-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ESmr3dNC2CKl6i7pX2LizyCRQxOuEJXCbI1pvIYtsrngTZzxXA2h8PogvSoWXR7c JVHYEOoH4ZGBSPHrAdjf2Q== 0000950131-96-001401.txt : 19960402 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 10-K405 1 FORM 10-K 405 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. 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 "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 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 --------------------------
PRODUCT ENROLLMENT AS OF 12/31/95 ENROLLMENT AS OF 1/31/96 - -------------------------------------------------------------------------------------------- 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 ========== ==========
(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 ENROLLMENT BY FUNDING MECHANISM AND PRODUCT TYPE ------------------------------------------------
12/31/95 1/31/96 ---------------------- ---------------------- PRODUCT FUNDED SELF-FUNDED FUNDED SELF-FUNDED - ---------------------------------------------------------------------- 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 ========= ========= ========= =========
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 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 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 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 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 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 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 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 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 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 EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------
FIRST ELECTED AS NAME AGE POSITION EXECUTIVE OFFICER - ---- --- -------- ----------------- 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
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 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 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.
High Low ------- ------- 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
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 ITEM. 6. SELECTED FINANCIAL DATA --------------------------------- Financial Highlights
For the Years Ended December 31, ------------------------------------------------------------------------ 1995 1994 1993 1992 l991 - ------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) - ------------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------------
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 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
1995 1994 1993 ---------------------------------------------------------------------- Amount or Percent Amount or Percent Amount or Percent Increase Percent Increase Percent - -------------------------------------------------------------------------------------------------------- (in thousands) - -------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------
/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 3,385,000 in 1995. 19 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 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 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 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ---------------------------------------------------- Consolidated Statements of Operations
Year ended December 31, -------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------------------- (in thousands, except per share data) - --------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------
See notes to consolidated financial statements 23 Consolidated Balance Sheets
December 31, ---------------------- 1995 1994 - -------------------------------------------------------------------------------------------------------------- (in thousands, except share and per share data) - -------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 24 Consolidated Statements of Changes in Shareholders' Equity
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) - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 25 Consolidated Statements of Cash Flows
Year ended December 31, ---------------------------------------- 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------- (in thousands) - ----------------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------------
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 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 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 - ------------------------------------------------------------------------------- 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 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 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):
Gross Gross Unrealized Unrealized Amortized Holding Holding Fair 1995 Cost Gains Losses Value - -------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------
31 As of December 31, 1995, the contractual maturities of the Company's cash and investments were as follows (in thousands):
Years to Maturity Less Than One to Over Five to Over Ten One Year Five Years Ten Years Years - ------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------
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 Stock Option Transactions
1995 1994 1993 - ------------------------------------------------------------------------------------------ (shares in thousands) - ------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------
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
Year Ended December 31, ------------------------------ 1995 1994 1993 - ------------------------------------------------------------------------------ (in thousands) - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------
Reconciliation of Statutory to Effective Income Tax Rate
Year Ended December 31, ---------------------------------- 1995 1994 1993 - ------------------------------------------------------------------------------- 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% - -------------------------------------------------------------------------------
33 Components of Deferred Income Tax Assets and Liabilities
December 31, ----------------------- 1995 1994 - ----------------------------------------------------------------------- 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 - -----------------------------------------------------------------------
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 - ------------------------------------------------------------------------------ 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):
1996 1997 1998 1999 2000 Thereafter - ------------------------------------------------------------------------------ $85,119 $62,952 $54,489 $38,380 $14,110 $20,699 - ------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------- 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:
Quarters Ended ---------------------------------------------------------- March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------
/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 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 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 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 *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 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 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 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 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 EXHIBIT INDEX -------------
Exhibit Number Description Page Number - -------------- ----------- ----------- 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.
*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
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. EX-3.A 2 COMPANY'S SECOND RESTATED ARTICLES 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 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. (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) 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 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. 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. 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. - ---------- -------------- (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- 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- 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- 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- 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- 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- 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- 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- 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- 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: 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 -2- 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 -3- 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 -4- 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 -5- 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 -6- 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 -7- 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 -8- 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 -9- 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 -10- 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. -11- (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 -12- 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 -13- 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 -14- 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 -15- 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 -16- 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 -17- 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 -18- 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 -19- 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 -20- 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 -21- 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 -22- 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. -23- (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. -24- 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. -25- (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. * * * * * -26- 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 EX-10.B 3 EMPLOYMENT AGREEMENT WILLIAM W. MCGUIRE 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 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 2 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:
Age Percentage 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
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 3 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. 4 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. 5 (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 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 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 (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 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 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 (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 (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 13 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, 14 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 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 EX-10.H 4 UHC 1996 EXECUTIVE SAVINGS PLAN 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. 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 -------------------- UNITED HEALTHCARE CORPORATION(SM) EXECUTIVE SAVINGS PLAN (1996 RESTATEMENT) EFFECTIVE JANUARY 1, 1996 EXPLANATION FOR ELIGIBLE EXECUTIVES EXHIBIT A UNITED HEALTHCARE CORPORATION(SM) EXECUTIVE SAVINGS PLAN (1996 RESTATEMENT) EFFECTIVE JANUARY 1, 1996 EXPLANATION FOR ELIGIBLE EXECUTIVES 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 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 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 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 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 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 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 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 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 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 ###-##-#### 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 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 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 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 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 ###-##-#### 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 EX-10.I 5 UHC 1996 MANAGEMENT INCENTIVE COMP. PLAN Exhibit 10(i) 1996 MANAGEMENT INCENTIVE PLAN - ------------------------------------------------------------------------------- United HealthCare(SM) 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 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 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 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 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 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 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 EX-10.M 6 EMPLOYMENT AGREEMENT MICHAEL MOONEY 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. 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 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 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 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 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 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 EX-10.T 7 INFORMATION TECHNOLOGY SERVICES AGREE. 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 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 ---- 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 ---- 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 ---- 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 ---- 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 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 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 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. 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. 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. 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 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. 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. 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. 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. 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 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 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. 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 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 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 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. 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. 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. 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 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. 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. 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 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 24 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 developments of such third party may be operated by ISSC, (2) assistance and support services to such third party at rates no less favorable than other customers of ISSC receiving substantially similar services, and (3) access to the Software and the Machines, subject to any third party restrictions on ISSC Third Party Software and ISSC Machines, as may be reasonably required by such third party and approved by MetraHealth in connection with such Third Party Service. MetraHealth shall require such third parties to comply with ISSC's reasonable requirements regarding operations, data center standards and security. ISSC shall, at its own expense, cooperate with such Third Party Service provider at MetraHealth's request, provided the Third Party Service provider complies with any written requirements, standards and policies for system operations provided to MetraHealth by ISSC. MetraHealth agrees to consider 25 recommendations from ISSC regarding the technical architecture or environment for any such Third Party Service. 6.03 Acquisition and Divestiture. In the event of an acquisition of any business or business unit by MetraHealth or its Affiliates, any increased function or service requirements that may result in connection with such acquisition may be treated as Additional Services or Third Party Services, at MetraHealth's option. In the event of a divestiture of any business or business unit of MetraHealth or its Affiliates, ISSC and MetraHealth shall negotiate and implement a decrease in the Base Charges. ARTICLE 7. CUSTOMER SATISFACTION. 