fundamental Change (as
defined in paragraph (g) of this Section 9) occurs, then the Conversion Price in
effect will be adjusted immediately after such Fundamental Change (which for
purposes of such adjustment shall be deemed to occur on the earlier of the
occurrence of such Fundamental Change and the date, if any, fixed for
determination of shareholders entitled to receive the cash, securities, property
or other assets distributable in such Fundamental Change to holders of the
Common Stock) as described below:
(i) In the case of a Non-Stock Fundamental Change, the Conversion
Price immediately following such Non-Stock Fundamental Change shall be the
lower of (A) the Conversion Price in effect immediately prior to such Non-
Stock Fundamental Change, but after giving effect to any other prior
adjustments effected pursuant to this Section 9, and (B) the product of (1)
the greater of the Applicable Price (as defined in paragraph (g) of this
Section 9) or the then
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applicable Reference Market Price (as defined in paragraph (g) of this
Section 9) and (2) a fraction, the numerator of which is $1,000 and the
denominator of which is (x) the Redemption Price applicable on the date of
such Non-Stock Fundamental Change (or, for the period commencing on October
2, 1995 and ending on September 30, 1996 and the 12-month periods
commencing October 1, 1996 and 1997, the product of 105.750%, 105.175% and
104.600%, respectively, times $1,000), plus (y) an amount equal to full
cumulative dividends thereon up to but excluding the date of such Non-Stock
Fundamental Change.
(ii) In the case of a Common Stock Fundamental Change, the Conversion
Price immediately following such Common Stock Fundamental Change shall be
the Conversion Price in effect immediately prior to such Common Stock
Fundamental Change, but after giving effect to any other prior adjustments
effected pursuant to this Section 9, multiplied by a fraction, the
numerator of which is the Purchaser Stock Price (as defined in paragraph
(g) of this Section 9) and the denominator of which is the Applicable
Price; provided, however, that in the event of a Common Stock Fundamental
Change in which (A) 100% of the value of the consideration received by a
holder of Common Stock is common stock of the successor, acquiror or other
third party (and cash, if any, paid with respect to any fractional
interests in such common stock resulting from such Common Stock Fundamental
Change) and (B) all of the Common Stock shall have been exchanged for,
converted into or acquired for such common stock (and any cash paid with
respect to fractional interests) of the successor, acquiror or other third
party, the Conversion Price immediately following such Common Stock
Fundamental Change shall be the Conversion Price in effect immediately
prior to such Common Stock Fundamental Change multiplied by a fraction, the
numerator of which is one and the denominator of which is the number of
shares of common stock of the successor, acquiror, or other third party
received by a holder of one share of Common Stock as a result of such
Common Stock Fundamental Change.
(g) Definitions. The following definitions shall apply to terms used in
this Section 9:
(i) "Applicable Price" shall mean (1) in the event of a Non-Stock
Fundamental Change in which the holders of the Common Stock receive only
cash, the amount of cash received by the holder of one share of Common
Stock and (2) in the event of any other Non-Stock Fundamental Change or any
Common Stock Fundamental Change, the Current Market Price (as defined in
Section 13 hereof) on the date
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fixed for the determination of the holders of Common Stock entitled to
receive cash, securities, property or other assets in connection with such
Non-Stock Fundamental Change or Common Stock Fundamental Change, or if
there is no such date, as of the date upon which the holders of the Common
Stock shall have the right to receive such cash, securities, property or
other assets.
(ii) "Common Stock Fundamental Change" shall mean any Fundamental
Change in which more than 50% by value (as determined in good faith by the
Board of Directors) of the consideration received by the holders of Common
Stock pursuant to such transaction consists of common stock that, for the
ten consecutive Trading Days immediately prior to such Fundamental Change,
has been admitted for listing or admitted for listing subject to notice of
issuance on a national securities exchange or quoted on the Nasdaq National
Market of The Nasdaq Stock Market; provided, however, that a Fundamental
Change shall not be a Common Stock Fundamental Change unless either (1) the
Corporation continues to exist after the occurrence of such Fundamental
Change and the outstanding shares of Convertible Preferred Stock continue
to exist as outstanding shares of Convertible Preferred Stock, or (2) not
later than the occurrence of such Fundamental Change, the outstanding
shares of Convertible Preferred Stock are converted into or exchanged for
shares of convertible preferred stock of a corporation succeeding directly
or indirectly to the business of the Corporation, which convertible
preferred stock has powers, preferences and relative, participating,
optional or other rights, and qualifications, limitations and restrictions,
substantially similar to those of the Convertible Preferred Stock.
(iii) "Fundamental Change" shall mean the occurrence of any
transaction or event or series of transactions or events pursuant to which
all or substantially all of the Common Stock shall be exchanged for,
converted into, acquired for or constitute solely the right to receive
cash, securities, property or other assets (whether by means of an exchange
offer, liquidation, tender offer, consolidation, merger, combination,
reclassification, recapitalization or otherwise); provided, however, in the
case of any such series of transactions or events, for purposes of
adjustments of the Conversion Price, such Fundamental Change shall be
deemed to have occurred when substantially all of the Common Stock of the
Corporation shall be exchanged for, converted into, or acquired for or
constitute solely the right to receive cash, securities, property or other
assets, but the adjustment shall be based upon the consideration which the
holders of Common Stock received in such transactions or events as a result
of which more than 50% of
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the Common Stock of the Corporation shall have been exchanged for,
converted into, or acquired for or constitute solely the right to receive
cash, securities, property or other assets; provided, further, that such
term does not include (1) any such transaction or event in which the
Corporation and/or any of its subsidiaries are the issuers of all the cash,
securities, property or other assets exchanged, acquired or otherwise
issued in such transaction or event, or (2) any such transaction or event
in which the holders of Common Stock receive securities of an issuer other
than the Corporation if, immediately following such transaction or event,
such holders hold a majority of the securities having the power to vote
normally in the election of directors of such other issuer outstanding
immediately following such transaction or other event.
(iv) "Non-Stock Fundamental Change" shall mean any Fundamental Change
other than a Common Stock Fundamental Change.
(v) "Purchaser Stock Price" shall mean, with respect to any Common
Stock Fundamental Change, the average of the Closing Prices (as defined in
Section 13 hereof) for one share of the common stock received in such
Common Stock Fundamental Change during the ten Trading Days immediately
prior to the date fixed for the determination of the holders of Common
Stock entitled to receive such common stock, or if there is no such date,
the date upon which the holders of the Common Stock shall have the right to
receive such common stock.
(vi) "Reference Market Price" shall initially mean $32.083 (which is
an amount equal to 66-2/3% of the Closing Price of the Common Stock on
September 28, 1995), and in the event of any adjustment to the Conversion
Price other than as a result of a Fundamental Change, the Reference Market
Price shall also be adjusted so that the ratio of the Reference Market
Price to the Conversion Price after giving effect to any such adjustment
shall always be the same as the ratio of the initial Reference Market Price
to the initial Conversion Price set forth in Section 9(a) hereof.
(h) Common Stock Definition. For the purpose of this Section 9, the term
"Common Stock" shall include any stock of any class of the Corporation which has
no preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation and which is not subject to redemption by the Corporation. However,
shares issuable on conversion of shares of Convertible Preferred Stock shall
include only shares of the class designated as Common Stock of the Corporation
as of October 2, 1995, or shares of any class or classes resulting from any
reclassification or
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reclassifications thereof and which have no preference in respect of dividends
or of amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and which are not subject to
redemption by the Corporation; provided that if at any time there shall be more
than one such resulting class, the shares of each such class then so issuable
shall be substantially in the proportion which the total number of shares of
such class resulting from all such reclassifications bears to the total number
of shares of all such classes resulting from all such reclassifications.
(i) Reservation of Shares, etc. The Corporation shall at all times reserve
and keep available, free from preemptive rights, out of its authorized but
unissued Common Stock, solely for the purpose of effecting the conversion of
shares of Convertible Preferred Stock, the full number of shares of Common Stock
then deliverable upon the conversion of all shares of Convertible Preferred
Stock then outstanding. If the Corporation shall issue any securities or make
any change in its capital structure which would change the number of shares of
Common Stock into which each share of the Convertible Preferred Stock shall be
convertible as herein provided, the Corporation shall at the same time also make
proper provision so that thereafter there shall be a sufficient number of shares
of Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Convertible Preferred Stock on the new basis.
If any shares of Common Stock required to be reserved for purposes of
conversion of the Convertible Preferred Stock hereunder require registration
with or approval of any governmental authority under any Federal or State law
before such shares may be issued upon conversion, the Corporation will in good
faith and as expeditiously as possible endeavor to cause such shares to be duly
registered or approved, as the case may be. If the Common Stock is listed on
the New York Stock Exchange or any other national securities exchange, the
Corporation will, in good faith and as expeditiously as possible, endeavor, if
permitted by the rules of such exchange, to list and keep listed on such
exchange, upon official notice of issuance, all shares of Common Stock issuable
upon conversion of the Convertible Preferred Stock.
(j) No Fractional Shares. No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon conversion of Convertible
Preferred Stock. Instead of any fraction of a share which would otherwise be
issuable upon conversion of any shares of Convertible Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction of the Closing Price (as defined in Section 13
hereof) of a share of Common Stock (or, if there is no such Closing Price, the
fair market value of a share of Common Stock, as determined in good faith by the
Board of Directors or in any manner prescribed by the Board of Directors) at the
close of business on the Trading Day immediately preceding the date of
conversion.
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(k) Transfer Taxes, etc. The Corporation will pay any and all taxes that
may be payable in respect of the issue or delivery of shares of Common Stock on
conversion of shares of Convertible Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of Convertible
Preferred Stock so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax, or has established to the satisfaction
of the Corporation that such tax has been paid.
10. EXCHANGES. Certificates representing shares of Convertible Preferred
Stock shall be exchangeable, at the option of the holder, for a new certificate
or certificates of the same or different denominations representing in the
aggregate the same number of shares of Convertible Preferred Stock.
11. OUTSTANDING SHARES. For purposes of this Certificate of Designations,
all shares of Convertible Preferred Stock shall be deemed outstanding except for
(a) shares of Convertible Preferred Stock held of record or beneficially by the
Corporation or any subsidiary of the Corporation; (b) from the date of surrender
of certificates representing Convertible Preferred Stock for conversion pursuant
to Section 9 hereof, all shares of Convertible Preferred Stock which have been
converted into Common Stock or other securities or property pursuant to Section
9 hereof; and (c) from the date fixed for redemption pursuant to Section 5 or 6
hereof, all shares of Convertible Preferred Stock which have been called for
redemption, provided that funds necessary for such redemption are available
therefor and have been irrevocably deposited or set aside for such purpose and
all other steps necessary to effect such redemption shall have been taken.
12. STATUS OF CONVERTIBLE PREFERRED STOCK UPON RETIREMENT. Shares of
Convertible Preferred Stock which are acquired or redeemed by the Corporation or
converted pursuant to Section 9 shall return to the status of authorized and
unissued shares of Preferred Stock of the Corporation, without designation as to
series. Upon the acquisition or redemption by the Corporation or conversion
pursuant to Section 9 of all outstanding shares of Convertible Preferred Stock,
all provisions of this Certificate of Designations shall cease to be of further
effect. Upon the occurrence of such event, the Board of Directors of the
Corporation shall have the power, pursuant to Minnesota Statutes, Section
302A.135, Subd. 5 or any successor provision and without shareholder action, to
cause restated articles of incorporation of the Corporation or other appropriate
documents to be prepared and filed with the Secretary of State of the State of
Minnesota which reflect such removal of all provisions relating to the
Convertible Preferred Stock and/or the cancellation of this Certificate of
Designations.
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<PAGE>
13. DEFINITIONS. For purposes of this Certificate of Designations, the
following terms shall have the meanings indicated:
(a) "Board of Directors" shall mean the board of directors of the
Corporation or any committee authorized by such board of directors to perform
any of its responsibilities with respect to the Convertible Preferred Stock.
(b) "Business Day" shall mean any day other than a Saturday, Sunday, or a
day on which commercial banks in the State of New York or the State of Minnesota
are authorized or required by law or executive order to close or a day which is
or is declared a national or New York or Minnesota state holiday;
(c) "Closing Price" with respect to any securities on any day shall mean
the closing sale price regular way on such day or, in case no such sale takes
place on such day, the average of the reported closing bid and asked prices,
regular way, in each case on the New York Stock Exchange, or, if such security
is not listed or admitted to trading on such Exchange, on the principal national
securities exchange or quotation system on which such security is quoted or
listed or admitted to trading, or, if not quoted or listed or admitted to
trading on any national securities exchange or quotation system, the average of
the closing bid and asked prices of such security on the over-the-counter market
on the day in question as reported by the National Quotation Bureau
Incorporated, or a similarly generally accepted reporting service, or if not so
available, in such manner as furnished by any New York Stock Exchange member
firm selected from time to time by the Board of Directors of the Corporation for
that purpose or a price determined in good faith by the Board.
(d) "Current Market Price" shall mean, for purposes of any computation
under Section 9(c)(vii), the average of the daily Closing Prices per share of
Common Stock on the day in question, and for purposes of any other computation
hereunder, the average of the daily Closing Prices per share of Common Stock for
the ten consecutive Trading Days immediately prior to the date in question.
(e) "fair market value" shall mean the amount which a willing buyer would
pay a willing seller in an arm's length transaction.
(f) "full cumulative dividends" shall mean, with respect to the Convertible
Preferred Stock, or any other capital stock of the Corporation, as of any date
the amount of accumulated, accrued and unpaid dividends payable on such shares
of Convertible Preferred Stock, or other capital stock, as the case may be,
whether or not earned or declared and whether or not there shall be funds
legally available for the payment thereof.
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(g) "record date" shall mean, with respect to any dividend, distribution or
other transaction or event in which the holders of Common Stock have the right
to receive any cash, securities or other property or in which the Common Stock
(or other applicable security) is exchanged or converted into any combination of
cash, securities or other property, the date fixed for determination of
shareholders entitled to receive such cash, securities or other property
(whether such date is fixed by the Board of Directors or by statute, contract or
otherwise), and with respect to any subdivision or combination of the Common
Stock, the effective date of such subdivision or combination.
(h) "Trading Day" shall mean (x) if the applicable security is listed or
admitted for trading on the New York Stock Exchange or another national
securities exchange, a day on which the New York Stock Exchange or another
national securities exchange is open for business or (y) if the applicable
security is quoted on the Nasdaq National Market of The Nasdaq Stock Market, a
day on which trades may be made on such Nasdaq National Market or (z) if the
applicable security is not so listed, admitted for trading or quoted, any day
other than a Saturday or Sunday or a day on which banking institutions in the
State of New York or the State of Minnesota are authorized or obligated by law
or executive order to close.
* * * * *
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IN WITNESS WHEREOF, United HealthCare Corporation has caused this
certificate to be signed by William W. McGuire, its President, this 2nd day of
October, 1995.
UNITED HEALTHCARE CORPORATION
By: /s/ William W. McGuire
-------------------------------
Name: William W. McGuire, M.D.
Title: President
Attest:
/s/ Brigid M. Spicola
- ------------------------------
Name: Brigid M. Spicola
Title: Assistant Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.B
<SEQUENCE>3
<DESCRIPTION>EMPLOYMENT AGREEMENT WILLIAM W. MCGUIRE
<TEXT>
<PAGE>
Exhibit 10(b)
EMPLOYMENT AGREEMENT
This Agreement, effective as of January 1, 1996, is made by and between
William W. McGuire, M.D. ("Executive") and United HealthCare Corporation
("United") for the purpose of setting forth the terms and conditions of
Executive's employment by United and to protect United's knowledge, expertise,
customer and provider relationships, and the confidential information United has
developed about its customers, providers, products, operations, and services.
As of the Effective Date, this Agreement supersedes any prior similar agreement
or agreements between Executive and United or any of United's subsidiaries or
affiliates.
1. Employment. United hereby employs Executive to serve as its Chief
Executive Officer and President. Executive shall, during the term of his
employment hereunder and subject to the supervision and control of the Board of
Directors of United (the "Board of Directors"), perform such duties, have such
power, and exercise such supervision and control with regard to the business of
United as are commonly associated with or appropriate to the office of President
and Chief Executive Officer, including, but not limited to, the day-to-day
general management, supervision and control of all businesses and operations of
United and its subsidiaries. In furtherance thereof, Executive shall report to
the Board of Directors, and all other senior executives of United and its
subsidiaries shall report to Executive or as Executive or the Board of Directors
may direct. In addition, Executive shall perform such other duties of a senior
executive nature as the Board of Directors and Executive from time to time
determine to be mutually acceptable. Executive accepts such employment on the
terms and conditions set forth in this Agreement and, except as specifically
superseded by this Agreement, subject to all of United's policies and
procedures, as changed from time-to-time, in regard to its employees.
2. Compensation.
(a) Base Salary. Executive shall initially be paid a minimum base
annual salary in the amount of $1,100,000 payable bi-weekly. From time-to-
time the Board of Directors shall review Executive's performance and shall
consider increasing Executive's compensation. Effective on each succeeding
January 1 during the term of this Agreement, Executive's then current
minimum base annual salary shall be increased by a minimum of $100,000.
The elements of Executive's overall compensation may be changed from time-
to-time as changes are made in United's overall compensation structure,
provided that no change may be inconsistent herewith.
(b) Annual Stock Options. Executive shall be eligible to receive each
year during the Initial Term of this Agreement and each year during any
<PAGE>
extension of the Initial Term in accordance with this Agreement,
nonqualified options to purchase a minimum of 250,000 shares of United's
Common Stock (the "Options"). The Options shall be granted semi-annually
or at such time or times as are mutually acceptable to Executive and the
Company. The exercise price for the Options shall initially be the fair
market value of shares of United Common Stock at the time of the grant as
determined by the Board of Directors, subject to certain adjustments
customary for options of this type and consistent with United's outstanding
options. Each Option shall vest over a period of four years at the rate of
25 percent per year on the anniversary of the grant of such option in
accordance with the terms and conditions of United's Amended and Restated
1991 Stock and Incentive Plan, or any substitute or similar successor plan
(the "Stock Plan"), and shall be subject to the additional vesting
provisions set for in Section 3 below. United agrees that it will take all
steps which are necessary to amend the Stock Plan or the Options, as
appropriate, to permit the Executive to transfer any Options to a trust for
the benefit of the Executive's immediate family. Notwithstanding the
foregoing provisions of this Section 2(b), the Executive shall be eligible
to receive additional awards of nonqualified options, as determined by the
Board of Directors, in accordance with the normal practices of United for
successful performance.
(c) Bonus and Stock Plans. Executive shall be eligible to participate
in United's incentive bonus and other bonus plans and shall be eligible to
receive grants or awards pursuant to United's stock option and incentive
plans, all in accordance with the terms and conditions of those plans and
on a basis consistent with that customarily provided for senior officers at
the highest level of United. Each year during the term of this Agreement,
Executive shall be eligible for an annual payment under United's Management
Incentive Compensation Plan which shall be equal to at least 100 percent of
his then-current minimum base annual salary.
(d) Employee Benefits. Executive shall be eligible to participate in
United's other employee benefit plans, including without limitation, any
life, health, dental, short-term and long-term disability insurance
coverage and any retirement or savings plans, in accordance with the terms
and conditions of those plans and on a basis consistent with that
customarily provided for senior officers at the highest level of United.
