Form S-4 Registration Statement
Table of Contents

As filed with the Securities and Exchange Commission on August 11, 2005

Registration No. 333-[            ]


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


 

UNITEDHEALTH GROUP INCORPORATED

(Exact Name of Registrant as specified in Its charter)

 


 

Minnesota   6324   41-1321939

(State or Other Jurisdiction

of Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

UNITEDHEALTH GROUP CENTER

9900 BREN ROAD EAST

MINNETONKA, MINNESOTA 55343

(952) 936-1300

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 


 

David J. Lubben, Esq.

General Counsel

UnitedHealth Group Incorporated

UnitedHealth Group Center

9900 Bren Road East

Minnetonka, Minnesota 55343

(952) 936-1300

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 


 

Copies to:

 

Thomas A. Roberts, Esq.

Raymond O. Gietz, Esq.

Weil, Gotshal & Manges LLP

767 Fifth Avenue

New York, New York 10153-0119

(212) 310-8000

 

Jonathan B. Abram, Esq.

Dorsey & Whitney LLP

50 South Sixth Street

Suite 1500

Minneapolis, Minnesota 55402

(612) 340-2600

 

Paul T. Schnell, Esq.

Neil P. Stronski, Esq.

Skadden, Arps, Slate,

Meagher & Flom LLP

Four Times Square

New York, New York 10036-6522

(212) 735-3000

 


 

Approximate Date of Commencement of the Proposed Sale to the Public: At the effective time of the merger of PacifiCare with and into a direct wholly-owned subsidiary of the Registrant, which shall occur as soon as practicable after the effective date of this registration statement and the satisfaction or waiver of all conditions to closing of such merger.

 

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 


 

CALCULATION OF REGISTRATION FEE


Title of Each Class of

Securities to be Registered

  

Amount to be

Registered(1)

  

Proposed Maximum

Offering Price Per

Share(2)

  

Proposed Maximum

Aggregate Offering

Price(2)

  

Amount of

Registration Fee

Common Stock, par value $0.01 per share

   117,100,000    N/A    $ 5,527,230,666    $ 650,555

(1) Based upon the maximum number of shares of the Registrant’s common stock expected to be issued in connection with the merger described herein to holders of shares of common stock of PacifiCare Health Systems, Inc. at the effective time of the merger.
(2) Estimated solely for purposes of calculating the registration fee required by Section 6(b) of the Securities Act of 1933, as amended (the “Securities Act”). This fee has been computed pursuant to Rules 457(f) and (c) and is based on (i) $74.85, the average of the high and low sales prices per share of common stock, par value $0.01 per share of PacifiCare Health Systems, Inc. common stock on the New York Stock Exchange on August 9, 2005, (ii) 103,603,199 shares, the maximum number of shares of PacifiCare Health Systems, Inc. common stock to be acquired by the Registrant pursuant to the merger (assuming exercise of all outstanding stock options, distribution of all restricted and deferred stock units and conversion of all outstanding convertible securities) and (iii) a cash payment of $2,227,468,779 by the Registrant to shareholders of PacifiCare Health Systems, Inc.

 


 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 



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PRELIMINARY COPY,

SUBJECT TO COMPLETION

 

LOGO

 

Dear Stockholders:

 

You are cordially invited to attend a special meeting of stockholders of PacifiCare Health Systems, Inc., which will be held on                     , 2005 beginning at              local time at                     . At the special meeting, PacifiCare’s stockholders will be asked to adopt the merger agreement that PacifiCare has entered into with UnitedHealth Group Incorporated and Point Acquisition LLC, a wholly owned subsidiary of UnitedHealth Group, pursuant to which the business of PacifiCare will be continued as a wholly owned subsidiary of UnitedHealth Group.

 

If it is completed, the proposed merger will create opportunities for broader customer access to a stronger and more diverse network of doctors and other care providers, enhanced and expanded affordable health care services that address the needs of older Americans, including those under new Medicare programs, the application of more consumer-oriented offerings and service capabilities, and quality enhancements and efficiency gains for hospitals, physicians and other health professionals. Following the merger, PacifiCare stockholders are expected to own in the aggregate approximately 8% of UnitedHealth Group’s outstanding common stock. By becoming part of a much larger health and well-being company, PacifiCare would be in a better position to take advantage of growth opportunities, meet competitive pressures, serve customers more efficiently and develop, introduce and administer new products to respond to the need for affordable healthcare.

 

If the proposed merger is completed, each share of PacifiCare common stock will be exchanged for 1.1 shares of UnitedHealth Group common stock and $21.50 in cash, collectively the merger consideration. UnitedHealth Group common stock is listed on the New York Stock Exchange, Inc. under the symbol “UNH” and PacifiCare common stock is listed on the New York Stock Exchange under the symbol “PHS”. The closing price of UnitedHealth Group common stock on the New York Stock Exchange was $             per share on                     , 2005 and the closing price of PacifiCare common stock on the New York Stock Exchange was $             per share on                     , 2005. The value of the merger consideration to be received by PacifiCare stockholders will fluctuate with changes in the price of UnitedHealth Group’s common stock—if the price of UnitedHealth Group’s common stock increases, the value of the merger consideration increases; if the price of UnitedHealth Group’s common stock decreases, the value of the merger consideration decreases. There can be no assurance as to the market price of UnitedHealth Group common stock at any time prior to the completion of the merger or at any time thereafter. Stockholders are urged to check the current trading price for UnitedHealth Group common stock and for PacifiCare common stock.

 

Our board of directors has reviewed and considered the terms of the merger and the merger agreement and has unanimously determined that the proposed merger is advisable, fair to and in the best interests of, PacifiCare and its stockholders and unanimously recommends that you vote “FOR” the adoption of the merger agreement, which is described in detail in the accompanying proxy statement/prospectus.

 

YOUR VOTE IS VERY IMPORTANT. PacifiCare cannot complete the proposed merger unless the merger agreement is adopted by the affirmative vote of holders of a majority of the shares of PacifiCare common stock outstanding on the close of business on                     , 2005. The obligations of PacifiCare and UnitedHealth Group to complete the merger are also subject to the satisfaction or waiver of several other conditions to the merger, including receiving approval from regulatory agencies. Whether or not you plan to attend the special meeting, please complete, sign, date and promptly return the accompanying proxy in the enclosed postage paid envelope. You may also vote your shares by telephone, using a toll-free number, or by accessing the Internet. Your proxy card contains instructions for using these convenient services. Returning the proxy does not deprive you of your right to attend our special meeting. If you decide to attend our special meeting and wish to change your proxy vote, you may do so by voting in person at the meeting. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote in person at the special meeting, you must obtain from the record holder a proxy issued in your name.

 

 


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Only stockholders who hold shares of PacifiCare common stock at the close of business on                     , 2005 will be entitled to vote at the special meeting. If the merger agreement is adopted by the PacifiCare stockholders, the parties intend to close the merger as soon as possible after the special meeting and after all of the conditions to closing the merger are satisfied or waived, if permissible under applicable law and stock exchange rules.

 

The proxy statement/prospectus explains the merger in greater detail and provides you with detailed information concerning UnitedHealth Group, PacifiCare and the special meeting. Please give all of the information contained in the proxy statement/prospectus your careful attention. In particular, you should carefully consider the discussion of the risk factors relating to the proposed merger in the section entitled “ Risk Factors” beginning on page 32 of this proxy statement/prospectus.

 

TO ADOPT THE MERGER AGREEMENT, YOU MUST VOTE “FOR” THE PROPOSAL BY FOLLOWING THE INSTRUCTIONS STATED ON THE ENCLOSED PROXY CARD. IF YOU DO NOT VOTE AT ALL, YOU WILL, IN EFFECT, HAVE VOTED AGAINST THE PROPOSAL.

 

If the proposed merger is completed, you will be sent written instructions for exchanging your certificates of PacifiCare common stock for the merger consideration. Please do not send in your certificates until you have received these instructions.

 

On behalf of the PacifiCare board of directors, I thank you for your support and urge you to VOTE FOR ADOPTION of the merger agreement.

 

Sincerely,

 

 

Howard G. Phanstiel

Chairman of the Board

 

Neither the Securities and Exchange Commission nor any state securities commission nor any state regulatory authority has approved or disapproved of the shares of UnitedHealth Group common stock to be issued in the merger, or determined if the proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.

 

The date of this proxy statement/prospectus is                     , 2005.

 

This proxy statement/prospectus and the form of proxy are first being mailed to the stockholders of PacifiCare on or about                     , 2005.


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LOGO

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON                     , 2005

 

To Stockholders:

 

NOTICE IS HEREBY GIVEN, that we will hold a special meeting of stockholders of PacifiCare Health Systems, Inc., a Delaware corporation, at             , local time, on                     , 2005 at                      for the following purposes:

 

  1. To consider and vote on a proposal to adopt the Agreement and Plan of Merger by and among UnitedHealth Group Incorporated, Point Acquisition LLC, and PacifiCare, dated as of July 6, 2005, pursuant to which PacifiCare will merge with and into Point Acquisition LLC, and PacifiCare will become a wholly owned subsidiary of UnitedHealth Group, such transaction being referred to as the merger. Each outstanding share of PacifiCare common stock will be converted into the right to receive 1.1 shares of UnitedHealth Group common stock and $21.50 in cash.

 

  2. To consider and vote on a proposal to authorize the proxyholders to vote to adjourn or postpone the special meeting, in their sole discretion, for the purpose of soliciting additional votes for the adoption of the merger agreement.

 

  3. To transact such other business as may properly come before the special meeting.

 

We describe the merger and the merger agreement more fully in the proxy statement/prospectus attached to and forming part of this notice. You are encouraged to read the entire document carefully. As of the date of this notice, PacifiCare’s board of directors knows of no other business to be conducted at the special meeting.

 

The board of directors of PacifiCare unanimously recommends that PacifiCare stockholders vote “FOR” approval and adoption of the merger agreement.

 

Only stockholders of record of PacifiCare common stock at the close of business on                     , 2005, the record date for the special meeting, are entitled to notice of, and will be entitled to vote at, the special meeting or any adjournment or postponement thereof. Adoption of the merger agreement will require the affirmative vote of PacifiCare stockholders representing a majority of the outstanding shares of PacifiCare common stock entitled to vote at the special meeting. Authorizing the proxyholders to vote to adjourn or postpone the special meeting for the purpose of soliciting additional votes for the adoption of the merger agreement will require the affirmative vote of PacifiCare stockholders representing a majority of the shares of PacifiCare common stock present and entitled to vote at the special meeting.

 

PacifiCare stockholders have the right to dissent from the merger and obtain payment in cash of the fair value of their shares of common stock under applicable provisions of Delaware law. In order to perfect dissenters’ rights, stockholders must give written demand for appraisal of their shares before the taking of the vote on the merger at the special meeting and must not vote in favor of the merger. A copy of the applicable Delaware statutory provision is included as Annex D to the attached proxy statement/prospectus and a summary of this provision can be found in the section entitled “Appraisal Rights for PacifiCare Stockholders” beginning on page 96 of the attached proxy statement/prospectus.

 

Your vote is important. To ensure that your shares are represented at the special meeting, you are urged to complete, date and sign the enclosed proxy and mail it promptly in the postage-paid envelope provided, whether or not you plan to attend the special meeting in person. Completing a proxy now will not prevent you from being able to vote at the special meeting by attending in person and casting a vote. You may also vote your shares by telephone, using a toll-free number, or the Internet. Your proxy card contains instructions for using these convenient services. If you do not return or submit the proxy or vote in person at the special meeting, the effect will be the same as a vote against the merger agreement proposal.


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You may revoke your proxy in the manner described in the accompanying proxy statement/prospectus at any time before it has been voted at the special meeting. If you attend the special meeting you may vote in person even if you returned a proxy. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote in person at the special meeting, you must obtain from the record holder a proxy issued in your name.

 

Please do not send your stock certificates at this time. If the merger is completed, you will be sent instructions regarding the surrender of your stock certificates.

 

By Order of the Board of Directors

 

 

Joseph S. Konowiecki

Secretary

 

Cypress, California

                    , 2005


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PRELIMINARY COPY,

SUBJECT TO COMPLETION

PROXY STATEMENT OF PACIFICARE HEALTH SYSTEMS, INC.

PROSPECTUS OF UNITEDHEALTH GROUP INCORPORATED

 

This proxy statement/prospectus is being furnished to stockholders of PacifiCare Health Systems, Inc., a Delaware corporation, referred to as PacifiCare, in connection with the solicitation of proxies by the board of directors of PacifiCare for use at the special meeting of stockholders of PacifiCare to be held on                      at             , local time, at                     . At the special meeting, holders of PacifiCare common stock, $0.01 par value, are being asked to consider and vote upon a proposal to adopt the Agreement and Plan of Merger, referred to as the merger agreement, dated as of July 6, 2005, by and among PacifiCare, UnitedHealth Group Incorporated, a Minnesota corporation, and Point Acquisition LLC, a limited liability company organized under the laws of the State of Delaware and a wholly owned subsidiary of UnitedHealth Group. The merger agreement provides for, among other things, the merger of PacifiCare with and into Point Acquisition, which is referred to as the merger. A copy of the merger agreement is attached hereto as Annex A and made part of this proxy statement/prospectus. At the special meeting, PacifiCare stockholders also are being asked to consider and vote upon a proposal to authorize the proxyholders to vote to adjourn or postpone the special meeting, in their sole discretion, for the purpose of soliciting additional votes for the adoption of the merger agreement.

 

At the effective time of the merger, PacifiCare will merge with and into Point Acquisition. Each outstanding share of PacifiCare common stock will be converted into the right to receive 1.1 shares of UnitedHealth Group common stock and $21.50 in cash. Approximately 105.6 million shares of UnitedHealth Group common stock are expected to be issued in connection with the merger (assuming no exercise of outstanding PacifiCare stock options). For additional information regarding the terms of the merger, see the merger agreement attached as Annex A to this proxy statement/prospectus and the section entitled “The Merger” beginning on page 45 of this proxy statement/prospectus. Completion of the merger is conditioned upon, among other things, adoption of the merger agreement by PacifiCare’s stockholders and receipt of all required regulatory approvals.

 

UnitedHealth Group common stock is listed on the New York Stock Exchange, Inc. under the symbol “UNH”, and PacifiCare common stock is listed on the New York Stock Exchange under the symbol “PHS”. The closing price of UnitedHealth Group common stock on the New York Stock Exchange was $             per share on                     , 2005 and the closing price of PacifiCare common stock on the New York Stock Exchange was $             per share on                     , 2005. There can be no assurance as to the market price of UnitedHealth Group common stock at any time prior to the effective time of the merger or at any time thereafter. Stockholders are urged to check the current trading price for UnitedHealth Group common stock and for PacifiCare common stock.

 


 

PACIFICARE STOCKHOLDERS ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO IN THE SECTION ENTITLED “ RISK FACTORS” BEGINNING ON PAGE 32 OF THIS PROXY STATEMENT/PROSPECTUS.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the shares of UnitedHealth Group common stock to be issued in the merger, or determined if the proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

The date of this proxy statement/prospectus is                     , 2005.

 

This proxy statement/prospectus and the form of proxy are first being mailed to the stockholders of PacifiCare on or about                     , 2005.


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IMPORTANT

 

This document constitutes a proxy statement of PacifiCare to PacifiCare stockholders and a prospectus of UnitedHealth Group for the shares of UnitedHealth Group common stock that UnitedHealth Group will issue to PacifiCare stockholders in the merger. UnitedHealth Group has filed a registration statement on Form S-4 to register the shares of UnitedHealth Group’s common stock to be issued to PacifiCare stockholders in the merger. This proxy statement/prospectus is part of the registration statement, but does not contain all of the information set forth in the registration statement, certain portions of which have been omitted as permitted by the rules and regulations of the Securities and Exchange Commission. Such additional information may be obtained, without charge, from the SEC’s principal office in Washington, D.C. or from the website maintained by the SEC at http://www.sec.gov. In accordance with the rules of the SEC this proxy statement/prospectus incorporates important business and financial information about UnitedHealth Group, PacifiCare and their affiliates that is contained in documents filed with the SEC and which are attached to this proxy statement/prospectus as Annexes E through Y. The information incorporated by reference is deemed to be part of this proxy statement/prospectus, except for any information superseded by information in this proxy statement/prospectus. See the section entitled “Where You Can Find More Information” beginning on page 141 of this proxy statement/prospectus.

 

We are not incorporating the contents of the websites of the SEC or any other person into this document. We are only providing the information about how you can obtain certain documents that are incorporated by reference into this proxy statement/ prospectus at such websites for your convenience.