7.01 Baseline Customer Satisfaction Survey. During the 90-day period after each Transition Completion Date and as part of the Base Services, ISSC shall conduct a baseline customer satisfaction survey, as approved by MetraHealth, for a representative sample of affected end-users at MetraHealth service locations as agreed to by the Parties. This survey shall be of the content and scope described in Exhibit 7, administered in accordance with the procedures agreed upon by MetraHealth and ISSC and shall be the baseline for measurement of performance improvements described in Section 7.02. The content, scope, method and timing of the survey shall be acceptable to MetraHealth and ISSC. 26 7.02 Customer Satisfaction Survey. At least once every 12 months during the Term and as part of the Base Services, ISSC shall conduct a customer satisfaction survey for each MetraHealth Service Location. The survey shall, at a minimum, cover at least the following classes of personnel: (1) end-users of the Services and (2) senior management of end-users. ISSC shall also conduct a similar annual survey of the senior managers of MetraHealth which shall focus on satisfaction with the functional interface between MetraHealth and ISSC. The content, scope and method of the survey shall be consistent with the baseline customer survey conducted pursuant to Section 7.01 and the timing of the above surveys are subject to MetraHealth's approval. ISSC shall provide MetraHealth and the Management Committee with a summary (in form and substance satisfactory to MetraHealth) of the results of any customer satisfaction survey conducted by ISSC pursuant to this Section 7.02. ISSC shall achieve at least 90 percent customer satisfaction for each class of end-users, as shall be defined by MetraHealth, and show reasonable improvement from the prior survey. If ISSC fails to achieve this standard, then 30 days after the survey is complete, ISSC shall submit a detailed plan to MetraHealth detailing how it will improve MetraHealth's satisfaction percentage. 27 ARTICLE 8. PERFORMANCE STANDARDS. 8.01 Base Services. Commencing 60 days after each Location Completion Date, ISSC shall provide the appropriate Base Services at the Base Performance Standards applicable to such Base Services. During the 60 day period after each Location Completion Date, ISSC shall benchmark its level of performance against the Base Performance Standards. In the event that ISSC is unable to achieve applicable Base Performance Standards within the 60 day period following the Location Completion Date, ISSC, as part of the Base Services, and MetraHealth shall consider mechanisms for tuning the operation of the Systems or adjusting the Base Performance Standards. 8.02 New Performance Standards. ISSC shall provide Additional Services at the levels of service (1) specified in an Additional Services Schedule or (2) otherwise established in writing by MetraHealth and ISSC (the "New Performance Standards"). 8.03 Adjustment of Performance Standards. The Management Committee shall review during the last quarter of every calendar year and shall adjust and implement, as appropriate, the Performance Standards. In addition, either MetraHealth or ISSC may, at any time upon notice to the other Party, request review and, upon agreement by the Management Committee, adjust any Performance Standard which such Party in good faith believes is inappropriate at that time. 28 8.04 Performance Reports. As part of the Base Services, on or before the tenth business day of each month during the Term, ISSC shall provide to MetraHealth monthly performance reports assessing ISSC's performance with respect to the Performance Standards as agreed upon by MetraHealth and ISSC and substantially similar to that set forth in Exhibit 21. 8.05 Root-Cause Analysis. In the event that the Services have not been provided in accordance with the Performance Standards, ISSC shall, as part of the Base Services, (1) perform a root-cause analysis to identify the cause of such failure, (2) correct such failure, (3) provide MetraHealth with a written report detailing the cause of, and procedure for correcting, such failure and (4) provide MetraHealth with reasonable evidence that such failure will not reoccur. ISSC shall provide the foregoing to MetraHealth at the next monthly management meeting following ISSC's failure to provide the Services in accordance with the Performance Standards. ARTICLE 9. BENCHMARKING. Within 180 days after the Effective Date, MetraHealth and ISSC shall jointly establish a continuous benchmark program against selected third parties for quality, cost and delivery of the Services to determine whether these factors are "best of breed". ISSC, at no cost to MetraHealth, shall develop an analysis of such benchmarking results, and implement a plan for reaching any higher level of service or better price performance 29 ratio identified by the benchmark. The benchmarker, the benchmarking and the information required to conduct or support the benchmarking shall be jointly determined by MetraHealth and ISSC. The benchmark shall be conducted upon written request of MetraHealth, but no more frequently than once during any 12 month period. ARTICLE 10. SERVICE LOCATIONS. 10.01 Service Locations. The Services shall be provided from the ISSC Service Locations. 10.02 Security Procedures. As part of the Base Services, ISSC shall maintain and enforce at the ISSC Service Locations safety and security procedures that are at least (1) equal to industry standards for such Service Locations and (2) as rigorous as those procedures in effect at the ISSC Service Locations as of the Effective Date. As part of the Base Services, ISSC shall provide at the Service Locations safety and security procedures sufficient to prevent unauthorized access to all software and equipment which process MetraHealth Data. ISSC shall periodically review and update safety and security procedures at the Service Locations. With respect to each MetraHealth Service Location, as part of the Base Services, ISSC shall comply with the safety and security procedures that are in effect at the MetraHealth Service Locations as may be reasonably required by MetraHealth and its Affiliates. 10.03 Security Relating to Competitors. If (1) ISSC provides the Services from an ISSC Service Location that is 30 shared with a third party or third parties and (2) any part of the business of ISSC or any such third party is now or in the future identified by MetraHealth as competitive with MetraHealth's or its Affiliates' businesses, then ISSC, at MetraHealth's request, shall develop a process, subject to approval of MetraHealth, to restrict access in any such shared environment to MetraHealth's Confidential Information so that ISSC's Agents engaged in such competitive business shall have no access to MetraHealth's Confidential Information. 10.04 Access to Personnel and Resources. As part of the Base Services, ISSC shall, upon MetraHealth's request, provide MetraHealth and its Affiliates equal access to ISSC's specialized technical personnel and resources consistent with ISSC's other commercial customers receiving substantially similar goods and services. 31 ARTICLE 11. PROJECT TEAM. 11.01 Management Committee. Within 30 days of the Effective Date, MetraHealth and ISSC shall appoint the Management Committee. A member of the Management Committee may be replaced at any time by the Party that originally appointed such member to the Management Committee with the prior consent of the other Party. MetraHealth shall designate one of its members on the Management Committee to act as the chairperson of the Management Committee. No Management Committee member shall have voting power greater than any other Management Committee member. The Management Committee shall be authorized and responsible for generally overseeing the performance of the Services. 11.02 ISSC Project Executive. ISSC shall appoint an individual who from the Agreement Date shall be in charge of implementing the Services on a full-time basis and shall act as the primary ISSC contact under this Agreement (the "ISSC Project Executive"). ISSC's appointment of any ISSC Project Executive shall be subject to MetraHealth's prior consent. The initial ISSC Project Executive shall be Christine Schuster. ISSC shall not reassign or replace any ISSC Project Executive during the first two years of his or her assignment as the ISSC Project Executive unless MetraHealth consents to such reassignment or replacement or the individual (1) voluntarily resigns from ISSC, (2) is dismissed by ISSC for misconduct or unsatisfactory performance in respect of his or her duties and responsibilities to MetraHealth or ISSC or (3) is unable to work due to his or her death or disability. The ISSC Project Executive shall be located at the ISSC facility located in Southbury, Connecticut, unless otherwise agreed upon by the Parties. 11.03 Key Employees. MetraHealth shall, subject to ISSC's consent, periodically update the list of Key Employees. The Key Employees as of the Effective Date shall be dedicated to the MetraHealth account on a full-time basis for at least two years unless otherwise identified in Exhibit 9. Subsequent Key Employees shall be dedicated to the MetraHealth account on a full-time basis for at least one year. Without MetraHealth's approval, which approval shall not be unreasonably withheld, ISSC shall not replace or reassign off the MetraHealth account any Key Employee (1) if such replacement or reassignment would materially disrupt the business of MetraHealth or any of its Affiliates (2) without at least two months' prior notice. 11.04 Project Staff. ISSC shall use adequate numbers of individuals with suitable training, education, experience and skill to perform the Services in the most cost effective manner consistent with the applicable Performance Standards. ISSC shall notify MetraHealth prior to implementing any material change in staffing requirements at (1) MetraHealth's Service Locations and (2) ISSC's Service Locations. 11.05 Facilities and Equipment. ISSC shall supply the personal computers, workstations, terminals, printers, software and other related equipment and supplies to the Key Employees and ISSC Project Executive required at any MetraHealth service location. ISSC shall also maintain and upgrade all such equipment and supplies. In addition, ISSC shall provide on ISSC's premises, to MetraHealth personnel reasonably required to be located on ISSC's premises, reasonable space, office furnishings, janitorial service, office supplies, available copier, telephone, local phone service and utilities as the Parties may agree. 11.06 Review Meetings. Promptly after the Effective Date, MetraHealth and ISSC shall determine an appropriate set of periodic meetings to be held between MetraHealth and ISSC. At a minimum, the parties shall schedule (1) meetings among operational personnel to discuss ongoing issues relating generally to daily performance and planned or anticipated activities and changes, (2) management meetings to review the performance report, the project schedule report, the changes report and such other matters as appropriate, and (3) senior management meetings to review relevant contract and performance issues, each to be held as often as the parties shall agree from time to time during the Term. Notwithstanding the foregoing, ISSC is willing to participate in such meetings as often as MetraHealth shall reasonably request. 11.07 Subcontractors. Exhibit 15 sets forth all subcontractors that ISSC proposes to use under this Agreement. ISSC may not subcontract any of the Services without MetraHealth's prior consent, except that ISSC may subcontract Operational Services without MetraHealth's consent, upon prior notice to MetraHealth, provided that with respect to each Contract Year, the aggregate amount of all subcontracts with respect to Operational Services shall not exceed 20 percent of the Base Charges for the previous Contract Year. Notwithstanding the foregoing, ISSC shall not be relieved of any obligation or responsibility under this Agreement by virtue of any subcontract and shall remain liable for each of its obligations and responsibilities under this Agreement. ISSC shall be responsible for the work and activities of each of its subcontractors, including compliance with the terms of this Agreement. ISSC shall be responsible for all payments to subcontractors of ISSC providing Services under this Agreement. 11.08 Conduct of ISSC Personnel. While at the MetraHealth service locations, ISSC and its Agents shall (1) comply with MetraHealth's requests, standard rules and regulations regarding personal and professional conduct (including, but not limited to, the wearing of an identification badge or personal protective equipment and adhering to regulations and general safety practices or procedures) generally applicable to such MetraHealth service locations and (2) otherwise conduct themselves in a businesslike and professional manner. In the event that MetraHealth determines in good faith that a particular employee, contractor or Agent is not conducting himself or herself in accordance with this Section 11.08, MetraHealth may, but shall not be required to, provide ISSC with notice and documentation in respect of such conduct. Upon receipt of such notice, ISSC shall promptly investigate the matter and take appropriate action. 11.09 Non-Competition. ISSC shall not assign an ISSC Project Executive or Key Employee to the account of the companies and organizations set forth in Exhibit 10 or any successor company or organization without MetraHealth's prior consent, which consent shall not be unreasonably withheld, during his or her assignment on the MetraHealth account or for two years from the date of removal. ARTICLE 12. MANAGEMENT AND CONTROL. ---------- ---------------------- 12.01 Procedures Manual. As part of the Base Services, ISSC shall deliver to MetraHealth, for MetraHealth's approval as to scope, prior to the first Location Completion Date, in the form and scope agreed upon by MetraHealth and ISSC and substantially similar to that set forth in Exhibit 24, the Procedures Manual, describing (1) the computer hardware and software environments in which the Services will be performed, (2) the documentation (such as operations manuals, user guides and disaster recovery plans) which provides further details regarding the Services, (3) the procedures ISSC intends to use and the activities ISSC proposes to undertake in order to manage the Services, including, when appropriate, those direction, supervision, monitoring, staffing, reporting, planning and oversight activities normally undertaken at the MetraHealth service locations where critical business, commercial and financial data of MetraHealth are processed and (4) crisis management and war room procedures. Until such time as the Procedures Manual has been approved as to scope by MetraHealth and except as otherwise required or permitted by this Agreement, ISSC shall follow and comply with the policies and procedures followed by and complied with by MetraHealth as of the Effective Date in respect of the Base Services. ISSC shall, prior to completing the Transition of each MetraHealth Data Center and otherwise periodically throughout the Term, update the Procedures Manual and provide MetraHealth with updated copies thereof to reflect any changes in the operations or procedures described therein within a reasonable time after such changes were made. The Procedures Manual shall not contradict the terms of this Agreement. 12.02 Change Control Procedures. As part of the Base Services, ISSC shall deliver to MetraHealth, for MetraHealth's approval, prior to the first Location Completion Date, in a form and scope substantially similar to that set forth in Exhibit 25 the Change Control Procedures. All Changes shall be made pursuant to the Change Control Procedures. No Change shall be implemented without MetraHealth's prior approval except as may be necessary on a temporary basis to maintain the continuity of the Services. ISSC shall (1) schedule all projects and Changes so as not to disrupt MetraHealth's or its Affiliates' businesses, (2) prepare and deliver to MetraHealth a monthly rolling schedule for ongoing and planned Changes for the next 90-day period, (3) monitor the status of Changes against the applicable schedule, (4) document and provide to MetraHealth notification (which may be given orally provided that such oral notice is confirmed in writing to MetraHealth within five business days) of all Changes performed on a temporary basis to maintain the continuity of the Services no later than the next business day after the Change was made and (5) once every 180 days during the Term review and modify as appropriate the Change Control Procedures. The Change Control Procedures shall be included in the Procedures Manual. ARTICLE 13. PROPRIETARY RIGHTS. ---------- ------------------ 13.01 MetraHealth Software. Subject to any third party restrictions, MetraHealth and its Affiliates hereby grant to ISSC, at no cost to ISSC, solely to provide the Services, a non- exclusive, non-transferable right to use the MetraHealth Software; provided, however, that ISSC may not decompile, disassemble or otherwise reverse engineer the MetraHealth Software in any manner, without MetraHealth's prior consent. As of the Effective Date, MetraHealth shall, subject to any third party restrictions, at no cost to ISSC, provide ISSC with access to the MetraHealth Software in the form in use by MetraHealth and its Affiliates as of the Effective Date. Subject to Section 11.07 and any third party restrictions, ISSC may sublicense to ISSC's subcontractors, at no cost to MetraHealth or its Affiliates, the right to have access to and operate the MetraHealth Software as may be necessary in connection with the provision of the Services. Except as otherwise provided in this Agreement, at such time as ISSC or its Agents cease to perform an applicable Service, this license to ISSC shall immediately revert to MetraHealth or its Affiliates and ISSC shall (1) deliver to MetraHealth or its Affiliates, at no cost to MetraHealth or its Affiliates, a current copy of all the MetraHealth Software in the form in use as of the date of such cessation and (2) destroy or erase all other copies of the MetraHealth Software that were made available to ISSC or its Agents. Any enhancements or modifications to the MetraHealth Software and related documentation shall be and shall remain the exclusive property of MetraHealth or its Affiliates or any of their third party licensors. 