Executive shall also receive other benefits consistent with his office and
position, which benefits shall include, without limitation, an allowance to
be determined by the Board of Directors, and acceptable to Executive, for
security considerations (such as home and personal security) and for tax
and financial planning expenses. Executive may utilize any United aircraft
for Executive's personal business up to such amount as represents an income
tax benefit to the Executive of not more than 10% of Executive's base
salary pursuant to Section 2(a). Executive
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shall be responsible for the payment of all income taxes payable by
Executive as a result of the personal use of United aircraft.
United shall provide Executive a supplemental retirement benefit in an
amount equal to the following percentages of his final average highest
three-year cash compensation: upon retirement from the date of this
Agreement until Executive reaches the age of forty-nine, 37.5% and
thereafter as follows:
<TABLE>
<CAPTION>
Age Percentage
<S> <C>
49 40.0
50 42.5
51 45.0
52 47.5
53 50.0
54 52.5
55 55.0
56 56.0
57 57.0
58 58.0
59 59.0
60 60.0
61 61.0
62 62.0
63 63.0
64 64.0
65 65.0
</TABLE>
Executive will be 100 percent vested in such retirement benefit as of
January 1, 1996. The supplemental retirement benefit shall be paid as a
joint and survivor annuity, and Executive's spouse shall be entitled to a
benefit, at no cost to Executive, equal to 50 percent of the benefit
payable to Executive at retirement. Provided, however, if Executive dies
while actively employed, his spouse shall receive a survivor annuity as if
Executive had retired the day before his death. Executive shall have the
option to convert such annuity to a lump sum payment or such other
actuarial equivalent optional form of payment if Executive makes an
irrevocable election (i) at least one year prior to retirement or (ii) if
less than one year prior to retirement if such election is agreeable to
United in its sole discretion. The actuarial equivalent value of any
optional form of benefit shall be determined on the basis of an interest
rate of 4 percent per annum and such other actuarial assumptions as are
reasonable and agreeable to the Executive and United. The supplemental
retirement benefit shall be payable as of the later of (i) the first day of
the month following Executive's retirement, or (ii) the first day of the
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<PAGE>
month after Executive reaches age fifty if Executive retires prior to
reaching age fifty.
United agrees that during the first year of the Initial Term of the
Agreement, it will consider adoption of a long term incentive performance
program which is customary for companies similar to United and which will
cover the Executive and other senior executives of United as designated by
the Board of Directors.
(e) Vacation and Illness. Executive shall be entitled to paid
vacation and sick leave benefits each year in accordance with United's
then-current policies and on a basis consistent with that customarily
provided for senior officers at the highest level of United.
(f) Additional Insurance. In addition to any other insurance to which
Executive is entitled under Section 2(d), United shall provide and pay for,
and Executive shall own, a term life insurance policy on Executive in an
amount equal to three times Executive's current base salary, which policy
shall include an option for Executive to purchase, at Executive's expense,
additional term life insurance on Executive in an amount equal to two times
Executive's current base salary, and an individual supplemental long term
"own occupation" disability insurance policy, which may be self-insured by
United, providing for monthly disability income payments to Executive equal
to his then-applicable monthly pro rata annual base salary reduced by any
monthly payments to Executive under other individual or group disability
income plans or policies provided and paid for by United. The life and
long term disability policies called for by this subsection shall be
maintained throughout the term of this Agreement and during the period for
which payments are being made under Section 3(d) and Section 3(g).
Executive shall be deemed disabled for purposes of such policy if by reason
of accident, illness, or injury he is unable to perform any of the
principal duties, responsibilities, or functions of his employment for a
period of thirty consecutive days (the "qualification period"). The
monthly disability income payments to Executive shall begin immediately
after the running of the qualification period and shall continue throughout
the period of Executive's disability for the greater of five years or until
Executive reaches age sixty-five. United shall compensate Executive on an
after-tax basis for any additional income taxes payable by Executive as a
result of United's payment of premiums with respect to the insurance
policies described in this subsection.
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<PAGE>
3. Term and Termination.
(a) Term. The term of this Agreement shall begin on January 1, 1996
(the "Effective Date") and shall continue in full force and effect until
the third anniversary of the Effective Date (the "Initial Term"), unless
and until terminated as set forth below. The term of this Agreement shall
be automatically extended for an additional period of one year at the end
of each year of the Initial Term and of each year thereafter, unless and
until terminated as set forth below, unless either party shall have
delivered a written notice to the other party of its intention not to renew
this Agreement at least 120 days prior to December 31 of any such year.
(b) Termination of Agreement.
(i) This Agreement may be terminated at any time by the mutual
written agreement of the parties.
(ii) This Agreement and Executive's employment may be terminated
by United for any reason and at any time upon thirty days' prior
written notice to Executive.
(iii) Executive may resign his employment and terminate this
Agreement by thirty days' prior written notice to United.
(iv) This Agreement shall automatically terminate upon the death
or permanent disability of Executive.
(v) This Agreement may be terminated by United for Cause (as
defined below) immediately upon written notice to Executive.
(vi) This Agreement and Executive's employment may be terminated
by Executive for Good Reason (as defined below) upon thirty days'
prior written notice from Executive to United specifying such Good
Reason, provided that such notice is given within 120 days after the
initial occurrence of such Good Reason and that such Good Reason
continues to exist at the end of the thirty-day notice period.
(c) Termination of Employment by United for Cause. If Executive's
employment with United is terminated by United under Section 3(b)(v) for
Cause prior to the end of the term of this Agreement then:
(i) All cash compensation payable to Executive shall cease.
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<PAGE>
(ii) Executive's participation in the health care coverage, life
insurance, or other employee benefit plans of United shall terminate
in accordance with applicable law and those plans' terms and
conditions. Executive shall receive any benefits payable under
Section 2(d) of this Agreement, including the supplemental retirement
benefit, within sixty (60) days of such termination.
(iii) Any stock options or grants awarded Executive under any
of United's stock option or grant or similar stock plans shall expire
and cease to be exercisable at the end of ninety days from the
effective date of such termination.
(d) Termination of Employment by United without Cause or by Executive
for Good Reason. If Executive's employment with United is terminated by
United under Section 3(b)(ii) without Cause prior to the end of the term of
this Agreement or Executive's employment with United is terminated by
Executive under Section 3(b)(vi) prior to the end of the term of this
Agreement then:
(i) For a period of thirty-six months following the effective
date of the termination of employment, Executive shall receive
biweekly payments equal to 1/26 of the greater of (A) the minimum base
annual salary of $1,100,000 plus an annual cash bonus equaling the
same percentage of such minimum base annual salary as the most recent
annual cash bonus received by Executive bore to Executive's then-
effective minimum base annual salary, or (B) Executive's then-current
annualized cash compensation, which shall mean Executive's then-
current actual annualized base salary plus the most recent annual cash
bonus actually received by Executive, at the time of termination.
Provided, however, in the event of any anticipated tax law change
during the payment period that would increase Executive's taxes on
such income, Executive may elect to take and receive his remaining
compensation under this Section 3(d)(i), discounted at 4 percent per
annum to the present value thereof, in a single lump sum payable
within thirty days after written request therefor setting forth such
anticipated tax law change.
(ii) Executive shall be entitled to continue participation in the
health care coverage, life insurance, or other employee benefit plans
of United including, without limitation, the Supplemental Retirement
Plan established under Section 2(d) of this Agreement, according to
and if permitted by applicable law and those plans' terms and
conditions. United shall for a period for thirty-six months following
the effective date of the termination (A) continue to pay disability
coverage
6
<PAGE>
premiums or provide disability coverage on a self-funded basis for
Executive and his dependents with United and Executive sharing the
costs associated with such coverage as if Executive were still
actively employed by United, and (B) maintain and pay the premiums
with respect to the additional insurance policies provided for in
Section 2(f). Executive shall continue to receive health care coverage
as provided in Section 3(i) of this Agreement. If Executive cannot be
covered under any of United's group plans or policies, United shall
reimburse Executive for his full cost of obtaining comparable
alternative group or individual coverage elsewhere, less any
contribution that Executive would have been required to make under
United's group plans or policies. Executive shall receive any benefits
payable under Section 2(d) of this Agreement, including the
supplemental retirement benefit, within sixty (60) days of such
termination.
(iii) Any vesting requirements or other conditions that an
employee or participant complete a longer period of service or
employment as shall otherwise theretofore pertain to any of
Executive's rights or benefits under the Options or any bonus,
incentive compensation, deferred compensation, other stock option,
stock grant, restricted stock, or similar plans, from time to time
implemented by United or its successor or assign, shall automatically
terminate and be of no further force or effect. All such rights and
benefits shall continue to be deemed to be fully vested and, as the
case may be, subject to accrual, payment or exercise in full, or
transfer (unless expressly nontransferable) without regard to such
restrictions. The Options and any other stock options or grants
awarded Executive under any of United's stock option or grant or
similar stock plans shall continue to be exercisable in accordance
with their terms for a period of thirty-six months after termination
of Executive's employment.
(iv) United shall pay a reasonable amount for outplacement and
job search services for Executive by a firm selected by United.
(v) Provided, however, in the event the payments under this
Agreement are "parachute payments" within the meaning of and the
regulations, rulings and procedures under Section 280G and 4999 of the
Internal Revenue Code of 1986, as the same from time to time may be
amended (the "Code"), or other related or successor sections and
provisions of the Code at any time applicable thereto, and become
subject to excise taxes under Section 4999 of the Code, United will
pay Executive the amount of such excise taxes plus all federal, state,
and local taxes applicable to United's payment of such excise taxes,
including any additional excise taxes due under Section 4999 of the
7
<PAGE>
Code with respect to payments made pursuant to this Section 3(d)(v).
All determinations required by this Section 3(d), upon termination of
Executive's employment and at United's sole expense, shall forthwith
be made by United's regularly engaged independent public accounting
firm. In determining the amount of excise tax which would be payable
by the Executive pursuant to Section 4999 of the Code, such accounting
firm shall take into consideration and apply all non-includible,
excludable and exempt amounts of compensation in accordance with
Section 280G of the Code. The parties shall cooperate fully by
promptly providing such accounting firm all information required to
complete such determinations. Such determinations shall be set forth
in a written statement and analysis thereof issued by such accounting
firm which shall be promptly furnished to and shall be binding upon
the parties.
(e) Termination of Employment by Executive without Good Reason. If
Executive's employment with United is terminated by Executive under Section
3(b)(iii) without Good Reason prior to the end of the term of this
Agreement then:
(i) For the period following the effective date of the
termination of employment to the end of the Initial Term of this
Agreement or the end of any extension of such term (the "Remaining
Term"), Executive shall receive a severance benefit payable in
accordance with United's normal payroll practices equal to the greater
of (A) the minimum base annual salary of $1,100,000 plus an annual
cash bonus equaling the same percentage of such minimum base annual
salary as the most recent annual cash bonus received by Executive bore
to Executive's then-effective minimum base annual salary, or (B)
Executive's then-current annualized cash compensation, which shall
mean Executive's then-current actual annualized base salary plus the
most recent annual cash bonus actually received by Executive, at the
time of termination, in either case pro-rated over the Remaining Term.
(ii) Executive's participation in the life insurance or other
employee benefit plans of United shall terminate in accordance with
applicable law and those plans' terms and conditions. Executive shall
continue to receive health care coverage as provided in Section 3(i)
of this Agreement. Executive shall receive any benefits payable under
Section 2(d) of this Agreement, including the supplemental retirement
benefit, within sixty (60) days of such termination.
8
<PAGE>
(iii) Any stock options or grants awarded Executive under any of
United's stock option or grant or similar stock plans shall cease to
vest following the effective date of termination and, to the extent
vested, shall be exercisable during the thirty-six-month period
following the effective date of termination.
(f) Termination of Employment in the Event of Death. If Executive's
employment with United is terminated under Section 3(b)(iv) due to the
death of Executive prior to the end of the term of this Agreement then:
(i) For each year of the Remaining Term, Executive's
beneficiaries shall receive a benefit payable in accordance with
United's normal payroll practices equal to the greater of (A) the
minimum base annual salary of $1,100,000 plus an annual cash bonus
equaling the same percentage of such minimum base annual salary as the
most recent annual cash bonus received by Executive bore to
Executive's then-effective minimum base annual salary, or (B)
Executive's then-current annualized cash compensation, which shall
mean Executive's then-current actual annualized base salary plus the
most recent annual cash bonus actually received by Executive, at the
time of termination.
(ii) Executive's beneficiaries shall be entitled to receive all
proceeds from the life insurance provided in accordance with this
Agreement and any benefit payable under Section 2(d) of this
Agreement, including the supplemental retirement benefit. Executive's
spouse and children shall continue to receive health care coverage as
provided in Section 3(i) of this Agreement.
(iii) Any stock options or grants awarded Executive under any of
United's stock option or grant or similar stock plans shall vest
immediately upon Executive's death and shall be exercisable by
Executive's beneficiaries during the thirty-six-month period following
the effective date of termination.
(g) Termination of Employment in the Event of Disability. If
Executive's employment with United is terminated under Section 3(b)(iv) due
to the permanent disability of Executive prior to the end of the term of
this Agreement then:
(i) For each year of the Remaining Term, Executive shall receive
a benefit payable in accordance with United's normal payroll practices
equal to the greater of (A) the minimum base annual salary of
$1,100,000 plus an annual cash bonus equaling the same percentage of
9
<PAGE>
such minimum base annual salary as the most recent annual cash bonus
received by Executive bore to Executive's then-effective minimum base
annual salary, or (B) Executive's then-current annualized cash
compensation, which shall mean Executive's then-current actual
annualized base salary plus the most recent annual cash bonus actually
received by Executive, at the time of termination.
(ii) Executive shall be entitled to receive health care coverage
in accordance with Section 3(i) of this Agreement and disability
benefits provided under any other employee benefit plans or
compensation policies of United to executive officers of similar rank
in accordance with applicable law and those plans' terms and
conditions. Executive shall receive any benefits payable under
Section 2(d) of this Agreement, including the supplemental retirement
benefit, within sixty (60) days of such termination.
(iii) Any stock options or grants awarded Executive under any of
United's stock option or grant or similar stock plans shall vest
immediately and shall be exercisable during the thirty-six-month
period following the effective date of termination.
(h) Definitions. For purposes of this Agreement:
(i) "Cause" means (A) the willful and continued failure by
Executive substantially to perform his duties hereunder (other than
any such failure resulting from his disability or from termination by
Executive for Good Reason), after a written demand for substantial
performance is delivered to Executive that specifically identifies the
manner in which United believes that Executive has not substantially
performed his duties, and Executive has failed to resume substantial
performance of his duties on a continuous basis; (B) a material
violation of United's Code of Conduct; (C) the conviction of any
criminal act or act of fraud or dishonesty by Executive; or (D) any
other willful and material breach of this Agreement by Executive;
provided that in each case described in clauses (A) through (D) the
Executive has been given written notice of the alleged basis for Cause
and Executive has not remedied the alleged Cause within thirty days
after receipt of such notice. For purposes of this paragraph, no act,
or failure to act, on Executive's part will be deemed "willful" unless
done, or omitted to be done, by Executive not in good faith and
without reasonable belief that his action or omission was in the best
interest of United.
(ii) "Good Reason" means (A) a material breach of this Agreement
by United, (B) United's elimination of current cash
10
<PAGE>
incentive compensation programs without replacing those programs with
similar programs, (C) United's failure to make payments to Executive
under United's standard cash incentive compensation programs on a
basis consistent with those given to other senior executives of
United, (D) United's requirement, without Executive's prior consent,
that Executive relocate or perform a significant portion of his duties
outside of a twenty-five-mile radius from United's principal executive
offices in Minnetonka, Minnesota, or (E) a material adverse change in
Executive's responsibilities or position (including any position on
the Board of Directors) or the duties, resources, personnel, reporting
responsibilities, or support assigned to Executive without his prior
consent.
(i) Health Care Continuation Coverage. Notwithstanding any other
provision of this Agreement to the contrary, if Executive is terminated
other than for Cause, United shall continue to provide, at no cost to
Executive, health care coverage for Executive and his wife for the
remainder of their lives and for his children until they attain age 25, as
in effect on the date of termination. If Executive, his wife, or his
children cannot be covered under any of United's group plans or policies,
United shall reimburse Executive for his full cost of obtaining comparable
alternative group or individual coverage elsewhere, less any contribution
that Executive would have been required to make under United's group health
plans or policies.
4. Property Rights, Confidentiality, Non-Solicit and Non-Compete Provisions.
(a) United's Property.
(i) Executive shall promptly disclose to United in writing all
inventions, discoveries, and works of authorship, whether or not patentable
or copyrightable, which are conceived, made, discovered, written, or
created by Executive alone or jointly with another person, group, or
entity, whether during the normal hours of employment at United or on
Executive's own time, during the term of this Agreement. Executive assigns
all rights to all such inventions and works of authorship to United.
Executive shall give United any of the assistance it reasonably requires in
order for United to perfect, protect and use its rights to inventions and
works of authorship.
This provision shall not apply to an invention, discovery, or work of
authorship for which no equipment, supplies, facility, or trade secret
information of United was used and which was developed entirely on the
Executive's own time and which does not relate to the business of United,
to United's anticipated research or development, or does not result from
any work performed by the Executive for United.
11
<PAGE>
(ii) Executive shall not remove any records, documents, or any other
tangible items (excluding Executive's personal property) from the premises
of United in either original or duplicate form, except as is needed in the
ordinary course of conducting business for United.
(iii) Executive shall immediately deliver to United, upon termination
of employment with United, or at any other time upon United's request, any
property, records, documents, and other tangible items (excluding
Executive's personal property) in Executive's possession or control,
including data incorporated in word processing, computer, and other data
storage media, and all copies of such records, documents, and information,
including all Confidential Information, as defined below.
(b) Confidential Information. During the course of his employment
Executive will develop, become aware of, and accumulate expertise,
knowledge, and information regarding United's organization, strategies,
business, and operations and United's past, current, or potential
customers, providers, and suppliers. United considers such expertise,
knowledge, and information to be valuable, confidential, and proprietary,
and it shall be considered Confidential Information for purposes of this
Agreement. During this Agreement and at all times thereafter Executive
shall not use such Confidential Information or disclose it to other persons
or entities except as is necessary for the performance of Executive's
duties for United or as has been expressly permitted in writing by United.
Provided, however, that the foregoing covenant shall not apply to any
information possessed by Executive prior to his employment by United, or to
any information which is in or has entered the public domain or has been
disclosed within any industry segment in which United or any subsidiary or
affiliated company of United operates by or pursuant to the authority of
United or any subsidiary or affiliated company of United.
(c) Non-Solicitation. During (i) the term of this Agreement, (ii) any
period for which Executive is receiving payments under Section 3(d) of this
Agreement, notwithstanding any lump-sum payment that Executive might
receive under Section 3(d)(i), (iii) any period following the termination
of this Agreement in which Executive remains employed by United, and (iv)
for a period of one year after the last day of the latest of any period
described in (i), (ii) or (iii), Executive shall not directly or indirectly
attempt to hire away any then-current employee of United or a subsidiary of
United or to persuade any such employee to leave employment with United.
12
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(d) Non-Competition.