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TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE MERGER

  1

SUMMARY OF THE PROXY STATEMENT/PROSPECTUS

  6

The Companies

  6

Reasons for the Merger

  8

Structure of the Transaction

  8

The Special Meeting of PacifiCare Stockholders

  9

UnitedHealth Group Shareholder Approval

  10

Recommendation of PacifiCare’s Board of Directors

  10

Fairness Opinions of MTS Health Partners, L.P. and Morgan Stanley & Co. Incorporated

  10

Interests of Certain Persons in the Merger

  10

Risk Factors

  11

Conditions to the Merger

  11

Termination of the Merger Agreement

  12

Payment of Termination Fee

  13

No Solicitation of Transactions Involving PacifiCare

  13

Material U.S. Federal Income Tax Consequences of the Merger

  13

Regulatory Matters

  14

Agreement to Obtain Clearance from Regulatory Authorities

  14

Restrictions on the Ability to Sell UnitedHealth Group Common Stock

  14

Dissenters’ or Appraisal Rights

  14

Surrender of Stock Certificates

  15

Certain Effects of the Merger

  15

SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF UNITEDHEALTH GROUP INCORPORATED

  16

SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF PACIFICARE

  17

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

  19

Pro Forma Condensed Combined Statement of Operations for the Six Months Ended June 30, 2005

  21

Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 2004

  22

Pro Forma Condensed Combined Balance Sheet as of June 30, 2005

  23

Notes to Unaudited Pro Forma Condensed Combined Financial Information

  24

UNAUDITED COMPARATIVE PER SHARE DATA

  29

MARKET PRICE AND DIVIDEND INFORMATION

  30

Recent Closing Prices

  30

Historical Market Price Data

  30

Dividend Information

  31

Number of Stockholders

  31

Shares Held by Certain Stockholders

  31

RISK FACTORS

  32

Risks Associated with the Merger

  32

Risks Related to UnitedHealth Group’s Business

  36

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

  40

THE SPECIAL MEETING OF PACIFICARE STOCKHOLDERS

  42

Date, Time and Place of the Special Meeting

  42

Matters to be Considered at the Special Meeting

  42

Board Recommendation

  42

Record Date and Shares Entitled to Vote

  42

Vote Required

  42

Voting of Proxies

  43

Other Business

  43

Revocation of Proxies

  43

Quorum; Broker Abstentions and Broker Non-Votes

  43

Expenses of Solicitation

  44

Householding

  44

Assistance

  44

THE MERGER

  45

General Description of the Merger

  45

Background of the Merger

  45

UnitedHealth Group’s Reasons for the Merger

  52

PacifiCare’s Reasons for the Merger

  54

PacifiCare Board of Directors Recommendation

  58

Opinions of PacifiCare’s Financial Advisors

  58

Certain Financial Projections

  80

 

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Completion and Effectiveness of the Merger

  81

Operations Following the Merger

  82

Health Services Agreements

  82

Certain Contracts between UnitedHealth Group and PacifiCare

  83

Interests of Certain Persons in the Merger

  83

Indemnification and Insurance

  89

PacifiCare Common Stock Ownership

  89

Regulatory Matters

  90

Material U.S. Federal Income Tax Consequences of the Merger

  91

Accounting Treatment

  94

Restrictions on Sale of Shares by Affiliates of PacifiCare and UnitedHealth Group

  94

Stock Market Listing

  95

APPRAISAL RIGHTS FOR PACIFICARE STOCKHOLDERS

  96

THE MERGER AGREEMENT

  99

Structure of the Merger and Conversion of PacifiCare Common Stock and Equity-Based Awards

  99

Closing and Effective Time

  100

Surrender of PacifiCare Stock Certificates

  100

Dividends

  100

Representations and Warranties

  101

Concept of Material Adverse Effect

  102

PacifiCare’s Conduct of Business Before Completion of the Merger

  103

No Solicitation of Transactions

  106

Reasonable Best Efforts

  107

Employee Matters

  108

Other Covenants

  109

Conditions to the Merger

  109

Termination of the Merger Agreement

  110

Payment of Termination Fee

  111

Amendments, Extension and Waivers

  112

CERTAIN INFORMATION CONCERNING UNITEDHEALTH GROUP

  113

Directors

  113

Director Compensation

  115

Executive Officers of UnitedHealth Group

  116

Option Grants in 2004

  118

Aggregated Option Exercises in 2004 and Option Values at December 31, 2004

  119

Performance Awards (LTIP) Under Executive Incentive Plan—Awards in Last Fiscal Year

  119

Executive Employment Agreements

  119

Executive Savings Plans

  122

UnitedHealth Group Common Stock Ownership

  123

CERTAIN INFORMATION CONCERNING PACIFICARE

  125

COMPARISON OF RIGHTS OF SHAREHOLDERS OF UNITEDHEALTH GROUP AND STOCKHOLDERS OF PACIFICARE

  126

DESCRIPTION OF UNITEDHEALTH GROUP CAPITAL STOCK

  139

UnitedHealth Group Common Stock

  139

UnitedHealth Group Preferred Stock

  139

Special Voting Rights

  139

Board of Directors

  139

Transfer Agent and Registrar

  139

EXPERTS

  140

LEGAL MATTERS

  140

FUTURE SHAREHOLDER PROPOSALS

  141

WHERE YOU CAN FIND MORE INFORMATION

  141

MISCELLANEOUS

  142

CERTAIN INFORMATION REGARDING UNITEDHEALTH GROUP AND PACIFICARE

  143

 

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ANNEXES

 

Annex A

   Agreement and Plan of Merger

Annex B

   Opinion of MTS Health Partners, L.P.

Annex C

   Opinion of Morgan Stanley & Co. Incorporated

Annex D

   Appraisal Rights under Section 262 of the Delaware General Corporation Law

Annex E

   PacifiCare Annual Report on Form 10-K for the fiscal year ended December 31, 2004

Annex F

   PacifiCare Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005

Annex G

   PacifiCare Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005

Annex H

   PacifiCare Current Report on Form 8-K with a filing date of August 4, 2005

Annex I

   PacifiCare Current Report on Form 8-K with a filing date of July 12, 2005

Annex J

   PacifiCare Current Report on Form 8-K with a filing date of July 12, 2005

Annex K

   PacifiCare Current Report on Form 8-K with a filing date of June 15, 2005

Annex L

   PacifiCare Current Report on Form 8-K with a filing date of May 31, 2005

Annex M

   PacifiCare Current Report on Form 8-K with a filing date of May 25, 2005

Annex N

   PacifiCare Current Report on Form 8-K with a filing date of May 6, 2005

Annex O

   PacifiCare Current Report on Form 8-K with a filing date of April 19, 2005

Annex P

   PacifiCare Current Report on Form 8-K with a filing date of April 6, 2005

Annex Q

   PacifiCare Current Report on Form 8-K with a filing date of March 31, 2005

Annex R

   PacifiCare Current Report on Form 8-K with a filing date of January 5, 2005

Annex S

   UnitedHealth Group Annual Report on Form 10-K for the fiscal year ended December 31, 2004

Annex T

   UnitedHealth Group Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005

Annex U

   UnitedHealth Group Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005

Annex V

   UnitedHealth Group Current Report on Form 8-K dated July 6, 2005

Annex W

   UnitedHealth Group Current Report on Form 8-K dated May 24, 2005

Annex X

   UnitedHealth Group Current Report on Form 8-K dated March 2, 2005

Annex Y

   UnitedHealth Group Current Report on Form 8-K dated February 2, 2005

Annex Z

   Form of proxy of PacifiCare

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

 

The following are some questions that you, as a stockholder of PacifiCare, may have regarding the merger and the other matters being considered at the special meeting and brief answers to those questions. We urge you to read carefully the remainder of this proxy statement/prospectus, including the documents attached to this proxy statement/prospectus, because the information in this section does not provide all the information that might be important to you with respect to the merger and the other matters being considered at the special meeting. Additional important information is also contained in the annexes and the documents that are incorporated by reference in this proxy statement/prospectus.

 

Q: Why am I receiving this proxy statement/prospectus

 

A: PacifiCare and UnitedHealth Group have agreed to the acquisition of PacifiCare by UnitedHealth Group under the terms of a merger agreement that is described in this proxy statement/prospectus. A copy of the merger agreement is attached to this proxy statement/prospectus as Annex A. In order to complete the merger, PacifiCare stockholders must approve and adopt the merger agreement and the transactions contemplated thereby. This proxy statement/prospectus contains important information about the merger, the merger agreement and the special meeting, which you should read carefully. The enclosed voting materials allow you to vote your shares without attending the special meeting. Your vote is very important. We encourage you to vote as soon as possible.

 

Q: What will be the impact of the merger?

 

A: If the merger is completed, PacifiCare will become part of UnitedHealth Group. By becoming part of a much larger health and well-being company, PacifiCare’s ability to market its services, expand its business and serve its members is expected to be greatly enhanced. We believe the merger will create the following benefits:

 

    broader customer access to a stronger and more diverse network of doctors and other care providers;

 

    enhanced and expanded affordable healthcare services that address the needs of older Americans, including those under new Medicare programs, and provide seniors with consistent quality of care and service across the country;

 

    the application of more consumer-oriented offerings and service capabilities that align with the rapidly developing confluence of health and financial services;

 

    quality enhancements and efficiency gains for hospitals, physicians and other health professionals.

 

Q: Why are UnitedHealth Group and PacifiCare proposing the merger?

 

A: To review the reasons for the merger, see the sections entitled “The Merger—UnitedHealth Group’s Reasons for the Merger” and “The Merger—PacifiCare’s Reasons for the Merger” beginning on pages 52 and 54 respectively of this proxy statement/prospectus.

 

Q: What will happen in the merger?

 

A: In the merger, PacifiCare will merge with and into Point Acquisition, which is a wholly owned subsidiary of UnitedHealth Group, with Point Acquisition continuing after the merger as the surviving entity and a wholly owned subsidiary of UnitedHealth Group.

 

Q: As a PacifiCare stockholder, what will I receive in the merger?

 

A:

If the merger is completed, for each share of PacifiCare common stock you own, you will receive 1.1 shares of UnitedHealth Group common stock and $21.50 in cash, referred to, collectively, as the merger consideration.

 

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UnitedHealth Group will not issue fractional shares of common stock. Instead, in lieu of any fractional share that you would otherwise receive, you will receive cash based on the closing market price of UnitedHealth Group common stock as of the effective date of the merger or, if such date is not a trading day, the last trading day prior to the effective date of the merger. As of July 5, 2005, the trading day immediately preceding the public announcement date of the proposed transaction, the implied value of the merger consideration was $80.05 per share of PacifiCare common stock. Immediately following the merger, PacifiCare stockholders are expected to own in the aggregate approximately 8% of the outstanding shares of UnitedHealth Group common stock.

 

Q: What are the principal risks relating to the merger?

 

A: The anticipated benefits of combining UnitedHealth Group and PacifiCare may not be realized. UnitedHealth Group may have difficulty integrating PacifiCare and may incur substantial costs in connection with the integration. UnitedHealth Group and PacifiCare must obtain several governmental consents to complete the merger, which, if delayed, not granted or granted with conditions or restrictions, may jeopardize or postpone the merger, result in additional expense or reduce the anticipated benefits of the transaction. The merger may result in the loss of customers or providers. If all of the conditions to the merger are not met, the merger may not occur and UnitedHealth Group and PacifiCare may lose some or all of the intended benefits of the merger. These and other risks are explained in the section entitled “Risk Factors—Risks Associated with the Merger” beginning on page 32 of this proxy statement/prospectus.

 

Q: Can the value of the transaction change between now and the time the merger is completed?

 

A: Yes. The value of the portion of the merger consideration comprised of UnitedHealth Group common stock can change. The 1.1 exchange ratio is a fixed exchange ratio, meaning that you will receive 1.1 shares of UnitedHealth Group common stock for each share of PacifiCare common stock you own plus $21.50 in cash regardless of the trading price of UnitedHealth Group common stock on the effective date of the merger. The market value of the UnitedHealth Group common stock you will receive in the merger will increase or decrease as the trading price of UnitedHealth Group’s common stock increases or decreases and, therefore, may be different at the time the merger is completed than it was at the time the merger agreement was signed and at the time of the special meeting. There can be no assurance as to the market price of UnitedHealth Group common stock at any time prior to the completion of the merger or at any time thereafter. You are urged to obtain current trading prices for UnitedHealth Group common stock and PacifiCare common stock.

 

Q: As a holder of options to purchase PacifiCare common stock, PacifiCare restricted stock units or PacifiCare deferred stock units, what will I receive in the merger?

 

A:

Each currently outstanding option to purchase PacifiCare common stock (whether or not then vested) which remains outstanding immediately prior to consummation of the merger will become fully vested upon consummation of the merger, will be assumed by UnitedHealth Group, subject generally to the same terms and conditions as previously applicable thereto, and will be converted automatically into options to purchase shares of UnitedHealth Group common stock pursuant to a formula more fully described in the merger agreement. All currently outstanding shares of PacifiCare common stock issued under PacifiCare compensation plans that are subject to forfeiture risk will fully vest as of the consummation of the merger and be converted into the right to receive the merger consideration. Currently outstanding restricted stock units and deferred stock units will become fully vested as of the completion of the merger and will become immediately distributable in the form of the merger consideration. For further

 

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information concerning the treatment of stock options and other equity-based awards in the merger, please see the section entitled “The Merger—Interests of Certain Persons in the Merger—Equity-Based Awards” beginning on page 83 of this proxy statement/ prospectus.

 

Q: When and where will the special meeting take place?

 

A: The special meeting is scheduled to take place at                     , local time, on                     , at                                         .

 

Q: Who is entitled to vote at the special meeting?

 

A: Holders of record of PacifiCare common stock as of the close of business on                     , 2005, referred to as the record date, are entitled to vote at the special meeting. Each stockholder has one vote for each share of PacifiCare common stock that the stockholder owns on the record date.

 

Q: What vote is required to adopt the merger agreement?

 

A: The affirmative vote of a majority of the shares of PacifiCare common stock outstanding as of the record date is the only vote required to adopt the merger agreement.

 

Q: How does the PacifiCare board of directors recommend that PacifiCare stockholders vote?

 

A: PacifiCare’s board of directors unanimously recommends that PacifiCare stockholders vote “FOR” the adoption of the merger agreement.

 

Q: What do I need to do now?

 

A: After carefully reading and considering the information contained in this proxy statement/prospectus, please mail your signed proxy card in the enclosed return envelope as soon as possible so that your shares may be represented at the special meeting. You may also vote your shares by telephone, using a toll-free number, or by accessing the Internet. Votes by telephone or the Internet must be received by                     , local time, on                     , 2005. Your proxy card contains instructions for using these convenient services. You may also attend the special meeting and vote in person. If your shares are held in “street name” by your broker or bank, your broker or bank will vote your shares only if you provide instructions on how to vote. You should follow the directions provided by your broker or bank regarding how to instruct your broker or bank to vote your shares.

 

Q: What if I do not vote, do not fully complete my proxy card or fail to instruct my broker?

 

A: It is very important for you to vote. If you do not submit a proxy or instruct your broker how to vote your shares if your shares are held in street name, and you do not vote by telephone, the Internet or in person at the special meeting, the effect will be the same as if you voted “AGAINST” the adoption of the merger agreement. If you submit a signed proxy without specifying the manner in which you would like your shares to be voted, your shares will be voted “FOR” the adoption of the merger agreement. However, if your shares are held in “street name” and you do not instruct your broker how to vote your shares, your broker will not vote your shares, such failure to vote being referred to as a broker non-vote, which will have the same effect as voting “AGAINST” the adoption of the merger agreement. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares in order to ensure that your shares will be voted at the special meeting.

 

Q: Can I change my vote after I have delivered my proxy?

 

A:

Yes. You may change your vote at any time before the vote takes place at the special meeting. To change your vote, you may (i) submit a new proxy card bearing a later date by mail or submit a new proxy by telephone or the Internet, or (ii) send a signed written notice bearing a date later than the date of the proxy to the Secretary of PacifiCare stating that you

 

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would like to revoke your proxy. You may also change your vote by attending the special meeting and voting in person, although your attendance alone will not revoke your proxy. However, if you elect to vote in person at the special meeting and your shares are held by a broker, bank or other nominee, you must bring to the meeting a legal proxy from the broker, bank or other nominee authorizing you to vote the shares.

 

Q: Will a proxy solicitor be used?

 

A: Yes. PacifiCare has engaged Georgeson Shareholder to assist in the solicitation of proxies for the special meeting and PacifiCare estimates that it will pay them a fee of approximately $20,000 and will reimburse them for reasonable out of pocket expenses incurred in connection with such solicitation.

 

Q: Do I need to attend the special meeting in person?

 

A: No. It is not necessary for you to attend the special meeting to vote your shares if PacifiCare has previously received your proxy, although you are welcome to attend.

 

Q: Should I send in my stock certificates now?

 

A: No. After the merger is completed, Wells Fargo, N.A., acting as our exchange agent, will send you instructions (including a letter of transmittal) explaining how to exchange your shares of PacifiCare common stock for the appropriate number of shares of UnitedHealth Group common stock and cash. Please do not send in your stock certificates with your proxy.

 

Q: When do you expect to complete the merger?

 

A: We are working to complete the merger as promptly as practicable after the special meeting and the receipt of required regulatory approvals or consents. However, because the merger is subject to closing conditions and the approval of a number of regulatory agencies, including the Department of Justice, referred to as the DOJ, and several state departments of insurance and/or health, we cannot predict the exact timing. For further information regarding regulatory approvals necessary for completion of the merger, please see the section entitled “The Merger—Regulatory Matters” beginning on page 90 of this proxy statement/prospectus.

 

Q: What are the material U.S. federal income tax consequences of the merger to me?

 

A: The completion of the merger is conditioned on the receipt by PacifiCare and UnitedHealth Group of tax opinions from their respective counsel dated as of the date of the merger to the effect that the merger will qualify for U.S. federal income tax purposes as a “reorganization” within the meaning in Section 368(a) of the Internal Revenue Code of 1986, as amended, referred to as the Code. PacifiCare’s and UnitedHealth Group’s conditions relating to these tax opinions are not waivable following the adoption of the merger agreement by PacifiCare stockholders without reapproval by PacifiCare stockholders (with appropriate disclosure), and neither PacifiCare nor UnitedHealth Group intends to waive this condition. Assuming the merger so qualifies as a “reorganization,” which PacifiCare and UnitedHealth Group anticipate, a PacifiCare stockholder generally will, for U.S. federal income tax purposes, recognize gain, but not loss, equal to the lesser of (1) the excess, if any, of the fair market value of the UnitedHealth Group common stock and the amount of cash received by you over your adjusted tax basis in your PacifiCare common stock exchanged in the merger or (2) the amount of cash received by you in the merger. This treatment may not apply to all PacifiCare stockholders. For further information concerning U.S. federal income tax consequences of the merger, please see the section entitled “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 91 of this proxy statement/prospectus.

 

    

Tax matters are very complicated and the consequences of the merger to any particular PacifiCare stockholder will depend on that stockholder’s particular facts and

 

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circumstances. You are urged to consult your own tax advisor to determine your own tax consequences from the merger.

 

Q: Will I have appraisal rights as a result of the merger?

 

A: Yes. In order to exercise your appraisal rights, you must follow the requirements of Delaware law. A copy of the applicable Delaware statutory provision is included as Annex D to this proxy statement/prospectus and a summary of this provision can be found in the section entitled “Appraisal Rights for PacifiCare Stockholders” beginning on page 96 of this proxy statement/prospectus.

 

Q: How will PacifiCare stockholders receive the merger consideration?

 

A: Following the merger, you will receive a letter of transmittal and instructions on how to obtain the merger consideration in exchange for your PacifiCare common stock. You must return the completed letter of transmittal and your PacifiCare stock certificates as described in the instructions, and you will receive the merger consideration as soon as practicable after Wells Fargo, the exchange agent, receives your completed letter of transmittal and PacifiCare stock certificates. If you hold shares through a brokerage account, your broker will handle the surrender of stock certificates to Wells Fargo.

 

Q: Who can I call with questions?

 

A: If you have any questions about the merger, how to submit your proxy or other matters discussed in this proxy statement/prospectus or if you need additional copies of this proxy statement/prospectus or the enclosed proxy card, you should contact Georgeson Shareholder at 866-344-4276.

 

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SUMMARY OF THE PROXY STATEMENT/PROSPECTUS

 

This summary highlights information from this proxy statement/prospectus and may not contain all of the information that is important to you. You should carefully read this entire document for a more complete understanding of the merger agreement and the transactions contemplated thereby, including the merger. In particular, you should read the documents attached to this proxy statement/prospectus, including the merger agreement and the fairness opinions which are attached as Annexes A, B and C, and made part of this proxy statement/prospectus. In addition, we have attached to this proxy statement/prospectus as Annexes E through Y important business, financial and other information about PacifiCare and UnitedHealth Group, which information is made part of this proxy statement/prospectus. This summary and the balance of this proxy statement/prospectus contain forward-looking statements about events that are not certain to occur as described, or at all, and you should not place undue reliance on those statements. Please carefully read the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 40 of this proxy statement/prospectus.

 

The Companies

 

PacifiCare Health Systems, Inc.

5995 Plaza Drive

Cypress, CA 90630-5028

Telephone: (714) 952-1121

 

PacifiCare offers managed care and other health insurance products to employer groups, individuals and Medicare beneficiaries throughout most of the United States and Guam. PacifiCare’s commercial and senior plans are designed to deliver quality health care and customer service to members cost-effectively. These products include health insurance, health benefits administration and indemnity products such as Medicare supplement products offered through health maintenance organizations, or HMOs, and Preferred Provider Organizations, or PPOs. PacifiCare also offers a variety of specialty managed care products and services that employees can purchase as a supplement to PacifiCare’s basic commercial and senior medical plans or as stand-alone products. These products include pharmacy benefit management, or PBM, services, behavioral health services, group life and health insurance and dental and vision benefit plans. As of June 30, 2005, PacifiCare had approximately 3.4 million HMO and other commercial and senior product members and approximately 11.3 million members in its PBM, dental and vision and behavioral plans, including both members covered by PacifiCare’s commercial or senior HMOs, and members who are unaffiliated with PacifiCare’s HMOs. PacifiCare’s PBM membership includes members who either have a prescription drug benefit or are entitled to purchase their prescriptions utilizing PacifiCare’s retail network contracts or mail service.