13.02 ISSC Proprietary Software. The ISSC Proprietary Software shall be and shall remain the exclusive property of ISSC. MetraHealth shall have no rights or interests in the ISSC Proprietary Software except as described in this Section 13.02. Prior to using any ISSC Proprietary Software to provide any of the Services, ISSC shall notify MetraHealth that it intends to use such ISSC Proprietary Software and obtain MetraHealth's consent. If MetraHealth does not consent, ISSC shall recommend a functionally equivalent alternative which ISSC shall use upon MetraHealth's consent. As part of the Base Services, ISSC shall make available to MetraHealth and its Affiliates ISSC Proprietary Software for use by MetraHealth and its Affiliates solely in connection with the Services. As part of the Base Services, ISSC shall deliver to MetraHealth a copy of, and grant to MetraHealth and its Affiliates a perpetual, non-exclusive, non-trnsferrable license to use the ISSC Proprietary Software at such time as ISSC and its Agents cease to perform an applicable Service under this Agreement. As part of the Base Services, ISSC shall, upon MetraHealth's request, no more than once each quarter during the Term, deliver to MetraHealth a copy of the ISSC Proprietary Software (including related source code) for archival purposes only. 13.03 ISSC Third Party Software. The ISSC Third Party Software shall be and shall remain the property of ISSC's third party licensors. As part of the Base Services, ISSC shall, to the extent permitted by third party restrictions, make available to MetraHealth and its Affiliates ISSC Third Party Software for use by MetraHealth and its Affiliates in connection with the Services. As part of the Base Services, ISSC shall, to the extent permitted by the licenses or leases in respect of the ISSC Third Party Software, deliver to MetraHealth a copy of, and transfer to MetraHealth or its Affiliates as agreed to by the Parties, a perpetual, non-exclusive, non-transferable license to use the ISSC Third Party Software at such time as ISSC and its Agents cease to provide an applicable Service. MetraHealth shall pay any ongoing fees after expiration or termination of an applicable Service (such as monthly license or monthly maintenance fees) for such ISSC Third Party Software. To the extent that third party restrictions prevent ISSC from transferring MetraHealth and its Affiliates such a license, ISSC shall recommend, and upon MetraHealth's approval, obtain a functionally equivalent alternative. ISSC shall pay any required consents for such initial license charges for the use of such functionally equivalent software. MetraHealth shall pay any ongoing fees after expiration or termination of an applicable Service (such as monthly license fees or monthly maintenance fees) for such functionally equivalent software. 13.04 Software Purchased by ISSC on Behalf of MetraHealth. The software purchased by ISSC on behalf of MetraHealth is set forth in Exhibit 20 and identified as Category B in Exhibit 3. As part of the Base Services, ISSC shall make available to MetraHealth and its Affiliates such Software for use by MetraHealth and its Affiliates solely in connection with the Services. As part of the Base Services, ISSC shall deliver to MetraHealth a copy of, and transfer to MetraHealth or its Affiliates a perpetual, non-exclusive, nontransferable license to the Software set forth in Exhibit 20 at such time as ISSC and its Agents cease to perform an applicable Service under this Agreement. ISSC shall pay the license transfer fee, if any, and MetraHealth will pay any ongoing charges after expiration or termination of any Service (such as monthly license fees or maintenance fees) for such Software. As part of the Base Services, ISSC shall, upon MetraHealth's request, no more than once each quarter during the Term, deliver to MetraHealth a copy of such Software (including related source code, if the license so permits) for archival purposes only. 13.05 MetraHealth Third Party Software. The MetraHealth Third Party Software has been licensed to MetraHealth or its Affiliates. MetraHealth is responsible for paying any consent or access fees to enable ISSC to use the MetraHealth Third Party Software during the Term. ISSC shall pay the ongoing charges (such as monthly license fees and monthly maintenance fees) for such MetraHealth Third Party Software. At such time as ISSC or its Agents cease to provide the applicable Service for which such MetraHealth Third Party Software is required, ISSC and its Agents shall cease to have access to such MetraHealth Third Party Software. 13.06 Developed Software. Prior to ISSC or any ISSC Agent (1) enhancing or modifying the MetraHealth Software or (2) developing any software and related documentation under this Agreement ((1) and (2), collectively, the "Developed Software"), the Parties shall agree on the appropriate allocation of the proprietary rights in and interests to the Developed Software pursuant to a separate, written agreement between the Parties (a "Developed Software Agreement") which shall preempt the application of any applicable state or Federal law or any other provision of this Agreement. Unless otherwise set forth in a Developed Software Agreement, at such time as ISSC and its Agents cease to provide an applicable Service, ISSC shall deliver to MetraHealth or its Affiliates, at no cost to MetraHealth or its Affiliates, a current copy of, and grant to MetraHealth and its Affiliates a perpetual, non-exclusive non-transferable license to use the Developed Software and any related documentation in the form in use by ISSC in connection with the Services as of the date of such cessation. 13.07 Infringement. In the event that the Services, the ISSC Software, or any code or materials created or used under this Agreement by ISSC or its Agents that is contained in the Developed Software is found to be infringing upon the proprietary rights of a third party, ISSC shall, at its own expense (1) obtain the right to use the infringing material, (2) modify 45 the software or material so that it is no longer infringing, or (3) obtain and install functionally similar software or materials that are not infringing. 13.08 Changes and Upgrades to the Systems. Except as may be approved by MetraHealth, ISSC shall not make any changes or modifications to the Software that would alter the functionality of the Software, degrade the performance of the Software, or materially adversely affect MetraHealth's or its Affiliates' businesses. ISSC shall be responsible, at no cost to MetraHealth or its Affiliates, for any modification or enhancement to, or substitution for, the Software used in connection with the Services necessitated by (1) unauthorized changes by ISSC to the MetraHealth Software or Developed Software or (2) changes to the Systems Software or related operating environments. 13.09 Documentation. Except as set forth in Section 13.02 and Section 13.03 with respect to the ISSC Software, all Documentation shall be made available to MetraHealth and its Affiliates on a non-exclusive basis. All Documentation with respect to MetraHealth Software and Application Software shall be and will remain the property of MetraHealth and its Affiliates. 13.10 Cooperation Upon Divestiture. In the event of a divestiture of any business or business unit of MetraHealth or its Affiliates, ISSC shall cooperate with MetraHealth with respect to, and shall not unreasonably withhold or delay consent 46 to, ISSC's transfer of any license or right to use Software or ISSC proprietary or third party tools. 47 ARTICLE 14. REQUIRED CONSENTS. ---------- ----------------- 48 All consents or approvals necessary to allow ISSC or its Agents to use MetraHealth's or its Affiliates' leased assets, the services provided under MetraHealth's or its Affiliates' service contracts and that MetraHealth Software which is acquired by ISSC during the Term on behalf of, or for the benefit of, MetraHealth or its Affiliates to provide the Services shall be obtained by ISSC with MetraHealth's cooperation. All consents, upgrade fees or approvals necessary to allow ISSC or its Agents to use MetraHealth Software, other than that which is acquired by ISSC on behalf of, or for the benefit of, MetraHealth shall be obtained by MetraHealth with ISSC's cooperation. All consents or approvals necessary to allow ISSC or its Agents to (1) use the ISSC Software and the ISSC Third Party Software, (2) use any assets leased or owned by ISSC or its Agents and (3) use third party services retained by ISSC to provide the Services during the Term shall be obtained by ISSC. All consents or approvals necessary to allow MetraHealth and its Affiliates to continue to use after ISSC or its Agents cease to provide an applicable Service (a) any assets leased or owned by ISSC or its Agents or (b) the third party services retained by ISSC to provide Services during the Term shall be obtained by ISSC. MetraHealth shall be responsible for paying the costs of obtaining any consents associated with MetraHealth Software, other than that which is acquired by ISSC on behalf of, or for the benefit of, MetraHealth and its Affiliates during the Term. The Parties shall negotiate 49 in good faith the financial responsibility for the costs of obtaining any other consents not otherwise provided for in this Agreement. ARTICLE 15. METRAHEALTH RESPONSIBILITIES. ---------- ---------------------------- In addition to MetraHealth's other responsibilities provided for in this Agreement, during the Term, MetraHealth shall be responsible for: (1) the appointment of the MetraHealth Project Executive with the authority to bind MetraHealth; (2) providing, on MetraHealth's premises, to ISSC employees dedicated full time to the MetraHealth account and reasonably required to be located on MetraHealth's premises, reasonable space, office furnishings, janitorial service, office supplies, available copier, telephone, local phone service and utilities in connection with ISSC's provision of the Services, at no cost to ISSC; and (3) cooperating with ISSC and its Agents by, among other things, making available, as reasonably requested by ISSC, personnel, information, approvals and acceptances so that ISSC may perform its obligations hereunder in a timely and acceptable manner. 50 ARTICLE 16. REPORTS AND DATA. ---------- ---------------- 16.01 Ownership of MetraHealth Data. The MetraHealth Data is and shall remain the property of MetraHealth and its Affiliates. The MetraHealth Data shall not be (1) used by ISSC or its Agents other than in connection with providing the Services, (2) disclosed, sold, assigned, leased or otherwise provided to third parties by ISSC or its Agents (except as provided for in this Agreement and subject to Article 22) or (3) commercially exploited by or on behalf of ISSC or its Agents. ISSC's security procedures shall ensure that MetraHealth Data shall not be available to MetraHealth Competitors. ISSC shall, at MetraHealth's request, provide information with respect to its security procedures with respect to MetraHealth Data. 16.02 Correction of Errors. As part of the Base Services, ISSC shall promptly correct at MetraHealth's request and sole discretion any errors or inaccuracies in the MetraHealth Data and the Reports caused by ISSC or its Agents and such correction shall not limit any other remedies that MetraHealth or its Affiliates may be entitled to under this Agreement or at law. Notwithstanding the foregoing, ISSC shall not make any changes to the MetraHealth Data without MetraHealth's prior approval. 16.03 Return of Data. ISSC shall, upon (1) request by MetraHealth at any time, or, (2) the cessation of all Termination Assistance Services, (a) promptly return to MetraHealth and its Affiliates, in the format and on the media requested by MetraHealth, at MetraHealth's option, all or a portion of the 51 MetraHealth Data and (b) erase or destroy that portion of the MetraHealth Data not returned to MetraHealth in ISSC's or its Agents' possession upon cessation of all Termination Assistance Services. MetraHealth shall pay ISSC's reasonable out-of-pocket costs associated with the return of such data. Archival tapes containing any MetraHealth Data may be used by ISSC or its Agents solely for back-up and recovery purposes. 16.04 Reports and Raw Data. As part of the Base Services, ISSC shall provide to MetraHealth the Reports. The Reports shall be prepared and provided by ISSC to MetraHealth according to the schedules and in the manner set forth in the Procedures Manual and substantially similar to that set forth in Exhibit 19. The Reports will detail MetraHealth's use of system resources, as they relate to the Charges. ISSC will also provide or allow MetraHealth and its Affiliates electronic access to the data that was used to generate the Reports for the purposes of ad hoc reporting and for input to appropriate MetraHealth charge-back systems. 16.05 Re-Runs. Neither MetraHealth nor its Affiliates shall be charged for any re-runs of Reports or MetraHealth Data due to the fault of ISSC or any of its Agents. MetraHealth shall pay for the Application Hours, the Application Gigabytes and the Application Tape Mount Charges as specified in Exhibit 11 for that percentage of re-runs necessitated by incorrect or incomplete data, failure of Applications Software or erroneous instructions supplied to ISSC by MetraHealth and for correction 52 of programming, operator, or other processing errors caused by MetraHealth. ISSC and MetraHealth shall agree on a process for detection, analysis and crediting with respect to re-runs as part of the Procedures Manual. 53 ARTICLE 17. CONTINUED PROVISION OF SERVICES. ---------- ------------------------------- 54 17.01 Disaster Recovery. As part of the Base Services, ISSC shall (1) assume responsibility for recovering MetraHealth's Critical Applications, (2) as soon as practicable after the Effective Date and prior to completing the Transition of the first MetraHealth Data Center, submit to MetraHealth for its approval and, upon MetraHealth's approval, develop a disaster recovery plan for MetraHealth's and its Affiliates' operations in accordance with Exhibit 12, (3) update the disaster recovery plan prior to completing the Transition of each of the MetraHealth Data Centers, (4) certify to MetraHealth at least once each Contract Year that the disaster recovery plan is fully operational, (5) implement the disaster recovery plans upon the declaration of a Disaster by either Party and (6) have a contract with a provider of backup processing services during the Term. The purpose of the disaster recovery plan is to protect MetraHealth and its Affiliates in the event of a Disaster. As part of the Base Services, ISSC shall at least once each Contract Year, update and test the operability of the disaster recovery plan in effect at that time. The disaster recovery plan shall identify a backup facility or facilities that can provide the Services in the event of a Disaster (the "Backup Facility"). The Backup Facility shall be sufficiently distant from ISSC's primary processing facility such that a single event would not compromise the primary processing facility and the Backup Facility simultaneously. In the event (a) Backup Facilities (e.g., operating systems) are not operational within 24 hours of the 55 declaration of a Disaster by either Party, (b) Critical Applications are not operational within 48 hours of the declaration of a Disaster or (c) Critical Applications are not provided in accordance with the Performance Standards within 72 hours of the declaration of a Disaster, MetraHealth may terminate the Agreement without regard to Article 25. ISSC shall demonstrate to MetraHealth's satisfaction that the Critical Applications can run at current transaction rates and schedules at the Backup Facility. ISSC shall demonstrate to MetraHealth's satisfaction that the Critical Applications can run in accordance with the Performance Standards at the Backup Facilities. As part of the Base Services, the disaster recovery plan shall provide that access from MetraHealth's locations to the Backup Facility shall be through direct data communications links (the number of access lines will be agreed upon) and will not pass through the primary data center complex. 