(i) During the term of this Agreement and ending one year after the
later of (A) any period for which Executive is receiving payments under
Section 3(d) of this Agreement, notwithstanding any lump-sum payment that
Executive might receive under Section 3(d)(i) or (B) the last day in which
Executive remains employed by United following termination of this
Agreement (the "Restriction Period"), Executive shall not directly or
indirectly solicit, divert, or take away, or attempt to solicit, divert, or
take away, the business of any person, partnership, company, or corporation
with which United, or any subsidiary or affiliated company thereof in which
United has a more than 20 percent equity interest (the "United Companies"),
has established a business or customer relationship; provided, however,
that this Section 4(d)(i) shall apply only to the business(es) in which
United or any of the United Companies were engaged prior to or planned to
be engaged in within six months after the termination of this Agreement.
(ii) During the Restriction Period, without United's prior written
consent, Executive shall not engage or participate, either individually or
as an employee, consultant or principal, partner, agent, trustee, officer
or director of a corporation, partnership, or other business entity, in any
business in which United or any of the United Companies is engaged;
provided, however, that this Section 4(d)(ii) shall apply only to
businesses whose primary business is in competition with a material
business of United as of the date of termination of this Agreement.
(iii) Except as otherwise set forth below in Section 4(d)(iv),
Executive's obligations under this Section 4(d) shall remain in effect only
so long as United continues to make the payments and provide the benefits
specified in Section 3(d) notwithstanding any lump sum payment that
Executive might receive under Section 3(d)(i) (though United shall have no
option to discontinue such payments on its own).
(iv) The provisions of this Section 4(d) shall terminate one year
after the date of termination of this Agreement if the Executive (A) elects
not to receive any further payments and benefits specified in Section 3(d),
(B) pays to United an amount equal to (1) any profits realized by Executive
upon the exercise of United stock options (with profits equaling the spread
between the exercise price and the fair market value at the close of
business on the respective date of exercise) that are accelerated pursuant
to Section 3(d)(iii), but only to the extent such options would not
otherwise have vested prior to exercise had Executive remained an employee
of United, multiplied by (2) the percentage of the period of time pursuant
to Section 3(d)(i) for which this Section shall no longer remain in effect,
and (C) reimburses United for that
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<PAGE>
portion of any single lump sum payment Executive received pursuant to
Section 3(d)(i) which represents the period of time for which this Section
shall no longer remain in effect.
5. Miscellaneous.
(a) Assignment. This Agreement shall be binding upon and shall inure
to the benefit of the parties and their respective legal and personal
representatives, heirs, successors, and assigns, but may not be assigned by
either party (except by operation of law upon death or disability of
Executive) without the prior written consent of the other party. Any
direct or indirect successor to United shall be deemed to be United for all
purposes of this Agreement. A "successor" for purposes of this Agreement
shall mean any person who, in any transaction or series of related
transactions after the Effective Date, directly or indirectly, by purchase,
lease, tender or exchange offer, proxy, voting trust, shareholder
agreement, merger, consolidation, statutory exchange, or otherwise,
acquires beneficial ownership or control or becomes the beneficial owner of
25 percent or more of the business, assets, properties, or capital stock of
United, or any successor or assign of this Agreement. The terms "person,"
"beneficial owner," and "beneficial ownership" shall have the meanings
ascribed to them in Section 14(d)(2) of the Exchange Act and Rules 13d-3
and 13d-5 under the Exchange Act as presently in effect.
(b) Notices. All notices under this Agreement shall be in writing and
shall be deemed to have been duly given if delivered by hand or mailed by
registered or certified mail, return receipt requested, postage prepaid, to
the party to receive the same at the address set forth below or at such
other address as may have been furnished by proper notice.
United: 300 Opus Center
9900 Bren Road East
Minnetonka, MN 55343
Attn: General Counsel
Executive: William W. McGuire, M.D.
(c) Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to its subject matter and may be
amended or modified only by a subsequent written amendment executed by the
parties. This Agreement replaces and supersedes any and all prior
employment or employment related agreements and understandings,
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including any letters or memos which may have been construed as agreements,
between the Executive and United or any of its subsidiaries and affiliated
companies.
(d) Choice of Law. This Agreement shall be construed and interpreted
under the applicable laws and decisions of the State of Minnesota.
(e) Waivers. No failure on the part of either party to exercise, and
no delay in exercising, any right or remedy under this Agreement shall
operate as a waiver; nor shall any single or partial exercise of any right
or remedy preclude any other or further exercise of any right or remedy.
(f) Adequacy of Consideration. Executive acknowledges and agrees that
he has received, prior to or contemporaneously with the Effective Date,
adequate consideration from United to enter into this Agreement.
(g) Dispute Resolution and Remedies. Any dispute arising between the
parties relating to this Agreement or to Executive's employment by United
shall be resolved by binding arbitration held in the City of Minneapolis
pursuant to the Rules of the American Arbitration Association, except as
hereinafter expressly modified. If the disputing and responding parties
are unable to agree upon a resolution within forty-five business days after
the responding party's receipt of written notice from the disputing party
setting forth the nature of the dispute, within the following ten business
days the disputing and responding parties shall select a mutually
acceptable single arbitrator to resolve the dispute or, if the parties fail
or are unable to do so, each shall within the following ten business days
select a single arbitrator, and the two so selected shall select a third
arbitrator within the following ten business days. Such single arbitrator
or, as the case may be, panel of three arbitrators acting by majority
decision, shall resolve the dispute within sixty days after the date such
arbitrator, or the last of them so selected, is selected, or as soon
thereafter as practicable. If either party refuses or fails to select an
arbitrator within the time therefor, the other party may do so on such
refusing or failing party's behalf. The arbitrators shall have no power to
award any punitive or exemplary damages or may construe or interpret but
shall not ignore or vary the terms of this Agreement and shall be bound by
controlling law. The parties acknowledge the Executive's failure to comply
with the Confidentiality, Non-solicit, and Non-Compete provisions of this
Agreement will cause immediate and irreparable injury to United and that
therefore the arbitrators, or a court of competent jurisdiction if an
arbitration panel cannot be immediately convened, will be empowered to
provide injunctive relief, including temporary or preliminary relief, to
restrain any such failure to comply. The party not prevailing in the
proceeding shall bear the costs and expenses thereof, including without
limitation, the reasonable
15
<PAGE>
attorneys' fees of the prevailing party. The arbitration award or other
resolution may be entered as a judgment at the request of the prevailing
party by any court of competent jurisdiction in Minnesota or elsewhere.
(h) Survival. The provision of Sections 2(d), 2(f), 3(c)-3(f), 3(i),
4 and 5 shall survive any termination of this Agreement pursuant to Section
3(b).
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE ENFORCED BY
THE PARTIES.
UNITED HEALTHCARE CORPORATION WILLIAM W. MCGUIRE, M.D.
By /s/ William G. Spears By /s/ William W. McGuire, M.D.
---------------------------- -----------------------------
Date March 15, 1996 Date March 15, 1996
-------------------------- ---------------------------
16
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.H
<SEQUENCE>4
<DESCRIPTION>UHC 1996 EXECUTIVE SAVINGS PLAN
<TEXT>
<PAGE>
Exhibit 10(h)
IMPORTANT NOTICE
----------------
THE ATTACHED MATERIALS CONTAIN IMPORTANT INFORMATION ABOUT THE UNITED HEALTHCARE
CORPORATION(SM) EXECUTIVE SAVINGS PLAN (1996 RESTATEMENT) ("THE PLAN"). YOU
SHOULD READ THESE MATERIALS AS SOON AS POSSIBLE IN ORDER TO MAKE THE NECESSARY
ELECTIONS UNDER THE PLAN.
SINCE ELIGIBILITY FOR CERTAIN BENEFITS UNDER THE PLAN DEPENDS ON YOUR 1996
ELECTIONS UNDER YOUR 401(k) PLAN, YOU SHOULD READ THE ATTACHED MATERIALS BEFORE
ENROLLING UNDER YOUR 401(k) PLAN.
PLEASE NOTE: THE DEADLINE FOR ENROLLING IN PART I OF THE PLAN ("THE 401(K) KEEP
WHOLE" PART) IS DECEMBER 18, 1995.
<PAGE>
UNITED HEALTHCARE CORPORATION(SM) EXECUTIVE SAVINGS PLAN (1996 RESTATEMENT)
PLAN DESCRIPTION
United HealthCare Corporation(SM) ("Plan Sponsor") hereby establishes an
unfunded employee benefit plan primarily for the purpose of providing deferred
compensation for a select group of persons who qualify as eligible management or
highly compensated employees. The name of this benefit plan is the United
HealthCare Corporation Executive Savings Plan (1996 Restatement) ("Plan").
The purpose of the Plan is to provide unfunded deferred compensation benefits,
as described in and under the terms and conditions set forth in this Plan
Description including the Explanation attached as Exhibit A to this Plan
Description.
This Plan is intended to be an unfunded plan maintained by Plan Sponsor under
the Employee Retirement Income Security Act of 1974 ("ERISA") primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees ("unfunded top hat plan").
This Restatement is effective January 1, 1996. This Plan supersedes any current
or prior plan, policy or program related to unfunded deferred compensation
except for The MetraHealth Insurance Company Frozen Nonqualified Plan. Any such
current or prior plan, policy or program is terminated as of the effective date
of this Plan except for The MetraHealth Insurance Company Frozen Nonqualified
Plan. Although the Plan Sponsor currently intends to continue the benefits
provided by this Plan, the Plan Sponsor reserves the right, at any time and for
any reason or no reason at all, to change, amend, interpret, modify, withdraw or
add benefits or terminate this Plan, in whole or in part and in its sole
discretion, without prior notice to or approval by Plan participants and their
beneficiaries. Any change or amendment to or termination of the Plan, its
benefits or its terms and conditions, in whole or in part, shall be made solely
in a written amendment (in the case of a change or amendment) or in a written
resolution (in the case of termination), whether prospective or retroactive, to
the Plan, approved by the Board of Directors of the Plan Sponsor or their
designee to whom such Board has delegated in writing the foregoing authority. No
person or entity has any authority to make any oral changes or amendments to the
Plan.
This Plan Description, including the Explanation attached as Exhibit A,
constitutes the entire Plan.
United HealthCare Corporation
- -----------------------------
(Plan Sponsor)
By: /s/ Robert J. Backes
--------------------
Name
Vice President
--------------------
Title
Date: 12/1/95
--------------------
<PAGE>
UNITED HEALTHCARE CORPORATION(SM) EXECUTIVE SAVINGS PLAN (1996 RESTATEMENT)
EFFECTIVE JANUARY 1, 1996
EXPLANATION
FOR
ELIGIBLE EXECUTIVES
<PAGE>
EXHIBIT A
UNITED HEALTHCARE CORPORATION(SM) EXECUTIVE SAVINGS PLAN (1996 RESTATEMENT)
EFFECTIVE JANUARY 1, 1996
EXPLANATION
FOR
ELIGIBLE EXECUTIVES
<PAGE>
UNITED HEALTHCARE CORPORATION(SM) EXECUTIVE SAVINGS PLAN (1996 RESTATEMENT)
EXPLANATION FOR ELIGIBLE EXECUTIVES
INTRODUCTION
This Explanation describes the terms and conditions of the United HealthCare
Corporation Executive Savings Plan (1996 Restatement) ("Plan"). Read this
document carefully so that you will have a clear understanding of the Plan. If
you have any questions, you may call the Plan Administrator at (612) 936-1300.
The Plan Sponsor and Plan Administrator have sole and exclusive discretion in
interpreting the benefits under the Plan and the other terms, conditions,
limitations and exclusions set out in the Plan Description and this Explanation,
in making factual determinations related to the Plan and its benefits, and in
construing any disputed or ambiguous terms. All determinations and
interpretations made by the Plan Sponsor and Plan Administrator are intended to
be conclusive and binding on all parties. The Plan Sponsor and Plan
Administrator may, from time to time, delegate such discretionary authority to
other persons or entities providing services in regard to the Plan and such
delegations may include the right to redelegate such authority. The Plan Sponsor
reserves the right, at any time and for any reason or no reason at all, to
change, amend, interpret, modify, withdraw or add benefits or terminate this
Plan, in whole or in part and in its sole discretion, without prior notice to or
approval by Plan participants and their beneficiaries. The legal documents
governing the Plan consist of only the Plan Description, along with this
Explanation. Any change or amendment to the Plan, its benefits or its terms and
conditions, in whole or in part, shall be made solely in a written amendment (in
the case of a change or amendment) or in a written resolution (in the case of
termination), whether prospective or retroactive, to the Plan, approved by the
Board of Directors of the Plan Sponsor or their designee to whom such Board has
delegated in writing the foregoing authority. No person or entity has any
authority to make any oral changes or amendments to the Plan.
The Plan Sponsor may, in its sole discretion, arrange for various persons or
entities to provide administrative services in regard to the Plan. The identity
of the service providers and the nature of the services provided may be changed
from time to time in the Plan Sponsor's sole discretion and without prior notice
to or approval by Plan participants. You must cooperate with those persons or
entities in the performance of their responsibilities.
ERISA
REQUIRED INFORMATION
NAME OF PLAN: United HealthCare Corporation Executive Savings Plan (1996
Restatement)
NAME OF PLAN SPONSOR AND NAMED FIDUCIARY: United HealthCare Corporation. The
Plan Sponsor may also delegate or allocate fiduciary responsibilities to other
persons or entities.
ADDRESS AND TELEPHONE NUMBER OF PLAN SPONSOR AND NAMED FIDUCIARY:
United HealthCare Corporation
9900 Bren Road East
P.O. Box 1459
Minneapolis, Minnesota 55440-1459
EMPLOYER IDENTIFICATION NUMBER (EIN): 41-1321939
1
<PAGE>
IRS PLAN NUMBER: 003
EFFECTIVE DATE OF PLAN RESTATEMENT: January 1, 1996.
TYPE OF PLAN: Unfunded Plan of Deferred Compensation for a Select Group of
Management or Highly Compensated Employees
NAME, BUSINESS ADDRESS, AND BUSINESS TELEPHONE NUMBER OF PLAN ADMINISTRATOR:
United HealthCare Corporation
9900 Bren Road East
P.O. Box 1459
Minneapolis, Minnesota 55440-1459
(612) 936-1300
TYPE OF ADMINISTRATION OF THE PLAN: The Plan Sponsor administers the Plan. The
Plan Sponsor may, from time to time in its sole discretion, contract with
outside parties to arrange for the provision of administrative services. The
named fiduciary of Plan is United HealthCare Corporation, the Plan Sponsor.
PERSON DESIGNATED AS AGENT FOR SERVICE OF LEGAL PROCESS: General Counsel, United
HealthCare Corporation. Service of process may also be made upon the Plan
Administrator.
SOURCE OF CONTRIBUTIONS UNDER THE PLAN: There are no contributions to the Plan
and the Plan has no assets. All benefits under the Plan are paid from the
general assets of the Plan Sponsor.
DATE OF THE END OF THE YEAR FOR PURPOSES OF MAINTAINING PLAN'S FISCAL RECORDS:
The plan year shall be a twelve month period ending December 31st.
Benefits under the Plan are furnished in accordance with the Plan Description,
including this Explanation issued by the Plan Sponsor.
Participants' rights under the Employee Retirement Income Security Act of 1974
(ERISA) and the procedures to be followed in regard to denied claims or other
complaints relating to the Plan are set forth in the body of this Explanation.
CLAIMS SUBMISSION
If you believe you are entitled to deferred compensation benefits under this
Plan which have not been paid, you may make a claim by submitting a written
request for the deferred compensation benefits. The request should be addressed
to the Human Resources Department of United HealthCare Corporation at:
United HealthCare Corporation
ATTN: Human Resources Department
9900 Bren Road East
P.O. Box 1459
Minneapolis, Minnesota 55440-1459
The request should include all information relevant to your claim for deferred
compensation benefits.
2
<PAGE>
CLAIMS DENIAL
Notice of a decision to deny a claim for deferred compensation benefits (in
whole or in part) shall be furnished to the claimant within 90 days following
the receipt of the claim or within 90 days following the expiration of the
initial 90 day period in a case where there are special circumstances requiring
extension of time for processing the claim. If special circumstances require an
extension of time for processing the claim, written notice of the extension
shall be furnished to the claimant prior to the expiration of the initial 90 day
period. The notice of extension shall indicate the special circumstances
requiring the extension and the date by which the notice of decision with
respect to the claim is expected to be furnished. If a claim is denied (in whole
or in part), notice shall be provided to the claimant in writing and shall set
forth: 1) the reason or reasons for the denial; 2) reference to the provisions
of the Plan on which the denial is based; 3) a description of any additional
material or information necessary for the claimant to perfect the claim, if the
claim was denied because the claimant failed to provide all necessary
information, and an explanation of why such material or information is
necessary; and 4) an explanation of the claim review procedure. If written
notice of the denial is not furnished to the claimant within 90 days (or if an
extension was required, 180 days) from the date the claim was received, the
claim shall be deemed denied and the claimant shall then be permitted to proceed
with the procedure set forth below.
REVIEW OF DENIED CLAIMS AND COMPLAINT PROCEDURE
If you or any person claiming through you wishes to have a denied claim
reviewed, a written request must be sent to the Plan Administrator (addressed to
the Human Resources Department) within 60 days from the date you received the
notice of denial of the claim or within 60 days from the date the claim was
deemed denied.
If you or any person claiming through you has any other complaint or dispute
relating to the Plan, including any dispute with the Plan Sponsor, the Plan
Administrator, any fiduciary of the Plan or any person or entities providing
services in regard to the Plan, written notice describing the complaint or
dispute in detail must be sent to the Plan Administrator (addressed to the Human
Resources Department) within 60 days of the event which gave rise to the
complaint or dispute.
Any complaint or dispute related to the terms and conditions of the Plan,
including requests for review of denied claims, shall be resolved in accordance
with the procedure set forth by the Plan Sponsor and outlined below.
1. The complainant may contact the Plan Administrator in an attempt to resolve
the complaint in an informal manner.
2. If the complainant is not satisfied with any attempts at informal resolution,
the complainant must submit a written request for review of a denied claim or
written notice of the complaint or dispute to the Plan Administrator
(addressed to the Human Resources Department) in accordance with the time
frames set out above. The complainant may submit supporting documentation or
information to be considered and can request a hearing. The complainant must
submit any requested additional information or documents. A hearing may be
held, at the Plan Administrator's or its designee's discretion, in accordance
with the procedures developed by the Plan Sponsor for such hearings.
3. A written notice of the final decision will usually be sent to the
complainant within 60 days of receipt of the written request for review of a
denied claim or notice of a complaint or dispute. However, if special
circumstances require an extension of time to reach a final decision, written
notice of the final decision will be sent as soon as possible following
expiration of the initial 60 day period, but no later than 120 days following
receipt of the request for review of a denied claim or notice of a complaint
or dispute. If special circumstances require such an extension of time,
written notice of the extension shall be furnished to the complainant prior
to the expiration of the initial 60 day period. The written notice of the
final decision will give specific reason(s) for the decision and references
to the provisions of the Plan on which the decision is based. If the final
written decision is not furnished to the complainant
3
<PAGE>
within 60 days (or if an extension was required, 120 days) from the date of
receipt of request for review of a denied claim or notice of a complaint or
dispute, the request for review or the complaint or dispute shall be deemed
rejected and denied on review. The written notice of the final decision will
give specific reasons for the decision and references to the provisions of
the Plan on which the decision is based.
4. If the complainant wishes to seek further review of the decision or the
complaint or dispute, he or she shall submit it to binding arbitration
pursuant to the rules of United HealthCare Corporation's Employment
Arbitration Policy. This is the only right a complainant has for further
consideration. The matter must be submitted to binding arbitration within one
year of receipt of notice of the final decision or within one year of the
date the claim, complaint or dispute was deemed rejected and denied on
review. The arbitrators shall have no power to award any punitive or
exemplary damages or to vary or ignore the provisions of the Plan and shall
be bound by controlling law.