 

For further information concerning PacifiCare, please refer to PacifiCare’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, attached as Annex E and its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31 and June 30, 2005, attached as Annexes F and G, to this proxy statement/prospectus and made part of this proxy statement/prospectus.

 

UnitedHealth Group Incorporated

UnitedHealth Group Center

9900 Bren Road East

Minnetonka, Minnesota 55343

(952) 936-1300

 

UnitedHealth Group is a diversified health and well-being company, serving more than 55 million Americans. UnitedHealth Group is focused on improving the health care system and how it works for multiple,

 

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distinct constituencies. UnitedHealth Group provides individuals with access to quality, cost-effective health care services and resources through more than 460,000 physicians and other care providers, and 4,200 hospitals across the United States. UnitedHealth Group manages approximately $60 billion in aggregate annual health care spending on behalf of more than 250,000 employer-customers and the consumers it serves. UnitedHealth Group’s primary focus is on improving health care systems by simplifying the administrative components of health care delivery, promoting evidence-based medicine as the standard for care, and providing relevant, actionable data that physicians, health care providers, consumers, employers and other participants in health care can use to make better, more informed decisions. UnitedHealth Group has developed its business around the principles of physician-centered health care that is supported by data-driven care facilitation and management resources. This approach works to ensure access through all clinical situations, improve outcomes and enhance affordability.

 

UnitedHealth Group’s revenues are derived from premium revenues on risk-based products, fees from management, administrative, technology, and consulting services, sales of a wide variety of products and services related to the broad health and well-being industry and investment and other income. UnitedHealth Group conducts its business primarily through operating divisions in the following business segments:

 

    Uniprise;

 

    Health Care Services, which includes our UnitedHealthcare, Ovations and AmeriChoice businesses;

 

    Specialized Care Services; and

 

    Ingenix.

 

Uniprise delivers health care and well-being services nationwide to large national employers, individual consumers and other health care organizations through three related business units: Uniprise Strategic Solutions, which is referred to as USS, Definity Health and Exante Financial Services. Each business unit works with other UnitedHealth Group businesses to deliver a complementary and integrated array of services. USS delivers strategic health and well-being solutions to large national employers. Definity Health provides consumer-driven health plans and services to employers and their employees. Exante delivers health care focused financial services for consumers, employers and providers. Most Uniprise products and services are delivered through its licensed affiliates. Uniprise provides administrative and customer care services for certain other businesses of UnitedHealth Group. Uniprise also offers transactional processing services to various intermediaries and health care entities.

 

UnitedHealth Group’s Health Care Services segment consists of the UnitedHealthcare, Ovations and AmeriChoice businesses. UnitedHealthcare offers a comprehensive array of consumer-oriented health benefit plans and services for local, small and mid-sized employers and individuals nationwide. Ovations provides health and well-being services for individuals age 50 and older, addressing their unique needs for preventative and acute health care services, as well as for services dealing with chronic disease and other specialized issues for older individuals. Ovation’s wide array of offerings and products includes Medicare Supplement and Medicare Advantage coverage and prescription discount cards, as well as disease management and chronic care capabilities. AmeriChoice provides network-based health and well-being services to state Medicaid, Children’s Health Insurance Program, and other government-sponsored health care programs and the beneficiaries of those programs.

 

The Specialized Care Services companies, which are referred to as SCS companies, offer a comprehensive platform of specialty health and wellness and ancillary benefits, services and resources to specific customer markets nationwide. These products and services include employee benefit offerings, provider networks and related resources focusing on behavioral health and substance abuse, dental, vision, disease management, complex and chronic illness and care facilitation. The SCS companies also offer solutions in the areas of complementary and alternative care, employee assistance, short-term disability, life insurance, work life balance and health-related information. These services are designed to simplify the consumer health care experience and facilitate efficient health care delivery.

 

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Ingenix offers database and data management services, software products, publications, consulting services, outsourced services and pharmaceutical services on a nationwide and international basis. Ingenix is engaged in the simplification of health care administration by providing products and services that help customers correctly and efficiently document, code and bill for reimbursement for the delivery of care services. Ingenix is a leader in clinical research, health education services, publications, and pharmacoeconomics, outcomes, safety and epidemiology research through its i3 Research and i3 Magnifi businesses.

 

For further information concerning UnitedHealth Group, please see the section entitled “Certain Information Concerning UnitedHealth Group” beginning on page 113 of this proxy statement/prospectus and refer to UnitedHealth Group’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, attached hereto as Annex S, and its Quarterly Reports on Form 10-Q for the quarterly period ended March 31 and June 30, 2005, attached hereto as Annexes T and U, each of which is attached to this proxy statement/prospectus and made part of this proxy statement/prospectus.

 

Point Acquisition LLC

UnitedHealth Group Center

9900 Bren Road East

Minnetonka, Minnesota 55343

(952) 936-1300

 

Point Acquisition is a limited liability company organized under the laws of the State of Delaware and a wholly owned subsidiary of UnitedHealth Group formed by UnitedHealth Group on June 30, 2005 for the sole purpose of effecting the merger. This is the only business of Point Acquisition.

 

Reasons for the Merger (see page 52)

 

The proposed merger will create opportunities for broader customer access to a stronger and more diverse network of doctors and other care providers; enhanced and expanded affordable health care services that address the needs of older Americans including those under new Medicare programs, and provide seniors consistent quality of care and service across the country; the application of more consumer-orientated offerings and service capabilities that align with the rapidly developing confluence of health and financial services; and quality enhancements and efficiency gains for hospitals, physicians and other health professionals. To review the reasons for the merger in greater detail, see the sections entitled “The Merger—UnitedHealth Group’s Reasons for the Merger” and “The Merger—PacifiCare’s Reasons for the Merger” beginning on pages 52 and 54 respectively in this proxy statement/prospectus.

 

Structure of the Transaction (see page 99)

 

PacifiCare will merge with and into Point Acquisition under the terms of the merger agreement that are described in this proxy statement/prospectus. Pursuant to the merger agreement, Point Acquisition will be the surviving entity and will continue as a wholly owned subsidiary of UnitedHealth Group, and will succeed to and assume all the rights and obligations of PacifiCare. Holders of PacifiCare common stock (other than holders perfecting appraisal rights, see the section entitled “Appraisal Rights for PacifiCare Stockholders” beginning on page 98 of this proxy statement/prospectus, and treasury shares) will receive 1.1 shares of UnitedHealth Group common stock and $21.50 in cash for each share of PacifiCare common stock they own. Stockholders will receive cash for any fractional shares that they would otherwise receive in the merger.

 

Each currently outstanding option to purchase PacifiCare common stock (whether or not then vested) which remains outstanding immediately prior to consummation of the merger will become fully vested upon consummation of the merger, will be assumed by UnitedHealth Group, on generally the same terms and conditions as the original PacifiCare option, and each option will be converted into a similar award for shares of

 

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UnitedHealth Group common stock as described below. The number of UnitedHealth Group stock options to be received in respect of PacifiCare stock options will be determined by multiplying the number of PacifiCare stock options outstanding immediately prior to the merger by the option exchange ratio and the per share exercise price of such options will be determined by dividing the per share exercise price applicable to the PacifiCare stock option immediately prior to the merger by the option exchange ratio. The option exchange ratio is equal to the exchange ratio of the UnitedHealth Group common stock issued as part of the merger consideration plus the fraction obtained by dividing the cash portion of the merger consideration by the per share closing trading price of UnitedHealth Group common stock on the trading day immediately preceding the closing date of the merger. All currently outstanding shares of PacifiCare common stock issued under PacifiCare compensation plans that are subject to forfeiture risk will fully vest as of the consummation of the merger and be converted into the right to receive the merger consideration. In addition, currently outstanding restricted stock units and deferred stock units will become fully vested as of the completion of the merger and will become immediately distributable in the form of the merger consideration. See the section entitled “The Merger—Interests of Certain Persons in the Merger—Equity-Based Awards” beginning on page 86 of this proxy statement/prospectus.

 

The Merger Agreement grants UnitedHealth Group the right to request that the merger be effected by converting Point Acquisition into a Delaware corporation and merging it with and into PacifiCare. However, this right can only be exercised if such alternate structure still allows for the delivery of legal opinions to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code, and the alternate structure will not (i) result in any change in the merger consideration, (ii) be materially adverse to the interests of UnitedHealth Group, PacifiCare, Point Acquisition or the respective stockholders of UnitedHealth Group or PacifiCare or (iii) unreasonably impede or delay completion of the merger.

 

The merger agreement is attached to this proxy statement/prospectus as Annex A. Stockholders of PacifiCare are encouraged to carefully read the merger agreement in its entirety as it is the legal document that governs the merger.

 

The Special Meeting of PacifiCare Stockholders (see page 42)

 

The special meeting will be held on                     , 2005, at             , local time, at                                 .

 

The purpose of the special meeting is to (1) consider and vote upon a proposal to adopt the merger agreement, (2) consider and vote upon a proposal to authorize the proxyholders to vote to adjourn or postpone the special meeting, in their sole discretion, for the purpose of soliciting additional votes for the adoption of the merger agreement and (3) transact such other business as may properly come before the special meeting or any postponements or adjournments of the special meeting. Adoption of the merger agreement will also constitute approval of the merger and the other transactions contemplated by the merger agreement.

 

PacifiCare’s board of directors has fixed the close of business on                     , 2005 as the record date for determination of PacifiCare stockholders entitled to notice of and to vote at the special meeting. As of the close of business on                     , 2005, there were              shares of PacifiCare common stock outstanding, which were held of record by approximately              stockholders. A majority of these shares, present in person or represented by proxy, will constitute a quorum for the transaction of business. If a quorum is not present, it is expected that the special meeting will be adjourned or postponed to solicit additional proxies. Each PacifiCare stockholder is entitled to one vote for each share of PacifiCare common stock held as of the record date.

 

Adoption of the merger agreement by PacifiCare’s stockholders is required by Delaware law. Such adoption requires the affirmative vote of the holders of a majority of the shares of PacifiCare common stock outstanding on the record date and entitled to vote at the special meeting. Authorizing the proxyholders to vote to adjourn or postpone the special meeting for the purpose of soliciting additional votes for the adoption of the merger agreement will require the affirmative vote of PacifiCare stockholders representing a majority of the shares of

 

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PacifiCare common stock present and entitled to vote at the special meeting. As of the record date, PacifiCare’s directors, executive officers and their affiliates held approximately 5% of the shares entitled to vote at the special meeting.

 

UnitedHealth Group Shareholder Approval

 

UnitedHealth Group shareholders are not required to approve the issuance of the shares of UnitedHealth Group common stock as part of the merger consideration.

 

Recommendation of PacifiCare’s Board of Directors (see page 58)

 

After careful consideration, PacifiCare’s board of directors has unanimously approved and adopted the merger agreement and determined that the merger is advisable, fair to and in the best interests of, PacifiCare and its stockholders and unanimously recommends that PacifiCare stockholders vote “FOR” adoption of the merger agreement.

 

Fairness Opinions of MTS Health Partners, L.P. and Morgan Stanley & Co. Incorporated (see page 58)

 

In connection with the merger, each of MTS Health Partners, L.P. and Morgan Stanley & Co. Incorporated, delivered a written opinion to PacifiCare’s board of directors to the effect that, as of July 6, 2005, and based upon and subject to the respective factors, assumptions and limitations set forth in each opinion, the merger consideration to be received by the holders of the outstanding shares of PacifiCare common stock pursuant to the merger agreement was fair from a financial point of view to those holders.

 

The full text of the written opinions of each of MTS and Morgan Stanley each dated July 6, 2005, which each set forth the respective assumptions made, procedures followed, matters considered, and limitations on the review undertaken in connection with each opinion, are attached as Annexes B and C, respectively. We encourage you to read each of these opinions carefully in their entirety for a description of the assumptions made, procedures followed, matters considered and limitations on the reviews undertaken. Each of MTS and Morgan Stanley provided its opinion for the information and assistance of PacifiCare’s board of directors in connection with its consideration of the merger. Each of MTS’ and Morgan Stanley’s opinion is directed to the PacifiCare board of directors and does not constitute a recommendation as to how any holder of PacifiCare common stock should vote with respect to the merger. PacifiCare’s stockholders are urged to read each of the opinions in its entirety.

 

Interests of Certain Persons in the Merger (see page 83)

 

When considering the recommendation of its board of directors with respect to the merger agreement, PacifiCare stockholders should be aware that PacifiCare’s directors and executive officers, as individuals, have interests in the merger that are in addition to, or different from, the interests of PacifiCare stockholders generally. Messrs. Phanstiel, Bowlus, Scott and Konowiecki and Ms. Kosecoff and certain other executive officers have entered into employment agreements with UnitedHealth Group that become effective upon completion of the merger and which will become void if the merger is not completed. These agreements provide for an initial term of one or two years and generally provide that each executive officer will receive a signing bonus in the form of restricted stock or cash. The employment agreements also provide for an initial grant of UnitedHealth Group restricted stock upon completion of the merger. In addition, the completion of the merger will generally result in the accelerated vesting of stock options that have been granted under PacifiCare’s equity compensation plans to employees, executive officers and directors. Restricted stock, restricted stock units and deferred stock units held by PacifiCare’s executive officers and directors under PacifiCare’s compensation plans generally will also vest and become distributable as a result of the merger, in the form of merger consideration.

 

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UnitedHealth Group has agreed in the merger agreement to continue the PacifiCare supplemental executive retirement plan for at least one year following the effective date of the merger, and to provide continued compensation and benefits following the completion of the merger that are no less favorable than those provided pursuant to PacifiCare’s plans and policies prior to the merger or those provided by UnitedHealth Group to its similarly situated employees in the discretion of UnitedHealth Group. UnitedHealth Group also agreed in the merger agreement to indemnify, exculpate and provide liability insurance to PacifiCare’s officers, directors and certain employees.

 

The PacifiCare board of directors was aware of these arrangements and considered them in its decision to approve and adopt the merger agreement.

 

Risk Factors (see page 32)

 

In evaluating the merger and the merger agreement and before deciding how to vote your shares of PacifiCare common stock at the special meeting, you should read this proxy statement/prospectus carefully and especially consider certain factors, risks and uncertainties discussed in the section entitled “Risk Factors” beginning on page 32 of this proxy statement/prospectus.

 

Conditions to the Merger (see page 109)

 

Each party’s obligation to complete the merger are subject to the prior satisfaction or waiver of each of the conditions specified in the merger agreement, including the following conditions that must be satisfied or waived, to the extent permitted by law or stock exchange rule, before the completion of the merger:

 

    the merger agreement and the merger must be adopted by the holders of a majority of the outstanding shares of PacifiCare common stock as of the record date;

 

    the shares of UnitedHealth Group common stock issuable to PacifiCare stockholders must be approved for listing, subject to official notice of issuance, on the New York Stock Exchange;

 

    the waiting period (and any extension thereof) applicable to the merger pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, referred to as the HSR Act, or any other applicable competition, merger, antitrust or similar law must have expired or been terminated or any clearance or approval required under such laws has been granted;

 

    there must be no temporary restraining order, preliminary or permanent injunction or other order or decree issued by any court of competent jurisdiction or other statute, law, rule, legal restraint or prohibition in effect preventing the completion of the merger;

 

    the registration statement, of which this proxy statement/prospectus is a part, must be effective under the Securities Act of 1933, as amended, and must not be the subject of any stop order or proceedings seeking a stop order;

 

    specified regulatory consents and approvals must have been obtained and be in full force and effect;

 

    the representations and warranties of the other party set forth in the merger agreement must be true and correct (without giving effect to materiality qualifiers) as of the date of the merger agreement and as of the date the merger is to be completed (except to the extent that such representations and warranties expressly relate to an earlier date, in which case as of such earlier date), except where such failure to be true and correct individually or in the aggregate would not reasonably be expected to have a material adverse effect on the representing party, except the representations and warranties relating to PacifiCare’s capital stock (subject to de minimis exceptions) and absence of certain changes or events with respect to UnitedHealth Group or PacifiCare, as the case may be, which must be true in all respects;

 

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    the other party to the merger agreement must have performed in all material respects all of its obligations under the merger agreement; and

 

    each party must have received an opinion of its counsel to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code.

 

The obligations of UnitedHealth Group and Point Acquisition to complete the merger are further subject to the satisfaction or waiver, to the extent permitted by law or stock exchange rule, of each of the following conditions specified in the merger agreement:

 

    there shall not be pending any suit, action or proceeding by any federal or state governmental entity (1) challenging the acquisition or seeking to place limitations on the acquisition and ownership of shares of PacifiCare by UnitedHealth Group or Point Acquisition or to restrain or prohibit the completion of the merger, which suit, action or proceeding UnitedHealth Group determines, in its reasonable discretion, has a reasonable possibility of being decided in favor of such governmental entity or could reasonably be expected to result in material damages or material harm to PacifiCare or UnitedHealth Group, (2) seeking to (i) prohibit or limit the ownership or operation of PacifiCare by UnitedHealth Group or Point Acquisition, (ii) compel the disposal of any business or assets as result of the merger, or (iii) impose any obligations on the operation of the businesses of UnitedHealth Group, PacifiCare or Point Acquisition, or (3) seeking to obtain damages, payments or legally binding assurances, which suit, action or proceeding in the case of (2) or (3) would reasonably be likely to have, individually or in the aggregate, a Negative Regulatory Action as defined in the section entitled “The Merger Agreement—Reasonable Best Efforts” beginning on page 107 of this proxy statement/prospectus;

 

    there must be no legal restraint in effect which would reasonably be expected to result in any of the effects set forth in (1) through (3) of the preceding bullet point; and

 

    specified regulatory consents and approvals must have been obtained and be in full force and effect without conditions, restrictions, limitations, qualifications or requirements which would be reasonably likely to constitute individually or in the aggregate a Negative Regulatory Action as defined in the section entitled “The Merger Agreement—Reasonable Best Efforts” beginning on page 107 of this proxy statement/prospectus.

 

Under applicable law and stock exchange rules, the parties are able to waive closing conditions with respect to pending litigation, representations and warranties, and the performance of agreements and covenants. However, the merger agreement provides that neither party can waive the condition regarding the receipt of the opinion of its tax counsel following the adoption of the merger agreement by PacifiCare stockholders unless further stockholder approval is obtained with appropriate disclosure.

 

Neither UnitedHealth Group nor PacifiCare can assure you that all of the conditions to the merger will be either satisfied or waived or that the merger will occur.