17.02 Force Majeure. Any failure or delay by MetraHealth or ISSC in the performance of its obligations pursuant to this Agreement shall not be deemed a default of this Agreement or a ground for termination hereunder, provided that such failure or delay could not have been prevented by reasonable precautions and cannot reasonably be circumvented by the non- performing Party through the use of alternate sources, work- around plans or other means to the extent such failure or delay is due to the occurrence of a Force Majeure Event. Except as provided under this Section 17.02, upon the occurrence of a Force 56 Majeure Event, the non-performing Party shall be excused from any further performance of its obligations pursuant to this Agreement affected by the Force Majeure Event for as long as (1) such Force Majeure Event continues and (2) such Party continues to use reasonable commercial efforts to recommence performance whenever and to whatever extent possible without delay. The occurrence of a Force Majeure Event in respect of another customer of ISSC does not constitute a Force Majeure Event under this Agreement. The Party delayed by a Force Majeure Event shall immediately notify the other Party by telephone (to be confirmed in a notice within five days of the inception of such delay) of the occurrence of a Force Majeure Event and describe in reasonable detail the nature of the Force Majeure Event. If any Force Majeure Event prevents, hinders, or delays performance of any Service necessary for the performance of Critical Applications for more than 24 hours, MetraHealth may, upon notice to ISSC, procure the Services from an alternate source. ISSC shall be liable for the amount of MetraHealth's payments to such alternate source in excess of ISSC's Charges under this Agreement. If any Force Majeure Event prevents, hinders or delays performance of the Services necessary for the performance of Critical Applications for more than 75 days, MetraHealth may terminate this Agreement (without regard to any cure rights that ISSC might otherwise have under this Agreement) without limitation as to any other remedies that MetraHealth or its Affiliates may be entitled to under this 57 Agreement or at law. The occurrence of a Force Majeure Event does not limit or otherwise affect ISSC's obligation to provide either normal business continuation procedures or any other disaster recovery services as described in Section 17.01. 17.03 Allocation of Resources. Whenever a Force Majeure Event or a Disaster causes ISSC to allocate limited resources between or among ISSC's Affiliates and customers, MetraHealth and its Affiliates shall receive at least the same priority in respect of such allocation as that received by ISSC's other commercial customers receiving substantially similar goods and services. ARTICLE 18. PAYMENTS. 18.01 Base Charges. In consideration of ISSC providing the Base Services, MetraHealth shall pay to ISSC the Base Charges. ISSC shall be responsible for all fees and expenses incurred by ISSC in connection with this Agreement prior to the Agreement Date. For the purposes of this Agreement, "as part of the Base Services" means that such Services or deliverables are included in the Base Charges. Unless explicitly set forth in this Agreement, no other charges apply to the provision of the Services. 18.02 Additional Charges. In consideration of ISSC providing the Additional Services, MetraHealth shall pay to ISSC the Additional Charges. 58 18.03 Rights of Set off. MetraHealth may set-off any amounts owed to MetraHealth as a credit against the Charges payable to ISSC. 18.04 Expenses. All expenses (including travel and travel-related expenses) incurred by ISSC in connection with its provision of the Base Services are included in the Base Charges and shall not be reimbursed by MetraHealth or its Affiliates unless agreed upon in advance by MetraHealth. If agreed upon pursuant to an Additional Services Schedule, MetraHealth shall pay or reimburse ISSC for the reasonable and actual documented expenses, including travel and travel-related expenses, incurred by ISSC in connection with its performance of the Additional Services provided that such expenses are incurred in accordance with MetraHealth's policy for such expenses as set forth in Exhibit 14 or otherwise approved in writing by the MetraHealth Project Executive. MetraHealth shall have no obligation to reimburse ISSC for any such expenses which are either not properly approved in advance or which are not invoiced within 120 days of the later of the date incurred or invoiced by the third party to ISSC. 18.05 Unused Credits. Any unused credits against future payments issued to MetraHealth by ISSC pursuant to this Agreement shall be paid to MetraHealth by ISSC within 30 days of the expiration or termination of this Agreement for any reason. 18.06 Adjustment to Charges. Except as otherwise agreed upon by the Parties and subject to this Section 18.06, 59 ISSC may not increase the Charges during the Term. Commencing as of December 31, 1996, and not more than once annually, ISSC may increase the Charges according to the formula set forth in Exhibit 23. 18.07 Proration. Unless otherwise specified, all periodic fees or Charges under this Agreement are to be calculated on a calendar month basis and will be prorated for any partial month. 18.08 Most Favored Customer. In the event that ISSC offers information technology services to other health insurance or managed care providers with books of business of at least five million lives that are substantially similar to Services provided under this Agreement and at charges lower than the Base Charges, MetraHealth shall receive for each such Service at least the same charges for such service, retroactive to the date such service was offered to the other customer. Upon MetraHealth's request, ISSC shall advise MetraHealth in writing that this Section 18.08 has not been contradicted by any transaction entered into by ISSC since the later of (1) the Effective Date or (2) the date of the most recent written notice provided by ISSC pursuant to this Section 18.08. 18.09 Technology Improvements. MetraHealth and ISSC acknowledge that significant hardware and software price and performance improvements which occur during the Term may result in greater savings in respect of the total costs of providing the Services than ISSC assumed in establishing the Charges. Within 60 60 days of the commencement of each calendar year, the Parties shall review actual information technology trends during the previous calendar year based on objective third-party information. In the event that MetraHealth believes that significant hardware and software price and performance improvements have occurred which are applicable to the Services and which have not been adopted by ISSC and if the Parties determine that they will realize significant cost savings as a result of the implementation of such new hardware and software improvements, ISSC and MetraHealth shall determine an appropriate allocation of implementation expenses, determine an appropriate reduction to the Charges which reflects anticipated cost savings, and implement such new hardware and software improvements. In the event that the Parties cannot agree on specific reductions, the matter shall be submitted to the Management Committee for dispute resolution pursuant to Article 28. 61 ARTICLE 19. PAYMENT SCHEDULE. ---------- ---------------- 19.01 Charges. ISSC shall provide MetraHealth during the Term with an invoice during the first week of each calendar month for that month's Base Charges and Additional Charges for any Additional Services performed by ISSC during the prior month. MetraHealth shall pay (***) of the Base Charges and (***) of the Additional Charges set forth on the invoice within 30 days after receipt by MetraHealth. The additional (***) of the Base Charges shall be included in the subsequent month's invoice. MetraHealth shall pay invoices by wire funds transfer or other electronic means acceptable to ISSC to an account specified by ISSC. 19.02 Detailed Invoices. Upon MetraHealth's request, ISSC shall provide invoices with varying degrees of detail as reasonably requested by MetraHealth. 19.03 Time of Payment. Any sum due ISSC pursuant to this Agreement for which payment is not otherwise specified shall be due and payable 30 days after receipt by MetraHealth of an invoice from ISSC. In the event that MetraHealth determines that it has made any overpayment or paid any charges not in fact due, MetraHealth shall be entitled to an immediate refund upon notice to ISSC of such overpayment. Any payment due to a Party under this Agreement, other than amounts set-off pursuant to Section 18.03 and disputed charges or credits under Section 19.04, shall accrue interest at the rate of (***) per *** 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. 62 month calculated from the date such payment is owed until the date of payment. 19.04 Disputed Charges or Credits. In the event either Party in good faith disputes the accuracy or applicability of any Charge or credit, the Party shall notify the other Party of the nature and support for such dispute within a reasonable period after becoming aware of, and performing an investigation of, the disputed matter. Except as permitted by Section 18.03, the Party contesting its obligations to pay a Charge or to grant a credit shall deposit any disputed amount up to but not exceeding 10 percent of the prior month's Charges, that cannot be resolved by the Management Committee which exceeds (***) in an interest- bearing escrow account in the United States bank or depository specified by the other Party. In the event of a dispute pursuant to which a Party in good faith believes it is entitled to withhold payment, (1) such Party shall continue to pay the undisputed amounts and pay the disputed amounts into escrow or to ISSC in accordance with this Section 19.04 and (2) the other Party shall continue to provide the Services or otherwise perform its obligations. Upon resolution of the dispute, the Parties shall allocate the money in the escrow account and any fees relating to opening and maintaining the escrow account, plus any interest earned on such money, according to the resolution of the dispute. No failure by either Party to identify a contested Charge or credit prior to payment of the invoiced amount shall limit or waive any of such Party's rights *** 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. 63 or remedies with respect to such Charges or credits, including such Party's right to withhold such disputed amounts from subsequent Charges or credits due to the other Party and pay such sums into an escrow account as described in this Section 19.04. Unpaid fees and credits that are in dispute in accordance with this Section 19.04 shall not be considered a basis for monetary or other default or other grounds for non-performance or termination under this Agreement. ARTICLE 20. TAXES. ---------- ----- (1) The Base Charges paid by MetraHealth are inclusive of any applicable sales, use, personal property or other taxes attributable to periods on or after the Effective Date based upon or measured by ISSC's cost in acquiring or providing equipment, materials, supplies or services furnished or used by ISSC in performing or furnishing the Base Services, including without limitation, all personal property and use taxes, if any, due on ISSC Machines and ISSC Software and sales tax, if any, due on ISSC's purchase of assets from MetraHealth or its Affiliates. (2) In the event that a sales, use, excise or services tax is assessed on the provision of the Services by ISSC or on ISSC's charges to MetraHealth under this Agreement, however levied or assessed, MetraHealth shall be 64 responsible for and pay the amount of any such tax. ISSC shall inform MetraHealth immediately upon its receipt of notice of any kind that any such sales, use, excise or service tax is due or has been assessed on the provision of the Services. In such event, ISSC and MetraHealth shall jointly determine whether any such tax or assessment shall be paid, compromised, litigated or appealed and shall jointly determine appropriate matters with respect to procedure, compromise, defense or appeal or any other aspects of any such tax or assessment concerning its liability. MetraHealth shall also be responsible for paying all personal property or use taxes due on or with respect to MetraHealth Machines and Applications Software and for the payment of any excise taxes for data network lines and circuits. (3) Each Party shall bear sole responsibility for all taxes, assessments and other real property-related levies on its owned or leased real property. (4) The Parties agree to cooperate with each other to more accurately determine each Party's tax liability and to minimize such liability to the extent legally possible. (5) Each Party shall provide and make available to the other any resale certificates, information regarding out-of-state sales or use of equipment, materials or 65 services, and other exemption certificates or information reasonably requested by either party. (6) MetraHealth and ISSC shall cooperate to segregate the fees payable under this Agreement into the following separate payment streams: (1) those for taxable Services, (2) those for nontaxable Services, (3) those for which a sales, use or similar tax has already been paid by ISSC and (4) those for which ISSC functions merely as a paying agent for MetraHealth in receiving goods, supplies or services (including leasing and licensing arrangements) that otherwise are nontaxable or have previously been subject to tax. ISSC shall minimize taxes to be incurred as a result of the performance of ISSC's obligations under this Agreement. 66 ARTICLE 21. AUDITS. ---------- ------ 21.01 Processing. Upon notice from MetraHealth, ISSC shall provide, and shall cause its Agents to provide, such auditors and inspectors as MetraHealth or any audit or regulatory authority may designate with reasonable access to the Service Locations and the Software and Machines for the purpose of performing audits or inspections of the Services and the businesses of MetraHealth (including ISSC's provision of any Service being provided in support of business being audited). ISSC shall provide, and shall cause its Agents to provide, such access (1) during normal business days and hours (except as may be necessary to perform security audits) at ISSC Service Locations and (2) at any time at MetraHealth's service locations. As part of the Base Services, ISSC shall provide, and shall cause its Agents to provide, such auditors and inspectors any assistance that they may reasonably require. If any audit by an auditor designated by MetraHealth or a regulatory authority results in ISSC being notified that it or its Agents are not in compliance with any generally accepted or statutory accounting principle, statutory requirement, or other audit requirement (as agreed to by the Parties) relating to the Services (other than an audit requirement relating specifically to the insurance industry), ISSC shall, and shall cause its Agents to, at its own expense and within the period of time specified by such auditor or regulatory authority comply with such audit. 67 21.02 Charges. Upon notice from MetraHealth, ISSC shall provide, and shall cause its Agents to provide, to MetraHealth and its designees access to such financial records and supporting documentation as may be necessary for MetraHealth to determine the accuracy of the Charges. Upon reasonable notice from MetraHealth, MetraHealth may audit the Charges charged to MetraHealth to determine that such Charges are accurate and in accordance with this Agreement. If, as a result of such audit, MetraHealth determines that ISSC has overcharged MetraHealth, MetraHealth shall notify ISSC of the amount of such overcharges and ISSC shall promptly pay to MetraHealth the amount of the overcharge, plus interest at the current prime rate, as announced by The Chase Manhattan Bank, N.A., calculated from the date of receipt by ISSC of the overcharged amount until the date of payment to MetraHealth. 