STATEMENT OF EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974
RIGHTS
The Employee Retirement Income Security Act of 1974 (ERISA) guarantees certain
rights and protections to participants of employee benefit plans. Federal law
and regulations require that a "Statement of ERISA Rights" be included in this
Explanation of the United HealthCare Corporation Executive Savings Plan.
You may examine, without charge, all Plan documents, including any insurance
contracts, collective bargaining agreements, annual reports, summary plan
descriptions and other documents filed with the Department of Labor. You can
examine copies of these documents in the Plan Administrator's office, or you can
ask your supervisor where copies of the documents are available.
If you want a personal copy of Plan documents or related material, you should
send a written request to the Plan Administrator. You will be charged only the
actual cost of these copies.
You are entitled to receive a summary of the Plan's annual financial report in
the event this is a funded plan. The Plan Administrator is required by law to
furnish each participant with a copy of this summary annual report.
In addition to creating rights for Plan participants, ERISA imposes duties upon
the people who are responsible for the operation of the employee benefit plan.
These individuals, called "fiduciaries," have an obligation to administer the
Plan prudently and to act in the interest of Plan participants and
beneficiaries. The named fiduciary for this Plan is the Plan Sponsor. No one may
discriminate against you in any way to prevent you from receiving benefits or
exercising your rights under ERISA.
When you become eligible for payments from the Plan, you should follow the
appropriate steps for filing a claim. In case of claim denial, in whole or in
part, you must receive a written explanation of the reason for the denial. You
have the right to have your claim reviewed and reconsidered.
Under ERISA, there are steps you can take to enforce the above rights. For
instance, if you request materials from the Plan and do not receive them within
30 days, you may file suit in a federal court, subject to any binding
arbitration requirements contained in the Explanation. In such a case, the court
may require the Plan Administrator to provide you the materials and pay you up
to $100.00 per day until you receive your materials, unless the materials were
not sent because of reasons beyond the control of the Plan Administrator. If you
have a claim for benefits which is denied or ignored, in whole or in part, you
may file a suit in a state of federal court, subject to any binding arbitration
requirements contained in the Explanation. In the event this is a funded plan
and if it should happen that Plan fiduciaries misuse the Plan's money, or if you
are discriminated against for asserting your rights, you may seek assistance
from the U.S. Department of Labor, or you may file suit in a federal court,
subject to any binding arbitration requirements contained in the Explanation.
The court will decide
4
<PAGE>
who should pay costs and legal fees. For example, if you are successful, the
court may order the person you sued to pay those costs and fees. If you lose or
if the court finds your suit to be frivolous, you may be ordered to pay these
costs and fees.
If you have any questions about your Plan, you should contact the Plan
Administrator. If you have any questions about this statement or about your
rights under ERISA, contact the nearest Area Office of the U.S. Labor Management
Services Administration, Department of Labor.
PURPOSE
The Plan has been designed to help eligible executives save for the future in
spite of increasingly restrictive tax legislation which has limited employee
deferrals into qualified plans such as your 401(k) plan. Another purpose of the
Plan is to provide executives with a means to defer the receipt of unearned
compensation to a later date if it is more tax advantageous for them.
IMPORTANT INFORMATION
The Plan is a non-qualified top hat plan which means that it is an unfunded,
non-qualified plan of deferred compensation for executives. It is not subject to
the same restrictions placed upon qualified plans. For example, salary you defer
under the Plan is not subject to the annual 401(k) dollar limit imposed under
the tax laws on salary deferral contributions to a qualified 401(k) plan, and
the compensation that can be used for deferrals under this Plan is not limited
to $150,000. However, because of federal regulations governing unfunded, non-
qualified plans of deferred compensation for executives, UHC cannot set aside
funds or contributions in a trust or other account. The Plan constitutes a mere
promise by UHC to make benefit payments in the future. Nor does the Plan operate
to create any trust or segregation of assets by UHC. It is the intention of UHC
that the Plan be unfunded for tax purposes and for purposes of Title I of the
Employee Retirement Income Security Act (ERISA). It is UHC's further intent that
the Plan constitute an unfunded "top hat" plan under ERISA.
All benefits payable under the Plan will be paid from the general assets of UHC.
Therefore, the Plan does not give participants or their beneficiaries any rights
or security interests in any asset of UHC, other than as general unsecured
creditors. For example, if UHC were to become insolvent or bankrupt, there is no
guarantee that salary you deferred under the Plan would be paid or returned to
you in the form of the Plan benefits. Any asset held by UHC is to remain as a
general, unpledged asset of UHC which would be subject to the claims of UHC's
general creditors, including claims of participants.
Participation in the Plan results in the deferral of income (i.e., salary) and
associated taxes to a future point in time. It also reduces your current take-
home pay. Because of this, your own special tax and financial needs, as well as
future changes in tax rates and laws, should be taken into consideration when
deciding whether or not to participate in the Plan. Please note that UHC cannot
predict future federal/state tax rates, nor provide tax/financial advice to you.
Accordingly, you should obtain the advice of a competent tax advisor and
financial advisor in deciding whether or not to participate in the Plan.
WHO IS ELIGIBLE?
The Plan has three eligibility requirements. First, in order to be eligible for
the Plan overall, you must be an executive employee of UHC or one of its
affiliates who is determined by UHC also to be a member of a select group of
management or highly compensated employees for the upcoming 1996 calendar year.
UHC will prepare a list of the class or class(es) of executives eligible for the
Plan for each particular year. The 1996 list is attached to this Explanation as
Attachment A. You must have completed at least two (2) months of continuous UHC
employment in an eligible class in order to enroll under the Plan.
5
<PAGE>
Second, in order to participate in PART I of the Plan, you must be eligible and
participate in the 401(k) plan available to you ("your 401(k) plan") and you
must reach one of the two Internal Revenue Service (IRS) limits on plan
benefits. The first IRS limit requires that the your 401(k) plan take into
account only $150,000 of Recognized Compensation in determining plan benefits
for the Plan Year. The second IRS limit places a cap on the dollar amount of
elective deferrals you may make under the your 401(k) plan. In order to
participate in Part I of the Plan, you must reach either the $150,000
compensation limit or the 1996 IRS annual dollar limit for elective deferrals.
The IRS' annual limit changes slightly each calendar year for cost of living
adjustments. The 1996 IRS annual limit is $9500.
Third, participation under either PART II or PART III of the Plan cannot be
earlier than the first day of the month following satisfaction of the
eligibility requirements.
HOW DOES THE PLAN WORK?
There are THREE separate and distinct parts to the Plan. Eligible executives may
enroll in one or more parts of the Plan, depending upon their eligibility.
PART I
- ------
Part I, the "401(k) Keep Whole" part, is intended to duplicate the concepts
behind a 401(k)-type plan as much as possible for executives who reach
either one or both of the IRS 401(k) limits: First, the limit on the dollar
amount you may contribute under your 401(k) plan; and second, the limit on
the amount of your compensation that may be taken into account for the
purpose of providing benefits under your 401(k) plan.
EMPLOYEE CONTRIBUTIONS. Under the tax laws, salary deferral contributions
to your 401(k) plan for 1996 will automatically stop when you have earned
$150,000 of Recognized Compensation or when your elective deferrals have
reached the 1996 IRS 401(k) dollar limit ($9,500). However, if you
participate in Part I of the Plan, your salary deferral contributions can
continue, but they will be credited to your the Plan Part I account. Under
Part I, you may defer between 2% and 15% of your cash compensation,
including cash bonuses. The percentage of compensation that you may defer
shall be (i) measured as of the same pay period in which your Recognized
Compensation under your 401(k) plan reaches $150,000 or your deferrals
under your 401(k) plan actually equal the 1996 IRS 401(k) dollar limit if
the compensation or dollar limit is reached on account of payment to you of
the UHC Management Incentive Bonus ("MIB") or a similar bonus which UHC's
Board of Directors, Compensation Committee or their designee declares as
being equivalent to MIB; (ii) measured from the first pay period after your
Recognized Compensation reaches $150,000 or your deferrals under your
401(k) plan actually equal the 1996 IRS 401(k) dollar limit if the 401(k)
limit is reach on account of payment to you of regular, cash wages (other
than those described in (i)); or (iii) if later, measured as of the due
date for returning your Part I Enrollment Form. Actual adjustments to your
pay may take up to two pay periods. However, only compensation which is not
yet earned or otherwise made available to you shall be eligible for
deferral under Part I.
EMPLOYER CONTRIBUTIONS. The first 6% of your salary deferred under Part I
will be "matched" by UHC at 50% for each dollar deferred.
CREDITING OF ACCOUNTS. Under Part I, deferral elections and any "matched"
amounts will be credited to a bookkeeping account on your behalf. This
bookkeeping account will also be credited with "interest" at the same rate
as the UHC 401(k) Savings Plan's fixed income fund during the calendar
quarter. No partial quarter interest shall be credited. The bookkeeping
account is used merely for accounting purposes since no monies or amounts
will be deposited into any account or otherwise segregated from UHC's
general assets.
6
<PAGE>
REGULAR DISTRIBUTIONS. Upon termination of your employment (or, if earlier,
the date of your death), the cumulative value of your Part I deferrals,
matched amounts and interest credits through the last day of the calendar
quarter coinciding with or immediately preceding distribution shall become
distributable to you (or, in the case of death, your designated
beneficiary) in a lump sum cash payment unless you are eligible to make an
installment election under the Special Grandfathering Rule, described
below. Actual distribution to you (or your designated beneficiary in the
event of your death) will be made as soon as administratively feasible
after the last day of the calendar month following the month in which your
employment with UHC and its affiliates is terminated (or, if earlier, the
date of your death) and your final regular paycheck is received.
ACCELERATED DISTRIBUTIONS. Under certain circumstances, accelerated
distributions on account of severe and unforeseeable financial hardship are
available. However, the UHC Employee Benefits Committee or their designee
will independently decide whether to accelerate distribution in the event
of severe and unforeseeable financial hardship and then only the amount
necessary to satisfy such hardship shall be accelerated as a distribution.
TAXATION OF DISTRIBUTIONS. Distributions to you (or your beneficiary) under
the Plan would be taxable upon receipt since previous deferrals, matched
amounts and interest credits through the end of the calendar quarter
preceding distribution were not subject to income taxation at the time they
were made. Since the Plan is a non-qualified plan, distributions would not
be eligible for the special tax treatment otherwise available to
distributions from qualified plans (e.g., 5 or 10 year averaging treatment
and tax-deferred "rollover" treatment would not be available). Similarly,
distributions under the Plan would not be subject to the 10% penalty
otherwise associated with early distributions from qualified plans before
age 59 1/2.
SPECIAL "GRANDFATHERING" RULE. If you made an installment election for
amounts deferred under the Plan in 1993, 1994 or 1995, you may elect to
receive distribution of your 1996 deferrals under the Plan either in a lump
sum or in three (3), five (5) or ten (10) year annual cash installments as
elected on your Part I enrollment form. Actual distribution to you (or your
designated beneficiary in the event of your death) will be made or
commenced as soon as administratively feasible following the last day of
the calendar month following the month in which your employment with UHC
and its affiliates is terminated (or, if earlier, the date of your death)
and your final regular paycheck is received. If distributions are in the
form of installments, subsequent installment payments shall be made
annually in accordance with the participant's distribution election on
his/her Part I enrollment form and as of the anniversary date of the first
installment payment. The amount of each installment payment shall be based
on the participant's Part I account balance as of the last day of the
calendar year preceding the year for which an installment payment is
scheduled to be made divided by the remaining number of installment
payments to be made (including the installment being determined).
PART II
- -------
This part of the Plan is a straight salary deferral option for your future
1996 unearned, cash compensation.
EMPLOYEE CONTRIBUTIONS. You may elect to defer the receipt of future
unearned, 1996 cash compensation, including bonus payments, to a future
date. The percentage of compensation you can defer under Part II is
measured from the first pay period following the date your completed Part
II enrollment form is received and processed by the UHC Corporate Benefits
Department. Actual adjustments to your pay may take up to two pay periods.
Only compensation which is not yet earned or otherwise made available shall
be eligible for deferral under Part II.
7
<PAGE>
At the time of enrollment, you must pre-select your length of deferral
time. You may defer payment of these amounts until February first (1st) of
a pre-selected year in the future or, if earlier, until termination of your
employment. However, in no case will deferrals for less than three months
of time be allowed. Accordingly, your Part II deferral election must be
made before November 1 of any given year if you want to elect a February
the succeeding year. If your employment is terminated before expiration of
your pre-selected February 1st deferral time, amounts deferred under Part
II will automatically become payable upon termination of employment.
Under current tax laws, you will not be taxed on these deferred amounts
until you receive them. However, because participation in Part II of the
Plan defers the payment of salary to you, including associated taxes, you
should consult with your tax advisor and financial advisor before you
decide whether or not (or to what degree) you should participate in Part II
of the Plan. Keep in mind that your decision to participate in the Plan
depends upon your current and projected tax and financial needs, as well as
current/future tax rates and laws -- neither of which are known to or
predictable by UHC.
EMPLOYER CONTRIBUTIONS. UHC does not match Part II deferrals.
CREDITING OF ACCOUNTS. Part II deferrals will be credited to a separate
bookkeeping account on your behalf. This bookkeeping account is used merely
for accounting purposes since no monies or amounts will be deposited into
any account or otherwise segregated from UHC's general assets. This
bookkeeping account will also be credited with "interest" at the same rate
as the UHC 401(k) Savings Plan's fixed income fund during the calendar
quarter. No partial quarter interest shall be credited.
REGULAR DISTRIBUTIONS. Upon the earlier of: termination of your employment,
the date of your death or the applicable February 1st payment date, if any,
pre-selected on your Part II enrollment form, the cumulative value of your
Part II deferrals and interest credits through the end of the calendar
quarter preceding distribution shall become distributable to you (or, in
the case of death, your designated beneficiary). If you pre-selected a
February 1st payment date, you (or your designated beneficiary in the case
of death) will receive a lump sum cash payment of the cumulative value of
your Part II deferrals and interest credits through the last day of the
calendar quarter coinciding with or immediately preceding distribution as
soon as administratively feasible after the earlier of (i) the applicable
February 1st payment date or (ii) the last day of the calendar month
following the month in which your employment is terminated (or, if earlier,
the date of your death) and your final regular paycheck is received. If you
did not pre-select a February 1st payment date on your Part II enrollment
form, distribution will be made in a lump sum cash payment unless you are
eligible to make an installment election under the Special Grandfathering
Rule, described below. Actual distribution to you (or your designated
beneficiary in the event of your death) will be made as soon as
administratively feasible following the last day of the calendar month
following the month in which your employment with UHC and its affiliates is
terminated (or, if earlier, the date of your death) and your final regular
paycheck is received.
ACCELERATED DISTRIBUTIONS. Under certain circumstances, accelerated
distributions on account of severe and unforeseeable financial hardship are
available. However, the UHC Employee Benefits Committee or their designee
will independently decide whether to accelerate distribution in the event
of severe and unforeseeable financial hardship and then only the amount
necessary to satisfy such hardship shall be accelerated as a distribution.
TAXATION OF DISTRIBUTIONS. Distributions to you (or your beneficiary) under
the Plan would be taxable upon receipt since previous deferrals and
interest credits were not subject to income taxation. Because the Plan is a
non-qualified plan, distributions would not be eligible for the special tax
treatment otherwise available to distributions from qualified plans (e.g.,
5 or 10 year averaging treatment and tax-deferred "rollover" treatment
would not be available). Similarly, distributions under the Plan would not
8
<PAGE>
be subject to the 10% penalty otherwise associated with early distributions
from qualified plans before age 59 1/2.
SPECIAL "GRANDFATHERING" RULE. If you made an installment election for
distribution of amounts deferred under the Plan in 1993, 1994 or 1995, you
may elect to receive distribution of your 1996 deferrals under the Plan
either in a lump sum or in three (3), five (5) or ten (10) year cash
installments as elected on your Part II enrollment form. Actual
distribution to you (or your designated beneficiary in the event of your
death) will be made or commenced as soon as administratively feasible after
the last day of the calendar month following the month in which your
employment with UHC and its affiliates is terminated (or, if earlier, the
date of your death) and your final regular paycheck is received. If
distributions are in the form of installments, subsequent installment
payments shall be made annually in accordance with the participant's
distribution election and as of the anniversary date of the first
installment payment. The amount of each installment payment shall be based
on the participant's Part II account balance as of the last day of the
calendar year preceding the year for which an installment payment is
scheduled to be made divided by the remaining number of installment
payments to be made (including the installment being determined).
PART III
- --------
This part of the Plan is a limited bonus deferral option that is available
only for those executives of UHC and its affiliates eligible for special
bonus amounts which are also declared by UHC's Board of Directors,
Compensation Committee or their designee as being eligible for deferral
under Part III of this Plan. Those executives eligible to make deferrals of
special bonuses under Part III will be notified in writing in advance of
their eligibility under this part. Part III enrollment and election forms
will be distributed to you only once you become eligible for a special
bonus that is eligible for deferral under Part III. Eligible executives
will receive a separate Part III enrollment and election form for each
special bonus which they may become eligible for.
EMPLOYEE CONTRIBUTIONS. You may elect to defer the receipt of your
unearned, special bonus to a future date. Part III applies only to your
eligible special bonus amount. Only eligible special bonuses which are not
yet earned or otherwise made available shall be eligible for deferral under
Part III.
At the time of enrollment, you must pre-select your length of deferral
time. You may defer payment of these amounts until February first (1st) of
a pre-selected year in the future or, if earlier, until termination of your
employment. However, in no case will deferrals for less than three months
of time be allowed. Accordingly, your Part III deferral election must be
made before November 1 of any given year if you want to elect a February
the succeeding year. If your employment is terminated before expiration of
your pre-selected February 1st deferral time, amounts deferred under Part
III will automatically become payable upon termination of employment.
Under current tax laws, you will not be taxed on these deferred amounts
until you receive them. However, because participation in Part III of the
Plan defers the payment of salary to you, including associated taxes, you
should consult with your tax advisor and financial advisor before you
decide whether or not (or to what degree) you should participate in Part
III of the Plan. Keep in mind that your decision to participate in the Plan
depends upon your current and projected tax and financial needs, as well as
current/future tax rates and laws -- neither of which are known to or
predictable by UHC.
EMPLOYER CONTRIBUTIONS. UHC does not match Part III deferrals.
CREDITING OF ACCOUNTS. Part III deferrals will be credited to a separate
bookkeeping account on your behalf. This bookkeeping account is used merely
for accounting purposes since no monies or amounts will be deposited into
any account or otherwise segregated from UHC's general assets. This
9
<PAGE>
bookkeeping account will also be credited with "interest" at the same rate
as the UHC 401(k) Savings Plan's fixed income fund during the calendar
quarter. No partial quarter interest shall be credited.