 

Termination of the Merger Agreement (see page 110)

 

Even if the PacifiCare stockholders approve the merger agreement, the merger agreement may be terminated by mutual consent, or by either UnitedHealth Group or PacifiCare, at any time before the completion of the merger under specified circumstances, including:

 

    if the merger is not completed, through no fault of the terminating party, by (i) May 5, 2006 or (ii) August 7, 2006, in the event that either party elects on or prior to May 5, 2006, to extend the termination date and on May 5, 2006, all conditions other than those relating to the absence of governmental litigation and governmental consents are satisfied or are capable of being satisfied;

 

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    if any legal restraint having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, shall be in effect and shall have become final and nonappealable;

 

    if the PacifiCare stockholders do not adopt the merger agreement at the special meeting; or

 

    if the other party has breached any of its representations and warranties or failed to perform any of its covenants and the breach or failure to perform would give rise to the failure of specified closing conditions relating to the accuracy of such party’s representations or compliance by such party with its covenants and such failure or breach is not cured or curable within 30 days following receipt of written notice of such breach or failure.

 

In addition, the merger agreement may be terminated by UnitedHealth Group within 45 days of the date on which the PacifiCare board of directors:

 

    withdraws (or modifies in a manner adverse to UnitedHealth Group) its recommendation of the merger or the merger agreement, or approves or recommends a takeover proposal (as defined in the section entitled “The Merger Agreement—No Solicitation of Transactions” starting on page 106 of this proxy statement/prospectus) or

 

    fails to publicly confirm its recommendation of the merger agreement and the merger within ten business days (or three business days if such request is initially received within ten business days of the special meeting) after a written request by UnitedHealth Group that it do so.

 

Payment of Termination Fee (see page 111)

 

PacifiCare has agreed to pay UnitedHealth Group a termination fee of $243.6 million if the merger agreement is terminated under specified circumstances.

 

No Solicitation of Transactions Involving PacifiCare (see page 106)

 

The merger agreement contains restrictions on the ability of PacifiCare to solicit or engage in discussions or negotiations with a third party with respect to a proposal to acquire a significant interest of PacifiCare equity or assets. Notwithstanding these restrictions, the merger agreement provides that, under specified circumstances, if PacifiCare receives an unsolicited proposal from a third party to acquire a significant interest in PacifiCare that the PacifiCare board of directors determines in good faith is or is reasonably likely to be a proposal that is superior to the merger, PacifiCare may furnish nonpublic information to that third party and engage in negotiations regarding a takeover proposal with that third party.

 

Material U.S. Federal Income Tax Consequences of the Merger (see page 91)

 

The completion of the merger is conditioned on the receipt by PacifiCare and UnitedHealth Group of tax opinions from their respective counsel dated as of the date of the merger to the effect that the merger will qualify for U.S. federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Code. PacifiCare’s and UnitedHealth Group’s conditions relating to these tax opinions are not waivable following the adoption of the merger agreement by PacifiCare stockholders without reapproval by PacifiCare stockholders (with appropriate disclosure), and neither PacifiCare nor UnitedHealth Group intends to waive this condition. Assuming the merger so qualifies as a “reorganization,” which PacifiCare and UnitedHealth Group anticipate, a PacifiCare stockholder generally will, for U.S. federal income tax purposes, recognize gain, but not loss, equal to the lesser of (1) the excess, if any, of the fair market value of the UnitedHealth Group common stock and the amount of cash received by the stockholder over that stockholder’s adjusted tax basis in the PacifiCare common stock exchanged in the merger or (2) the amount of cash received by the stockholder in the merger. This treatment may not apply to all stockholders. For further information concerning U.S. federal income tax consequences of the merger, please see the section entitled “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 91 of this proxy statement/prospectus.

 

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Tax matters are very complicated and the consequences of the merger to any particular PacifiCare stockholder will depend on that stockholder’s particular facts and circumstances. PacifiCare stockholders are urged to consult their own tax advisors to determine their own tax consequences from the merger.

 

Regulatory Matters (see page 90)

 

The merger is subject to U.S. antitrust laws. Under the HSR Act, each of UnitedHealth Group and PacifiCare will file the required Hart-Scott Rodino notification and report forms with the Antitrust Division of the DOJ, and the U.S. Federal Trade Commission, referred to as the FTC. The applicable waiting period will begin on the date of filing by both parties and will expire 30 days thereafter (or on the next regular business day if the 30th day falls on a Saturday, Sunday or legal public holiday), unless the waiting period is earlier terminated or extended by a request for additional information. In addition, certain state attorneys general may review the proposed transaction to determine if there are potential antitrust issues arising therefrom. In that connection, the Office of the Attorney General of the State of Texas has issued a Civil Investigative Demand, referred to as a CID, to UnitedHealth Group and PacifiCare as part of its review of the merger. The DOJ or the FTC, as well as a State Attorney General or private person, may challenge the merger at any time before or after its completion.

 

In addition, California’s Department of Managed Health Care and the Departments of Insurance of the States of Arizona, California, Colorado, Indiana, Nevada, Oklahoma, Oregon, Texas, Washington and Wisconsin, collectively the Principal States, must approve UnitedHealth Group’s acquisition of control of PacifiCare and certain PacifiCare subsidiaries. UnitedHealth Group, or the applicable PacifiCare subsidiary, as the case may be, has filed applications for acquisition of control as required by law, in the Principal States. For more information about regulatory approvals that UnitedHealth Group and PacifiCare must obtain in order to complete the merger, see the section entitled “The Merger—Regulatory Matters” beginning on page 90 of this proxy statement/prospectus.

 

While UnitedHealth Group and PacifiCare expect to obtain all required regulatory approvals, we cannot assure you that these regulatory approvals will be obtained or that the granting of these regulatory approvals will not involve the imposition of conditions on the completion of the merger. Such conditions or changes could result in the conditions to the merger not being satisfied.

 

Agreement to Obtain Clearance from Regulatory Authorities (see page 107)

 

UnitedHealth Group and PacifiCare have agreed to use their reasonable best efforts to take all actions necessary, proper or advisable to complete the merger as expeditiously as practicable, including, among other things, obtaining all necessary consents and approvals and avoiding impediments under any laws that may be asserted by any governmental authority. However, UnitedHealth Group is not obligated to take any action if it would result in, or would be reasonably likely to result in, a Negative Regulatory Action as defined and discussed in the section entitled, “The Merger Agreement—Reasonable Best Efforts,” beginning on page 107 of this proxy statement/prospectus.

 

Restrictions on the Ability to Sell UnitedHealth Group Common Stock (see page 94)

 

All shares of UnitedHealth Group common stock you receive in connection with the merger will be freely transferable unless you are considered an “affiliate” of either PacifiCare or UnitedHealth Group for the purposes of the Securities Act at the time the merger agreement is submitted to PacifiCare stockholders for adoption, in which case you will be permitted to sell the shares of UnitedHealth Group common stock you receive in the merger only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act. This proxy statement/prospectus does not register the resale of stock held by affiliates.

 

Dissenters’ or Appraisal Rights (see page 96)

 

Under Delaware law, you are entitled to appraisal rights in connection with the merger.

 

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You will have the right under Delaware law to have the fair value of your shares of PacifiCare common stock determined by the Delaware Chancery Court. This value could be more than, less than or the same as the merger consideration for the PacifiCare common stock. This right to appraisal is subject to a number of restrictions and technical requirements. Generally, in order to exercise your appraisal rights you must:

 

    send a written demand to PacifiCare for appraisal in compliance with Delaware law before the vote on the merger;

 

    not vote in favor of the merger; and

 

    continuously hold your PacifiCare common stock, from the date you make the demand for appraisal through the closing of the merger.

 

Merely voting against the merger will not protect your rights to an appraisal, which requires all the steps provided under Delaware law. Requirements under Delaware law for exercising appraisal rights are described in further detail in the section entitled “Appraisal Rights for PacifiCare Stockholders” beginning on page 96 of this proxy statement/prospectus. The relevant section of Delaware law regarding appraisal rights is reproduced and attached as Annex D to this proxy statement/prospectus. We encourage you to read these provisions carefully and in their entirety.

 

IF YOU VOTE FOR THE MERGER, YOU WILL WAIVE YOUR RIGHTS TO SEEK APPRAISAL OF YOUR SHARES OF PACIFICARE COMMON STOCK UNDER DELAWARE LAW.

 

Surrender of Stock Certificates (see page 100)

 

Following the effective time of the merger, UnitedHealth Group will cause a letter of transmittal to be mailed to all holders of PacifiCare common stock containing instructions for surrendering their certificates. Certificates should not be surrendered until the letter of transmittal is received, fully completed and returned as instructed in the letter of transmittal.

 

Certain Effects of the Merger (see page 126)

 

Upon completion of the merger, PacifiCare stockholders will become shareholders of UnitedHealth Group. The internal affairs of UnitedHealth Group are governed by the Minnesota Business Corporation Act and UnitedHealth Group’s articles of incorporation and bylaws. The internal affairs of PacifiCare are governed by the Delaware General Corporation Law and PacifiCare’s certificate of incorporation and bylaws. Due to differences between the governing documents and governing state laws of UnitedHealth Group and PacifiCare, the merger will result in PacifiCare stockholders having different rights once they become UnitedHealth Group shareholders, which rights are summarized in the section entitled “Comparison of Rights of Shareholders of UnitedHealth Group and Stockholders of PacifiCare” beginning on page 126 of this proxy statement/prospectus.

 

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SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA

OF UNITEDHEALTH GROUP INCORPORATED

 

The following table summarizes selected historical consolidated financial data of UnitedHealth Group which should be read in conjunction with the consolidated financial statements of UnitedHealth Group, and the notes thereto, included as part of UnitedHealth Group’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 in Annex S and made part of this proxy statement/prospectus. The financial data for the five years ended December 31, 2004 has been derived from the audited consolidated financial statements of UnitedHealth Group. The financial data as of and for the six months ended June 30, 2005 and 2004 has been derived from the unaudited condensed consolidated financial statements of UnitedHealth Group included as part of UnitedHealth Group’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005 in Annex U and made a part of this proxy statement/prospectus. In the opinion of UnitedHealth Group’s management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial data for the six months ended June 30, 2005 and 2004 have been reflected therein. Operating results for the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the full year. A two-for-one split of UnitedHealth Group’s common stock was effective as of May 27, 2005. All per share calculations reflect the two-for-one common stock split.

 

    For the Six Months
Ended June 30,
(unaudited)


    For the Year Ended December 31,

 

(In millions, except per share data)


    2005  

    2004(1)

    2004(1)

    2003

    2002

    2001

    2000

 

Consolidated Operating Results:

                                                       

Revenues

  $ 21,998     $ 16,848     $ 37,218     $ 28,823     $ 25,020     $ 23,454     $ 21,122  
   


 


 


 


 


 


 


Earnings From Operations

  $ 2,566     $ 1,821     $ 4,101     $ 2,935     $ 2,186     $ 1,566     $ 1,200  

Net Earnings

  $ 1,588     $ 1,150     $ 2,587     $ 1,825     $ 1,352     $ 913     $ 736  

Return on Shareholders’ Equity (annualized)

    30.0 %     35.4 %     31.4 %     39.0 %     33.0 %     24.5 %     19.8 %
   


 


 


 


 


 


 


Basic Net Earnings Per Common Share

  $ 1.25     $ 0.95     $ 2.07     $ 1.55     $ 1.12     $ 0.73     $ 0.57  

Diluted Net Earnings Per Common Share

  $ 1.19     $ 0.91     $ 1.97     $ 1.48     $ 1.06     $ 0.70     $ 0.55  
   


 


 


 


 


 


 


Consolidated Financial Condition:

(As of period end):

                                                       

Cash and Investments

  $ 12,773     $ 10,193     $ 12,253     $ 9,477     $ 6,329     $ 5,698     $ 5,053  

Total Assets

  $ 28,521     $ 20,883     $ 27,879     $ 17,634     $ 14,164     $ 12,486     $ 11,053  

Debt

  $ 4,250     $ 2,400     $ 4,023     $ 1,979     $ 1,761     $ 1,584     $ 1,209  

Shareholders’ Equity

  $ 10,529     $ 7,118     $ 10,717     $ 5,128     $ 4,428     $ 3,891     $ 3,688  

Debt-to-Total-Capital Ratio

    28.8 %     25.2 %     27.3 %     27.8 %     28.5 %     28.9 %     24.7 %
   


 


 


 


 


 


 


Other Data:

                                                       

Consolidated Cash Flows From (Used For):

                                                       

Operating Activities

  $ 2,497     $ 1,927     $ 4,135     $ 3,003     $ 2,423     $ 1,844     $ 1,521  

Investing Activities

  $ (808 )   $ (449 )   $ (1,644 )   $ (745 )   $ (1,391 )   $ (1,138 )   $ (968 )

Financing Activities

  $ (1,638 )   $ (640 )   $ (762 )   $ (1,126 )   $ (1,442 )   $ (585 )   $ (739 )
   


 


 


 


 


 


 


Common Stock Dividends Per Share (annualized)

  $ 0.015     $ 0.015     $ 0.015     $ 0.008     $ 0.008     $ 0.008     $ 0.004  
   


 


 


 


 


 


 


 

(1) UnitedHealth Group acquired Oxford Health Plans, Inc. in July 2004 and Mid Atlantic Medical Services, Inc., referred to as MAMSI, in February 2004. The results of operations and financial condition of Oxford and MAMSI have been included in UnitedHealth Group’s consolidated financial statements since the respective acquisition dates.

 

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SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF PACIFICARE

 

The following table summarizes selected historical consolidated financial data of PacifiCare which should be read in conjunction with the consolidated financial statements of PacifiCare, and the notes thereto, included as part of PacifiCare’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 in Annex E and made part of this proxy statement/prospectus. The financial data for the five years ended December 31, 2004 has been derived from the audited consolidated financial statements of PacifiCare. The financial data as of and for the six months ended June 30, 2005 and 2004 has been derived from the unaudited condensed consolidated financial statements of PacifiCare included as part of PacifiCare’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005 in Annex G and made a part of this proxy statement/prospectus. In the opinion of PacifiCare’s management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial data for the six months ended June 30, 2005 and 2004 have been reflected therein. Operating results for the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the full year. On January 20, 2004, PacifiCare effected a two-for-one stock split in the form of a stock dividend of one share of common stock for every share of common stock outstanding to stockholders of record as of the close of business on January 7, 2004. All per share calculations reflect the two-for-one common stock split.

 

    

For the Six Months

Ended June 30,
(unaudited)


    For the Year Ended December 31,

 
     2005(1)(2)

    2004

    2004(1)

    2003

    2002(3)(4)

    2001(5)(7)

    2000(6)(7)

 

(In millions, except per share data)


      

Consolidated Operating Results:

                                                        

Revenues

   $ 7,017     $ 6,012     $ 12,277     $ 11,009     $ 11,157     $ 11,844     $ 11,576  
    


 


 


 


 


 


 


Earnings From Operations

   $ 326     $ 256     $ 542     $ 490     $ 297     $ 127     $ 367  

Net Earnings

   $ 178     $ 143     $ 303     $ 243     $ (758 )   $ 19     $ 161  

Return on Shareholders’ Equity (annualized)

     15.5 %     14.7 %     15.0 %     15.8 %     (53.8 %)     0.9 %     8.1 %
    


 


 


 


 


 


 


Basic Net Earnings Per Common Share

   $ 2.07     $ 1.69     $ 3.60     $ 3.26     $ (10.75 )   $ 0.28     $ 2.29  

Diluted Net Earnings Per Common Share

   $ 1.85     $ 1.51     $ 3.20     $ 2.89     $ (10.75 )   $ 0.27     $ 2.29  
    


 


 


 


 


 


 


Consolidated Financial Condition:

(As of period end):

                                                        

Cash and Investments

   $ 2,926     $ 2,456     $ 2,901     $ 2,725     $ 2,333     $ 2,152     $ 2,210  

Total Assets

   $ 5,428     $ 4,371     $ 5,227     $ 4,619     $ 4,251     $ 5,096     $ 5,323  

Debt

   $ 1,062     $ 615     $ 1,089     $ 620     $ 839     $ 794     $ 837  

Shareholders’ Equity

   $ 2,406     $ 2,001     $ 2,188     $ 1,852     $ 1,328     $ 2,034     $ 2,004  

Debt-to-Total-Capital Ratio

     30.6 %     23.5 %     33.2 %     25.1 %     38.7 %     28.1 %     29.5 %
    


 


 


 


 


 


 


Other Data:

                                                        

Consolidated Cash Flows From (Used For):

                                                        

Operating Activities

   $ 142     $ (193 )   $ 28     $ 414     $ 242     $ 39     $ 631  

Investing Activities

   $ (274 )   $ (111 )   $ (810 )   $ (202 )   $ (278 )   $ (261 )   $ 72  

Financing Activities

   $ (22 )   $ (14 )   $ 408     $ 34     $ 10     $ (52 )   $ (301 )
    


 


 


 


 


 


 


Common Stock Dividends Per Share (annualized)

     —         —         —         —         —         —         —    
    


 


 


 


 


 


 



(1) The year ended December 31, 2004 and the six months ended June 30, 2005 results of operations reflect the results of American Medical Security Group since the acquisition date of December 13, 2004.
(2) The 2005 results of operations reflect the results of Pacific Life Insurance Company since the acquisition date of April 27, 2005.

 

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(3) The 2002 results include impairment, disposition, restructuring, Office of Personnel Management, or OPM, and other net pretax charges totaling $3.8 million ($2.4 million or $0.03 diluted loss per share, net of tax).
(4) The 2002 results include a cumulative effect of a change in accounting principle in connection with the goodwill impairment charge recognized upon the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, totaling $929 million ($897 million or $12.73 diluted loss per share, net of tax).
(5) The 2001 results include impairment, disposition, restructuring, OPM and other net pretax charges totaling $61 million ($39 million or $0.56 diluted loss per share, net of tax).
(6) The 2000 results include impairment, disposition, restructuring, OPM and other net pretax charges totaling $9 million ($5 million or $0.07 diluted loss per share, net of tax).
(7) In 2001 and 2000, the effective income tax rate included the effect of nondeductible pretax charges, primarily goodwill amortization.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

On July 6, 2005, UnitedHealth Group and PacifiCare entered into the merger agreement, pursuant to which PacifiCare will be merged with and into a subsidiary of UnitedHealth Group, with the subsidiary being the surviving entity. Under the terms of the agreement, holders of PacifiCare common stock will receive 1.1 shares of UnitedHealth Group common stock and $21.50 in cash for each share of PacifiCare common stock they own. Total estimated merger consideration for the transaction of approximately $8.2 billion, to be issued upon closing, is comprised of approximately 105.6 million shares of UnitedHealth Group common stock, valued at approximately $5.6 billion based upon the average of the closing prices of UnitedHealth Group common stock for two trading days before, the day of, and two trading days following the acquisition announcement of July 6, 2005, approximately $2.1 billion in cash, and UnitedHealth Group vested common stock options with an estimated fair value of approximately $450 million to be issued in exchange for PacifiCare’s outstanding vested common stock options.

 

On July 29, 2004, UnitedHealth Group acquired Oxford. Under the terms of the merger agreement, Oxford shareholders received 1.2714 shares of UnitedHealth Group common stock and $16.17 in cash for each share of Oxford common stock they owned. Total consideration issued was approximately $5.0 billion, comprised of approximately 104.4 million shares of UnitedHealth Group common stock, valued at approximately $3.4 billion based upon the average of the closing prices of UnitedHealth Group common stock for two trading days before, the day of, and two trading days following the acquisition announcement date of April 26, 2004, approximately $1.3 billion in cash, and UnitedHealth Group vested common stock options with an estimated fair value of $240 million issued in exchange for Oxford’s outstanding vested common stock options. The results of operations and financial condition of Oxford have been included in the UnitedHealth Group historical financial statements since the July 29, 2004 acquisition date.