68 21.03 Unauthorized Access. ------------------- (1) In the event ISSC or its Agents discover or are notified of a material breach or potential material breach of security on a system, or telecommunications network which contains, processes or transmits MetraHealth's Confidential Information, ISSC shall immediately (a) notify MetraHealth, (b) investigate the breach or potential breach and (c) provide MetraHealth and its designees with reasonable access to all resources and information in ISSC's possession as may be necessary to investigate the breach or potential breach. MetraHealth shall have the right to conduct any investigation relating to such breach or potential breach that it determines is appropriate. (2) In the event ISSC or its Agents may have been, or are likely to be, involved in unauthorized or illegal activities to obtain money or information from or through MetraHealth or any of its Affiliates, its clients or suppliers or in any way damage (or expose to damage) MetraHealth its Affiliates or any of their clients or suppliers, ISSC shall immediately (a) notify MetraHealth, (b) investigate such activities and (c) provide 69 MetraHealth and its designees with reasonable access to all resources and information in ISSC's possession as may be necessary to investigate such activities. MetraHealth shall have the right to conduct and control any investigation relating to such activities that it determines is appropriate. 21.04 Record Retention. Each of MetraHealth and ISSC, as part of the Base Services, shall (1) retain records and supporting documentation sufficient to document the Services and the Charges paid or payable by MetraHealth under this Agreement in accordance with such Party's record and document retention policies and procedures and in accordance with all laws and regulations applicable to MetraHealth and its Affiliates' businesses and (2) upon notice from the other Party, provide such Party and its auditors or inspectors with reasonable access to such records and documentation. 21.05 Access and Reports. As part of the Base Services, ISSC shall provide to MetraHealth and its designees access to (1) ISSC's and its Agents' staff, (2) records and supporting documentation (including program source code to the extent permitted by law or under the applicable third party agreements) relating to the Services and the portion of the Charges which are volume-related, (3) the Software and (4) the Service Locations or other facilities, as may be reasonably necessary for MetraHealth or its auditors or inspectors to perform the audits described in Section 21.01 and Section 21.02. 70 As part of the Base Services, ISSC shall provide to MetraHealth periodic status reports in accordance with the audit procedures described in Exhibit 13 regarding ISSC's resolution of any audit- related compliance activity for which ISSC is responsible. 21.06 Audit Software. As part of the Base Services, and subject to the Change Control Procedures, ISSC shall, at MetraHealth's request and to the extent permitted under the applicable third party agreements, operate such audit software as MetraHealth or its designee may provide to ISSC from time to time during the Term. 21.07 Facilities. To the extent reasonably available, ISSC shall provide to MetraHealth and its designees on ISSC's premises (or if the audit is being performed of a subcontractor, the subcontractor's premises if necessary) space, office furnishings (including lockable cabinets), telephone and facsimile service, utilities and office-related equipment (including a copier) as MetraHealth or such auditors and inspectors may reasonably require to perform the audits described in this Article 21. Such facilities and related assistance shall be provided as part of the Base Services. 21.08 Third Party Audit. As part of the Base Services, ISSC shall cooperate and participate, at the reasonable request of MetraHealth, in an audit of ISSC by an external auditor acceptable to, and paid for by, MetraHealth for the purpose of ensuring compliance with this Agreement. The results 71 of such third party audit shall be the exclusive property of MetraHealth. 72 ARTICLE 22. CONFIDENTIALITY. ---------- --------------- 73 22.01 Confidential Information. Each Party shall use at least the same standard of care in the protection of Confidential Information of the other Party as it uses to protect its own confidential or proprietary information. Each Party shall use the Confidential Information of the other Party only in the performance of obligations under this Agreement and shall make such Confidential Information available only to its employees or Agents having a "need to know" with respect to such purpose. Each Party shall advise each such employee and Agent of its obligations under this Agreement and require such employees, subcontractors and agents to abide by such obligations. In the event of the expiration or termination of this Agreement for any reason, all Confidential Information of a Party disclosed to and all copies thereof made by the other Party shall be returned to the disclosing Party or, at the disclosing Party's option, erased or destroyed. The recipient of the Confidential Information shall provide to the disclosing Party certificates evidencing such destruction. The obligations in this Section 22.01 shall not restrict any disclosure by a Party pursuant to any applicable law, or by order of any court or government agency (provided that the disclosing Party shall give prompt notice to the non- disclosing Party of such order). Confidential Information of a Party shall not be afforded the protection of this Agreement if such data was (a) developed by the other Party from non- Confidential Information, (b) rightfully obtained by the other Party without restriction from a third party, (c) publicly available 74 other than through the fault or negligence of the other Party or (d) released without restriction to anyone by the owner of the Confidential Information. Except for such longer period as may be required by law or contract, the obligations set forth in this Article 22 shall continue for five years after the expiration or termination of this Agreement. In addition, each Party understands and agrees that the receiving Party's employees will further develop their skills and experience through use of the disclosing Party's Confidential Information. It is not a violation of this Agreement for the recipient to use such general knowledge, skills, ideas, and techniques learned from Confidential Information in the ordinary course of its business; provided, however, that such knowledge, skills, ideas, and techniques are limited to information mentally retained by the receiving Party's employees without a subsequent reference to tangible documentation, and will not include (i) the source of the information, (ii) any financial, statistical, or personnel information, or (iii) the business plans of the disclosing Party. 22.02 Attorney-Client Privilege. ISSC acknowledges that MetraHealth asserts that Privileged Work Product has been or will be prepared in anticipation of litigation and that ISSC is performing the services in respect of Privileged Work Product as an agent of MetraHealth, and that all matter related thereto is protected from disclosure by Rule 26 of the Federal Rules of Civil Procedure. MetraHealth will notify ISSC of any Privileged Work Product to which ISSC has or may have access. After the 75 ISSC Project Executive is notified or otherwise becomes aware that such documents, data, database or communications are Privileged Work Product, only ISSC personnel for whom such access is necessary for the purposes of providing Services to MetraHealth as provided in this Agreement may have access to Privileged Work Product. Should ISSC ever be notified of any judicial or other proceeding seeking to obtain access to Privileged Work Product, ISSC shall (a) immediately notify the person signing this Agreement on behalf of MetraHealth and (b) resist providing such access to the extent it may lawfully do so. MetraHealth shall have the right and duty to represent ISSC in such resistance or to select and compensate counsel to so represent ISSC or to reimburse ISSC for reasonable attorneys' fees and expenses incurred in resisting such access. If ISSC is ultimately required, pursuant to an order of a court of competent jurisdiction, to produce documents, disclose data or otherwise act in contravention of the confidentiality obligations imposed in this Agreement, or otherwise with respect to maintaining the confidentiality, proprietary nature and secrecy of Privileged Work Product, ISSC shall not be liable for breach of such obligation. 22.03 Equitable Relief. Each Party acknowledges and agrees that, in the event of a breach or threatened breach of any of the foregoing provisions, such Party may have no adequate remedy in damages and, accordingly, shall be entitled to seek an injunction or specific performance to prevent such breach or 76 threatened breach; provided, however, that no specification of a particular legal or equitable remedy shall be construed as a waiver, prohibition or limitation of any legal or equitable remedies in the event of a breach hereof. 22.04 Unauthorized Acts. Each Party shall: (1) notify the other Party promptly of any unauthorized possession, use or knowledge, or attempt thereof, of any Confidential Information by any person or entity which may become known to it, (2) promptly furnish to the other Party full details of the unauthorized possession, use or knowledge, or attempt thereof, and use reasonable efforts to assist the other Party in investigating or preventing the reoccurrence of any unauthorized possession, use or knowledge, or attempt thereof, of Confidential Information, (3) cooperate with the other Party in any litigation and investigation against third parties deemed necessary by such Party to protect its proprietary rights and (4) promptly prevent a reoccurrence of any such unauthorized possession, use or knowledge of Confidential Information. 22.05 Legal Action. Neither Party shall commence any legal action or proceeding in respect of any unauthorized possession, use or knowledge, or attempt thereof, of Confidential Information by any person or entity which action or proceeding identifies the other Party or its Confidential Information without such Party's consent. 77 ARTICLE 23. REPRESENTATIONS, WARRANTIES AND COVENANTS. ---------- ----------------------------------------- 23.01 By MetraHealth. MetraHealth represents, warrants and covenants that: (1) it is a corporation validly existing and in good standing under the laws of Delaware, (2) it has all the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement, (3) the execution, delivery and performance of this Agreement has been duly authorized by MetraHealth, (4) no approval, authorization or consent of any governmental or regulatory authority is required to be obtained or made by it in order for it to enter into and perform its obligations under this Agreement, (5) in connection with its obligations under this Agreement, it shall comply with all applicable Federal, state and local laws and regulations and shall obtain all applicable permits and licenses, (6) the MetraHealth Proprietary Software does not and will not, and any code or materials provided or created by MetraHealth or its Agents that is contained on Developed Software will not, infringe upon the proprietary rights of any third party (7) it has not disclosed as of the Effective Date any Confidential Information relating to ISSC and (8) it is either the owner or authorized by the owner of the MetraHealth Machines and MetraHealth Software to use such MetraHealth Machines and MetraHealth Software in accordance with the terms of this Agreement. 23.02 By ISSC. ISSC represents, warrants and covenants that: (1) it is a corporation validly existing and in good standing under the laws of Delaware (2) it has all requisite 78 corporate power and authority to execute, deliver and perform its obligations under this Agreement, (3) the execution, delivery and performance of this Agreement has been duly authorized by ISSC, (4) no approval, authorization or consent of any governmental or regulatory authority is required to be obtained or made by it in order for it to enter into and perform its obligations under this Agreement, (5) in connection with providing the Services, it shall comply with all applicable Federal, state and local laws and regulations and has obtained all applicable permits, rights and licenses (including, without limitation, all rights and licenses which are necessary to use the Systems), (6) the ISSC Proprietary Software does not, and the provision of the Services and the Developed Software (except for any code or materials provided or created by MetraHealth or its Agents) does not, infringe upon the proprietary rights of any third party, (7) it has not disclosed as of the Effective Date any Confidential Information relating to MetraHealth, (8) it is either the owner or authorized by the owner of the ISSC Machines to use such ISSC Machines in accordance with the terms of this Agreement and (9) MetraHealth shall not be required to pay any pass-through charges under this Agreement. 23.03 Government Contracts. ISSC and its Agents, as subcontractors for MetraHealth or its Affiliates under certain agreements between MetraHealth or its Affiliates and the United States Department of Health and Human Services Health Care Financing Administration and the United States Railroad Retire- 79 ment Board whereby MetraHealth or its Affiliates provide administrative services under the Federal Social Security Act (the "Medicare Contracts"), agree to comply with all provisions applicable to subcontractors under the Medicare Contracts, which provisions are herein incorporated by reference. ARTICLE 24. TERMINATION. ---------- ----------- 24.01 Termination for Convenience. MetraHealth may terminate this Agreement, without regard to Section 24.02, Section 24.03 or Section 24.04, at any time after the fourth anniversary of the Effective Date upon 90 days' prior notice to ISSC. 24.02 Termination for Sale of ISSC. In the event that substantially all of the assets or more than 50 percent of the voting securities of ISSC are sold or transferred to any person or entity or events occur that would constitute a change in control of ISSC, ISSC shall provide MetraHealth notice within 10 days thereof. MetraHealth may terminate this Agreement upon 120 days' prior notice to ISSC, if such notice is given within 60 days of MetraHealth's receipt of notice by ISSC of such a sale, transfer or change in control. In the event that ISSC fails to provide the notice pursuant to this Section 24.02, and fails to cure such breach within two days after receipt of notice from MetraHealth, MetraHealth may terminate this Agreement immediately. The termination rights described in this Section 24.02 shall not apply to a merger or corporate reorganization in 80 which IBM is the surviving entity (provided, however, that such merger or corporate reorganization does not result in a material adverse change in the performance of the Services). 24.03 Termination for Sale of MetraHealth. In the event that substantially all of the assets or more than 50 percent of the voting securities of MetraHealth are sold or transferred to any person or entity that would constitute a change in control of MetraHealth occurs, MetraHealth may, within 360 days' of such sale or transfer, provide ISSC notice that it intends to terminate this Agreement. Provided that MetraHealth provides such notice, MetraHealth may, upon 60 days' prior notice to ISSC, terminate this Agreement at any time following the fourth anniversary of the Effective Date. 24.04 Termination for Material Breach. If either party defaults in the performance of any of its material obligations under this Agreement and such default is not cured within 30 days (the "Default Cure Period") after notice (the "Default Notice") is received by the defaulting Party specifying, in reasonable detail, the nature of the default, the non-defaulting Party may, upon further notice to the defaulting Party, terminate this Agreement as of the date specified in such notice of termination. Any non-payment of a disputed amount under this Agreement pursuant to Section 19.04 shall not be considered a default under this Agreement. Any termination under this Section 24.04 shall be without limitation as to any other remedies that a Party may be entitled to under this Agreement. A Party shall be in 81 default under this Agreement if upon the occurrence of events reasonably creating doubts as to such Party's ability or willingness to perform future obligations under this Agreement and such Party fails to provide within 10 days after written notice by the other Party such assurances of performance as are reasonably requested in writing by the other Party. Notwithstanding anything to the contrary contained in this Agreement, in the event of a dispute relating to or arising out of a Default Notice, the dispute resolution process set forth in Section 28.02 and Section 28.03 must be commenced and completed within the Default Cure Period. 24.05 Other Terminations. This Agreement may also terminate this Agreement, in whole or in part, pursuant to Section 17.01, Section 17.02 and Section 30.03. Any such termination shall not be subject to Section 24.01, Section 24.03 or Section 24.04. ARTICLE 25. TERMINATION CHARGE. ---------- ------------------ 25.01 Termination for Convenience. In the event of a termination pursuant to Section 24.01, MetraHealth shall pay to ISSC on the effective date of such termination an amount equal to the Termination Charge specified in Exhibit 17 for termination pursuant to Section 24.01 for the Contract Year that such termination is effected. 