REGULAR DISTRIBUTIONS. Upon the earlier of: termination of your employment,
the date of your death or the applicable February 1st payment date, if any,
pre-selected on your Part III enrollment form, the cumulative value of your
Part III deferrals and interest credits through the last day of the
calendar quarter coinciding with or immediately preceding distribution
shall become distributable to you (or, in the case of death, your
designated beneficiary). If you pre-selected a February 1st payment date,
you (or your designated beneficiary in the case of death) will receive a
lump sum cash payment of the cumulative value of your Part III deferrals
and interest credits through the last day of the calendar quarter
coinciding with or immediately preceding distribution as soon as
administratively feasible after the earlier of (i) the applicable February
1st payment date or (ii) the last day of the calendar month following the
month in which your employment is terminated (or, if earlier, the date of
your death) and your final regular paycheck is received. If you did not
pre-select a February 1st payment date on your Part III enrollment form,
distribution will be made in a lump sum cash payment unless you are
eligible to make an installment election under the Special Grandfathering
Rule, described below. Actual distribution to you (or your designated
beneficiary in the event of your death) will be made as soon as
administratively feasible following the last day of the calendar month
following the month in which your employment with UHC or its affiliates is
terminated (or, if earlier, the date of your death) and your final regular
paycheck is received.
ACCELERATED DISTRIBUTIONS. Under certain circumstances, accelerated
distributions on account of severe and unforeseeable financial hardship are
available. However, the UHC Employee Benefits Committee or their designee
will independently decide whether to accelerate distribution in the event
of severe and unforeseeable financial hardship and then only the amount
necessary to satisfy such hardship shall be accelerated as a distribution.
TAXATION OF DISTRIBUTIONS. Distributions to you (or your beneficiary) under
the Plan would be taxable upon receipt since previous deferrals and
interest credits were not subject to income taxation. Because the Plan is a
non-qualified plan, distributions would not be eligible for the special tax
treatment otherwise available to distributions from qualified plans (e.g.,
5 or 10 year averaging treatment and tax-deferred "rollover" treatment
would not be available). Similarly, distributions under the Plan would not
be subject to the 10% penalty otherwise associated with early distributions
from qualified plans before age 59 1/2.
SPECIAL "GRANDFATHERING" RULE. If you made an installment election for
distribution of amounts deferred under the Plan in 1993, 1994 or 1995, you
may elect to receive distribution of your 1996 deferrals under the Plan
either in a lump sum or in three (3), five (5) or ten (10) year cash
installments as elected on your Part II enrollment form (the employee with
Social Security Number 022-30-6898 may elect this option also). Actual
distribution to you (or your designated beneficiary in the event of your
death) will be made or commenced as soon as administratively feasible after
the last day of the calendar month following the month in which your
employment with UHC and its affiliates is terminated (or, if earlier, the
date of your death) and your final regular paycheck is received. If
distributions are in the form of installments, subsequent installment
payments shall be made annually in accordance with the participant's
distribution election and as of the anniversary date of the first
installment payment. The amount of each installment payment shall be based
on the participant's Part III account balance as of the last day of the
calendar year preceding the year for which an installment payment is
scheduled to be made divided by the remaining number of installment
payments to be made (including the installment being determined).
10
<PAGE>
IN WHAT ORDER ARE MY DEFERRAL ELECTIONS MADE?
Deferral elections will be applied against your compensation and/or bonus in the
following sequence:
401k Plan Deferral Election (if applicable)
Part I - Executive Savings Plan
Part III - Executive Savings Plan
Part II - Executive Savings Plan
Although your deferral elections are applied in the above sequence, the actual
deferral percentage is calculated using your entire compensation and/or bonus
amount and is applied only against that portion, if any, of your compensation
and/or bonus which remains following application of the preceding deferral
election(s).
WHEN MAY I MAKE MY DEFERRAL ELECTION?
Each eligible executive may make only one election per calendar year under Part
I and Part II of the Plan. Deferral elections under Part I and Part II are valid
only for the calendar year in which they are made. Only eligible executives who
have been informed that they are (or may be) eligible for a special bonus
eligible for deferral under Part III of the Plan may make an election under Part
III. Part III enrollment and election forms are distributed only once you become
eligible for Part III. You will receive a separate Part III enrollment and
election form for each special bonus which is eligible under Part III. Deferral
elections under Part III are valid only for the special bonus to which they
relate.
Eligible executives must make their deferral election under PART II by December
18, 1995. Eligible executives must make a deferral election under PART III
within the written time frames set forth on the Part III enrollment and election
form. In order to make a PART I election for 1996, you must complete and return
your Part I enrollment form to the UHC Corporate Benefits Department no later
than December 18, 1995 (even if you won't become a participant in the UHC 401(k)
Savings Plan until sometime during 1996 or if you intend to change your 401(k)
plan elections during 1996). If you fail to return your PART I enrollment form
by December 18, 1995, you will not be eligible for the 50% company match under
Part I for 1996. Since Part I elections take effect only in the event you would
actually reach the IRS 401(k) limits for 1996, you should sign-up for Part I if
you want to continue the tax benefits of salary deferral and company match under
the Plan for 1996.
HOW DO I ENROLL?
If you would like to sign-up for one or more parts of the Plan, simply complete
the applicable Enrollment Form and return it to the Corporate Benefits
Department at mail route MN08-B212, unless a different mail route is indicated
on your enrollment and election form. Keep in mind that Part I and Part II
elections for 1996 must be made before December 18, 1995 and Part I elections
take effect only if your eligible compensation reaches $150,000 or your elective
deferrals reach the 1996 401(k) dollar limit during 1996.
MAY I CHANGE MY DEFERRAL ELECTION DURING THE YEAR?
No, once an election is made it is irrevocable. However, you may elect to
prospectively decrease your deferral (percentage) rate to zero (0) under Part I
and/or Part II and thus stop future payroll deductions at any time. If you wish
to stop payroll deductions during the year, simply contact your local Corporate
Benefits representative to obtain a copy of the appropriate Cancellation Form.
MAY I CHANGE MY LENGTH OF DEFERRAL TIME OR DISTRIBUTION OPTIONS
AFTER MY 1996 DEFERRAL ELECTION BEGINS?
11
<PAGE>
No, under current tax laws, the length of deferral time and the distribution
option (e.g., lump sum or installments) must be irrevocably elected before your
deferral election begins and cannot be later changed, except as provided below
for severe and unforeseeable financial hardship.
MAY I RECEIVE PAYMENTS BEFORE MY EMPLOYMENT IS TERMINATED
(OR, IF EARLIER, BEFORE EXPIRATION
OF THE DEFERRAL TIME PRE-SELECTED UNDER PART II OR III)?
No, unless you qualify for accelerated distribution on account of severe and
unforeseeable financial hardship. The UHC Employee Benefits Committee or their
designee will independently decide whether to accelerate distribution for severe
and unforeseeable financial hardship and then only the amount necessary to
satisfy such hardship shall be accelerated as a distribution.
EFFECT OF REEMPLOYMENT
If a participant is reemployed by UHC or its affiliate before actual
distribution or after distribution has commenced, such reemployment shall not
affect the regularly scheduled distribution of amounts under this Plan.
EFFECT OF DEATH PRIOR TO FULL DISTRIBUTION
If a participant dies before actual distribution or after distribution has
commenced, the undistributed portion of the participant's accounts under this
Plan shall be distributed to the participant's designated beneficiaries (or, as
provided below, automatic beneficiaries) in the same manner as if the
participant had terminated employment. For Special Grandfathered Participants,
if the participant had elected payment to be made in the form of installments,
such installments shall commence or continue, as the case may be, to the
participant's designated beneficiaries, at the same frequency of distribution as
initially elected by the participant.
DESIGNATION OF BENEFICIARIES
Each participant in this Plan may designate, upon forms furnished by and filed
with UHC, a primary beneficiary, and if desired, a secondary beneficiary to
receive the participant's Part I, Part II and/or Part III account balance in the
event of the participant's death. The participant may elect different or same
beneficiaries for Part I, Part II and Part III of the Plan. The participant may
change or revoke any such designation from time to time without notice to or
consent from any beneficiary or spouse. No such designation, change or
revocation shall be effective unless executed by the participant and received by
UHC during the participant's lifetime. If a beneficiary survives the participant
but dies before receipt of all payments due him or her under the Plan, such
remaining payments shall be payable to that beneficiary's estate and not to any
other beneficiary. If a participant (1) fails to designate a beneficiary, (2)
designates a beneficiary and thereafter revokes such designation without naming
another beneficiary, or (3) designates one or more beneficiaries and all such
designated beneficiaries fail to survive the participant, then such
participant's Part I, Part II and Part III account balance shall be payable to
the first class of the following classes of automatic beneficiaries with a
member of such class surviving the participant and (except in the case of
surviving issue) in equal shares if more than one member in such a class
survives the participant:
participant's surviving spouse
participant's surviving issue per stirpes and not per capita
participant's surviving parents
participant's surviving brothers and sisters
representative of participant's estate
The automatic beneficiaries above shall become fixed at the time of the
participant's death.
12
<PAGE>
ANTI-ASSIGNMENT
Each participant's rights to benefit payments under the Plan are not subject in
any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment, or garnishment by creditors of participant or his/her
beneficiary.
NOTICE
All notices, whether to the Plan Administrator from you or to you from the Plan
Administrator, must be written and sent through first class mail.
RELATION TO EMPLOYMENT
Nothing in this Plan shall be interpreted or deemed to be a contract of
employment or to give an employee any rights in the assets of UHC.
GOVERNING LAW
To the extent not preempted by ERISA, the laws of the state of Minnesota shall
govern this Plan.
AMENDMENT AND TERMINATION
The Plan Sponsor reserves the right to change, amend, interpret, modify,
withdraw or add benefits or terminate the Plan, in its sole discretion, at any
time and for any reason whatsoever without prior notice to or approval by the
Plan participants. Any change or amendment to the Plan, its benefits or its
terms and conditions may be made solely in a written amendment to the Plan,
approved by the Board of Directors of the Plan Sponsor or their designee. Any
termination of the Plan shall be accomplished by a written resolution approved
by the Board of Directors of the Plan Sponsor or their designee. No person or
entity has any authority to make any oral changes or amendments to the Plan.
Upon termination of the Plan, participants will be paid the cumulative value of
their deferral contributions plus any matching and interest credits in a lump
sum as soon as possible following termination of the Plan.
13
<PAGE>
ATTACHMENT A
UNITED HEALTHCARE CORPORATION EXECUTIVE SAVINGS PLAN (1996 RESTATEMENT)
1996 ELIGIBLE EXECUTIVE CLASSES FOR PART I AND PART II:
- UHC Executive Class (Grade Ex 01-07)
- UHC Medical Director Class (Grade M 01-04)
- UHC Psychiatrist Class (Grade PO)
- UHC Regional Vice Presidents of Sales Class
- UHC Medical Class (Grade CD, 01-03)
- UHC Clinical Medical Class, full-time (Grade CM, 01-04)
Note: only full-time physicians in the Clinical Medical Class who are
designated to earn at least $150,000 annual base salary plus
guaranteed incentive bonus as determined in the
October immediately preceding the Plan Year are eligible.
- MetraHealth Executive Class (salary bands 5, 6 and 7)
with an annual base salary of at least $150,000.
- Employee with Social Security Number 508-28-9788
1996 ELIGIBLE EXECUTIVE CLASS FOR PART III:
Executives who are eligible for Part I and Part II and who are also declared
eligible for Part III by UHC's Board of Directors, Compensation Committee or
their Designee
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.I
<SEQUENCE>5
<DESCRIPTION>UHC 1996 MANAGEMENT INCENTIVE COMP. PLAN
<TEXT>
<PAGE>
Exhibit 10(i)
1996
MANAGEMENT
INCENTIVE
PLAN
- -------------------------------------------------------------------------------
United HealthCare(SM)
<PAGE>
1996 Management Incentive Plan - a Message from Bill McGuire
- -------------------------------------------------------------------------------
As a company widely regarded as the managed care industry leader, United
HealthCare is committed to rewarding--and keeping--the professionals who have
helped us accomplish our leadership position. 1996 represents a time when our
company must attain even higher levels of performance to maintain our leadership
position. Overall, we believe our company will continue to provide tremendous
opportunities for all of us who work to make UHC successful.
In our endeavors in this year and beyond, we will stress tightly managed
operational execution and excellence in service. Specific goals include
continuing our strong financial performance, improving our responsiveness
through improved organizational structures and processes, continuing to gain
leadership in the Health Plan markets we compete in, continuing Specialty
Company growth through new products and services, and finally, successful merger
and acquisition activity. We must maintain our focus on our improvements in
appropriate health care delivery, SG&A, and medical cost trends.
The information presented in this brochure describes UHC's Management Incentive
Plan. Incentive programs and performance management are inherent to our
corporate culture, a culture that rewards our managers who strive for excellence
and continuous improvement.
As leaders at UHC, we are all responsible and accountable for maintaining the
standards of excellence that will reinforce our position as the company that is
improving health care in America.
/S/ William W. McGuire, M.D.
William W. McGuire, M.D.
Chief Executive Officer, President and Chairman
1
<PAGE>
1996
MANAGEMENT
INCENTIVE
PLAN
How does it work?
- --------------------------------------------------------------------------------
Your management incentive award is based on three major areas of performance:
1) The overall performance of UHC, measured by accomplishment of strategic
initiatives, deployment of capital and resources, market valuation, merger and
acquisition activity, public image and recognition, as well as financial goals
in the following categories: earnings, revenue, SG&A, medical loss ratio, growth
and membership. The UHC company performance, by design, affects every managers
incentive to some degree.
2) The overall performance of your business unit, support unit or corporate
division. If you're part of a UHC business unit, your goals will be developed
jointly by your Senior Executive, CEO or Subsidiary President and the person to
whom he or she reports. If you're part of a UHC business support or corporate
division, your goals will be established by the appropriate Senior Executive and
the person to whom he or she reports.
3) Your individual performance, based on your overall performance in your
position and accomplishment of established goals and objectives.
Does my management incentive opportunity
depend on all three performance measures?
- --------------------------------------------------------------------------------
Yes. All three performance measures are used to determine the incentive pool
and incentive awards. We believe that our collective success must grow out of a
synergy of effort. This blend of performance measurement helps ensure all of
UHC works together toward common goals--and therefore allows us the greatest
opportunities for success, both professionally and personally.
2
<PAGE>
How are incentive payments determined?
- --------------------------------------------------------------------------------
Step 1--Establishment of Total Incentive Pool
- ---------------------------------------------
At the end of UHC's fiscal year, the Compensation and Stock Option Committee of
the Board of Directors will determine overall UHC company performance and the
total amount available in the company incentive pool. The total company
incentive pool represents UHC's total performance on its strategic initiatives,
merger and acquisition activity, and the collective results of all UHC
operations. It is not the average result of UHC operations but the overarching
performance of the entire company.
The Compensation and Stock Option Committee will approve an incentive pool
amount based on an assessment ranging from 50% of total incentive targets to
200% of total incentive targets. No pool amount of less than 50% will be
established.
Step 2--Establishment of Business Unit and Corporate Division Pools
- -------------------------------------------------------------------
Following a determination of the total amount available in the UHC incentive
pool, UHC Senior Management determines the performance and incentive pools
specific to the business units, business unit support areas and UHC corporate
divisions. Business support areas will be evaluated based on the primary
business areas they support and their specific unit performance. The business
unit, business support division or corporate division pool is established by
creating a pool of available dollars from 50% of target to 200% of targets.
Generally, no pool amount of less than 50% will be established for any business
unit, support area, or corporate division.
Step 3--Establishment of Individual Incentive Payments
- ------------------------------------------------------
After business unit, support division and UHC corporate division incentive pools
are established, the respective Health Plan CEOs, Subsidiary Business Presidents
and Corporate Senior Managers determine individual incentive payments for their
eligible managers. Health Plan CEOs, Corporate Executives or Specialty Business
Presidents' incentives are determined by the person to whom they report.
Individual incentive payments range from 50% of incentive target to 200% of
incentive target. Generally, no incentive payments of less than 50% will be
made. Employees on formal disciplinary action are not eligible for an incentive
payment.
3
<PAGE>
1996
MANAGEMENT
INCENTIVE
PLAN
Who is eligible for a management incentive?
- --------------------------------------------------------------------------------
Employees grade 28 and above are eligible for MIP awards. It is at this level
that positions are directly accountable for meeting key division or business
unit objectives, managing staff, and determining and managing financial
resources and budgets.
The senior vice president of Human Resources will determine any exceptions to
eligibility guidelines. Certain positions are not eligible for MIP due to
participation in other incentive plans, even if they meet the above criteria.
What is my incentive target?
- --------------------------------------------------------------------------------
Your incentive target is defined as a percent of your eligible base earnings
that you were paid during the current fiscal year. The incentive target
percents are based on grade level and overall position responsibility.
What if I've been a manager for only part of the year?
- --------------------------------------------------------------------------------
If you were hired or promoted during the year to a management position, your
eligibility for management incentive participation will be prorated for the
number of days you serve as manager. Managers hired or promoted in the fourth
quarter of 1996 are not eligible to participate in the 1996 plan. If you change
positions during the year to a non-manager position, you are not eligible for a
management incentive for that year.
What happens if I get promoted to a position that
carries a higher management incentive potential?
- --------------------------------------------------------------------------------
Any incentive paid to you would be based on a combination of your existing and
new incentive targets. The targets would be weighted according to the number of
days you held each position.
4
<PAGE>
What happens if I am on leave for part of the year?
- --------------------------------------------------------------------------------
Pay that you receive while on leave will not be included as base earnings in the
calculation of the management incentive payment.
How do Management Incentive Plan payments affect my
401(k) Plan and ESOP Contributions?
- --------------------------------------------------------------------------------
Management Incentive Plan payments are considered compensation under the 401(k)
and Employee Stock Ownership (ESOP) Plans. Management incentive payments are not
eligible for the Employee Stock Purchase Plan (ESPP).
When are management incentive payments made?
- --------------------------------------------------------------------------------
Management Incentive Plan payments are generally made following the close of the
corporate and operating unit books for the 1996 operating year, generally
occurring on or before April 1st of the following year.
What if I terminate my UHC employment before management
incentive payments are made?
- --------------------------------------------------------------------------------
To be eligible for a management incentive payment, you must be an active
employee at the time such payments are made.
How do I find out what my management incentive target is?
- --------------------------------------------------------------------------------
All UHC positions are being converted to new UHC salary grades in the first
quarter of 1996. As the grades are finalized, the person to whom you report will
personally meet with you to present your management incentive targets and to
discuss corporate, business unit or corporate division goals, and work with you
to establish your individual goals.
If you have any questions about the Management Incentive Plan, contact your
supervisor or the head of your operating unit.
There is no guarantee that any Management Incentive Plan payouts will be made.
UHC has the discretion to amend or terminate the terms of this Management
Incentive Plan at any time and without notice. Any changes must be made in a
written amendment made solely by the Senior Vice President of Human Resources.
UHC has the exclusive and binding discretionary authority in interpreting the
terms and conditions of this Management Incentive Plan and in making legal and
factual determinations. This Management Incentive Plan is not and shall not be
deemed to be an enforceable contract or an employee benefit plan within the
meaning of ERISA.
5
<PAGE>
EXAMPLES
- --------------------------------------------------------------------------------
EXAMPLE 1 - BUSINESS UNIT MANAGER (E.G., HEALTH PLAN)
-----------------------------------------------------
STEP 1: UHC Compensation & Stock Option Committee determines overall
MIP pool.