 

On February 10, 2004, UnitedHealth Group acquired MAMSI. Under the terms of the merger agreement, MAMSI stockholders received 1.64 shares of UnitedHealth Group common stock and $18 in cash for each share of MAMSI common stock they owned. Total consideration issued was approximately $2.7 billion, comprised of approximately 72.8 million shares of UnitedHealth Group common stock, valued at approximately $1.9 billion based upon the average of the closing prices of UnitedHealth Group common stock for two trading days before, the day of, and two trading days following the acquisition announcement date of October 27, 2003, and approximately $800 million in cash. The results of operations and financial condition of MAMSI have been included in the UnitedHealth Group historical financial statements since the February 10, 2004 acquisition date.

 

The unaudited pro forma condensed combined financial information gives effect to the acquisitions of PacifiCare, Oxford and MAMSI by UnitedHealth Group as if the acquisitions had occurred on January 1, 2004 for purposes of the pro forma condensed combined statements of operations. The unaudited pro forma condensed combined financial information gives effect to the acquisition of PacifiCare by UnitedHealth Group as if the acquisition had occurred on June 30, 2005 for purposes of the pro forma condensed combined balance sheet as of June 30, 2005.

 

Under the purchase method of accounting, the total estimated purchase price is allocated to the net tangible and intangible assets of an acquired entity based on their estimated fair values as of the completion of the transaction. A final determination of these fair values will include management’s consideration of a valuation prepared by an independent valuation specialist. This valuation will be based on the actual net tangible and intangible assets of the acquired entity that exist as of the closing date of the transaction.

 

Because this unaudited pro forma condensed combined financial information has been prepared based on preliminary estimates of fair values, the actual amounts recorded as of the completion of the transaction may differ materially from the information presented in this unaudited pro forma condensed combined financial information. In addition to the independent valuation, the impact of any integration activities, the timing of

 

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completion of the transaction and other changes in PacifiCare’s net tangible and intangible assets that occur prior to completion of the transaction could cause material differences from the information presented below. Potential synergies which may result from the integration of physician, hospital and other health care provider networks and operating and administrative activities have been excluded from the pro forma condensed combined financial information.

 

The unaudited pro forma condensed combined financial information should be read in conjunction with the historical consolidated financial statements and accompanying notes of UnitedHealth Group and PacifiCare, included in Annexes E, F, G, S, T and U and made part of this proxy statement/prospectus, and the summary historical consolidated financial data included elsewhere in this proxy statement/prospectus. All share and per share amounts have been restated to reflect the UnitedHealth Group two-for-one common stock split that was effective on May 27, 2005. The unaudited pro forma condensed combined financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of UnitedHealth Group that would have been reported had the transactions been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial condition of UnitedHealth Group.

 

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Pro Forma Condensed Combined Statement of Operations

Six Months Ended June 30, 2005

(Unaudited)

(In millions, except per share amounts)

 

     Historical

                   
     (b)(c)
UnitedHealth
Group


    (bb)
PacifiCare


    (y)
Reclassification
Adjustments


    Pro Forma
Adjustments


    Pro Forma
Combined


 

Revenues

                                        

Premiums

   $ 19,933     $ 6,688     $ —       $ —       $ 26,621  

Services

     1,822       267       —         —         2,089  

Investment and Other Income

     243       62       —         —         305  
    


 


 


 


 


Total Revenues

     21,998       7,017       —         —         29,015  
    


 


 


 


 


Medical and Operating Costs

                                        

Medical Costs

     15,963       5,766       (139 )(aa)     —         21,590  

Operating Costs

     3,252       884       139   (aa)     (5 )(q)     4,270  

Depreciation and Amortization

     217       41       —         40  (d)     287  
                               (11 )(e)        
    


 


 


 


 


Total Medical and Operating Costs

     19,432       6,691       —         24       26,147  
    


 


 


 


 


Earnings From Operations

     2,566       326       —         (24 )     2,868  

Interest Expense

     (104 )     (36 )     —         36  (k)     (171 )
                               (67 )(j)        
    


 


 


 


 


Earnings Before Income Taxes

     2,462       290       —         (55 )     2,697  

Provision for Income Taxes

     (874 )     (112 )     —         19  (r)     (967 )
    


 


 


 


 


Net Earnings

   $ 1,588     $ 178     $ —       $ (36 )   $ 1,730  
    


 


 


 


 


Basic Net Earnings Per Common Share

   $ 1.25                             $ 1.26  
    


                         


Diluted Net Earnings Per Common Share

   $ 1.19                             $ 1.20  
    


                         


Basic Weighted-Average Number of Common Shares Outstanding

     1,268.0                       105.6  (s)     1,373.6  
    


                 


 


Diluted Weighted-Average Number of Common Shares Outstanding

     1,331.0                       105.6  (s)     1,441.7  
    


                 


 


                               5.1  (t)        
                            


       

 

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Table of Contents

Pro Forma Condensed Combined Statement of Operations

Year Ended December 31, 2004

(Unaudited)

(In millions, except per share amounts)

 

    Historical

       
    (b)(c)
UnitedHealth
Group


   

(c)

MAMSI
January 1

to
February 10,
2004


   

(b)
Oxford
January 1
to
July 29,
2004


   

(a)
PacifiCare
January 1

to
December 31,
2004


   

(y)
Reclassification
Adjustments


   

Pro Forma
Adjustments


   

Pro Forma
Combined


 

Revenues

                                                       

Premiums

  $ 33,495     $ 303     $ 3,208     $ 11,761     $ (19 )   $ —       $ 48,748  

Services

    3,335       8       7       427       2       —         3,779  

Investment and Other Income

    388       2       50       89       —         (5 )(n)     524  
   


 


 


 


 


 


 


Total Revenues

    37,218       313       3,265       12,277       (17 )     (5 )     53,051  
   


 


 


 


 


 


 


Medical and Operating Costs

                                                       

Medical Costs

    27,000       235       2,591       10,174       (236 )(aa)     —         39,764  

Operating Costs

    5,743       36       322       1,491       219  (aa)     (25 )(q)     7,786  

Depreciation and Amortization

    374       1       17       70       —         80  (d)     548  
                                              (20 )(e)        
                                              24  (f)        
                                              2  (g)        
   


 


 


 


 


 


 


Total Medical and Operating Costs

    33,117       272       2,930       11,735       (17 )     61       48,098  
   


 


 


 


 


 


 


Earnings From Operations

    4,101       41       335       542       —         (66 )     4,953  

Interest Expense

    (128 )     —         (10 )     (48 )     —         48  (k)     (282 )
                                              (120 )(j)        
                                              (31 )(m)        
                                              10  (n)        
                                              (3 )(o)        
   


 


 


 


 


 


 


Earnings Before Income Taxes

    3,973       41       325       494       —         (162 )     4,671  

Provision for Income Taxes

    (1,386 )     (14 )     (125 )     (191 )     —         57  (r)     (1,659 )
   


 


 


 


 


 


 


Net Earnings

  $ 2,587     $ 27     $ 200     $ 303     $ —       $ (105 )   $ 3,012  
   


 


 


 


 


 


 


Basic Net Earnings Per Common Share

  $ 2.07                                             $ 2.11  
   


                                         


Diluted Net Earnings Per Common Share

  $ 1.97                                             $ 2.02  
   


                                         


Basic Weighted-Average Number of Common Shares Outstanding

    1,252.0                                       105.6  (s)     1,425.4  
   


                                 


 


                                              59.8  (u)        
                                           


       
                                              8.0  (v)        
                                           


       

Diluted Weighted-Average Number of Common Shares Outstanding

    1,311.0                                       105.6  (s)     1,489.5  
   


                                 


 


                                              5.1  (t)        
                                           


       
                                              59.8  (u)        
                                           


       
                                              8.0  (v)        
                                           


       

 

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Table of Contents

Pro Forma Condensed Combined Balance Sheet

As of June 30, 2005

(Unaudited)

(In millions)

 

    Historical

           
    (b)(c)
UnitedHealth
Group


  (z)
PacifiCare


    Pro Forma
Adjustments


    Pro Forma
Combined


Assets

                           

Current Assets

                           

Cash and Cash Equivalents

  $ 4,042   $ 670     $ —       $ 4,712

Short-Term Investments

    301     418       —         719

Accounts Receivable, net

    914     406       —         1,320

Assets Under Management

    1,839     —         —         1,839

Deferred Income Taxes and Other

    964     223       —         1,187
   

 


 


 

Total Current Assets

    8,060     1,717       —         9,777
   

 


 


 

Long-Term Investments

    8,430     1,838       —         10,268

Property, Equipment, Capitalized Software and Other Assets, net

    1,290     308       —         1,598

Goodwill

    9,669     1,333       (1,333 )(x)     16,073
                    6,404   (a)      

Intangible Assets, net

    1,072     232       (232 )(x)     2,272
                    1,200   (a)(d)      
   

 


 


 

Total Assets

  $ 28,521   $ 5,428     $ 6,039     $ 39,988
   

 


 


 

Liabilities and Shareholders’ Equity

                           

Current Liabilities

                           

Medical Costs Payable

  $ 5,909   $ 1,251     $ —       $ 7,160

Accounts Payable and Accrued Liabilities

    2,496     447       30   (w)     2,973

Other Policy Liabilities

    1,862     —         —         1,862

Short-Term Debt and Current Maturities of Long-Term Debt

    400     35       (35 )(k)     400

Unearned Premiums

    895     92       —         987
   

 


 


 

Total Current Liabilities

    11,562     1,825       (5 )     13,382
   

 


 


 

Long-Term Debt, less current maturities

    3,850     892       (892 )(k)     6,840
                    2,990   (a)(i)      

Convertible Subordinated Debentures

    —       135       (135 )(a)(l)     —  

Future Policy Benefits for Life and Annuity Contracts

    1,719     —         —         1,719

Deferred Income Taxes and Other Liabilities

    861     170       420   (a)(h)     1,451
   

 


 


 

Shareholders’ Equity

                           

Common Stock

    13     1       (1 )(x)     13

Additional Paid-In Capital

    1,340     1,650       (1,650 )(x)     7,407
                    6,067   (a)(p)      

Unearned Compensation

    —       (58 )     58   (x)     —  

Retained Earnings

    9,053     816       (816 )(x)     9,053

Accumulated Other Comprehensive Income:
Net Unrealized Gains on Investments, net of tax effects

    123     (3 )     3   (x)     123
   

 


 


 

Total Shareholders’ Equity

    10,529     2,406       3,661       16,596
   

 


 


 

Total Liabilities and Shareholders’ Equity

  $ 28,521   $ 5,428     $ 6,039     $ 39,988
   

 


 


 

 

23


Table of Contents

Notes to Unaudited Pro Forma Condensed Combined Financial Information

 

(a) The PacifiCare acquisition was announced on July 6, 2005. The unaudited pro forma financial information gives effect to the expected issuance of UnitedHealth Group common stock and cash based upon the exchange ratio of 1.1 shares of UnitedHealth Group common stock and $21.50 of cash for each outstanding share of PacifiCare common stock. The average market price per share of UnitedHealth Group common stock of $53.22 used in determining the fair value of the stock consideration is based upon the average of the closing prices for a range of trading days (July 1, 2005 through July 8, 2005) around the announcement date (July 6, 2005) of the transaction. This results in an estimated purchase price of $8,160 million ($5,617 million in stock, $2,063 million in cash, $450 million for the estimated fair value of UnitedHealth Group vested stock options issued in exchange for outstanding vested PacifiCare stock options and $30 million of estimated transaction costs) as follows (in millions, except per share amounts):

 

Stock Consideration

             

UnitedHealth Group average market price per share

   $ 53.22       

Exchange ratio

     1.1       
    

      

Equivalent per share consideration

   $ 58.54       

Outstanding shares of PacifiCare—June 30, 2005 (see note l)

     95.96       
    

      

Fair value of UnitedHealth Group shares to be issued

          $ 5,617

Converted Stock Options

             

Estimated UnitedHealth Group vested stock options to be issued

     11.5       

Estimated fair value per stock option to be issued

   $ 39.10       
    

      

Estimated fair value of stock options to be issued

            450
           

Total estimated fair value of equity instruments to be issued

            6,067

Cash Consideration

             

Per share cash consideration

   $ 21.50       

Outstanding shares of PacifiCare—June 30, 2005 (see note l)

     95.96       
    

      

Cash to be paid

            2,063

Estimated transaction costs

            30
           

Estimated purchase price

          $ 8,160
           

 

The estimated PacifiCare purchase price of $8,160 million has been preliminarily allocated to acquired tangible assets and liabilities based upon their estimated fair values as of June 30, 2005. The estimated excess purchase price has been preliminarily allocated as detailed below (in millions):

 

Estimated purchase price

        $ 8,160  

Net tangible assets—PacifiCare June 30, 2005 balance sheet

          (841 )

Conversion of subordinated debentures to PacifiCare common stock (see note l)

          (135 )
         


Total estimated excess purchase price

          7,184  

Estimated finite-lived intangibles

          (1,200 )

Deferred tax liability for finite-lived intangibles

          420  
         


Estimated goodwill

        $ 6,404  
         


 

(b)

The Oxford acquisition closed on July 29, 2004. The pro forma condensed combined balance sheet as of June 30, 2005 includes the effects of the Oxford acquisition in the UnitedHealth Group historical information. The pro forma condensed combined statement of operations for the six months ended June 30,

 

24


Table of Contents
 

2005 includes Oxford’s results of operations in the UnitedHealth Group historical information. The pro forma condensed combined statement of operations for the year ended December 31, 2004 includes Oxford’s results of operations from July 29, 2004 to December 31, 2004 in the UnitedHealth Group historical information This acquisition resulted in the issuance of UnitedHealth Group common stock and cash based upon the exchange ratio of 1.2714 shares of UnitedHealth Group common stock and $16.17 of cash for each outstanding share of Oxford common stock. The average market price per share of UnitedHealth Group common stock of $32.39 was based upon the average of the closing prices for a range of trading days (April 22, 2004 through April 28, 2004) around the announcement date (April 26, 2004) of the transaction. This resulted in a purchase price of $4,975 million ($3,357 million in stock, $1,318 million in cash, $285 million for the estimated fair value of UnitedHealth Group vested stock options issued in exchange for outstanding vested Oxford stock options and $15 million of transaction costs) as follows (in millions, except per share amounts):

 

Stock Consideration

             

UnitedHealth Group average market price per share

   $ 32.39       

Exchange ratio

     1.2714       
    

      

Equivalent per share consideration

   $ 41.18       

Outstanding shares of Oxford

     81.52       
    

      

Fair value of UnitedHealth Group shares issued

          $ 3,357

Converted Stock Options

             

UnitedHealth Group vested stock options issued

     16.28       

Fair value per stock option issued

   $ 17.50       
    

      

Fair value of stock options issued

            285
           

Fair value of equity instruments issued

            3,642

Cash Consideration

             

Per share cash consideration

   $ 16.17       

Outstanding shares of Oxford

     81.52       
    

      

Cash paid

            1,318

Transaction costs

            15
           

Purchase price

          $ 4,975
           

 

The Oxford purchase price of $4,975 million was allocated to acquired tangible assets and liabilities based upon their estimated fair values as of the acquisition date. The excess purchase price was allocated as detailed below (in millions):

 

Purchase price

        $ 4,975  

Net tangible assets at acquisition date

          (826 )
         


Total excess purchase price

          4,149  

Finite-lived intangibles

          (600 )

Deferred tax liability for finite-lived intangibles

          225  
         


Goodwill

        $ 3,774  
         


 

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Table of Contents
(c) The MAMSI acquisition closed on February 10, 2004. The pro forma condensed combined balance sheet as of June 30, 2005 includes the effects of the MAMSI acquisition in the UnitedHealth Group historical information. The pro forma condensed combined statement of operations for the six months ended June 30, 2005 includes MAMSI’s results of operations in the UnitedHealth Group historical information. The pro forma condensed combined statement of operations for the year ended December 31, 2004 includes MAMSI’s results of operations from February 11, 2004 to December 31, 2004 in the UnitedHealth Group historical information. This acquisition resulted in the issuance of UnitedHealth Group common stock and cash based upon the exchange ratio of 1.64 shares of UnitedHealth Group common stock and $18 of cash for each outstanding share of MAMSI common stock. The average market price per share of UnitedHealth Group common stock of $26.53 was based upon the average of the closing prices for a range of trading days (October 23, 2003 through October 29, 2003) around the announcement date (October 27, 2003) of the transaction. This resulted in a purchase price of $2,745 million ($1,932 million in stock, $800 million in cash and $13 million of transaction costs) as follows (in millions, except per share amounts):

 

Stock Consideration

             

UnitedHealth Group average market price per share

   $ 26.53       

Exchange ratio

     1.64       
    

      

Equivalent per share consideration

   $ 43.50       

Outstanding shares of MAMSI

     44.41       
    

      

Fair value of UnitedHealth Group shares issued

          $ 1,932

Cash Consideration

             

Per share cash consideration

   $ 18.00       

Outstanding shares of MAMSI

     44.41       
    

      

Cash paid

            800

Transaction costs

            13
           

Purchase price

          $ 2,745
           

 

The MAMSI purchase price of $2,745 million was allocated to acquired tangible assets and liabilities based upon their estimated fair values as of the acquisition date. The excess purchase price was allocated as detailed below (in millions):

 

Purchase price

        $ 2,745  

Net tangible assets at acquisition date

          (598 )
         


Total excess purchase price

          2,147  

Finite-lived intangibles

          (280 )

Deferred tax liability for finite-lived intangibles

          100  
         


Goodwill

        $ 1,967  
         


 

(d) Finite-lived intangible assets relating to the PacifiCare acquisition have been estimated at approximately $1,200 million and consist mainly of membership lists, provider networks and trademarks. The estimated weighted average useful life is approximately 15 years and the estimated annual amortization expense is approximately $80 million.

 

(e) Represents the elimination of intangible asset amortization recorded in PacifiCare’s historical financial statements.

 

(f) Finite-lived intangible assets relating to the Oxford acquisition were recorded at $600 million, consisting mainly of membership lists, provider networks and trademarks. The weighted average useful life is 16 years and the annual amortization expense is approximately $42 million.

 

26


Table of Contents
(g) Finite-lived intangible assets relating to the MAMSI acquisition were recorded at $280 million and consist mainly of membership lists, provider networks and trademarks. The weighted average useful life is 17 years and the estimated annual amortization expense is approximately $20 million.

 

(h) Represents the deferred tax liability established for the book and tax basis difference of finite-lived intangible assets, which are amortizable for book purposes but not for tax.

 

(i) Represents the borrowing of the cash to be paid as consideration in the PacifiCare transaction as detailed in note (a) of $2,063 million plus the borrowing for the PacifiCare debt retirement of $927 million, for total borrowing of $2,990 million.