25.02 Termination for Sale of MetraHealth. In the event of a termination pursuant to Section 24.03, MetraHealth 82 shall pay to ISSC on the effective date of such termination an amount equal to the Termination Charge specified in Exhibit 17 for a termination pursuant to Section 24.03 for the Contract Year that such termination is effected. 25.03 Proration. The Termination Charge shall be prorated from the effective date of any termination effected pursuant to Section 24.01 according to the following formula: (A-B)/12 months} x C + B = Prorated Termination Fee where: A = the termination fee specified in Exhibit 17 for the Contract Year in which termination is effective; B = the termination fee specified in Exhibit 17 for the Contract Year after the Contract Year in which termination is effective; and C = the number of months remaining during the Contract Year in which termination is effective. 25.04 No Additional Charges. In the event of a termination of this Agreement, MetraHealth shall not pay to ISSC any fees or charges other than those fees due and payable under this Agreement at the time of such termination and the applicable Termination Charges set forth in Section 25.01. 83 ARTICLE 26. TERMINATION ASSISTANCE. ---------- ---------------------- Provided that MetraHealth is not in default of its financial obligations to ISSC under this Agreement, ISSC shall perform, upon MetraHealth's request, the Termination Assistance Services for up to 360 days following the expiration or termination of this Agreement, in whole or in part, for the Charges in effect immediately prior to such expiration or termination. The quality and standards of performance following expiration or termination shall not be degraded. Upon expiration or termination of this Agreement, in whole or in part, each Party shall, in accordance with the other's written instructions, return to the other Party all relevant Confidential Information or other materials supplied to it in the same condition as received, normal wear and tear excepted. If MetraHealth requests that all MetraHealth Data stored on any data media be returned to it, MetraHealth shall pay ISSC the then current replacement cost of all data media delivered by ISSC to MetraHealth. ISSC shall provide the data in a machine readable form to the specifications set by MetraHealth and to the satisfaction of MetraHealth. 84 ARTICLE 27. EXIT PLAN. ---------- --------- Provided that MetraHealth is not in default of its financial obligations under this Agreement, then upon the expiration or the termination of this Agreement, in whole or in party, for any reason: (1) ISSC shall provide the Termination Assistance Services with MetraHealth's reasonable cooperation in accordance with Article 26; (2) each Party shall have the rights specified in Article 13 in respect of the Software and tools; (3) upon MetraHealth's request, with respect to any contracts applicable to services being provided to MetraHealth or its Affiliates for maintenance, disaster recovery services and other necessary third party services being used by ISSC or its Agents to perform Services as of the expiration or termination, ISSC shall, if possible, transfer or assign such agreements to MetraHealth or its designee, on terms and conditions acceptable to both parties; and (5) upon MetraHealth's request, ISSC shall sell to MetraHealth or its designee the ISSC Machines being solely used to provide the Services, free and clear of all liens, security interests or other encumbrances, at market rates. 85 ARTICLE 28. DISPUTE RESOLUTION. ---------- ------------------ 28.01 Project Executives. All disputes shall initially be referred to the ISSC Project Executive and the MetraHealth Project Executive. If the Project Executives are unable to resolve the dispute within 10 business days after referral of the matter to them, the Parties shall submit the dispute to the Management Committee. 28.02 Management Committee. The Management Committee shall meet at least once every 90-day period during the Term (or such other time as the Management Committee may agree from time to time) for the purpose of overseeing the performance of this Agreement and resolving the disputes that may arise under this Agreement. The Management Committee shall consider the disputes in the order such disputes are brought before it. In the event the Management Committee is unable to resolve a dispute within 10 business days from the date that the Management Committee first considered the matter, the Management Committee shall notify the senior management of each Party pursuant to Section 28.03. 28.03 Senior Management. Either Party may, upon notice and within 10 business days of receipt of a notice from the Management Committee pursuant to Section 28.02, elect to convene a meeting between senior management of the Parties. Such meeting shall occur no more than 10 business days after a Party serves notice to commence the procedure set forth in this Section 28.03. If the matter cannot be resolved at such meeting by such senior executives, a neutral adviser, if one has been agreed 86 upon, may be asked to assist such senior executives in evaluating the strengths and weaknesses of each Party's position on the merits of the dispute. Thereafter, such senior executives shall meet and try again to resolve the matter. If the matter cannot be resolved at such meeting, such senior executives shall inform their respective senior management and the proceedings occurring pursuant to this Section 28.03 will have been without prejudice to the legal position of either Party. Each of the Parties shall bear its respective costs incurred in connection with the procedure set forth in this Section 28.03, except that they shall share equally the fees and expenses of the neutral adviser, if any, and the costs of the facility for the meeting. 28.04 Judicial Resolution. If a dispute is not resolved pursuant to Section 28.03, then either Party may, institute a legal proceeding against the other Party. With respect to an action to seek injunctive relief or specific performance to prevent or stay a breach of any provision of Article 13 or Article 22, the procedures of this Article 28 are not binding. 28.05 Continuity of Services. During the Term, ISSC assumes an independent obligation to continue to perform the Services during any dispute between the Parties, including any litigation proceedings. 87 ARTICLE 29. INDEMNIFICATION. ---------- --------------- 29.01 By MetraHealth. Subject to the limits and other provisions of Article 30, MetraHealth shall indemnify and hold ISSC harmless from any liability, damages or expenses, including reasonable attorneys' fees, arising out of or relating to (1) any claim by a third party that (a) the MetraHealth Proprietary Software or (b) any code or materials provided or created by MetraHealth that is contained in the Developed Software (except as may have been caused by a (i) modification by ISSC or its Agents (which was not directed by MetraHealth) or (ii) ISSC's combination, operation or use with devices, data or programs furnished by ISSC or its Agents, to the extent that the infringement arises from such modifications, combination, operation or use) infringes upon the proprietary rights of any third party, (2) any amounts, including taxes, interest and penalties assessed against ISSC which are obligations of MetraHealth pursuant to Article 20, (3) the inaccuracy or untruthfulness of any representation, warranty or covenant made by MetraHealth pursuant to Section 23.01, (4) tangible personal or real property damage, net of insurance recovery, resulting from MetraHealth's acts or omissions, to the extent such damage exceeds $50,000 in the aggregate, (5) any payment or other obligation of MetraHealth which accrues prior to the Effective Date and (6) breaches of MetraHealth's obligations under this Agreement. 29.02 By ISSC. Subject to the limits and other provisions of Article 30, ISSC shall indemnify and hold 88 MetraHealth harmless from, any liability, damages or expenses, including reasonable attorneys' fees, arising out of or relating to (1) any claim by a third party that (a) the Services, (b) the ISSC Proprietary Software or (c) any code or materials provided or created by ISSC or its Agents that is contained in the Developed Software infringe upon the proprietary rights of any third party (except as may have been caused by (i) a modification by MetraHealth's employees (which was not directed by ISSC) or (ii) MetraHealth's combination, operation or use with devices, data or programs furnished by MetraHealth or its Agents to the extent that the infringement would not have occurred but for such modification, combination, operation or use), (2) any amounts including taxes, interest and penalties assessed against MetraHealth or its Affiliates which are obligations of ISSC pursuant to Article 20, (3) the inaccuracy or untruthfulness of any representation, warranty or covenant made by ISSC pursuant to Section 23.02, (4) claims arising out of ISSC's breach or violation of ISSC's subcontracting arrangements, (5) tangible personal or real property damage, net of insurance recovery, resulting from ISSC's acts or omissions, to the extent such damage exceeds (***) in the aggregate, (6) a breach of the safety or physical security procedures in effect (i) at the ISSC Service Locations or (ii) at the MetraHealth service locations to the extent the breach results from ISSC's acts or omissions and (7) breaches of ISSC's obligations under this Agreement. *** 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. 89 29.03 Indemnification Procedures. If any third party makes a claim covered by Section 29.01 or Section 29.02 against an Indemnitee with respect to which such Indemnitee intends to seek indemnification under Section 29.01 or Section 29.02, such Indemnitee shall give prompt notice of such claim to the Indem- nifying Party (under Section 29.01 or Section 29.02), including a brief description of the amount and basis therefor, if known. Neither the Indemnifying Party nor any Indemnitee shall be liable for any settlement of any third party claim subject to indemnification effected without its consent. ARTICLE 30. DAMAGES. ---------- ------- 30.01 Direct Damages. Each of MetraHealth and ISSC shall be liable to the other Party for any direct damages arising out of or relating to a breach of its obligations under this Agreement. The following shall be considered direct damages and ISSC shall not assert that they are indirect, incidental, special, or consequential damages or lost profits to the extent they result from ISSC's failure to provide the Services in accordance with the Agreement: (1) costs of recreating or reloading any of MetraHealth's or its Affiliates' information that is lost or damaged; (2) costs of implementing a work around in respect of a failure to provide all or a portion of the Services or any part thereof; 90 (3) costs of replacing lost or damaged equipment software and materials; (4) costs and expenses incurred by MetraHealth or its Affiliates to correct errors in software maintenance and enhancements provided as part of the Services or any part thereof; (5) costs and expenses incurred by MetraHealth or its Affiliates to procure the Services from an alternate source, to the extent in excess of ISSC's charges under the Agreement; (6) straight time, overtime or related expenses incurred by MetraHealth or its Affiliates, including overhead allocations of MetraHealth or its Affiliates for their employees, wages and salaries of additional employees, travel expenses, overtime expenses, telecommunication charges and similar charges, due to the failure of ISSC or its Agents to provide all or a portion of the Services incurred in connection with (1) through (5) above; and (7) (***) *** 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. 91 The liability of either Party for actual, direct damages resulting from performance or nonperformance under this Agreement, regardless of the form of action, and whether in contract, tort (including, without limitation, negligence), warranty or other legal or equitable grounds, will be limited in the aggregate to (***) (the "Direct Damages Cap"). This limitation will not apply to (a) losses by either Party for bodily injury or damage to real property or tangible personal property, (b) either Party's obligations to indemnify the other pursuant to Section 29.01(1), Section 29.01(4), Section 29.02(1) and Section 29.02(5) or (c) any breach of confidentiality obligations contained in this Agreement or the improper disclosure of MetraHealth Data. 30.02 Consequential Damages. In no event will either Party have any liability whether based on contract, tort (including, without limitation, negligence), warranty or any other legal or equitable grounds, for any loss of interest, profit or revenue by the other Party or for any consequential, indirect, incidental, special, punitive or exemplary damages suffered by the other Party, arising from or related to this Agreement, even if such Party has been advised of the possibility of such losses or damages; provided, however, that this clause will not prevent either Party from recovering amounts owed under this Agreement. This limitation will not apply to (1) losses by either Party for bodily injury or damage to real property or tangible personal property, (2) either Party's obligations to indemnify the other pursuant to Section 29.01(1), Section *** 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. 92 29.01(3), Section 29.01(4), Section 29.02(1), Section 29.02(3) and Section 29.05(6) or (3) any breach of confidentiality obligations contained in this Agreement or the improper disclosure of MetraHealth Data. Notwithstanding the foregoing and subject to the Direct Damages Cap, ISSC shall be liable to MetraHealth for up to three times the amount of any payment or penalty imposed on MetraHealth or its Affiliates by a regulatory agency arising out of ISSC's or its Agents' nonperformance under this Agreement. 30.03 Performance Credits. In the event ISSC fails to meet any of the Performance Standards, ISSC shall pay to MetraHealth the applicable Performance Credits. The Performance Credits payable to MetraHealth in any calendar month shall not exceed, in the aggregate, (***) of that calendar month's Base Charges. The Performance Credits represent negotiated amounts on the basis of reduced service levels and shall not be deemed or construed as a penalty. If the Performance Credits incurred exceed (***) of the calendar month's Base Charges during five months in any consecutive six month period during the Term, MetraHealth may, upon notice to ISSC, terminate this Agreement immediately in whole or in part without regard to Section 24.04. Notwithstanding the foregoing, ISSC and its Agents shall cooperate with MetraHealth and its Affiliates to respond to customer and provider complaints or concerns in connection with ISSC's performance or non-performance of Services under this Agreement and shall effectuate a prompt work-around or other solution to the extent necessary to address satisfactorily *** 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. 93 such complaints or concerns. If, during the Term, the Performance Credits incurred exceed, in the aggregate, (***) MetraHealth may, upon notice to ISSC within 90 days of exceeding such amount, terminate this Agreement in whole or in part without regard to Section 24.04. In the event MetraHealth terminates this Agreement in part, (1) the Baseline shall be adjusted to reflect such Services removed from the scope of this Agreement as a consequence of such termination and (2) ISSC shall reduce the Base Charges on a dollar for dollar basis. MetraHealth's receipt of Performance Credits shall be without limitation as to any other remedies available to MetraHealth or its Affiliates under this Agreement or at law, provided that MetraHealth shall not receive duplicative recoveries. ARTICLE 31. INSURANCE. ---------- --------- As part of the Base Services, without limitation of any of MetraHealth's other rights or remedies, during the Term, ISSC shall maintain and shall cause its subcontractors to maintain insurance of the type and in the amounts specified below: (1) statutory workers compensation in accordance with all Federal, state and local requirements; (2) employers' liability insurance in an amount not less than $1,000,000 per occurrence; (3) commercial general liability or at ISSC's option umbrella liability (including contractual liability *** 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. 94 insurance) and coverage for the indemnity agreements in an amount not less than $10,000,000 per occurrence; and (4) comprehensive automobile liability covering all vehicles that ISSC owns, hires or leases in an amount not less than $1,000,000 per occurrence (combined single limit for bodily injury and property damages). ISSC shall furnish to MetraHealth certificates of insurance or other appropriate documentation (including evidence of renewal of insurance) evidencing coverage in accordance with this Article 31 and naming MetraHealth as an additional insured. Such certificates or other documentation shall include a provision whereby 20 days' notice must be received by MetraHealth prior to coverage cancellation or material alteration of the coverage by either ISSC or the applicable insurer. 