STEP 2: Top Management determines each unit's pool. As an example,
assume this unit is:
Business Unit Pool = 130% of targets for that business
6 eligible managers Incentive Targets
2 at 15% at $60,000 Base Salary $18,000
2 at 10% at $50,000 Base Salary $10,000
2 at 10% at $40,000 Base Salary $ 8,000
----------- ------------------- -------
Total Incentive Target equals $36,000
POOL IS CALCULATED: 130% (Unit Pool) X $36,000 (Incentive Target) = Incentive
Pool of $46,800
STEP 3: Business Unit Senior Manager evaluates individual
performance of each manager and determines incentive
payments for each manager. Management incentive payments can
range from 0%, or 50% to 200% of targets. The amount of the
pool for this Senior Manager to distribute is $46,800; total
payments cannot exceed the pool total.
- --------------------------------------------------------------------------------
EXAMPLE 2 - UHC CORPORATE DIVISION
----------------------------------
(E.G., CORPORATE FINANCE DEPARTMENT)
------------------------------------
STEP 1: UHC Compensation & Stock Option Committee determines overall
MIP pool.
STEP 2: Top Management determines each unit's pool. As an example,
assume this unit is:
Corporate Division Rating = 90% of target
6 eligible managers Incentive Targets
1 at 20% at $70,000 Base Salary $14,000
2 at 15% at $50,000 Base Salary $15,000
2 at 10% at $45,000 Base Salary $ 9,000
----------- ------------------- -------
Total Incentive Target equals $38,000
POOL IS CALCULATED: 90% (Overall Rating) X $38,000 (Incentive Target) =
Incentive Pool of $34,200
STEP 3: Corporate Division Head evaluates individual performance of
each manager and determines incentive payment for each
manager. Management incentive payments can range from 0%, or
50% to 200% of targets. The amount of the pool for this
Division Head is $34,200; total payments cannot exceed the
pool total.
6
<PAGE>
EXAMPLES
- --------------------------------------------------------------------------------
EXAMPLE 3 - BUSINESS SUPPORT UNIT
---------------------------------
(E.G., SUBSIDIARY COMPANY)
--------------------------
STEP 1: UHC Compensation & Stock Option Committee determines overall
MIP pool.
STEP 2: Top Management determines each unit's pool. As an example,
assume this unit is:
Support Unit Pool = 100%
4 eligible managers Incentive Targets
1 at 15% at $60,000 Base Salary $ 9,000
2 at 10% at $45,000 Base Salary $ 9,000
1 at 10% at $40,000 Base Salary $ 4,000
----------- ------------------- -------
Total Incentive Target equals $22,000
POOL IS CALCULATED: 100% (Overall Rating) X $22,000 (Incentive Target) =
Incentive Pool of $22,000
STEP 3: Business Support Unit Senior Manager evaluates individual
performance of each manager and determines incentive
payments for each manager. Management incentive payments can
range from 0%, or 50% to 200% of targets. The amount of the
pool for this Senior Manager to distribute is $22,000; total
payments cannot exceed the pool total.
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.M
<SEQUENCE>6
<DESCRIPTION>EMPLOYMENT AGREEMENT MICHAEL MOONEY
<TEXT>
<PAGE>
Exhibit 10(m)
EMPLOYMENT AGREEMENT
This Agreement is made by and between Michael Mooney ("Employee") and
United HealthCare Corporation, ("United") for the purpose of setting forth
certain terms and conditions of Employee's employment by United and to protect
United's knowledge, expertise, customer relationships and the confidential
information United has developed about its customers, products, operations and
services. As of the Effective Date, this Agreement supersedes any prior
employment-related agreement or agreements between Employee and United or any
subsidiary or affiliate of United.
1. Employment and Duties.
---------------------
A. Employment. United hereby directly or through its subsidiaries employs
Employee. Employee accepts such employment on the terms and conditions set
forth in this Agreement and, except as specifically superseded by this
Agreement, subject to all of United's policies and procedures in regard to
its employees.
B. Duties. Employee shall perform such duties as are commonly associated
with his/her position or as are reasonably assigned to Employee by his/her
supervisor from time-to-time. Employee agrees to devote substantially all
of his/her business time and energy to the performance of his/her duties in
a diligent and proper manner.
2. Compensation.
------------
A. Base Salary. Employee shall initially be paid a base annual salary in
the amount of $132,400 payable bi-weekly, less all applicable withholdings
and deductions. Employee shall receive a periodic performance review from
his/her supervisor and consideration for an increase of such base salary.
B. Bonus and Stock Plans. Employee shall be eligible to participate in
United's incentive compensation plans and its stock option and grant plans,
in accordance with the terms and conditions of those plans and applicable
laws and regulations.
C. Employee Benefits. The Employee shall be eligible to participate in
United's other employee benefit plans, including without limitation, any
life, health, dental, short-term and long-term disability insurance
coverages and any retirement plans, in accordance with the terms and
conditions of those plans and applicable laws and regulations.
D. Vacation; Illness. Employee shall be entitled to paid vacation and sick
leave each year in accordance with United's then-current policies.
3. Term and Termination.
--------------------
A. Term. The term of this Agreement shall begin on November 1, 1994 (the
"Effective Date") and shall continue unless and until terminated as set
forth in Section 3B.
<PAGE>
B. Termination of Agreement and/or Employment.
------------------------------------------
1. This Agreement may be terminated at any time by the mutual written
agreement of the parties.
2. United may terminate Employee's employment or terminate this
Agreement by giving written notice of termination which is received
by Employee at least 30 days before the effective date of termination
of employment or of this Agreement, as the case may be.
3. Employee may terminate his/her employment by giving written notice of
termination of employment which is received by United at least 30
days before the effective date of termination of employment.
4. This Agreement shall automatically terminate on the effective date of
the termination of Employee's employment or on the date of Employee's
death, retirement or permanent and total disability which renders
Employee incapable of performing Employee's duties. United has the
sole discretion to determine whether employee is permanently or
totally disabled with the meaning of this Section 3B4.
C. Severance Events and Compensation. In the event a Change in Control
occurs and within one year after the effective date of the Change in
Control (i) Employee's employment with United is terminated by United
pursuant to Section 3B2 and without Cause or (ii) a Change in Employment
occurs which Employee elects to treat as a termination of Employee's
employment under Section 3B2 ((i) and (ii) are collectively referred to as
the "Severance Events"), then:
1. For 12 months following the effective date of the termination of
Employee's employment ("Severance Period"), Employee shall receive
biweekly payments equal to 1/26 of (a) Employee's annualized base salary
at the effective date of termination, less all applicable withholdings
or deductions required by law or Employee's elections under any employee
benefit plans which Employee continues to participate in under Section
3C2, plus (b) one-half of the total of any bonus or incentive
compensation (but not including any special or one-time bonus or
incentive compensation payments) paid or payable to Employee for the two
most recent calendar years or other periods generally used by United to
determine such bonus or incentive compensation, or if Employee has been
eligible for such bonus or incentive compensation payments for less than
two such periods, the last such payment paid or payable to Employee ((a)
and (b) are collectively referred to as the "Severance Compensation").
Employee shall use reasonable efforts to find appropriate employment or
work as an independent contractor not inconsistent with Section 4D and a
biweekly payment shall be reduced by any compensation which Employee
receives or reasonably could have received in that biweekly period as a
result of employment or work as an independent contractor elsewhere.
Employee shall promptly disclose to United any such compensation.
2
<PAGE>
2. As of the effective date of termination of employment, Employee
shall cease to be eligible for all benefit plans maintained by United,
except as required by federal or state continuation of coverage laws.
If Employee elects continuation of coverage under one or more benefit
plans subject to such continuation requirements, United shall, for the
Severance Period, pay on behalf of Employee an amount equal to
United's employer contribution for similarly situated active
employees' coverages under such benefit plans. During the Severance
Period Employee's share of coverage costs for such benefit plans shall
be deducted automatically through after-tax payroll deduction from the
Severance Compensation.
3. During the Severance Period United shall pay to an outplacement
firm selected by United an amount deemed reasonable by United for
outplacement and job search services for Employee.
4. Any unvested stock options or grants awarded Employee under any of
United's stock option or grant plans shall continue to vest during the
Severance Period in accordance with those options' or grants' pre-
established or usual vesting schedule.
The payments and benefits to Employee under this Section 3C shall be the
sole liability of United to Employee in the event of a Severance Event and
shall replace and be in lieu of any payments or benefits which otherwise
might be owed by United under any other severance plan or program and such
payments and benefits may be conditioned by United upon receipt of a
release of claims from Employee. Solely for purposes of stock options and
grants, the date of termination of employment shall be the last day of the
Severance Period.
D. Definitions and Procedure.
-------------------------
1. For purposes of this Agreement, "Cause" shall mean the (a) the
failure or refusal of Employee to follow the reasonable directions of
United's Board of Directors or Employee's supervisor or to perform any
duties reasonably required by United, (b) a failure to adequately meet
reasonable performance expectations, (c) material violations of
United's Code of Conduct or (d) the commission of any criminal act or
act of fraud or dishonesty by Employee in connection with Employee's
employment by United. In the event that United terminates Employee's
employment under subsections (a) or (b) of this Cause definition,
United shall specify in the notice of termination the basis for Cause.
If the Cause described in the notice is cured to United's reasonable
satisfaction prior to the end of the 30 day notice period, the notice
of termination of employment shall be withdrawn.
2. For purposes of this Agreement a "Change in Employment" shall be
deemed to have occurred (a) if (i) Employee's duties are materially
adversely changed without Employee's prior consent or (ii) Employee's
salary or benefits are reduced other than as a general reduction of
salaries and benefits by United or (iii) the location of performance
of most of Employee's duties is moved from
3
<PAGE>
the general geographic location in which Employee performed such
duties prior to the move or (iv) without terminating Employee's
employment this Agreement is terminated by United pursuant to Section
3B2, and (b) if in each case under subsections (a) (i), (ii), (iii)
and (iv), in the period beginning 60 days before the time the Change
in Employment occurs, Cause does not exist or if Cause does exist
United has not given Employee written notice that Cause exists.
Employee may elect to treat a Change in Employment as a termination of
employment by United. To do so Employee shall send written notice of
such election to United within 60 days after the date Employee
receives notice from United or otherwise is definitively informed of
the events constituting the Change in Employment. No Change in
Employment shall be deemed to have occurred if Employee fails to send
the notice of election within the 60 day period. Employee's failure to
treat a particular Change in Employment as a termination of employment
shall not preclude Employee from treating a subsequent Change in
Employment as a termination of employment. The effective date of a
Change in Employment termination shall be the date 30 days after
United receives the written notice of election.
3. For purposes of this Agreement a "Change in Control" of United
shall mean the sale of all or substantially all of its assets or any
merger, reorganization, or exchange or tender offer which, in each
case, will result in a change in the power to elect 50% or more of the
members of the Board of Directors of United.
4. Property Rights, Confidentiality, Non-Solicit and Non-Compete Provisions.
------------------------------------------------------------------------
A. United's Property.
-----------------
1. Employee shall promptly disclose to United in writing all
inventions, discoveries and works of authorship, whether or not
patentable or copyrightable, which are conceived, made, discovered,
written or created by Employee alone or jointly with another person,
group or entity, whether during the normal hours of employment at
United or on Employee's own time, during the term of this Agreement.
Employee assigns all rights to all such inventions and works of
authorship to United. Employee shall give United any the assistance it
reasonably requires in order for United to perfect, protect, and use
its rights to inventions and works of authorship.
This provision shall not apply to an invention for which no equipment,
supplies, facility or trade secret information of United was used and
which was developed entirely on the Employee's own time and which (1)
does not relate to the business of United or to United's anticipated
research or development, or (2) does not result from any work
performed by the Employee for United.
2. Employee shall not remove any records, documents, or any other
tangible items (excluding Employee's personal property) from the
premises of United in either original or duplicate form, except as is
needed in the ordinary course of conducting business for United.
4
<PAGE>
3. Employee shall immediately deliver to United, upon termination of
employment with United, or at any other time upon United's request,
any property, records, documents, and other tangible items (excluding
Employee's personal property) in Employee's possession or control,
including data incorporated in word processing, computer and other
data storage media, and all copies of such records, documents and
information, including all Confidential Information, as defined below.
B. Confidential Information. During the course of his/her employment
Employee will develop, become aware of and accumulate expertise, knowledge
and information regarding United's organization, strategies, business and
operations and United's past, current or potential customers and suppliers.
United considers such expertise, knowledge and information to be valuable,
confidential and proprietary and it shall be considered Confidential
Information for purposes of this Agreement. During this Agreement and at
all times thereafter Employee shall not use such Confidential Information
or disclose it to other persons or entities except as is necessary for the
performance of Employee's duties for United or as has been expressly
permitted in writing by United.
C. Non-Solicitation. During (i) the term of this Agreement, (ii) any
period for which Employee is receiving payments under Section 3C of this
Agreement, (iii) any period following the termination or expiration of this
Agreement during which Employee remains employed by United and (iv) for a
period of one year after the last day of the latest of any period described
in (i), (ii) or (iii), Employee shall not (y) directly or indirectly
attempt to hire away any then-current employee of United or a subsidiary of
United or to persuade any such employee to leave employment with United, or
(z) directly or indirectly solicit, divert, or take away, or attempt to
solicit, divert, or take away, the business of any person, partnership,
company or corporation with whom United (including any subsidiary or
affiliated company in which United has a more than 20% equity interest) has
established or is actively seeking to establish a business or customer
relationship.
D. Non-Competition. During (i) the term of this Agreement, (ii) any
period for which Employee is receiving payments under Section 3C of this
Agreement, and (iii) any period following the termination or expiration of
this Agreement during which Employee remains employed by United, Employee
shall not, without United's prior written consent, engage or participate,
either individually or as an employee, consultant or principal, partner,
agent, trustee, officer or director of a corporation, partnership or other
business entity, in any business in which United (including any subsidiary
or affiliated company in which United has a more than 20% equity interest)
is engaged. In the event that Employee elects to terminate Employee's
employment pursuant to Section 3B3, United may elect to have the provisions
of this Section 4D be in effect for six months following the effective date
of such resignation if during that six month period United pays Employee
biweekly payments equal to 1/26 of the Severance Compensation. United must
send written notice of such election within 10 days after it receives
written notice of the termination of employment. Employee shall use
reasonable efforts to find appropriate employment or work as an independent
contractor not inconsistent with this Section 4D and a biweekly payment
shall be
5
<PAGE>
reduced by any compensation which Employee receives or reasonably could
have received in that biweekly period as a result of employment or work as
an independent contractor elsewhere. Employee shall promptly disclose to
United any such compensation.
5. Miscellaneous.
-------------
A. Assignment. This Agreement shall be binding upon and shall inure to the
benefit of the parties and their successors and assigns, but may not be
assigned by either party without the prior written consent of the other
party, except that United in its sole discretion may assign this Agreement
to an entity controlled by United at the time of the assignment. If United
subsequently loses or gives up control of the entity to which this
Agreement is assigned, such entity shall become United for all purposes
under this Agreement, beginning on the date on which United loses or gives
up control of the entity. Any successor to United shall be deemed to be
United for all purposes of this Agreement.
B. Notices. All notices under this Agreement shall be in writing and shall
be deemed to have been duly given if delivered by hand or mailed by
registered or certified mail, return receipt requested, postage prepaid, to
the party to receive the same at the address set forth below or at such
other address as may have been furnished by proper notice.
United: 300 Opus Center
9900 Bren Road East
Minnetonka, MN 55343
Attn: Vice President Human Resources
Employee:
-------------------------
-------------------------
-------------------------
C. Entire Agreement. This Agreement contains the entire understanding of
the parties with respect to its subject matter and may be amended or
modified only by a subsequent written amendment executed by the parties.
This Agreement replaces and supersedes any and all prior employment or
employment related agreements and understandings, including any letters or
memos which may have been construed as agreements, between the Employee and
United or any of its subsidiaries and affiliated companies.
D. Choice of Law. This Agreement shall be construed and interpreted under
the applicable laws and decisions of the State of Minnesota.
E. Waivers. No failure on the part of either party to exercise, and no
delay in exercising, any right or remedy under this Agreement shall operate
as a waiver; nor shall any single or partial exercise of any right or
remedy preclude any other or further exercise of any right or remedy.
6
<PAGE>
F. Adequacy of Consideration. Employee acknowledges and agrees that
he/she has received adequate consideration from United to enter into this
Agreement.
G. Dispute Resolution and Remedies. Any dispute arising between the parties
relating to this Agreement or to Employee's employment by United shall be
resolved by binding arbitration pursuant to the Rules of the American
Arbitration Association. In no event may the arbitration be initiated more
than one year after the date one party first gave written notice of the
dispute to the other party. The arbitrators shall not ignore or vary the
terms of this Agreement and shall be bound by and apply controlling law,
but may not in any case award any punitive or exemplary damages. The
parties acknowledge that Employee's failure to comply with the
Confidentiality, Non-Solicit and Non-Compete provisions of this Agreement
will cause immediate and irreparable injury to United and that therefore
the arbitrators, or a court of competent jurisdiction if an arbitration
panel cannot be immediately convened, will be empowered to provide
injunctive relief, including temporary or preliminary relief, to restrain
any such failure to comply.
H. No Third-Party Beneficiaries. This Agreement shall not confer or be
deemed or construed to confer any rights or benefits upon any person other
than the parties.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE
ENFORCED BY THE PARTIES.
UNITED HEALTHCARE CORPORATION
By /s/ William W. McGuire /s/ Michael A. Mooney
---------------------- ---------------------
Employee
Date 11/15/94 Date 11/10/94
-------- --------
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.T
<SEQUENCE>7
<DESCRIPTION>INFORMATION TECHNOLOGY SERVICES AGREE.