 

(j) Represents the estimated interest expense associated with borrowing the $2,990 million cash to be paid as consideration and debt retirement in the PacifiCare transaction. The interest rate is based on the issuance of five- to ten-year fixed-rate debt and UnitedHealth Group’s estimated borrowing rate of approximately 4.0% and 4.5% for such debt for the year ended December 31, 2004 and the six months ended June 30, 2005, respectively. The impact on interest expense of a 1/8% change in interest rates would be approximately $4 million annually.

 

(k) Represents the expected retirement of the PacifiCare debt of $927 million at closing and the corresponding estimated reduction in interest expense.

 

(l) Holders of PacifiCare’s Convertible Subordinated Debentures may realize a substantial embedded gain through conversion of such notes prior to the merger, and accordingly, the pro forma financial information assumes that all holders of Convertible Subordinated Debentures will voluntarily convert such notes into shares of PacifiCare common stock in accordance with their terms prior to the merger and that such shares of PacifiCare common stock will be exchanged for the Merger Consideration.

 

(m) Represents the estimated interest expense associated with borrowing the $1,318 million cash paid as consideration in the Oxford transaction. The interest rate is based on the issuance of five- to ten-year fixed-rate debt and the borrowing rate of approximately 4.0% for such debt. For the December 31, 2004 pro forma condensed combined statement of operations, the estimated interest expense is for the period January 1, 2004 to July 29, 2004 since interest expense for the remaining period during the quarter is reflected in the UnitedHealth Group historical information.

 

(n) Represents the payoff of the Oxford debt of $397 million at closing and the corresponding estimated reduction in interest expense and interest income. The effective interest rate used for the investment interest income was 2.0% based upon estimated interest rates on the short term investment portfolio.

 

(o) Represents the interest expense associated with borrowing the $800 million cash paid as consideration in the MAMSI transaction. The interest expense is based on the issuance of $500 million of five- to ten-year floating-rate debt and $300 million of commercial paper at a weighted average interest rate of approximately 3.0%. For the December 31, 2004 pro forma condensed combined statement of operations, the estimated interest expense is for the period January 1, 2004 to February 10, 2004 since interest expense for the remaining period during the quarter is reflected in the UnitedHealth Group historical information.

 

(p) Represents the issuance of UnitedHealth Group stock and stock options as consideration issued in the PacifiCare transaction as detailed in note (a).

 

(q) Represents stock option expense recognized in PacifiCare’s historical statements of operations. PacifiCare voluntarily adopted FAS No. 123, which requires stock options to be expensed based upon their fair value, effective January 1, 2003. UnitedHealth Group has elected not to expense stock options until FAS No. 123(R) is required to be adopted on January 1, 2006. This adjustment eliminates PacifiCare’s FAS No. 123 stock option expense from all historical results for comparability purposes.

 

27


Table of Contents
(r) Represents the pro forma tax effect of the MAMSI, Oxford and PacifiCare pro forma adjustments based upon the statutory federal income tax rate of 35%.

 

(s) Represents the increase in weighted average shares outstanding from the PacifiCare acquisition based on the assumed issuance of 105.6 million shares of UnitedHealth Group common stock at the beginning of the period presented. The share issuance is calculated based upon the 95.96 million outstanding shares of PacifiCare stock multiplied by the 1.1 exchange ratio as detailed in note (a).

 

(t) Represents the estimated common stock equivalents related to the issuance of 11.5 million vested options to purchase shares of UnitedHealth Group common stock in exchange for the outstanding options to purchase shares of PacifiCare common stock at June 30, 2005 as detailed in note (a). This was calculated using the “Treasury Stock” method under FAS No. 128 and using a $15 average exercise price and a $53.22 average common stock fair value.

 

(u) Represents the increase in weighted average shares outstanding from the Oxford acquisition based on the issuance of 104.4 million shares of UnitedHealth Group common stock at the beginning of the period presented, partially offset by 44.6 million in weighted average shares outstanding that had been included in the UnitedHealth Group December 31, 2004 historical information which represents the pro rata impact during the period post-acquisition.

 

(v) Represents the increase in weighted average shares outstanding from the MAMSI acquisition based on the issuance of 72.8 million shares of UnitedHealth Group common stock at the beginning of the period presented, partially offset by 64.8 million in weighted average shares outstanding that had been included in the UnitedHealth Group December 31, 2004 historical information which represents the pro rata impact during the period post-acquisition.

 

(w) Represents an accrual of $30 million for estimated transaction costs as a result of the PacifiCare acquisition.

 

(x) Represents the elimination of PacifiCare’s equity, goodwill and intangible asset account balances.

 

(y) Reflects the reclassification of certain historical amounts of the acquired companies to conform to financial reporting being used prospectively by the combined company. While we have conducted preliminary reviews of accounting and financial reporting policy differences relating to PacifiCare, this review is ongoing and will continue throughout the merger process. As such, additional reclassifications or pro forma adjustments may be identified.

 

(z) For comparison purposes, investments available for sale at fair value have been reclassified between short and long term investments based upon remaining maturities.

 

(aa) For comparison purposes, PacifiCare’s external pharmacy benefit management expenses have been reclassified to operating costs from medical costs.

 

(bb) PacifiCare’s historical results for the six months ended June 30, 2005 include Medicare Part D readiness expenses of approximately $12 million and transaction expenses associated with the UnitedHealth Group merger of approximately $4 million.

 

28


Table of Contents

UNAUDITED COMPARATIVE PER SHARE DATA

 

In the following table, UnitedHealth Group and PacifiCare provide you with historical and unaudited pro forma combined per share data, after giving effect to the merger and the issuance of 1.1 shares of UnitedHealth Group common stock and the payment of $21.50 in cash in exchange for each share of PacifiCare common stock. This data should be read along with the selected consolidated historical financial data and the historical financial statements of UnitedHealth Group and PacifiCare and the notes thereto that are included in Annexes S and E attached hereto and made part hereof. The pro forma information is presented for illustrative purposes only. You should not rely on the pro forma financial information as an indication of the combined financial position or results of operations of future periods or the results that actually would have been realized had the entities been a single entity during the periods presented. The PacifiCare equivalent pro forma combined per share data is calculated by multiplying the pro forma combined UnitedHealth Group common stock per share amounts by the exchange ratio of 1.1.

 

    

As of or For the

Year Ended

December 31,

2004


  

As of or For the

Six Months

Ended June 30,

2005


UnitedHealth Group Historical Per Share of Common Stock:

             

Basic Net Earnings Per Share of Common Stock

   $ 2.07    $ 1.25

Diluted Net Earnings Per Share of Common Stock

   $ 1.97    $ 1.19

Book Value Per Share of Common Stock

   $ 8.33    $ 8.39

Cash Dividends Per Share of Common Stock

   $ 0.015    $ 0.015

PacifiCare Historical Per Share of Common Stock:

             

Basic Net Earnings Per Share of Common Stock

   $ 3.60    $ 2.07

Diluted Net Earnings Per Share of Common Stock

   $ 3.20    $ 1.85

Book Value Per Share of Common Stock

   $ 25.43    $ 27.46

Cash Dividends Per Share of Common Stock

     n/a      n/a

Pro Forma Combined Per Share of UnitedHealth Group Common Stock:

             

Basic Net Earnings Per Share of Common Stock

   $ 2.11    $ 1.26

Diluted Net Earnings Per Share of Common Stock

   $ 2.02    $ 1.20

Book Value Per Share of Common Stock

     n/a    $ 12.20

Cash Dividends Per Share of Common Stock

     n/a    $ 0.015

Pro Forma Combined Per Share of PacifiCare Equivalent Common Stock:

             

Basic Net Earnings Per Share of Common Stock

   $ 2.32    $ 1.39

Diluted Net Earnings Per Share of Common Stock

   $ 2.22    $ 1.32

Book Value Per Share of Common Stock

     n/a    $ 13.42

Cash Dividends Per Share of Common Stock

     n/a      n/a

 

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MARKET PRICE AND DIVIDEND INFORMATION

 

Recent Closing Prices

 

The table below presents the closing price per share of UnitedHealth Group common stock on the New York Stock Exchange, and the closing price per share of PacifiCare common stock on the New York Stock Exchange, on July 5, 2005, the last full trading day immediately preceding the public announcement date of the merger, and on                     , 2005, the most recent practicable date prior to the mailing of this proxy statement/prospectus, as well as the “equivalent stock price plus cash” of shares of PacifiCare common stock on such dates. The “equivalent stock price plus cash” of shares of PacifiCare common stock was calculated by multiplying the closing sales price per share for UnitedHealth Group’s common stock on the New York Stock Exchange on July 5, 2005 and                     , 2005, in each case, by the exchange ratio of 1.1 shares of UnitedHealth Group common stock for each share of PacifiCare common stock and adding to such amount the cash consideration of $21.50 to be paid with respect to each share of PacifiCare common stock. The equivalent stock price on July 5, 2005 plus cash reflects an implied premium of $7.37 per share or 10.1% over the closing price per share of PacifiCare common stock on July 5, 2005. Keep in mind that the value of the merger consideration to be received by PacifiCare stockholders will fluctuate with changes in the price of UnitedHealth Group common stock—when the price of UnitedHealth Group’s common stock increases, the value of the merger consideration increases; when the price of UnitedHealth Group’s common stock decreases, the value of the merger consideration will decrease. There can be no assurances as to the market price of UnitedHealth Group common stock at any time prior to the merger or any time thereafter. Stockholders should obtain current trading prices for shares of UnitedHealth Group common stock and PacifiCare common stock prior to making any decision with respect to the merger.

 

    

UnitedHealth Group

Common Stock

(price per share)


  

PacifiCare

Common Stock

(price per share)


  

PacifiCare Equivalent

Stock Price Plus Cash

(price per share)


July 5, 2005

   $ 53.23    $ 72.68    $ 80.05

                    , 2005

   $             $             $         

 

Historical Market Price Data

 

PacifiCare’s common stock is quoted on the New York Stock Exchange under the symbol “PHS”. UnitedHealth Group’s common stock is quoted on the New York Stock Exchange under the symbol “UNH”.

 

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The following table sets forth the high and low sales prices per share of UnitedHealth Group and PacifiCare common stock as adjusted for all applicable stock splits, as reported on the New York Stock Exchange for the periods indicated:

 

    

UnitedHealth Group

Common Stock


  

PacifiCare

Common Stock


         High    

       Low    

       High    

       Low    

2002

                           

Quarter ended March 31, 2002

   $ 19.20    $ 16.96    $ 11.67    $ 7.30

Quarter ended June 30, 2002

   $ 24.47    $ 18.78    $ 16.31    $ 8.48

Quarter ended September 30, 2002

   $ 24.08    $ 20.37    $ 13.86    $ 9.85

Quarter ended December 31, 2002

   $ 25.25    $ 18.76    $ 16.83    $ 10.65

2003

                           

Quarter ended March 31, 2003

   $ 23.17    $ 19.60    $ 14.87    $ 10.47

Quarter ended June 30, 2003

   $ 26.34    $ 22.05    $ 25.99    $ 11.38

Quarter ended September 30, 2003

   $ 28.13    $ 23.63    $ 29.63    $ 23.35

Quarter ended December 31, 2003

   $ 29.34    $ 23.79    $ 34.20    $ 24.17

2004

                           

Quarter ended March 31, 2004

   $ 32.25    $ 27.73    $ 39.96    $ 28.64

Quarter ended June 30, 2004

   $ 34.25    $ 29.31    $ 42.72    $ 33.71

Quarter ended September 30, 2004

   $ 37.38    $ 29.67    $ 38.70    $ 29.35

Quarter ended December 31, 2004

   $ 44.38    $ 32.31    $ 57.53    $ 32.50

2005

                           

Quarter ended March 31, 2005

   $ 48.33    $ 42.63    $ 65.60    $ 53.44

Quarter ended June 30, 2005

   $ 53.64    $ 44.30    $ 72.40    $ 52.27

Quarter ended September 30, 2005 (through August 10, 2005)

   $ 54.50    $ 47.75    $ 83.45    $ 70.71

 

PacifiCare stockholders are encouraged to obtain current trading prices for UnitedHealth Group and PacifiCare common stock and to review carefully the other information contained in this joint proxy statement/ prospectus or incorporated by reference into this joint proxy statement/ prospectus in considering whether to approve the respective proposals before them. See the section entitled “Where You Can Find More Information” on page 141 of this proxy statement/prospectus.

 

Dividend Information

 

PacifiCare has never paid cash dividends on its common stock. The board of directors of PacifiCare declared a 2-for-1 split of its common stock on December 19, 2003, which was effective on January 20, 2004.

 

All share and per share amounts have been restated to reflect the stock split.

 

UnitedHealth Group paid a cash dividend of $0.015 per share (split-adjusted) on April 18, 2005. The board of directors of UnitedHealth Group declared a 2-for-1 split of its common stock on May 3, 2005, which was effective on May 27, 2005.

 

All share and per share amounts have been restated to reflect the stock split.

 

Number of Stockholders

 

As of                     , 2005, there were approximately              stockholders of record of PacifiCare common stock, as shown on the records of PacifiCare’s transfer agent for such shares. As of                     , 2005, there were approximately              shareholders of record of UnitedHealth Group, as shown on the records of UnitedHealth Group’s transfer agent for such shares.

 

Shares Held by Certain Stockholders

 

Adoption of the merger agreement by PacifiCare’s stockholders requires the affirmative vote of the holders of a majority of the shares of PacifiCare common stock outstanding and entitled to vote at the special meeting. As of                     , 2005, approximately 5% of the outstanding shares of PacifiCare common stock were held by directors and executive officers of PacifiCare and their affiliates. Neither UnitedHealth Group nor any of its directors or executive officers owns any shares of PacifiCare stock.

 

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RISK FACTORS

 

Before you vote for adoption of the merger agreement, you should carefully consider the risks described below in addition to the other information contained in this proxy statement/prospectus, including the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 40 of this proxy statement/prospectus. By voting in favor of the merger, you will be choosing to invest in UnitedHealth Group common stock. The risks and uncertainties described below are not the only ones facing UnitedHealth Group. If any of the following risks actually occur, UnitedHealth Group’s business, financial condition or results of operations could be materially adversely affected, the value of UnitedHealth Group’s common stock could decline and you may lose all or part of your investment.

 

Risks Associated with the Merger

 

UnitedHealth Group and PacifiCare must obtain several governmental consents to complete the merger, which, if delayed, not granted or granted with conditions may jeopardize or postpone the merger, result in additional expense or reduce the anticipated benefits of the transaction.

 

UnitedHealth Group and PacifiCare must obtain specified approvals and consents in a timely manner from federal and state agencies prior to the completion of the merger. UnitedHealth Group, or the applicable subsidiary of PacifiCare, as the case may be, has filed acquisition of control and other transaction-related filings for approval with the Insurance Departments of the Principal States, as well as filings with California’s Department of Managed Health Care. If such approvals are not obtained, neither UnitedHealth Group nor PacifiCare will be obligated to complete the merger. If the parties do not receive these approvals on terms that satisfy the merger agreement, then UnitedHealth Group will not be obligated to complete the merger. The governmental agencies from which the parties seek approvals have broad discretion in administering relevant laws and regulations. As a condition to approval of the merger, agencies may impose conditions, restrictions, qualifications, requirements or limitations that could negatively affect the way the combined company conducts business or impair the benefits UnitedHealth Group anticipates the merger will create. UnitedHealth Group is not obligated to complete the merger if a governmental agency or agencies impose a condition, restriction, qualification, requirement or limitation when it grants the specified approvals and consents which (if implemented) would constitute, or would be reasonably likely to constitute, individually or in the aggregate, a Negative Regulatory Action, as such term is defined in the section entitled “The Merger Agreement—Reasonable Best Efforts” beginning on page 107 of this proxy statement/prospectus. Any such conditions, restrictions, qualifications, requirements or limitations imposed by one or more agencies could adversely affect UnitedHealth Group’s ability to integrate the business of PacifiCare or reduce the anticipated benefits of the merger. The merger also is subject to the requirements of the HSR Act, which prevents certain acquisitions from being completed until required information and materials are furnished to the Antitrust Division of the DOJ and the FTC and certain waiting periods are terminated or expire.

 

The anticipated benefits of acquiring PacifiCare may not be realized.

 

UnitedHealth Group and PacifiCare entered into the merger agreement with the expectation that the merger will result in various benefits including, among others, benefits relating to a stronger and more diverse network of doctors and other health care providers, expanded and enhanced affordable health care services that address the needs of older Americans, enhanced revenues, a strengthened market position for UnitedHealth Group across the United States, cross selling opportunities, technology, cost savings and operating efficiencies. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether UnitedHealth Group integrates PacifiCare in an efficient and effective manner, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could materially impact UnitedHealth Group’s business, financial condition and operating results.

 

UnitedHealth Group may have difficulty integrating PacifiCare and may incur substantial costs in connection with the integration.

 

Integrating PacifiCare’s operations into UnitedHealth Group operating platform will be a complex, time-consuming and expensive process. Before the merger, UnitedHealth Group and PacifiCare operated

 

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independently, each with its own business, products, customers, employees, culture and systems. UnitedHealth Group may experience material unanticipated difficulties or expenses in connection with the integration of PacifiCare, especially given the relatively large size of PacifiCare’s operations. The time and expense associated with converting the businesses of the combined company to a common platform and negotiating amended or new contracts with physicians, other health care professionals and facilities, as well as other service providers may exceed management’s expectations and limit or delay the intended benefits of the transaction. Similarly, the process of combining sales and marketing and network management forces, consolidating administrative functions, and coordinating product and service offerings can take longer, cost more, and provide fewer benefits than initially projected. To the extent any of these events occurs, the benefits of the transaction may be reduced, at least for a period of time.

 

UnitedHealth Group may face substantial difficulties, costs and delays in integrating PacifiCare. These factors may include:

 

    retaining and integrating management and other key employees of the combined company;

 

    costs and delays in implementing common systems and procedures;

 

    perceived adverse changes in product offerings available to customers or customer service standards, whether or not these changes do, in fact, occur;

 

    potential charges to earnings resulting from the application of purchase accounting to the transaction;

 

    difficulty comparing financial reports due to differing management systems;

 

    diversion of management resources from the business of the combined company;

 

    retention of PacifiCare’s provider networks;

 

    difficulty in retaining existing customers of each company; and

 

    reduction or loss of customer sales due to the potential for market confusion, hesitation and delay.

 

After the merger, UnitedHealth Group may seek to combine certain operations and functions using common information and communication systems, operating procedures, financial controls and human resource practices, including training, professional development and benefit programs. UnitedHealth Group may be unsuccessful in implementing the integration of these systems and processes. Any one or all of these factors may cause increased operating costs, worse than anticipated financial performance or the loss of customers and employees. Many of these factors are also outside the control of either company.

 

No material commercial third party consents or approvals are required in connection with the proposed transaction.

 

The value of the shares of UnitedHealth Group common stock that PacifiCare stockholders receive in the merger will vary as a result of the fixed exchange ratio and possible fluctuations in the price of UnitedHealth Group’s common stock.