95 ARTICLE 32. MISCELLANEOUS PROVISIONS. ---------- ------------------------ 32.01 Assignment and Change of Control. -------------------------------- (1) This Agreement shall be binding upon and shall inure to the benefit of each Party hereto, its successors and assigns; provided, however, neither Party may assign this Agreement or any of its rights or obligations hereunder without the consent of the other Party and any such attempted assignment shall be void, except that either Party may assign this Agreement or any of its rights or obligations hereunder without the consent of the other Party pursuant to a change of control, including a merger, consolidation or other similar corporate transaction, or sale of substantially all of its assets or stock. (2) In the event of a change of control of MetraHealth, MetraHealth (or its successor or assignee) and ISSC shall review the Services being provided under this Agreement and mutually determine an appropriate adjustment to the Services and Base Charges to meet MetraHealth's changing business requirements. 96 32.02 Notices. Except as otherwise specified in this Agreement, all notices, requests, consents, approvals and other communications required or permitted under this Agreement shall be in writing and shall be sent by telecopy, if possible, to the number specified below. A copy of any such notice shall also be sent by registered express air mail or U.S. certified mail (return receipt requested) on the date such notice is transmitted by telecopy to the address specified below: In the case of MetraHealth: The MetraHealth Companies, Inc. 450 Columbus Boulevard Hartford, Connecticut 06183 Attn: Mario Fabrizio For default or termination, with a copy to: The MetraHealth Companies, Inc. 9900 Bren Road East Minnetonka, Minnesota 55343 Attn: William McGuire, M.D. In the case of ISSC: Integrated Systems Solutions Corporation 44 South Broadway White Plains, New York 10601 Attn: Health Care - Vice President For a default or termination, with a copy to: Integrated Systems Solutions Corporation 44 South Broadway White Plains, New York 10601 Attn: General Counsel 97 Either Party may change its address or telecopy number for notification purposes by giving the other Party notice of the new address or telecopy number and the date upon which it will become effective. 32.03 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one single agreement between the Parties. 32.04 Headings. The article and section headings and the table of contents are for reference and convenience only and shall not be considered in the interpretation of this Agreement. 32.05 Relationship. The performance by ISSC of its duties and obligations under this Agreement shall be that of an independent contractor and nothing contained in this Agreement, except for the limited agency expressly provided for herein, shall create or imply an agency relationship between MetraHealth or its Affiliates and ISSC, nor shall this Agreement be deemed to constitute a joint venture or partnership between MetraHealth or its Affiliates and ISSC. ISSC agrees and represents that it is an independent contractor and its personnel are not MetraHealth's or its Affiliates' agents or employees for federal tax purposes, and are not entitled to any MetraHealth employee benefits. MetraHealth and ISSC each assume sole and full responsibility for the acts of their respective personnel and MetraHealth and ISSC and their respective personnel have no authority to make commitments or enter into contracts on behalf of, bind or otherwise obligate the other party or their Affiliates in any 98 manner whatsoever, except for the limited agency expressly provided for herein. 32.06 Consents, Approvals and Requests. Unless otherwise specified in this Agreement, all consents and approvals, acceptances or similar actions to be given by either Party under this Agreement shall not be unreasonably withheld or delayed and each Party shall make only reasonable requests under this Agreement. 32.07 Severability. If any provision of this Agreement (other than a term or provision relating to any payment obligation) is held by a court of competent jurisdiction to be contrary to law, then the remaining provisions of this Agreement or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable shall not be affected thereby, and each such provision of this Agreement shall be valid and enforceable to the extent granted by law. 32.08 Waiver. No delay or omission by either Party to exercise any right or power it has under this Agreement shall impair or be construed as a waiver of such right or power. A waiver by any Party of any breach or covenant shall not be construed to be a waiver of any succeeding breach or any other covenant. All waivers must be in writing and signed by the party waiving its rights. 32.09 Publicity. Each Party shall (1) submit to the other all advertising, written sales promotions, press releases and other publicity matters relating to the Agreement in which 99 the other Party's name or mark is mentioned or language from which the connection of said name or mark may be inferred or implied and (2) not publish or use such advertising, sales promotions, press releases or publicity matters without the other Party's consent. 32.10 Entire Agreement. This Agreement and each of the Exhibits, which are hereby incorporated by reference into this Agreement, is the entire agreement between the Parties with respect to its subject matter and supersedes all other agreements, oral or written, relating to its subject matter. There are no other representations, understandings or agreements between the Parties relative to such subject matter. 32.11 Amendments. No amendment to, or change, waiver or discharge of, any provision of this Agreement shall be valid unless in writing and signed by an authorized representative of the party against which such amendment, change, waiver or discharge is sought to be enforced. 32.12 Governing Law. This Agreement and the rights and obligations of the Parties hereunder shall be construed in accordance with and be governed by the laws of the State of New York. Any legal action, suit or proceeding arising out of or relating to this Agreement shall be brought by the Parties in Federal District Court in Hartford, Connecticut. 32.13 Survival. The terms of Article 13, Article 18, Article 21, Article 22, Article 23, Article 26, Article 27, Article 28, Article 29, Article 30, Section 16.01, Section 16.03, 100 Section 32.09, Section 32.12, this Section 32.13, Section 32.14, Section 32.15 and Section 32.16 shall survive the expiration or termination of this Agreement for any reason. 32.14 Third Party Beneficiaries. Each Party intends that this Agreement shall not benefit, or create any right or cause of action in or on behalf of, any person or entity other than MetraHealth or ISSC. 32.15 Covenant of Further Assurances. MetraHealth and ISSC covenant and agree that, subsequent to the execution and delivery of this Agreement and without any additional consideration, each of MetraHealth and ISSC will execute and deliver any further legal instruments which are or may become reasonably necessary to effectuate the purposes of this Agreement. 101 32.16 Solicitation. ISSC shall not, without MetraHealth's prior consent, during the Term or for the one-year period following termination or expiration of this Agreement, knowingly solicit, offer employment, commence employment or retain as a consultant any employee or former employee of MetraHealth or its Affiliates who has been directly or indirectly employed in the performance of the Services (other than employees who have ceased to be employed for a period of at least one year). Neither MetraHealth nor its Affiliates shall, without ISSC's prior consent, during the Term knowingly solicit, offer employment, commence employment or retain as a consultant any employee or former employee of ISSC who has been directly or indirectly employed in the performance of the Services (other than employees who have ceased to be employed for a period of at least one year). 32.17 Remedies. All remedies, either under this Agreement or by law or otherwise afforded, will be cumulative and not alternative. 102 IN WITNESS WHEREOF, each of MetraHealth and ISSC have each caused this Agreement to be signed and delivered by its duly authorized representative. THE METRAHEALTH COMPANIES, INC. By: /s/ William W. McGuire ___________________________________ Name: William W. McGuire _________________________________ Title:_________________________________ Date: 11/16/95 _________________________________ INTEGRATED SYSTEMS SOLUTIONS CORPORATION By: /s/ Michael E. Daniels ___________________________________ Name: Michael E. Daniels _________________________________ Title: Vice President, Systems Solutions _________________________________ Date: 11/17/95 _________________________________ MetraHealth 450 Columbus Boulevard -- 6NB Hartford, Connecticut 06183 November 28, 1995 Christine Schuster Integrated Systems Solutions Corporation 44 South Broadway White Plains, New York 10601 Per our previous conversation, please sign and return this letter to confirm your agreement and understanding regarding the following typographical errors in the Agreement between ISSC and MetraHealth. . In section 30.02(2) (pg. 92, second line), the reference to section 29.05(6) should be section 29.02(5). . In section 7.01 (pg. 25), in the first sentence, the words: "Transition Completion Date" should be: "Location Completion Date." Sincerely, /s/ Mario Fabrizio Mario Fabrizio I concur: /s/ C.L. Schuster Date: 12/8/95 ------------------------------- ------- cc: M. Friedman C. Pattacini EX-10.W 8 LETTER AGREEMENT KENNET L. SIMMONS [LETTERHEAD OF METRAHEALTH] Exhibit 10(w) October 2, 1995 Mr. Kennett L. Simmons P.O. Box 28 Kents Store, Virginia 23084 Dear Mr. Simmons: This letter sets forth our agreement concerning a special bonus payment to be made to you in connection with the consummation of the merger of The MetraHealth Companies, Inc. (the "Company"), and United HealthCare Corporation. We have agreed that the Company will pay you the sum of Three Million Dollars ($3,000,000.00) upon the closing of the transaction described in the Agreement and Plan of Merger dated June 25, 1995, as amended, among United HealthCare Corporation, Montana Acquisition, Inc., The MetraHealth Companies, Inc., Metropolitan Life Insurance Company, The Travelers Insurance Company, Inc., The Travelers Insurance Group Inc., and MetLife HealthCare Holdings, Inc. (the "Merger Agreement"). We have also agreed that the Company will pay you an additional Three Million Dollars ($3,000,000.00) if the 1995 audited operating results of the MetraHealth Business through September 30, 1995, equal at least One Hundred and Thirty-Five Million Dollars ($135,000,000.00), as adjusted in good faith and using best efforts by making material adjustments (on a pro-rata basis, when appropriate) consistent with the definition of Company Earnings in Section 2.03 of the Merger Agreement, excluding the prospective claim reserve true-up but including reserve margin changes (as those terms are used in the Merger Agreement). The Company will make reasonable efforts to make the calculation described above within ninety (90) days after September 30, 1995. The payments described in this letter are separate from any other payments of any type made or to be made to you by the Company, and this letter Mr. Kennett L. Simmons October 2, 1995 Page 2 does not modify or affect any other agreements between you and the Company. All amounts payable under this letter will be paid in cash, subject to required income and payroll tax withholdings. If the above is in accordance with your understanding of the terms of our agreement, please execute a duplicate copy of this letter where indicated. Sincerely, /s/ James M. Michener James M. Michener Secretary Accepted and Agreed this 2 day of October, 1995. /s/ Kennett L. Simmons - -------------------------- Kennett L. Simmons EX-10.X 9 CONSULTING AGREEMENT [LETTERHEAD OF METRA HEALTH] Exhibit 10(x) October 2, 1995 Mr. Kennett L. Simmons P.O. Box 28 Kents Store, Virginia 23084 RE: CONSULTING AGREEMENT -------------------- Dear Mr. Simmons: The Metrahealth Companies, Inc. (the "Company") considers it essential to the best interests of the Company that the Company continue to have your advice available to it on an advisory basis. In order to induce you to act as a consultant to the Company, the Company has offered, and you have accepted, the compensation set forth in this letter agreement (the "Agreement"). 1. Services to be Provided. You agree to provide up to 10 hours per month of consulting services to the Company from time to time at the request of the Company, the scheduling of such time to be at your sole discretion; provided, that you shall not be required to devote any minimum amount of time to the performance of such services. It is within your sole discretion whether such services shall be performed in your home or at the Company's offices. Such consulting services shall consist of advising management of the Company with respect to general business matters, issues and strategies relating to the Company's business. You shall report to the Chief Executive Officer of the Company, or his successor or designee. The Company acknowledges and accepts that you provide or may provide consulting, management and other services to other companies, in addition to the consulting services provided hereunder. Except as provided in Sections 6 and 7, the Company agrees that you shall not be restricted in any manner whatsoever by this Agreement from providing services to any other person or entity and that the agreements set forth herein are entered into upon a non-exclusive basis. 2. Compensation. You shall be paid consulting fees at a mutually agreed upon hourly rate for consulting services actually rendered hereunder. Such compensation shall be payable upon invoice from you. The Company shall promptly reimburse you for all reasonable expenses incurred by you in performing services pursuant to the terms hereof during the Term, provided you properly account therefor in accordance with Company policy as in effect from time to time and of which you are made aware. To the extent that you are required to travel on behalf of the Company, you shall be entitled to use first class accommodations. 3. Term. The term of this Agreement shall be the period commencing on October 2, 1995 (the "Effective Date") and expiring on the January 31, 1998 (the "Term"), unless extended by agreement of the parties, or otherwise terminated pursuant to the provisions of this Agreement. 4. Termination. (a) The Company may terminate this Agreement for "Cause" which shall be defined as (1) unlawful act or acts intended by you to result directly or indirectly in your material gain or personal enrichment at the expense of the Company or any subsidiary, (2) material breach of any written employment, noncompetition, nondisclosure or other similar written agreement with the Company or any subsidiary, (3) material and knowing direct involvement in the failure of the Company or any subsidiary to comply with any material requirement of law which results in intended material financial harm to the Company or any subsidiary or (4) material breach of this Agreement. (b) The Executive may terminate this Agreement at any time by giving notice. 5. Confidential Information. You agree that during and after the term of this Agreement, you shall keep confidential all confidential information and trade secrets of the Company, or any subsidiaries or affiliates of the Company and shall not disclose such information to any person without the prior approval of the Company, or use such information for any purpose other than in the course of fulfilling your duties pursuant to the Agreement. Upon termination of this Agreement, you shall return any documents, records, data, books or materials of or pertaining to the Company or its subsidiaries of affiliates in your possession or control and any of your work papers in your possession or control containing confidential information or trade secrets. The Company acknowledges that you already have substantial experience and expertise in the health insurance and managed health care business, and use of that experience and expertise in other employment will not be deemed a violation of this Agreement. 2 6. Non-Competition. (a) You agree that during the term of this Agreement, you will not engage, directly or indirectly (whether as officer, director, employee, consultant or by ownership or otherwise) in a competitive business in the Company's market area. (b) Notwithstanding the foregoing, nothing in this Agreement shall prohibit or penalize the ownership by you of investments in shares of a competitive business that are registered under Section 12 of the Securities Exchange Act of 1934 and constitute, together with all such investments owned by any immediate family member of, affiliate of, or person acting in concert with, you, less than 5% of the outstanding registered investments in such business. As used herein, the term "competitive business" means a business entity that markets health insurance, managed health care, health maintenance organizations, or the administration of health insurance programs, and the term "market area" means any state or possession in which the Company is engaged in business on the date of your termination of employment. 