<TEXT>
<PAGE>
Exhibit 10(t)
11/14/95
INFORMATION TECHNOLOGY SERVICES AGREEMENT
between
THE METRAHEALTH COMPANIES, INC.
and
INTEGRATED SYSTEMS SOLUTIONS CORPORATION
dated as of
November 1, 1995
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1. DEFINITIONS..................................... 1
ARTICLE 2. TERM............................................ 10
ARTICLE 3. BASE SERVICES................................... 10
3.01 Generally....................................... 10
3.02 Changes to the Services......................... 10
3.03 Systems Software................................ 10
3.04 Systems Software Maintenance.................... 11
3.05 Additional Third Party Software................. 11
3.06 New Releases and Versions of the Software....... 13
3.07 Technology Developments......................... 14
3.08 Licenses and Permits............................ 14
3.09 Changes in Law and Regulations.................. 15
3.10 Strategic Plan and Product Standards............ 15
3.12 Supplies........................................ 16
3.13 Hardware Currency............................... 17
3.14 Changes in Scope of Services.................... 17
3.15 Changes to Base Charges......................... 18
3.16 Software Manuals................................ 18
3.17 Dedicated Logical Environments.................. 19
ARTICLE 4. TRANSITION...................................... 19
4.01 Transition Services............................. 19
4.02 Changes to the Transition Schedules............. 19
4.03 Testing Environments............................ 19
4.04 Transition Acceptance Criteria.................. 20
4.05 Location Completion............................. 20
4.06 Transition Completion........................... 20
4.07 Incentive Payment............................... 20
4.08 Incentive Credits............................... 20
4.09 Usage Charges During Transition................. 21
4.10 Software Conversions............................ 21
ARTICLE 5. APPLICATION RESOURCES........................... 21
5.01 Application Resources........................... 21
5.02 Application Resource Proposals.................. 22
i
<PAGE>
Page
----
ARTICLE 6. ADDITIONAL SERVICES............................. 23
6.01 Additional Services............................. 23
6.02 Third Party Services............................ 23
6.03 Acquisition..................................... 25
ARTICLE 7. CUSTOMER SATISFACTION........................... 25
7.01 Baseline Customer Satisfaction Survey........... 25
7.02 Customer Satisfaction Survey.................... 26
ARTICLE 8. PERFORMANCE STANDARDS........................... 27
8.01 Base Services................................... 27
8.02 New Performance Standards....................... 27
8.03 Adjustment of Performance Standards............. 27
8.04 Performance Reports............................. 28
8.05 Root-Cause Analysis............................. 28
ARTICLE 9. BENCHMARKING.................................... 28
ARTICLE 10. SERVICE LOCATIONS.............................. 29
10.01 Service Locations.............................. 29
10.02 Security Procedures............................ 29
10.03 Security Relating to Competitors............... 29
10.04 Access to Personnel and Resources.............. 30
ARTICLE 11. PROJECT TEAM................................... 31
11.01 Management Committee........................... 31
11.02 ISSC Project Executive......................... 31
11.03 Key Employees.................................. 32
11.04 Project Staff.................................. 32
11.05 Facilities and Equipment....................... 32
11.06 Review Meetings................................ 33
11.07 Subcontractors................................. 34
11.08 Conduct of ISSC Personnel...................... 35
11.09 Non-Competition
ARTICLE 12. MANAGEMENT AND CONTROL......................... 36
12.01 Procedures Manual.............................. 37
12.02 Change Control Procedures...................... 38
ARTICLE 13. PROPRIETARY RIGHTS............................. 39
13.01 MetraHealth Software........................... 40
ii
<PAGE>
Page
----
13.02 ISSC Proprietary Software...................... 41
13.03 ISSC Third Party Software...................... 41
13.04 Software Purchased by ISSC on Behalf of
MetraHealth................................... 42
13.05 MetraHealth Third Party Software............... 43
13.06 Developed Software............................. 44
13.07 Infringement................................... 44
13.08 Changes and Upgrades to the Systems............ 45
13.09 Documentation.................................. 45
13.10 Cooperation Upon Divestiture................... 45
ARTICLE 14. REQUIRED CONSENTS.............................. 47
ARTICLE 15. METRAHEALTH RESPONSIBILITIES................... 49
ARTICLE 16. REPORTS AND DATA............................... 50
16.01 Ownership of MetraHealth Data.................. 50
16.02 Correction of Errors........................... 50
16.03 Return of Data................................. 50
16.04 Reports and Raw Data........................... 51
16.05 Re-Runs........................................ 51
ARTICLE 17. CONTINUED PROVISION OF SERVICES................ 53
17.01 Disaster Recovery.............................. 54
17.02 Force Majeure.................................. 55
17.03 Allocation of Resources........................ 57
ARTICLE 18. PAYMENTS....................................... 57
18.01 Base Charges................................... 57
18.02 Additional Charges............................. 57
18.03 Rights of Set off.............................. 58
18.04 Expenses....................................... 58
18.05 Unused Credits................................. 58
18.06 Adjustment to Charges.......................... 58
18.07 Proration...................................... 59
18.08 Most Favored Customer.......................... 59
18.09 Technology Improvements........................ 59
ARTICLE 19. PAYMENT SCHEDULE............................... 61
19.01 Charges........................................ 61
19.02 Detailed Invoices.............................. 61
19.03 Time of Payment................................ 61
iii
<PAGE>
Page
----
19.04 Disputed Charges or Credits.................... 62
ARTICLE 20. TAXES.......................................... 63
ARTICLE 21. AUDITS......................................... 66
21.01 Processing..................................... 66
21.02 Charges........................................ 67
21.03 Unauthorized Access............................ 68
21.04 Record Retention............................... 69
21.05 Access and Reports............................. 69
21.06 Audit Software................................. 70
21.07 Facilities..................................... 70
21.08 Third Party Audit.............................. 70
ARTICLE 22. CONFIDENTIALITY................................ 72
22.01 Confidential Information....................... 73
22.02 Attorney-Client Privilege...................... 74
22.03 Equitable Relief............................... 75
22.04 Unauthorized Acts.............................. 76
22.05 Legal Action................................... 76
ARTICLE 23. REPRESENTATIONS, WARRANTIES AND COVENANTS...... 77
23.01 By MetraHealth................................. 77
23.02 By ISSC........................................ 77
23.03 Government Contracts........................... 78
ARTICLE 24. TERMINATION.................................... 79
24.01 Termination for Convenience.................... 79
24.02 Termination for Sale of ISSC................... 79
24.03 Termination for Sale of MetraHealth............ 80
24.04 Termination for Material Breach................ 80
24.05 Other Terminations............................. 81
ARTICLE 25. TERMINATION CHARGE............................. 81
25.01 Termination for Convenience.................... 81
25.02 Termination for Sale of MetraHealth............ 81
25.03 Proration...................................... 82
25.04 No Additional Charges.......................... 82
ARTICLE 26. TERMINATION ASSISTANCE......................... 83
iv
<PAGE>
Page
----
ARTICLE 27. EXIT PLAN...................................... 84
ARTICLE 28. DISPUTE RESOLUTION............................. 85
28.01 Project Executives............................. 85
28.02 Management Committee........................... 85
28.03 Senior Management.............................. 85
28.04 Judicial Resolution............................ 86
28.05 Continuity of Services......................... 86
ARTICLE 29. INDEMNIFICATION................................ 87
29.01 By MetraHealth................................. 87
29.02 By ISSC........................................ 87
29.03 Indemnification Procedures..................... 89
ARTICLE 30. DAMAGES........................................ 89
30.01 Direct Damages................................. 89
30.02 Consequential Damages.......................... 91
30.03 Performance Credits............................ 92
ARTICLE 31. INSURANCE...................................... 93
ARTICLE 32. MISCELLANEOUS PROVISIONS....................... 95
32.01 Assignment and Change of Control............... 95
32.02 Notices........................................ 96
32.03 Counterparts................................... 97
32.04 Headings....................................... 97
32.05 Relationship................................... 97
32.06 Consents, Approvals and Requests............... 98
32.07 Severability................................... 98
32.08 Waiver......................................... 98
32.09 Publicity...................................... 98
32.10 Entire Agreement............................... 99
32.11 Amendments..................................... 99
32.12 Governing Law.................................. 99
32.13 Survival....................................... 99
32.14 Third Party Beneficiaries...................... 100
32.15 Covenant of Further Assurances................. 100
32.16 Solicitation................................... 101
32.17 Remedies....................................... 101
v
<PAGE>
LIST OF EXHIBITS
Exhibit 1 Base Services and Performance Standards
Exhibit 2 Applications Software
Exhibit 3 Systems Software
Exhibit 4 Transition Plan
Exhibit 5 Performance Credits
Exhibit 6 Machines
Exhibit 7 Customer Satisfaction Survey
Exhibit 8 Service Locations
Exhibit 9 Key Employees
Exhibit 10 MetraHealth Competitors
Exhibit 11 Charges
Exhibit 12 Disaster Recovery Services and Critical Applications
Exhibit 13 Audit Procedures
Exhibit 14 MetraHealth Expense Policy
Exhibit 15 Subcontractors
Exhibit 16 Termination Assistance Services
Exhibit 17 Termination Charges
Exhibit 18 Application Resource Request
Exhibit 19 Resource Usage Reports and Data
Exhibit 20 Software Purchased by ISSC on Behalf of MetraHealth
Exhibit 21 Form of Performance Report
Exhibit 22 Strategic Plan
Exhibit 23 Cost of Living Adjustment
Exhibit 24 Procedures Manual Outline
Exhibit 25 Change Control Procedures Outline
Exhibit 26 MetraHealth Affiliates
vi
<PAGE>
INFORMATION TECHNOLOGY SERVICES AGREEMENT, dated as of
November 1, 1995, by and between THE METRAHEALTH COMPANIES, INC.
and INFORMATION SYSTEMS SOLUTIONS CORPORATION. Capitalized terms
not otherwise defined herein have the meanings set forth in
Article 1.
W I T N E S S E T H:
WHEREAS, MetraHealth and ISSC have engaged in extensive
negotiations and discussions that have culminated in the
formation of the relationship to provide information technology
services according to Performance Standards and according to the
terms and conditions as described in this Agreement.
NOW, THEREFORE, for and in consideration of the
agreements of the parties set forth below, MetraHealth and ISSC
agree as follows:
ARTICLE 1. DEFINITIONS.
The following defined terms shall have the meanings
specified below:
(1) "Additional Charges" shall mean the fees described in an
Additional Services Schedule.
(2) "Additional Services" shall mean those services requested by
MetraHealth and provided by ISSC that are outside the
scope of the Base Services.
(3) "Additional Services Proposal" shall mean the proposal,
submitted by ISSC in response to MetraHealth's request
<PAGE>
2
for the performance of an Additional Service, containing a
description of the scope and functionality of such Additional
Service and an estimate, as may be applicable, of the computing,
communications, human resources, capacity requirements and costs
necessary to develop and implement such Additional Service.
(4) "Additional Services Schedule" shall mean, in the event that
MetraHealth elects to have ISSC perform an Additional Service, a
written agreement executed by MetraHealth and ISSC.
"Affiliate" shall mean, with respect to a Party, any entity
controlled by that Party, and with respect to MetraHealth, those
entities shown on Exhibit 26, and certain entities, as may be
designated by MetraHealth, including United HealthCare Corporation
and other entities under common control with MetraHealth. The term
"Control" as used in this Agreement shall mean the legal,
beneficial or equitable ownership, directly or indirectly, of more
than 50 percent of the aggregate of all voting equity interest of
such entity.
"Agents" shall mean with respect to a party, such party's
directors, officers, employees, agents, subcontractors and other
representatives.
"Agreement" shall mean this Information Technology Services
Agreement, dated November 1, 1995, by and between MetraHealth and
ISSC, its Exhibits and Attachments, as may be amended by the
Parties from time to time.
"Agreement Date" shall mean November 1, 1995.
"Application Gigabytes" shall mean the allocated disk space,
measured in gigabytes, that represents MetraHealth's
billable portion of the installed DASD.
"Application Hours" shall mean the CPU time, measured in terms of
a 9021-340 processor, that represents MetraHealth's
billable portion of CPU consumption.
"Applications Software" shall mean the software set forth in
Exhibit 2.
"Application Tape Mounts" shall mean the tape mounts that
represent MetraHealth's billable portion of tape
mounts.
<PAGE>
3
(13) "Backup Facility" shall have the meaning set forth in
Section 17.01.
(14) "Base Charges" shall mean the fees for the Base Services set
forth in Exhibit 11.
(15) "Baseline" shall mean the specified quantity of resources
included in the Base Charges set forth in Exhibit 11.
(16) "Base Performance Standards" shall mean the performance standards
described in Exhibit 1 for the Base Services, as may
be adjusted pursuant to Section 8.03.
(17) "Base Services" shall mean the services and obligations (a) set
forth in Exhibit 1 and (b) otherwise identified in
this Agreement as being Base Services.
(18) "Change(s)" shall mean all changes to the Systems and the
Services that would materially alter the functionality
or technical environment of the Systems.
(19) "Change Control Procedures" shall mean the written
procedures for handling and implementing Changes as
approved by MetraHealth.
(20) "Charges" shall mean the Base Charges and the Additional Charges,
collectively.
(21) "Confidential Information" of a Party shall mean (a) all
confidential or proprietary information of either
Party that is marked as such, (b) other information of
MetraHealth, its Affiliates or their customers that is
not permitted to be disclosed to third parties under
applicable local law or regulation and (c) the terms
of this Agreement.
(22) "Contract Year" shall mean each 12-month period commencing on the
Effective Date or any anniversary of the Effective
Date during the Term.
(23) "Critical Applications" shall mean those applications set forth
in Exhibit 12 as may be updated by MetraHealth from
time to time during the Term.
(24) "Default Cure Period" shall have the meaning set forth in Section
24.04.
(25) "Default Notice" shall have the meaning set forth in Section
24.04.
<PAGE>
4
(26) "Developed Software" shall have the meaning set forth in
Section 13.06.
(27) "Developed Software Agreement" shall have the meaning set forth
in Section 13.06.
(28) "Direct Damages Cap" shall have the meaning set forth in Section
30.01.
(29) "Disaster" shall mean any event including, without limitation, a
Force Majuere Event, which (a) causes one or more of the Critical
Applications to be unavailable at any MetraHealth Service
Location or (b) is generally referred to as a disaster in the
health insurance or managed health care industries.
(30) "Documentation" shall mean, except as set forth in Section 13.02
and Section 13.03 with respect to the ISSC Software, all
documentation, written materials, work papers, configurations,
manuals (including the Procedures Manual and the Change Control
Procedures) and other work product prepared by or on behalf of
ISSC or otherwise used by ISSC or its Agents in connection with
providing the Services.
(31) "Effective Date" shall mean November 1, 1995.
(32) "Fixed Charges" shall have the meaning set forth in Exhibit 11.
(33) "Force Majeure Event" shall mean any failure or delay caused,
directly or indirectly, by fire, flood, earthquake, elements of
nature or acts of God, acts of war, terrorism, riots, sabotage,
civil disorders, rebellions or revolutions in the United States
or any other similar cause beyond the reasonable control of a
Party and without the fault or negligence of such Party.
(34) "IBM" shall mean International Business Machines Corporation.
(35) "Indemnifying Party" shall mean the Party to whom the Indemnitee
shall give notice of a claim that is covered by Section 29.01 or
Section 29.02.
(36) "Indemnitee" shall mean the party against whom a third party
makes a claim covered by Section 29.01 or Section 29.02 with
respect to which such Party seeks indemnification.
<PAGE>
5
(37) "ISSC" shall mean Integrated Systems Solutions Corporation, a
Delaware corporation, with a principal place of business at 44
South Broadway, White Plains, New York 10601.
(38) "ISSC Direct Costs" shall mean, for any activity or resource, the
direct costs, excluding allocated overhead, incurred by ISSC in
connection with that activity or resource, as reflected in the
profit and loss statement for ISSC as prepared by ISSC in the
ordinary course of its business and according to generally
accepted accounting principles consistently applied.
(39) "ISSC Machines" shall mean those machines and equipment owned or
leased by ISSC for use in connection with the Services set forth
in Exhibit 6.
(40) "ISSC Project Executive" shall have the meaning set forth in
Section 11.02.
(41) "ISSC Proprietary Software" shall mean the software identified as
such and listed on Exhibit 3, as appropriate, and related
documentation (a) owned by ISSC prior to the Agreement Date which
is used in connection with the Services, (b) of which ISSC
acquires ownership after the Agreement Date which is used in
connection with the Services, or (c) is developed by or on behalf
of ISSC after the Agreement Date for use in connection with the
Services that is not MetraHealth Software or Developed Software.
(42) "ISSC Service Locations" shall mean the service locations owned,
leased or under the control of ISSC that are set forth in Exhibit
8.
(43) "ISSC Software" shall mean the ISSC Proprietary Software and the
ISSC Third Party Software, collectively.
(44) "ISSC Systems" shall mean the ISSC Software and the ISSC
Machines, collectively.
(45) "ISSC Third Party Software" shall mean all software identified as
such and listed in Exhibit 3, as appropriate, and related
documentation licensed or leased from a third party by ISSC (a)
prior to the Agreement Date which will be used in connection with
the Services or (b) after the Agreement Date for use in
connection with the Services. Software owned by IBM
<PAGE>
6
shall be considered ISSC Third Party Software to the extent that
ISSC and IBM remain distinct entities.
(46) "Key Employee(s)" shall mean the Project Staff members who
are set forth on Exhibit 9 as may be updated pursuant to
Section 11.03.
(47) "Location Completion Date" shall mean, in respect of each
MetraHealth Data Center, the date MetraHealth and ISSC agree that
ISSC has met all of the Transition Acceptance Criteria.
(48) "Machines" shall mean the MetraHealth Machines and the ISSC
Machines, collectively.
(49) "Management Committee" shall mean the committee comprised of (a)
two members of MetraHealth's executive management staff,
appointed by MetraHealth, and (b) two members of ISSC's executive
management staff, appointed by ISSC.
(50) "Medicare Contracts" shall have the meaning set forth in Section
23.03.
(51) "MetLife" shall mean Metropolitan Life Insurance Company, a
mutual life insurance company organized under the laws of the
State of New York.
(52) "MetraHealth" shall mean The MetraHealth Companies, Inc., a
Delaware corporation.
(53) "MetraHealth Competitors" shall mean those entities set forth in
Exhibit 10.
(54) "MetraHealth Data" shall mean all data and information submitted
to ISSC by MetraHealth or its Affiliates in connection with the
Services, including data and information derived from that which
is submitted to ISSC by MetraHealth or its Affiliates.
(55) "MetraHealth Data Center" shall mean those MetraHealth data
centers that are set forth in Exhibit 4.
(56) "MetraHealth Direct Costs" shall mean, for any activity or
resource, the direct costs, excluding allocated overhead,
incurred by MetraHealth in connection with that activity or
resource, as reflected in the profit and loss statement for
MetraHealth as prepared by MetraHealth in the ordinary course of
its business and according to generally accepted accounting
principles consistently applied.
<PAGE>
7
(57) "MetraHealth Machines" shall mean those machines and equipment
which ISSC uses in the provision of the Services and which are
owned or leased by MetraHealth and set forth in Exhibit 6.
(58) "MetraHealth Project Executive" shall mean the individual who is
appointed by MetraHealth who shall be solely authorized to act as
the primary point of contact for ISSC in dealing with MetraHealth
and its Affiliates with respect to each party's obligations under
this Agreement and all consents or approvals under this Agreement
and to make all requests on behalf of MetraHealth and its
Affiliates.
(59) "MetraHealth Proprietary Software" shall mean the software owned
by MetraHealth or its Affiliates identified as such and set forth
in Exhibit 2.
(60) "MetraHealth Service Locations" shall mean the service locations
owned, leased or under the control of MetraHealth that are set
forth in Exhibit 8.
(61) "MetraHealth Software" shall mean the MetraHealth Proprietary
Software, the MetraHealth Third Party Software and any related
documentation in MetraHealth's possession on or after the
Agreement Date.
(62) "MetraHealth Third Party Software" shall mean the software
licensed or leased by MetraHealth or its Affiliates from a third
party which is identified as such and set forth in Exhibit 2 and
Exhibit 3.
(63) "New Performance Standards" shall mean the levels of service to
be provided by ISSC for an Additional Service that are (a)
specified in the Additional Services Schedule or (b) otherwise
established by MetraHealth and ISSC.
(64) "Operations Services" shall mean services relating to facilities
management, master console operation, tape management, tape
librarian, print and I/O management, physical data center
security and level one help desk services, collectively.
(65) "Performance Credit(s)" shall mean, in the event of a failure to
provide the Services in accordance with the Performance
Standards, the performance credits incurred by ISSC to be applied
against the Charges identified in and according to the schedule
set forth in Exhibit 5.
<PAGE>
8
(66) "Performance Standards" shall mean the Base Performance
Standards and the New Performance Standards, collectively.
(67) "Privileged Work Product" shall mean certain documents, data and
databases created by ISSC and its Agents for MetraHealth and its
Affiliates and all associated communications thereto subject to
the attorney-client privilege.
(68) "Procedures Manual" shall mean the operating procedures manual
prepared by ISSC in the form and scope agreed upon by MetraHealth
and ISSC which establishes the procedures pursuant to which
policies of MetraHealth and ISSC will be adhered to during the
Term.
(69) "Project Executives" shall mean the ISSC Project Executive and
the MetraHealth Project Executive, collectively.