 

At the effective time of the merger, each outstanding share of PacifiCare common stock will be converted into the right to receive 1.1 shares of UnitedHealth Group common stock and $21.50 in cash. The ratio at which the shares will be converted is fixed and any changes in the price of UnitedHealth Group common stock will affect the value of the consideration that PacifiCare stockholders receive in the merger such that if the price of UnitedHealth Group common stock declines prior to completion of the merger, the value of the merger consideration to be received by PacifiCare stockholders will decrease. Stock price variations could be the result of changes in the business, operations or prospects of UnitedHealth Group, PacifiCare or the combined company, market assessments of the likelihood that the merger will be completed within the anticipated time or at all, general market and economic conditions and other factors which are beyond the control of UnitedHealth Group or PacifiCare. Recent market prices of UnitedHealth Group common stock and PacifiCare common stock are set forth in the section entitled “Market Price and Dividend Information.” on page 30 of this proxy statement/prospectus.

 

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We encourage PacifiCare stockholders to obtain current trading prices for UnitedHealth Group common stock and PacifiCare common stock. The price of UnitedHealth Group common stock and PacifiCare common stock at the effective time of the merger may vary from their prices on the date of this proxy statement/prospectus and at the time of the special meeting. The historical prices of UnitedHealth Group’s common stock and PacifiCare’s common stock included in this proxy statement/prospectus are not indicative of their prices on the date the merger is effective. The future market prices of UnitedHealth Group common stock and PacifiCare common stock cannot be guaranteed or predicted.

 

The merger may result in a loss of customers and providers.

 

Some customers may seek alternative sources of product and/or service after the announcement of the merger due to, among other reasons, a desire not to do business with the combined company or perceived concerns that the combined company may not continue to support and develop certain product lines. The combined company could experience some customer attrition by reason of announcement of the merger or after the merger. Difficulties in combining operations could also result in the loss of providers and potential disputes or litigation with customers, providers or others. Any steps by management to counter such potential increased customer or providers attrition may not be effective. Failure by management to control attrition could result in worse than anticipated financial performance.

 

If the conditions to the merger are not met, the merger may not occur.

 

Specified conditions set forth in the merger agreement must be satisfied or waived to complete the merger. For a more complete discussion of the conditions to the merger, please see the section entitled “The Merger Agreement—Conditions to the Merger” beginning on page 109 of this proxy statement/prospectus. If the conditions are not satisfied or waived, to the extent permitted by law or stock exchange rule, the merger will not occur or will be delayed, and each of UnitedHealth Group and PacifiCare may lose some or all of the intended benefits of the merger. The following conditions, in addition to other customary closing conditions, must be satisfied or waived, if permissible, before UnitedHealth Group and PacifiCare are obligated to complete the merger:

 

    the merger agreement must be adopted by the holders of a majority of the outstanding shares of PacifiCare common stock as of the record date;

 

    the waiting period (and any extension thereof) applicable to the merger pursuant to the HSR Act, or any other applicable competition, merger, antitrust or similar law must have expired or been terminated;

 

    specified governmental consents and approvals must have been obtained and be in full force and effect; and

 

    there must be no temporary restraining order, preliminary or permanent injunction or other order or decree issued by any court of competent jurisdiction or other statute, law, rule, legal restraint or prohibition in effect preventing the completion of the merger.

 

In addition, the obligations of UnitedHealth Group and Point Acquisition to complete the merger are subject to the satisfaction or waiver to the extent permitted by law or stock exchange rule, of each of the following conditions specified in the merger agreement:

 

   

there shall not be pending any suit, action or proceeding by any federal or state governmental entity (1) challenging the acquisition or seeking to place limitations on the acquisition and ownership of shares of PacifiCare by UnitedHealth Group or Point Acquisition or to restrain or prohibit the completion of the merger which suit, action or proceeding UnitedHealth Group determines has a reasonable possibility of being decided in favor of such governmental entity or could reasonably be expected to result in material damages or material harm to PacifiCare or UnitedHealth Group, (2) seeking to (i) prohibit or limit the ownership or operation of PacifiCare by UnitedHealth Group or Point Acquisition, (ii) compel the disposal of any business or assets as result of the merger, or (iii) impose any obligations on the operation of the businesses of UnitedHealth Group, PacifiCare or Point Acquisition, or (3) seeking to obtain damages, payments or legally binding assurances, which suit, action or proceeding in the case of (2) or (3) would

 

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reasonably be likely to have, individually or in the aggregate, a Negative Regulatory Action as defined in the section entitled “The Merger Agreement—Reasonable Best Efforts” beginning on page 107 of this proxy statement/prospectus;

 

    there must be no legal restraint in effect which would reasonably be expected to result in any of the effects set forth in (1) through (3) of the preceding bullet point; and

 

    specified regulatory consents and approvals must have been obtained and be in full force and effect without conditions, restrictions, limitations, qualifications or requirements which would be reasonably likely to constitute individually or in the aggregate a Negative Regulatory Action as defined in the section entitled “The Merger Agreement—Reasonable Best Efforts” beginning on page 107 of this proxy statement/prospectus.

 

UnitedHealth Group and PacifiCare may waive one or more of the conditions to the merger without resoliciting stockholder approval for the merger.

 

Except as provided in the last sentence of this paragraph, each of the conditions to UnitedHealth Group’s and PacifiCare’s obligations to complete the merger may be waived, in whole or in part, to the extent permitted by applicable law, by agreement of UnitedHealth Group and PacifiCare if the condition is a condition to both UnitedHealth Group’s and PacifiCare’s obligation to complete the merger, or by the party for which such condition is a condition of its obligation to complete the merger. The boards of directors of UnitedHealth Group and PacifiCare will evaluate the materiality of any such waiver to determine whether amendment of this proxy statement/prospectus and resolicitation of proxies is necessary. However, UnitedHealth Group and PacifiCare generally do not expect any such waiver to be significant enough to require resolicitation of stockholders. In the event that any such waiver is not determined to be significant enough to require resolicitation of stockholders, the companies will have the discretion to complete the merger without seeking further stockholder approval. UnitedHealth Group and PacifiCare have agreed, however, that neither party shall waive the condition regarding the receipt of the opinion of its tax counsel following the adoption of the merger agreement by PacifiCare stockholders unless further stockholder approval is obtained with appropriate disclosure.

 

Some directors and executive officers of PacifiCare have interests that differ from those of PacifiCare stockholders in recommending that PacifiCare stockholders vote in favor of adoption of the merger agreement.

 

PacifiCare’s directors and executive officers have interests in the merger as individuals in addition to, and that may be different from, the interests of PacifiCare stockholders generally. Twenty-one members of PacifiCare’s senior management, including, Messrs. Phanstiel, Bowlus, Scott and Konowiecki and Ms. Kosecoff have entered into employment agreements with UnitedHealth Group that become effective upon completion of the merger and which will become void if the merger is not completed. These agreements provide for initial terms of one or two years and generally provide that each executive officer will receive a signing bonus in the form of restricted stock or cash. The employment agreements also provide for an initial grant of UnitedHealth Group restricted stock upon completion of the merger. In addition, the completion of the merger will generally result in the accelerated vesting of stock options that have been granted under PacifiCare’s equity compensation plans to employees, executive officers and directors. Restricted stock, restricted stock units and deferred stock units held by PacifiCare’s executive officers and directors under PacifiCare’s compensation plans generally will also vest and become distributable as a result of the merger, in the form of merger consideration. UnitedHealth Group has agreed in the merger agreement to continue the PacifiCare supplemental executive retirement plan for at least one year following the effective date of the merger, and to provide continued compensation and benefits following the completion of the merger that are no less favorable than those provided pursuant to PacifiCare’s plans and policies prior to the merger or those provided by UnitedHealth Group to its similarly situated employees in the discretion of UnitedHealth Group. UnitedHealth Group also agreed in the merger agreement to indemnify, exculpate and provide liability insurance to PacifiCare’s officers, directors and certain employees. The PacifiCare board of directors was aware of these arrangements and considered them in its decision to approve and adopt the merger agreement.

 

Such interests may influence directors in making their recommendation that you vote in favor of the merger agreement and officers in supporting the merger. For more information about these interests, please see the section entitled “Interests of Certain Persons in the Merger” beginning on page 83 of this proxy statement/prospectus.

 

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Risks Related to UnitedHealth Group’s Business

 

UnitedHealth Group must effectively manage its health care costs.

 

Under UnitedHealth Group’s risk-based product arrangements, it assumes the risk of both medical and administrative costs for its customers in return for monthly premiums. Premium revenues from risk-based products (excluding AARP) have typically comprised approximately 75% to 80% of UnitedHealth Group’s total consolidated revenues. UnitedHealth Group generally uses approximately 80% to 85% of its premium revenues to pay the costs of health care services delivered to these customers. The profitability of UnitedHealth Group’s risk-based products depends in large part on its ability to accurately predict, price for, and effectively manage health care costs. Total health care costs are affected by the number of individual services rendered and the cost of each service. UnitedHealth Group’s premium revenue is typically fixed in price for a 12-month period and is generally priced one to four months before contract commencement. Services are delivered and related costs are incurred when the contract commences. Although UnitedHealth Group bases the premiums it charges on its estimate of future health care costs over the fixed premium period, inflation, regulations and other factors may cause actual costs to exceed what was estimated and reflected in premiums. These factors may include increased use of services, increased cost of individual services, catastrophes, epidemics, the introduction of new or costly treatments and technology, new mandated benefits or other regulatory changes, insured population characteristics and seasonal changes in the level of health care use. As a measure of the impact of medical cost on UnitedHealth Group’s financial results, relatively small differences between predicted and actual medical costs as a percentage of premium revenues can result in significant changes in its financial results. For example, if medical costs increased by 1 percent without a proportional change in related revenues for UnitedHealth Group’s commercial insured products, its annual net earnings for 2004 would have been reduced by approximately $105 million. In addition, the financial results UnitedHealth Group reports for any particular period include estimates of costs that have been incurred for which it has not received the underlying claims or for which it has received the claims but not yet processed them. If these estimates prove too high or too low, the effect of the change in estimate will be included in future results. That change can be either positive or negative to UnitedHealth Group’s results.

 

UnitedHealth Group faces competition in many of its markets and customers have flexibility in moving between competitors.

 

UnitedHealth Group’s businesses compete throughout the United States and face competition in all of the geographic markets in which they operate. For UnitedHealth Group’s Uniprise and Health Care Services segments, competitors include Aetna Inc., Cigna Corporation, Coventry Health Care, Inc., Humana Inc., WellChoice, Inc., and WellPoint, Inc., numerous for-profit and not-for-profit organizations operating under licenses from the Blue Cross Blue Shield Association and other enterprises concentrated in more limited geographic areas. UnitedHealth Group’s Specialized Care Services and Ingenix segments also compete with a number of businesses. The addition of new competitors can occur relatively easily, and customers enjoy significant flexibility in moving between competitors. In particular markets, competitors may have capabilities that give them a competitive advantage. Greater market share, established reputation, superior supplier arrangements, existing business relationships, and other factors all can provide a competitive advantage to UnitedHealth Group’s businesses or to their competitors. In addition, significant merger and acquisition activity has occurred in the industries in which it operates, both as to its competitors and suppliers in these industries. Consolidation may make it more difficult for UnitedHealth Group to retain or increase customers, to improve the terms on which it does business with its suppliers, or to maintain or advance profitability.

 

UnitedHealth Group’s relationship with AARP is important.

 

Under UnitedHealth Group’s 10-year contract with AARP, which commenced in 1998, it provides Medicare supplement and hospital indemnity health insurance and other products to AARP members. As of June 30, 2005, its portion of AARP’s insurance program represented approximately $4.7 billion in annual net premium revenue from approximately 3.8 million AARP members. The AARP contract may be terminated early by it or AARP under certain circumstances, including a material breach by either party, insolvency of either party, a material adverse change in the financial condition of either party, and by mutual agreement. The success of UnitedHealth Group’s

 

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AARP arrangement depends, in part, on its ability to service AARP and its members, develop additional products and services, price the products and services competitively, and respond effectively to federal and state regulatory changes.

 

The favorable and unfavorable effects of changes in Medicare are uncertain.

 

The Medicare changes being implemented as a result of the Medicare Modernization Act of 2003 are complex and wide-ranging. There are numerous changes that will influence UnitedHealth Group’s business. It has invested considerable resources analyzing how to best address uncertainties and risks associated with the changes that may arise. In January 2005, the Centers for Medicare and Medicaid Services, which is referred to as CMS, released detailed regulations on major aspects of the legislation, however, some important requirements related to the implementation of the new product offerings, including the Part D prescription drug benefit and the regional Medicare Advantage Preferred Provider Organizations, have not yet been released by the federal government, thus creating challenges for planning and implementation. UnitedHealth Group believes the increased funding provided in the legislation will increase the number of competitors in the seniors health services segment.

 

UnitedHealth Group’s business is subject to routine government scrutiny, and UnitedHealth Group must respond quickly and appropriately to frequent changes in government regulations.

 

UnitedHealth Group’s business is regulated at the federal, state, local and international levels. The laws and rules governing its business and interpretations of those laws and rules are subject to frequent change. Broad latitude is given to the agencies administering those regulations. Existing or future laws and rules could force UnitedHealth Group to change how it does business, restrict revenue and enrollment growth, increase its health care and administrative costs and capital requirements, and increase its liability in federal and state courts for coverage determinations, contract interpretation and other actions. UnitedHealth Group must obtain and maintain regulatory approvals to market many of its products, to increase prices for certain regulated products and to consummate its acquisitions and dispositions. Delays in obtaining or its failure to obtain or maintain these approvals could reduce its revenue or increase UnitedHealth Group’s costs.

 

UnitedHealth Group participates in federal, state and local government health care coverage programs. These programs generally are subject to frequent change, including changes that may reduce the number of persons enrolled or eligible, reduce the amount of reimbursement or payment levels, or increase its administrative or health care costs under such programs. Such changes have adversely affected its financial results and willingness to participate in such programs in the past, and may do so in the future.

 

State legislatures and Congress continue to focus on health care issues. Legislative and regulatory proposals at state and federal levels may affect certain aspects of UnitedHealth Group’s business, including contracting with physicians, hospitals and other health care professionals; physician reimbursement methods and payment rates; coverage determinations; claim payments and processing; drug utilization and patient safety efforts; use and maintenance of individually identifiable health information; medical malpractice litigation; and government-sponsored programs. UnitedHealth Group cannot predict if any of these initiatives will ultimately become binding law or regulation, or, if enacted, what their terms will be, but their enactment could increase its costs, expose it to expanded liability, require it to revise the ways in which it conducts business or put it at risk for loss of business.

 

UnitedHealth Group typically has and is currently involved in various governmental investigations, audits and reviews. These include routine, regular and special investigations, audits and reviews by CMS, state insurance and health and welfare departments and state attorneys general, the Office of the Inspector General, the Office of Personnel Management, the Office of Civil Rights, the DOJ and U.S. attorneys. Such government actions can result in assessment of damages, civil or criminal fines or penalties, or other sanctions, including restrictions or changes in the way it conducts business, loss of licensure or exclusion from participation in government programs. In addition, public perception or publicity surrounding routine governmental investigations may adversely affect its stock price, damage its reputation in various markets or make it more difficult for UnitedHealth Group to sell products and services.

 

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Relationships with physicians, hospitals and other health care providers are important to UnitedHealth Group’s business.

 

UnitedHealth Group contracts with physicians, hospitals, pharmaceutical benefit service providers, pharmaceutical manufacturers, and other health care providers for competitive prices. UnitedHealth Group’s results of operations and prospects are substantially dependent on its continued ability to maintain these competitive prices. A number of organizations are advocating for legislation that would exempt certain of these physicians and health care professionals from federal and state antitrust laws. In any particular market, these physicians and health care professionals could refuse to contract, demand higher payments, or take other actions that could result in higher health care costs, less desirable products for customers or difficulty meeting regulatory or accreditation requirements. In some markets, certain health care providers, particularly hospitals, physician/hospital organizations or multi-specialty physician groups, may have significant market positions or near monopolies that could result in diminished bargaining power on UnitedHealth Group’s part.

 

The nature of UnitedHealth Group’s business exposes it to litigation risks.

 

Periodically, UnitedHealth Group becomes a party to the types of legal actions that can affect any business, such as employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, tort claims, shareholder suits, and intellectual property-related litigation. In addition, because of the nature of UnitedHealth Group’s business, it is routinely made party to a variety of legal actions related to the design, management and offerings of its services. These matters include, among others, claims related to health care benefits coverage, medical malpractice actions, contract disputes and claims related to disclosure of certain business practices. In 1999, a number of class action lawsuits were filed against it and virtually all major entities in the health benefits business. The suits are purported class actions on behalf of physicians for alleged breaches of federal statutes, including the Employee Retirement Income Security Act of 1974 and the Racketeer Influenced Corrupt Organization Act. In March 2000, the American Medical Association filed a lawsuit against it in connection with the calculation of reasonable and customary reimbursement rates for non-network providers. Although the expenses which UnitedHealth Group has incurred to date in defending the 1999 class action lawsuits and the American Medical Association lawsuit have not been material to its business, it will continue to incur expenses in the defense of these lawsuits and other matters, even if they are without merit.

 

UnitedHealth Group is largely self-insured with regard to litigation risks, however, it maintains excess liability insurance with outside insurance carriers to minimize risks associated with catastrophic claims. Although UnitedHealth Group believes that it is adequately insured for claims in excess of its self-insurance, certain types of damages, such as punitive damages, are not covered by insurance. UnitedHealth Group records liabilities for its estimates of the probable costs resulting from self-insured matters. Although UnitedHealth Group believes the liabilities established for these risks are adequate, it is possible that the level of actual losses may exceed the liabilities recorded.

 

UnitedHealth Group’s businesses depend on effective information systems and the integrity of the data in UnitedHealth Group’s information systems.

 

UnitedHealth Group’s ability to adequately price its products and services, provide effective and efficient service to its customers, and to accurately report its financial results depends on the integrity of the data in its information systems. As a result of its acquisition activities, it has acquired additional systems. UnitedHealth Group has been taking steps to reduce the number of systems it operates and have upgraded and expanded its information systems capabilities. If the information it relies upon to run its businesses was found to be inaccurate or unreliable or if it fails to maintain effectively its information systems and data integrity, it could lose existing customers, have difficulty attracting new customers, have problems in determining medical cost estimates and establishing appropriate pricing, have customer and physician and other health care provider disputes, have regulatory problems, have increases in operating expenses or suffer other adverse consequences.

 

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UnitedHealth Group has intangible assets, whose values may become impaired.

 

Due largely to UnitedHealth Group’s recent acquisitions, goodwill and other intangible assets represent a substantial portion of its assets. Goodwill and other intangible assets were approximately $10.7 billion as of June 30, 2005, representing approximately 38% of its total assets. If UnitedHealth Group makes additional acquisitions, such as its pending acquisitions of PacifiCare and Neighborhood Health Partnership, it is likely that UnitedHealth Group will record additional intangible assets on its books. UnitedHealth Group periodically evaluates its goodwill and other intangible assets to determine whether all or a portion of their carrying values may no longer be recoverable, in which case a charge to earnings may be necessary. Any future evaluations requiring an asset impairment of its goodwill and other intangible assets could materially affect its results of operations and shareholders’ equity in the period in which the impairment occurs. A material decrease in shareholders’ equity could, in turn, negatively impact its debt ratings or potentially impact its compliance with existing debt covenants.

 

UnitedHealth Group must comply with emerging restrictions on patient privacy and information security, including taking steps to ensure compliance by its business associates who obtain access to sensitive patient information when providing services to it.