7. Nonsolicitation. You agree that during the term of this Agreement, you will not (a) induce or attempt to induce, directly or indirectly, any of the Company's employees to terminate their employment with the Company nor (b) solicit the sale of any product or service that constitutes a competitive business to any entity which on the date of your termination of employment was purchasing (or with which substantial negotiations were then in progress for the purchase of) the Company's services or products. 8. Return of Documents. Upon termination of your consultancy for any reason, you agree to return all documents and other property provided to you or prepared by you during your consultancy with the Company, including but not limited to, contracts, agreements, customer lists, business plans, books, records, notes and all copies thereof. 9. Consultant's Independence and Discretion. (a) Nothing herein contained shall be construed to constitute the parties hereto as partners or as joint venturers, or either as agent of the other, or as employer and employee. By virtue of the relationship described herein your relationship to the Company during the Term of this Agreement shall only be that of an independent contractor and you shall perform all services pursuant to this Agreement as an independent contractor. You 3 shall not provide any services under the Company's business name and shall not present yourself as an employee of the Company. (b) Subject only to such specific limitations as are contained in this Agreement, the manner, means, details or methods by which you perform your obligations under this Agreement shall be solely within your discretion. The Company shall not have the authority to, nor shall it, supervise, direct or control the manner, means, details or methods utilized by you to perform your obligations under this Agreement and nothing in this Agreement shall be construed to grant the Company any such authority. (c) The Company shall have no responsibility to you to withhold, and does not intend to withhold, any amounts from payments advanced to you on account of withholding taxes or other employment taxes. 10. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Virginia applicable to contracts made and to be wholly performed therein. 11. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 12. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge shall be agreed to in writing and signed by you and by a duly authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. All descriptive headings in this Agreement are inserted for conve- 4 nience only and shall be disregarded in construing or applying any provision of this Agreement. 13. Successors; Binding Agreement. (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company or its affiliates would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 14. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 15. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 5 If you agree that this letter sets forth our agreement on the subject matter hereof, please sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, By: /s/ James M. Michener ------------------------ Name: James M. Michener Title: Secretary Agreed to this 2nd day of October, 1995 /s/ Kennett L. Simmons - -------------------------- Kennett L. Simmons 6 EX-11 10 STATE REGARDING COMP PER SHARE EARNINGS EXHIBIT 11 UNITED HEALTHCARE CORPORATION STATEMENT RE COMPUTATION OF PER COMMON SHARE EARNINGS
Year Ended December 31, -------------------------------------- 1995 1994 1993 ---- ---- ---- (in thousands, except per share data) PRIMARY: - -------- NET EARNINGS BEFORE EXTRAORDINARY GAIN $285,964(1) $ 288,139(2) $212,078 EXTRAORDINARY GAIN ON SALE OF SUBSIDIARY -- 1,377,075 -- LESS CONVERTIBLE PREFERRED STOCK DIVIDENDS 7,188 -- -- -------------------------------------- NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS $278,776 $1,665,214 $212,078 ====================================== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Weighted average number of common shares outstanding 173,587 170,711 166,927 Additional equivalent shares issuable from assumed exercise of stock options 3,856 4,498 4,812 -------------------------------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 177,443 175,209 171,739 ====================================== NET EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY GAIN $1.57(1) $1.64(2) $1.23 EXTRAORDINARY GAIN PER COMMON SHARE -- 7.86 -- -------------------------------------- NET EARNINGS PER COMMON SHARE $1.57 $9.50 $1.23 ====================================== FULLY DILUTED: - -------------- NET EARNINGS BEFORE EXTRAORDINARY GAIN $285,964 $ 288,139 $212,078 EXTRAORDINARY GAIN ON SALE OF SUBSIDIARY -- 1,377,075 -- -------------------------------------- NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS $285,964 $1,665,214 $212,078 ====================================== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Weighted average number of common shares outstanding 173,587 170,711 166,927 Additional equivalent shares issuable from assumed exercise of stock options 5,132 4,506 4,812 Assumed conversion of convertible preferred stock 2,547 -- -- -------------------------------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 181,266 175,217 171,739 ====================================== NET EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY GAIN $1.58 $1.64 $1.23 EXTRAORDINARY GAIN PER COMMON SHARE -- 7.86 -- -------------------------------------- NET EARNINGS PER COMMON SHARE $1.58(3) $9.50(4) $1.23(4) ======================================
(1) 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 net earnings would have $382.9 million, or $2.12 per common share. (2) 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. (3) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. (4) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EX-21 11 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 ---------- SUBSIDIARIES OF REGISTRANT -------------------------- Subsidiaries of United HealthCare Corporation State of - --------------------------------------------- Incorporation Name or Organization - ---- --------------- United HealthCare Services, Inc./1/ Minnesota United Health and Life Insurance Company/2/ Minnesota United Behavioral Systems, Inc./3/ Minnesota United Behavioral Systems, Inc. Iowa United HealthCare of Georgia, Inc./4/ Georgia United HealthCare of Utah/5/ Utah Midwest Physicians Health Programs, Inc. Delaware Physicians Health Plan of Greater St. Louis, Inc. Delaware PrimeCare Health Plan, Inc. Wisconsin United HealthCare of Ohio, Inc./6/ Ohio United Health and Life Insurance Company of Ohio/7/ Ohio United Health Plans of New England, Inc./8/ Rhode Island Share Health Plan of Illinois, Inc. Illinois United HealthCare of the Midlands, Inc./9/ Nebraska Chicago HMO Ltd. Delaware United Health and Life Insurance Company of Illinois Illinois FOCUS Healthcare Management, Inc. Tennessee Ramsay-HMO, Inc. Delaware United HealthCare South, Inc./10/ Florida CAC - United HealthCare Plans of Florida, Inc./11/ Florida United HealthCare Plans of Florida, Inc./12/ Florida Complete Health, Inc. Alabama Alabama Health Network, Inc. Alabama Complete Health of Arkansas, Inc. Arkansas Complete Health of Georgia, Inc. Georgia Complete Health of Mississippi, Inc. Mississippi Complete Health of Tennessee, Inc. Tennessee Complete Health of Alabama, Inc. Alabama Community Health Network of Louisiana, Inc. Louisiana GenCare Health Systems, Inc. Missouri Group Sales and Service of Puerto Rico, Inc. Puerto Rico UHC Overseas R.S.A., Inc. Delaware UHC International Holdings, Inc. Delaware UHC Holdings R.S.A., L.L.C. Delaware The MetraHealth Companies, Inc. Delaware The MetraHealth Insurance Company Connecticut MetraHealth Care Management Corporation Delaware The MetraHealth Insurance Company of New York New York The MetraHealth Employee Benefits Company, Inc. Connecticut The MetraHealth Care Holding Company Connecticut ProAmerica Managed Care, Inc. Texas The MetraHealth Care Network, Inc. Delaware U.S. Behavioral Health California MetraHealth Care Plan of Upstate New York, Inc. New York MetraHealthCare Plan of Texas, Inc. Texas MetraHealth Care Plan of Greater Chicago, Inc. Illinois MetraHealth Care Plan of Louisiana, Inc. Louisiana U.S. Behavioral Health Plan, California California MetraHealth Services Corporation New York HealthSpring, Inc. Delaware United HealthCare Administrators, Inc. Connecticut MetraHealth Care Plan of Arizona, Inc. Arizona MetraHealth Care Plan of California, Inc. California MetraHealth Care Plan of Colorado, Inc. Colorado MetraHealth Care Plan of Florida, Inc. Florida MetraHealth Care Plan of Georgia, Inc. Georgia MetraHealth Care Plan of Illinois, Inc. Delaware MetraHealth Care Plan of Kansas City, Inc. Missouri MetraHealth Care Plan of Kentucky, Inc. Delaware MetraHealth Care Plan of Massachusetts, Inc. Massachusetts MetraHealth Care Plan of New Jersey, Inc. New Jersey MetraHealth Care Plan of New York, Inc. New York MetraHealth Care Plan of Ohio, Inc. Ohio MetraHealth Care Plan, Inc. Texas MetraHealth Care Plan of Wisconsin, Inc. Wisconsin - -------------------------------------------- 1. Previously doing business as "UHC Management Company, Inc.", "Charter Med, Incorporated", "Charter HealthCare, Inc.", Charter Med, Inc. of Minnesota" and "Charter Med, Incorporated of Minnesota." Also doing business as "United HealthCare Services of Minnesota, Inc.", "Healthmarc", "EverCare", "Employee Performance Design", "HealthCare Evaluation Services", "Managed Care for the Aged", "United HealthCare", "United HealthCare Corporation", "United HealthCare Management Company, Inc.", "United HealthCare Management", "UMC Management Company, Inc.", "Personal Decision Services", "UHC Management and Administrators", "United Resource Networks", "Health Pro", "Institute for Human Resources", "The Long Term Care Group" and "Health Professionals Review", "United HealthCare of Illinois, Inc." and "UHC of Illinois, Inc." 2. Formerly "Life of Mid-America Insurance Company". Also doing business as "UHC Insurance Company". 3. Formerly "United Clinics of Counseling, Inc." Also doing business as "United Behavioral Clinics" and "Positive Focus Professional Counseling Associates". 4. Formerly "Health 1st, Inc". 5. Formerly "Physicians Health Plan of Utah". 6. Formerly "Physicians Health Plan of Ohio, Inc."; also doing business as "PHP Benefit Systems" and "Western Ohio Health Care Corporation". 7. Formerly "Benefit Systems Life Insurance Company". 8. Also doing business as "Ocean State Physicians Health Plan". 9. Formerly "Share Health Plan of Nebraska, Inc." 10. Formerly "Complete Health Services, Inc." 11. Formerly "CAC - Ramsay Health Plans, Inc." 12. Formerly "C.A.C. Health Plan, Inc." EX-23 12 CONSENT OF INDEPEDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement Nos. 2-95342, 33-3558, 33-22310, 33-27208, 33-36579, 33-50282, 33-67918, 33-68300, 33-75846, 33-79632, 33-79634, 33-79636, 33-79638, 33-59083, 33-59623, 33-63885 and 333-01517. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, March 29, 1996 EX-24 13 POWERS OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each person whose signature appears below constitutes and appoints each of William W. McGuire, M.D. and Kevin H. Roche, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 of United HealthCare Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney- in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on the 16th day of March, 1996, by the following person. /s/ Thomas H. Kean - ------------------ Thomas H. Kean 1 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each person whose signature appears below constitutes and appoints each of David P. Koppe and Kevin H. Roche, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 of United HealthCare Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on the __________ day of March, 1996, by the following person. - ------------------------ William W. McGuire, M.D. 2 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each person whose signature appears below constitutes and appoints each of William W. McGuire, M.D. and Kevin H. Roche, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 of United HealthCare Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney- in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on the 22nd day of March, 1996, by the following person. /s/ Douglas W. Leatherdale - -------------------------- Douglas W. Leatherdale 3 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each person whose signature appears below constitutes and appoints each of William W. McGuire, M.D. and Kevin H. Roche, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 of United HealthCare Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney- in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on the 15th day of March, 1996, by the following person. /s/ William C. Ballard, Jr. - --------------------------- William C. Ballard, Jr. 4 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each person whose signature appears below constitutes and appoints each of William W. McGuire, M.D. and Kevin H. Roche, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 of United HealthCare Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney- in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on the 15th day of March, 1996, by the following person. /s/ Elizabeth J. McCormack - -------------------------- Elizabeth J. McCormack 5 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each person whose signature appears below constitutes and appoints each of William W. McGuire, M.D. and Kevin H. Roche, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 of United HealthCare Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney- in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on the 15th day of March, 1996, by the following person. /s/ Richard T. Burke - -------------------- Richard T. Burke 6 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each person whose signature appears below constitutes and appoints each of William W. McGuire, M.D. and Kevin H. Roche, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 of United HealthCare Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney- in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on the 15th day of March, 1996, by the following person. /s/ James L. Seiberlich - ----------------------- James L. Seiberlich 7 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each person whose signature appears below constitutes and appoints each of William W. McGuire, M.D. and Kevin H. Roche, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 of United HealthCare Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney- in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on the 16th day of March, 1996, by the following person. /s/ Kennett L. Simmons - ---------------------- Kennett L. Simmons 8 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each person whose signature appears below constitutes and appoints each of William W. McGuire, M.D. and Kevin H. Roche, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 of United HealthCare Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney- in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on the 15th day of March, 1996, by the following person. /s/ William G. Spears - --------------------- William G. Spears 9 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each person whose signature appears below constitutes and appoints each of William W. McGuire, M.D. and Kevin H. Roche, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 of United HealthCare Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney- in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on the 15th day of March, 1996, by the following person. /s/ James A. Johnson - -------------------- James A. Johnson 10 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each person whose signature appears below constitutes and appoints each of William W. McGuire, M.D. and Kevin H. Roche, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 of United HealthCare Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney- in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on the 15th day of March, 1996, by the following person. /s/ Gail R. Wilensky - -------------------- Gail R. Wilensky 11 EX-27 14 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from United HealthCare Corporation 10K and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 940,110 863,815 577,497 27,184 6,000 2,867,121 417,166 149,514 6,160,986 2,433,996 0 1,752 500,000 0 3,186,268 6,160,986 5,511,062 5,670,878 4,961,839 5,210,093 248,254 2,555 771 460,014 170,205 285,964 0 0 0 285,964 1.57 1.57
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