(70) "Project Staff" shall have the meaning set forth in Section
11.04.
(71) "Reasonable Currency" shall have the meaning set forth in Section
3.06.
(72) "Report(s)" shall mean those reports (a) prepared by MetraHealth
as of the Effective Date and (b) as MetraHealth may reasonably
require from time to time during the Term to meet MetraHealth's
and its Affiliates' operational requirements.
(73) "Service Locations" shall mean those MetraHealth Service
Locations and ISSC Service Locations that are set forth in
Exhibit 8.
(74) "Services" shall mean the Base Services and the Additional
Services, collectively.
(75) "Software" shall mean the ISSC Software, the MetraHealth Software
and the Developed Software, collectively.
(76) "Strategic Plan" shall have the meaning set forth in Section
3.11.
(77) "Systems Software" shall mean the software set forth in
Exhibit 3.
(78) "Systems" shall mean the Software and the Machines, collectively.
<PAGE>
9
(79) "Term" shall have the meaning set forth in Article 2.
(80) "Termination Assistance Services" shall mean (1) the cooperation
of ISSC and its Agents with MetraHealth and its Affiliates in
effecting the orderly transfer of the Services to a third party
or the resumption of the Services by MetraHealth or its
Affiliates upon request by MetraHealth and (2) the performance by
ISSC of such services as may be requested by MetraHealth in
accordance with Exhibit 16, in connection with the transfer of
the Services to a third party or the resumption of the Services
by MetraHealth or its Affiliates.
(81) "Termination Charge" shall mean those fees described in Exhibit
17.
(82) "Third Party Services" shall have the meaning set forth in
Section 6.02.
(83) "Transition Acceptance Criteria" shall mean the acceptance tests
in respect of the Transition Services described in
Exhibit 4.
(84) "Transition Completion Date" shall mean the date MetraHealth and
ISSC agree that ISSC has met all of the Transition Acceptance
Criteria for all of the MetraHealth Data Centers.
(85) "Transition Phases" shall mean the key phases identified in
Exhibit 4 with respect to which ISSC must accomplish certain
tasks.
(86) "Transition Services" shall mean the migration of the Base
Services to ISSC, including the project management, data center
migration, network deployment, application consolidation,
application and data conversion, testing, training, documentation
and related services described in Exhibit 4.
(87) "Transitioned Employees" shall mean any former employees or
agents of Travelers, MetLife or MetraHealth or its Affiliates
hired by ISSC in connection with this Agreement.
(88) "Transition Schedule" shall have the meaning set forth in Section
4.02.
(89) "Travelers" shall mean The Travelers Insurance Company, a
Connecticut corporation.
<PAGE>
10
ARTICLE 2. TERM.
The term of this Agreement shall commence on November 1,
1995 and shall continue until 12:00 midnight (Eastern Standard
Time) on November 1, 2005, unless terminated earlier pursuant to
this Agreement (the "Term").
ARTICLE 3. BASE SERVICES.
3.01 Generally. Commencing on each Location Completion
Date and continuing throughout the Term, ISSC shall provide to
MetraHealth and certain Affiliates of MetraHealth the Base
Services with respect to the appropriate MetraHealth Data Center.
ISSC shall increase or decrease the amount of the Base Services
according to MetraHealth's and such Affiliates' demand for the
Base Services and at the Charges described in Exhibit 11. In
performing the Services, ISSC and its Agents shall during the
Term use the ISSC Software, MetraHealth Software and such other
software as the Parties may agree.
3.02 Changes to the Services. Except as may be
necessary on an emergency basis to maintain the continuity of the
Services, as required pursuant to the Change Control Procedures
or as otherwise set forth in this Agreement, ISSC shall not,
without MetraHealth's prior consent, modify the then current (1)
composition or nature of the Services or (2) manner in which the
Services are provided or delivered.
3.03 Systems Software. Except as otherwise provided
herein, as part of the Base Services, ISSC shall have
<PAGE>
11
administrative, operational, maintenance and financial
responsibility for the Systems Software.
3.04 Systems Software Maintenance. As part of the Base
Services, ISSC shall provide MetraHealth and its Affiliates with
Systems Software maintenance and Systems Software production
support services as described in Exhibit 1, including but not
limited to (1) preventive and corrective maintenance to correct
defects and failures in the Systems Software and any third party
systems software, (2) installing, testing and maintaining
upgrades to the Systems Software and any third party systems
software and (3) changes, enhancements and replacements of the
Systems Software or additional Systems Software, as ISSC deems
necessary, in order to perform the Services in accordance with
the Performance Standards.
3.05 Additional Third Party Software. MetraHealth may
request ISSC to provide additional third party applications or
systems software to perform the Services. With respect to such
software, ISSC shall use reasonable commercial efforts to secure
a license that is either (1) in ISSC's name and transferable to
MetraHealth or its Affiliates, as agreed to by the Parties, upon
the expiration or termination of any Service under this Agreement
or (2) in MetraHealth's or its Affiliates' name, as agreed to by
the Parties, with ISSC having the right to have access to and use
such software to the extent contemplated by this Agreement.
Additionally, ISSC shall use reasonable commercial efforts to
have included in each such license the
<PAGE>
13
right for MetraHealth or its Affiliates, as agreed to by the
Parties, and ISSC to attend all user group meetings offered by
the software vendor. As part of the Base Services, ISSC shall
have administrative, operational, maintenance responsibility for
any additional third-party systems software requested by
MetraHealth during the Term if such software is identified as
System Software. The financial responsibility for the acquisition
of such additional third party systems software shall be
determined by the Project Executives on a case by case basis.
<PAGE>
3.06 New Releases and Versions of the Software.
(1) As part of the Base Services, ISSC shall maintain
Reasonable Currency for releases and versions of the ISSC
Software, unless otherwise agreed to by MetraHealth and
ISSC. "Reasonable Currency" shall mean that new releases
and versions of the ISSC Software shall be installed by
ISSC and be operational no later than 12 months following
the date the licensor of such software made such release or
version generally available to ISSC. ISSC shall perform the
installation of new versions and releases, program
temporary fixes, perform preventive maintenance and perform
other software changes in accordance with the Change
Control Procedures. MetraHealth and ISSC shall jointly
determine the appropriate level of testing required for
such System Software Changes. MetraHealth shall provide
maintenance and testing support for Application Software to
allow ISSC to meet upgrade schedules for System Software
changes.
(2) If MetraHealth determines that certain Software requires a
migration period during which multiple product levels are
supported, ISSC shall advise MetraHealth of the additional
charges, if any, associated with the provision of such
support and the Parties shall agree on the terms and
conditions
<PAGE>
14
associated with providing such support. If MetraHealth
requests that ISSC delay upgrading any ISSC Software, and
ISSC is not meeting an affected Performance Standard,
MetraHealth shall relieve ISSC from such Performance
Standard (as agreed to by the Parties) until such time as
such ISSC Software is deemed current. In the event that any
such Software is no longer supported by the vendor of such
ISSC Software, ISSC may pass through to MetraHealth the
incremental maintenance costs in respect of such ISSC
Software.
3.07 Technology Developments. As part of the Base
Services, ISSC shall provide to MetraHealth, for MetraHealth's
evaluation and testing in connection with the Services, at the
same time as access is provided to other ISSC customers, any new,
commercially available ISSC information
processing technology developments, including new software and
hardware developments, that could reasonably be expected to have
an impact on MetraHealth's business. If, after such evaluation
and testing, MetraHealth requests that ISSC provide any
technology developments to MetraHealth for MetraHealth's or its
Affiliates' use, ISSC shall provide such developments to
MetraHealth at reasonable commercial rates as may be agreed to by
MetraHealth and ISSC for any incremental costs.
3.08 Licenses and Permits. As part of the Base Services,
ISSC shall be responsible for obtaining all governmental
licenses, authorizations and permits required by
<PAGE>
15
applicable laws and regulations, which ISSC is required to have
to perform the Services. ISSC shall have financial responsibility
for, and shall pay, all fees and taxes associated with obtaining
such governmental licenses, authorizations and permits.
3.09 Changes in Law and Regulations. Each Party shall
identify and notify the other Party of changes in
applicable laws and regulations and, as part of the Base
Services, ISSC shall identify the impact of such changes on its
ability to perform and deliver the Services. ISSC shall promptly
make any modifications to the Services as are reasonably
necessary to perform and deliver the Services in accordance with
the Performance Standards as a result of such changes. ISSC
shall be responsible for, and shall pay for, the cost of any such
modification relating to ISSC's business. MetraHealth shall pay
for the cost of any such modification relating to MetraHealth's
or its Affiliates' businesses. All such modifications shall be
effected through the Change Control Procedures.
3.10 Strategic Plan and Product Standards. ISSC shall
comply with MetraHealth's strategic plan and product standards
(the "Strategic Plan") existing as of the Effective Date, as set
forth in Exhibit 22, and as may be modified during the Term.
Upon MetraHealth's request, and as part of the Base Services,
ISSC shall assist MetraHealth in modifying the Strategic Plan to
incorporate alternative
technologies, such as hardware and applications software that
support comprehensive centralized and
<PAGE>
16
decentralized processing correlating to MetraHealth's strategic
business direction. Upon MetraHealth's request, ISSC shall assist
in the modification of such strategic systems plan in cooperation
with a third party consultant designated and paid for by
MetraHealth. Notwithstanding any such assistance from ISSC, the
adoption of such modifications, in whole or in part, (1) shall be
within MetraHealth's sole discretion and (2) may be considered a
Change or an Additional Service.
3.11 Manufacturers' Warranties. As part of the Base
Services, ISSC shall without limitation of any of MetraHealth's
other rights or remedies, pass through to MetraHealth or its
Affiliates, as agreed to by the Parties, whenever such pass
through is permitted, the manufacturer's or vendor's warranty on
all Machines, Software, or any installation or maintenance
services provided in connection with such Machines or Software,
and, in the event of any warranty claim, cooperate
fully with MetraHealth in asserting such claim against the
warrantor.
3.12 Supplies. As part of the Base Services, ISSC shall
provide to MetraHealth such data processing related forms and
supplies required for Systems operations. ISSC shall provide
magnetic tapes and disc packs, provided that if there is a
material change in the Services that affects the volume of data
processing related forms and supplies required for Systems
operations, the Parties shall negotiate an appropriate adjustment
to the Charges.
<PAGE>
17
3.13 Hardware Currency. As part of the Base Services,
ISSC shall maintain the Machines under the original
manufacturer's specifications for such Machines. In the event
such specifications have been or will be discontinued, ISSC shall
develop a plan for MetraHealth's approval to replace such
Machines within a reasonable time with Machines and equipment
providing equal functionality for which maintenance is available.
3.14 Changes in Scope of Services. Notwithstanding
anything to the contrary contained in the Agreement, MetraHealth
shall have the right, at any time (1) to insource or to contract
with a third party to perform any Services or (2) increase or
decrease workload volumes based on environmental changes. With
respect to those Services that are charged on a usage basis, as
set forth in Exhibit 11, any increase or decrease in
MetraHealth's or its Affiliates' demand for such usage-based
Services shall be measured in Application Hours, Application
Gigabytes and/or Application Tape Mounts. In the event that, as a
result of MetraHealth's decision to increase or decrease its
demand for such usage-based Services, the number of Application
Hours, Application Gigabytes or Application Tape Mounts
attributable to MetraHealth or its Affiliates increases or
decreases, ISSC shall increase or decrease the Base Charges in
accordance with the rates set forth in Exhibit 11. In the event
that the number of Application Hours, Application Gigabytes or
Application Tape Mounts attributable to MetraHealth or its
Affiliates (a) exceeds the applicable Baseline by (***) or
- --------------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
18
(b) falls below the applicable Baseline by (***) for four
consecutive months during the Term, MetraHealth and ISSC shall
negotiate and implement an adjustment to the Base Charges and
Baseline for Application Hours, Application Gigabytes or
Application Tape Mounts, as the case may be. With respect to all
other Services, MetraHealth shall have an unlimited ability to
decrease its demand for such Services. The Fixed Charges will not
change as a direct result of such decreased demand. MetraHealth
may elect to request ISSC to perform functions outside the scope
of Services as an Additional Service pursuant to Section 6.01.
3.15 Changes to Base Charges. Any disagreement between
the Parties with respect to any adjustments to the Base Charges
contemplated by Section 3.14 or Section 6.03 shall be resolved in
accordance with the dispute resolution procedures set forth in
Article 28.
3.16 Software Manuals. As part of the Base Services,
ISSC will provide, as requested by MetraHealth or its Affiliates,
documentation for the ISSC Software set forth in Exhibit 3, to
the extent that a licensor would normally provide such
documentation to a licensee. Any additional documentation
required beyond the normal distribution shall be at MetraHealth's
expense.
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
19
3.17 Dedicated Logical Environments. As part of the
Base Services, ISSC shall provide the Services using logical
environments (LPARS) dedicated solely to MetraHealth and its
Affiliates. ISSC may propose from time to time during the Term
that MetraHealth share the same logical environment that is
dedicated solely to supporting MetraHealth and its Affiliates
with other customers of ISSC. ISSC shall provide to MetraHealth,
for MetraHealth's approval, a detailed proposal for such shared
environment, including benefits, savings or risks to MetraHealth
and its Affiliates during the Term.
ARTICLE 4. TRANSITION.
4.01 Transition Services. Commencing on the Effective
Date, as part of the Base Services, ISSC shall provide the
Transition Services in accordance with the schedule (the
"Transition Schedule") set forth in Exhibit 4.
4.02 Changes to the Transition Schedules. In the event
MetraHealth and ISSC jointly agree to change aspects of the
Transition Schedule, MetraHealth and ISSC shall negotiate an
appropriate adjustment to the Charges, incentive payments set
forth in Section 4.07 or incentive credits set forth in Section
4.08.
4.03 Testing Environments. As part of the Base
Services, ISSC shall provide appropriate transition (1)
operation/testing environments and (2) training environments
using test data prepared by ISSC. Subject to MetraHealth's
approval and where testing with data representative of the
<PAGE>
20
production environment is necessary, ISSC may use a copy of such
MetraHealth production data as provided by MetraHealth.
4.04 Transition Acceptance Criteria. As part of the Base
Services, MetraHealth and ISSC shall perform the Transition
Acceptance Criteria for each MetraHealth Data Center set forth in
Exhibit 4.
4.05 Location Completion. The Transition of each
MetraHealth Data Center shall be considered complete when
MetraHealth and ISSC agree that the Transition Acceptance
Criteria have been met with respect to each such MetraHealth Data
Center.
4.06 Transition Completion. Upon the Transition
Completion Date, when MetraHealth and ISSC agree that the
Transition Acceptance Criteria for all of the MetraHealth Data
Centers have been met, then the transition with respect to all of
the MetraHealth Data Centers shall be deemed to be complete.
4.07 Incentive Payment. Upon the Transition Completion
Date, MetraHealth shall pay to ISSC (***) with respect to each of
the four MetraHealth Data Centers upon ISSC meeting or exceeding
the Transition Schedule as set forth in Exhibit 4.
4.08 Incentive Credits. ISSC shall pay to MetraHealth
(***) with respect to each of the four MetraHealth Data Centers
upon ISSC failing to meet the Transition Schedule as set forth in
Exhibit 4. The incentive credits referred to in this Section 4.08
represent liquidated damages on the basis of reduced
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
21
service levels and shall not be deemed or construed as a penalty.
Such liquidated damages are independent of any other contractual
or legal remedy but shall not duplicate any other recovery to
which MetraHealth may be entitled.
4.09 Usage Charges During Transition. MetraHealth shall
pay those usage-based charges during the Transition as set forth
in Exhibit 11.
4.10 Software Conversions. In the event the Parties
agree that any planned Software conversion cannot be successfully
accomplished with reasonable efforts, then (1) the parties will
agree on a replacement product acceptable to MetraHealth, (2)
MetraHealth will be financially responsible for procurement of
such software including appropriate license fees, (3) ISSC will
be financially responsible for the maintenance fees of such
software and treat it as System Software and (4) the Parties will
agree on the support required by such software and the financial
responsibility of the Parties associated with such support.
ARTICLE 5. APPLICATION RESOURCES.
5.01 Application Resources. As part of the Services,
ISSC shall, upon MetraHealth's request, provide to MetraHealth
and its Affiliates access to ISSC's specialized technical
personnel and resources consistent with ISSC's other commercial
customers receiving substantially similar goods and services
(such as ISSC consulting services, technology architects) at the
rate of (***) per hour (***) for the first two
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
22
years following the first Location Completion Date, for use in
connection with new projects or such other services designated by
MetraHealth, including enhancement and consulting services (the
"Application Resource Pool"). ISSC shall not use the Application
Resource Pool to (1) implement the Transition Services, (2)
provide operational or administrative support or (3) provide
services otherwise included in the Base Services.
5.02 Application Resource Proposals. MetraHealth may
from time to time request that ISSC perform services using the
Application Resource Pool. As soon as reasonably practicable
after receipt of such a request from MetraHealth and as part of
the Base Services, ISSC shall provide to MetraHealth (1) a
written description of the work ISSC anticipates performing in
connection with such Application Resource Pool, (2) a schedule
for commencing and completing such work, (3) the number of person
hours included in the Application Resource Pool to be expended
and (4) when appropriate, the software, hardware and human
resources and run-time requirements necessary to develop and
operate any new applications and the Parties' respective
obligations and ISSC's charges, if any. In the event MetraHealth
elects to have ISSC perform services using the Application
Resource Pool, MetraHealth and ISSC shall execute an Application
Resource Request. ISSC shall not use any Application Resource
Pool until an Application Resource Request in respect of such
Application Resource Pool has been executed on behalf of
MetraHealth. If ISSC becomes aware that the actual resources
<PAGE>
23
(including software, hardware, human and run-time resources)
expended by ISSC or its Agents in performing the services
pursuant to an Application Resource Request exceed or are likely
to exceed the resources set forth in such Application Resource
Request, ISSC shall notify MetraHealth immediately of the extent,
or likely extent, that the actual resources exceed or are
expected to exceed the anticipated resources. Unless the charges
for the project are fixed, ISSC shall, as soon as practicable,
perform a root-cause analysis, at its own expense, to identify
the cause of the need for such excess resources and provide a
report detailing the circumstances resulting in the need for such
excess resources.
ARTICLE 6. ADDITIONAL SERVICES.
6.01 Additional Services. During the Term, MetraHealth
may, from time to time, request that ISSC perform an Additional
Service. ISSC shall, as part of the Base Services, provide to
MetraHealth, as soon as reasonably practicable following receipt
of MetraHealth's request, an Additional Services Proposal. In the
event MetraHealth elects to have ISSC perform the Additional
Service, MetraHealth and ISSC shall execute an Additional
Services Schedule. ISSC shall not begin performing any Additional
Service until an Additional Services Schedule has been duly
executed by MetraHealth and ISSC.
6.02 Third Party Services. Notwithstanding any request
made to ISSC or the submission of an Additional Services
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Proposal by ISSC pursuant to Section 6.01, MetraHealth shall have
the right to contract with a third party to perform any services
which are in addition to, or outside the scope of, the Services
(the "Third Party Services"). If MetraHealth contracts with a
third party to perform any Third Party Service, ISSC shall
cooperate with MetraHealth and such third party to the extent
reasonably required by MetraHealth, including provision of (1)
written requirements, standards and procedures for MetraHealth
systems operations maintained by ISSC so that the enhancements or