 

The use of individually identifiable data by UnitedHealth Group’s businesses is regulated at the international, federal and state levels. These laws and rules are changed frequently by legislation or administrative interpretation. Various state laws address the use and disclosure of individually identifiable health data. Most are derived from the privacy and security provisions in the federal Gramm-Leach-Bliley Act and the Health Insurance Portability and Accountability Act of 1996, which is referred to as HIPAA. HIPAA also imposes guidelines on its business associates (as this term is defined in the HIPAA regulations). Even though UnitedHealth Group provides for appropriate protections through its contracts with its business associates, it still has limited control over their actions and practices. Compliance with these proposals, requirements, and new regulations may result in cost increases due to necessary systems changes, the development of new administrative processes, and the effects of potential noncompliance by its business associates. They also may impose further restrictions on its use of patient identifiable data that is housed in one or more of its administrative databases.

 

UnitedHealth Group’s knowledge and information-related businesses depend on its ability to maintain proprietary rights to its databases and related products.

 

UnitedHealth Group relies on its agreements with customers, confidentiality agreements with employees, and its trade secrets, copyrights and patents to protect its proprietary rights. These legal protections and precautions may not prevent misappropriation of its proprietary information. In addition, substantial litigation regarding intellectual property rights exists in the software industry, and UnitedHealth Group expects software products to be increasingly subject to third-party infringement claims as the number of products and competitors in this industry segment grows. Such litigation and misappropriation of UnitedHealth Group’s proprietary information could hinder its ability to market and sell products and services.

 

The effects of the war on terror and future terrorist attacks could impact the health care industry.

 

The terrorist attacks launched on September 11, 2001, the war on terrorism, the threat of future acts of terrorism and the related concerns of customers and providers have negatively affected, and may continue to negatively affect, the U.S. economy in general and its industry specifically. Depending on the government’s actions and the responsiveness of public health agencies and insurance companies, future acts of terrorism and bio-terrorism could lead to, among other things, increased use of health care services including, without limitation, hospital and physician services; loss of membership in health benefit programs it administers as a result of lay-offs or other reductions of employment; adverse effects upon the financial condition or business of employers who sponsor health care coverage for their employees; disruption of its information and payment systems; increased health care costs due to restrictions on its ability to carve out certain categories of risk, such as acts of terrorism; and disruption of the financial and insurance markets in general.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This proxy statement/prospectus, including the annexes and exhibits hereto, and the other documents incorporated by reference in this proxy statement/prospectus contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be made directly in this proxy statement/prospectus referring to UnitedHealth Group or PacifiCare, including the Annexes attached to this proxy statement/prospectus and made part of this proxy statement/prospectus, and may include statements regarding the period following completion of the merger. These statements are intended to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

 

These forward-looking statements are based on current expectations or projections about operations, industry, financial condition and liquidity. Words such as “may,” “could,” “will,” “should,” “plan,” “predict,” “potential,” “anticipate,” “continue,” “estimate,” “expect,” “project,” “intend,” “believe” and variations thereof or words and terms of similar substance used in connection with any discussion of future operating or financial performance, the merger or our businesses, identify forward- looking statements. You should note that the discussion of UnitedHealth Group’s and PacifiCare’s reasons for the merger and the description of PacifiCare’s financial advisors’ opinions, as well as other portions of this proxy statement/prospectus, contain many forward-looking statements that describe beliefs, assumptions and estimates as of the indicated dates and those forward-looking expectations may have changed as of the date of this proxy statement/prospectus. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. By their nature, forward-looking statements are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from these forward-looking statements.

 

Health benefits companies operate in a highly competitive, constantly changing environment that is significantly influenced by aggressive marketing and pricing practices of competitors, regulatory oversight and organizations that have resulted from business combinations. In addition to the risk factors identified elsewhere in this proxy statement/prospectus, the following is a summary of factors, the results of which, either individually or in combination, if markedly different from UnitedHealth Group’s and PacifiCare’s planning assumptions, could cause UnitedHealth Group’s and PacifiCare’s results to differ materially from those expressed in any forward-looking statements contained in this proxy statement/prospectus, including the Annexes attached to this proxy statement/prospectus and made part of this proxy statement/prospectus:

 

    trends in health care costs and utilization rates

 

    ability to secure sufficient premium rate increases;

 

    competitor pricing below market trends of increasing costs;

 

    increased government regulation of health benefits and managed care or other changes in the regulatory environment;

 

    significant acquisitions or divestitures by major competitors;

 

    introduction and utilization of new prescription drugs and technology;

 

    a downgrade in our financial strength ratings;

 

    changes in the securities markets;

 

    litigation targeted at health benefits companies;

 

    ability to contract with providers consistent with past practice;

 

    general economic downturns or changes in political or competitive forces;

 

    the level of realization, if any, of expected cost savings and other synergies from the merger;

 

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    difficulties related to the integration of the business of UnitedHealth Group and PacifiCare may be greater than expected;

 

    revenues following the merger may be lower than expected;

 

    the general risks that occur in our day-to-day businesses including those discussed in our respective Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and exhibits and amendments to those reports; and

 

    the risk that our analyses of these risks could be incorrect and that the strategy developed to address them could be unsuccessful.

 

The above list is not intended to be exhaustive and there may be other factors that would preclude us from realizing the predictions made in the forward-looking statements. Because such forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those contemplated, projected, expressed or implied by such forward-looking statements. PacifiCare stockholders are cautioned not to place undue reliance on such statements, which speak only as of the date of this proxy statement/prospectus or the date of PacifiCare’s financial advisors’ respective opinions or in the case of documents incorporated by reference, as of the date of those documents.

 

All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this proxy statement/prospectus and attributable to UnitedHealth Group or PacifiCare or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable law or regulation, neither UnitedHealth Group nor PacifiCare undertakes any obligation to release publicly any revisions or updates to such forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect the occurrence of unanticipated events.

 

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THE SPECIAL MEETING OF PACIFICARE STOCKHOLDERS

 

This proxy statement/prospectus is furnished in connection with the solicitation of proxies from the holders of PacifiCare common stock by the PacifiCare board of directors for use at the special meeting of PacifiCare stockholders. The purpose of the special meeting is for you to consider and vote upon a proposal to adopt the merger agreement. A copy of the merger agreement is attached to this proxy statement/prospectus as Annex A and made part of this proxy statement/prospectus.

 

This proxy statement/prospectus is first being furnished to PacifiCare stockholders on or about                     , 2005.

 

Date, Time and Place of the Special Meeting

 

The special meeting will be held on                     , 2005 at                      local time at                     .

 

Matters to be Considered at the Special Meeting

 

At the special meeting, stockholders of PacifiCare will be asked to (1) consider and vote upon a proposal to adopt the merger agreement, (2) consider and vote on a proposal to authorize the proxyholders to vote to adjourn or postpone the special meeting, in their sole discretion, for the purpose of soliciting additional votes for the adoption of the merger agreement and (3) transact such other business as may properly come before the special meeting or any postponements or adjournments of the special meeting. Adoption of the merger agreement will also constitute approval of the merger and the other transactions contemplated by the merger agreement.

 

Board Recommendation

 

The PacifiCare board of directors has unanimously approved and adopted the merger agreement and unanimously recommends that PacifiCare stockholders vote “FOR” the adoption of the merger agreement and authorization of the proxyholders to vote to adjourn or postpone the special meeting for the purpose of soliciting additional votes for the adoption of the merger agreement. See the section entitled “The Merger—PacifiCare’s Reasons for the Merger” beginning on page 54 of this proxy statement/prospectus.

 

Record Date and Shares Entitled to Vote

 

PacifiCare’s board of directors has fixed the close of business on                     , 2005 as the record date for determination of PacifiCare stockholders entitled to notice of and to vote at the special meeting. As of the close of business on                     , 2005, there were              shares of PacifiCare common stock outstanding and entitled to vote, held of record by approximately              stockholders. A majority of these shares, present in person or represented by proxy, will constitute a quorum for the transaction of business. If a quorum is not present, it is expected that the special meeting will be adjourned or postponed to solicit additional proxies. Each PacifiCare stockholder is entitled to one vote for each share of PacifiCare common stock held as of the record date.

 

Vote Required

 

Adoption of the merger agreement by PacifiCare’s stockholders is required by Delaware law. Such adoption requires the affirmative vote of the holders of a majority of the shares of PacifiCare common stock outstanding on the record date and entitled to vote at the special meeting. Authorizing the proxyholders to vote to adjourn or postpone the special meeting for the purpose of soliciting additional votes for the adoption of the merger agreement will require the affirmative vote of PacifiCare stockholders representing a majority of the shares of PacifiCare common stock present and entitled to vote at the special meeting. The directors and executive officers of PacifiCare beneficially owned approximately 5% of the outstanding shares of PacifiCare common stock as of June 30, 2005, including options exercisable within 60 days, as of the record date. As of the record date and the date of this proxy statement/prospectus, neither UnitedHealth Group nor any of its directors or officers owned any shares of PacifiCare common stock.

 

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Voting of Proxies

 

If you vote your shares of PacifiCare common stock by (1) signing and returning the enclosed proxy in the enclosed prepaid and addressed envelope, (2) telephone or (3) accessing the Internet, your shares, unless your proxy is revoked, will be voted at the special meeting as you indicate on your proxy. If no instructions are indicated on your signed proxy card, your shares will be voted “FOR” adoption of the merger agreement and authorization of the proxyholders to vote for the adjournment or postponement of the special meeting for the purpose of soliciting additional votes.

 

You are urged to mark the box on the proxy card, following the instructions included on your proxy card, to indicate how to vote your shares. To vote by telephone or the Internet, please follow the instructions included on your proxy card. If you vote by telephone or the Internet, you do not need to complete and mail your proxy card. Votes by telephone or the Internet must be received by 11:59 p.m., local time, on             ,                     , 2005. Voting by telephone or the Internet will not affect your right to vote in person should you decide to attend the special meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct such institution on how to vote your shares. Your broker or bank will vote your shares only if you provide instructions on how to vote by following the information provided to you by your broker or bank. If you do not instruct your broker, bank or other nominee, they will not be able to vote your shares.

 

Other Business

 

PacifiCare’s board of directors does not presently intend to bring any other business before the special meeting and, so far as is presently known to PacifiCare’s board of directors, no other matters are to be brought before the special meeting. As to any business that may properly come before the special meeting, however, it is intended that proxies, in the form enclosed, will be voted in respect of such business in accordance with the judgment of the persons voting such proxies.

 

Revocation of Proxies

 

You may revoke your proxy at any time prior to its use by delivering to the Secretary of PacifiCare, at PacifiCare’s offices at 5995 Plaza Drive, Cypress, CA 90630-5028, a signed notice of revocation bearing a date later than the date of the proxy stating that the proxy is revoked, by granting a duly executed new, signed proxy bearing a later date or by submitting a new proxy by telephone or the Internet, or if you are a holder of record by attending the special meeting and voting in person. Although, attendance at the special meeting does not in itself constitute the revocation of a proxy. If you hold your shares in “street name,” you must get a proxy from your broker, bank or other custodian to vote your shares in person at the special meeting.

 

Quorum; Broker Abstentions and Broker Non-Votes

 

The required quorum for the transaction of business at the special meeting is a majority of the shares of PacifiCare common stock issued and outstanding on the record date. Abstentions and broker non-votes each will be included in determining the number of shares present and voting at the meeting for the purpose of determining the presence of a quorum. Because adoption of the merger agreement requires the affirmative vote of a majority of the outstanding shares of PacifiCare common stock entitled to vote, abstentions and broker non-votes will have the same effect as votes against adoption of the merger agreement. Abstentions and broker non-votes also will have the same effect as votes against the authorization of the proxyholders to vote to adjourn or postpone the special meeting for the purpose of soliciting additional votes. In addition, the failure of a PacifiCare stockholder to return a proxy will have the effect of a vote against the adoption of the merger agreement.

 

The actions proposed in this proxy statement/prospectus are not matters that can be voted on by brokers holding shares for beneficial owners without the owners’ specific instructions. If you do not instruct your broker, bank or other nominee, they will not be able to vote your shares, such failure to vote is a broker non-vote. Accordingly, if a broker or bank holds your shares you are urged to instruct your broker or bank on how to vote your shares.

 

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Expenses of Solicitation

 

UnitedHealth Group and PacifiCare will share equally the costs of preparing and distributing this proxy statement/prospectus for the special meeting. In addition to solicitation by mail, directors, officers and regular employees of PacifiCare or its subsidiaries may solicit proxies from stockholders by telephone, telegram, e-mail, personal interview or other means. UnitedHealth Group and PacifiCare currently expect not to incur any costs beyond those customarily expended for a solicitation of proxies in connection with a merger agreement. Directors, officers and employees of UnitedHealth Group and PacifiCare will not receive additional compensation for their solicitation activities, but may be reimbursed for reasonable out of pocket expenses incurred by them in connection with the solicitation. Brokers, dealers, commercial banks, trust companies, fiduciaries, custodians and other nominees have been requested to forward proxy solicitation materials to their customers and such nominees will be reimbursed for their reasonable out of pocket expenses. PacifiCare has engaged Georgeson Shareholder to assist in the solicitation of proxies for the special meeting and PacifiCare estimates it will pay such firm a fee of approximately $20,000, and will reimburse Georgeson Shareholder for reasonable out of pocket expenses incurred in connection with such solicitation.

 

Householding

 

Some banks, brokers and other nominee record holders may be participating in the practice of “householding” proxy statements and annual reports. This means that only one copy of this proxy statement/prospectus may have been sent to multiple stockholders in your household. PacifiCare will promptly deliver a separate copy of this proxy statement/prospectus, including the attached Annexes to you if you write to PacifiCare Health Systems, Inc., 5995 Plaza Drive, Cypress, CA 90630, Attention: Investor Relations or call Investor Relations at 714-952-1121. If you wish to receive separate copies of an annual report or proxy statement in the future, or if you are receiving multiple copies and would like to receive only one copy for your household, you should contact your bank, broker or other nominee record holder, or you may contact PacifiCare, as applicable, at the above address and phone number.

 

Assistance

 

If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact PacifiCare Investor Relations at 714-952-1121 or write to PacifiCare Health Systems, Inc., 5995 Plaza Drive, Cypress, CA 90630, Attention: Investor Relations, or contact Georgeson Shareholder toll-free at 866-344-4276 or write to Georgeson Shareholder, 17 State Street, 10th Floor, New York, NY 10004-1501.

 

The matters to be considered at the special meeting are of great importance to the stockholders of PacifiCare. Accordingly, you are urged to read and carefully consider the information presented in this proxy statement/prospectus, and to complete, date, sign and promptly return the enclosed proxy in the enclosed postage-paid envelope or submit your proxy by telephone or the Internet.

 

Stockholders should not send any stock certificates at this time. A transmittal form with instructions for the surrender of stock certificates for PacifiCare common stock will be mailed to you as soon as practicable after completion of the merger.

 

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THE MERGER

 

This section of the proxy statement/prospectus describes material aspects of the merger. While UnitedHealth Group and PacifiCare believe that the description covers the material terms of the merger and the related transactions, this summary may not contain all of the information that is important to you. You should carefully read this entire proxy statement/prospectus, the attached annexes, and the other documents to which this proxy statement/prospectus refers, for a more complete understanding of the merger.

 

General Description of the Merger

 

At the effective time of the merger, PacifiCare will merge with and into Point Acquisition. Upon completion of the merger, the separate corporate existence of PacifiCare will cease and Point Acquisition will continue as the surviving entity with the name PacifiCare Health Systems.

 

As a result of the merger, each share of PacifiCare common stock outstanding at the effective time of the merger will be converted automatically into the right to receive 1.1 shares of UnitedHealth Group common stock, sometimes referred to as the “exchange ratio”, plus $21.50 in cash, without interest. PacifiCare stockholders will receive cash instead of fractional shares of UnitedHealth Group common stock that would have otherwise been issued as a result of the merger. If the number of shares of either UnitedHealth Group common stock or PacifiCare common stock changes before the merger is completed because of stock dividend, subdivision, reclassification, recapitalization, split, combination, exchange of shares or similar transaction, then an appropriate and proportionate adjustment will be made to the stock and cash to be received by PacifiCare stockholders in the merger.

 

Based on the number of shares of PacifiCare common stock and UnitedHealth Group common stock outstanding or issuable upon exercise of outstanding stock options and other equity-based awards, whether or not vested with respect to PacifiCare common stock, as of the record date, and the exchange ratio, approximately 105.6 million shares of UnitedHealth Group common stock will be issued pursuant to the merger agreement (assuming no exercise of outstanding stock options), representing approximately 8% of the UnitedHealth Group common stock outstanding immediately after the merger. The total cash estimated to be payable to PacifiCare’s stockholders in exchange for their common stock pursuant to the merger agreement is approximately $2.1 billion, (assuming no exercise of outstanding stock options) determined without regard to any dissenting shares and any fractional shares.

 

The merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code for U.S. federal income tax purposes. See the section entitled “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 91 of this proxy statement/prospectus for a discussion of material U.S. federal income tax consequences of the merger.

 

Background of the Merger

 

UnitedHealth Group continually evaluates strategic opportunities and business scenarios as a part of its ongoing evaluation of the market and opportunities to strengthen its business. In connection with this ongoing evaluation, management of UnitedHealth Group regularly evaluates other companies across its business units and regularly updates its board of directors on potential acquisitions. As a result of this ongoing evaluation, UnitedHealth Group has been generally familiar with the profile and activities of PacifiCare over the past several years.

 

For a number of years, PacifiCare’s board of directors and senior management have periodically reviewed changes and developments in the health insurance industry and PacifiCare’s strategic position. In the course of this review, PacifiCare’s Board and management explored various potential strategic alternatives to improve PacifiCare’s strategic position and increase stockholder value.

 

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In the fall of 2004, PacifiCare began discussions with another company in the health insurance industry, referred to as the Target Company, regarding exploring a possible strategic business combination transaction in which PacifiCare would acquire the Target Company. Such discussions, which involved PacifiCare’s management as well as its financial advisors, MTS Health Partners, L.P., referred to as MTS, and Morgan Stanley & Co. Incorporated, referred to as Morgan Stanley, continued until their termination in April 2005. During such period, PacifiCare and the Target Company executed a confidentiality agreement, conducted legal, financial and operational due diligence review on each other and sought to negotiate possible terms of a transaction. Also during this period, the PacifiCare board of directors was updated regularly on the status of, and developments in, such discussions and met several times to review the possible transaction, including the possible terms and status of negotiations with the Target Company.

 

In early December 2004, Mr. Stephen J. Hemsley, President and Chief Operating Officer of UnitedHealth Group, contacted Mr. Howard G. Phanstiel, Chairman and Chief Executive Officer of PacifiCare, to discuss in general terms their respective businesses, including prospects for the industry. Throughout December 2004, Mr. Hemsley and Dr. William W. McGuire, Chairman and Chief Executive Officer of UnitedHealth Group, had conversations and a meeting with Mr. Phanstiel relating to prospects for the industry, as well as exploring possible business relationships between the two companies, including UnitedHealth Group’s interest in discussing a possible business combination.

 

In late December 2004, Mr. Phanstiel then contacted a representative of MTS to discuss the matters raised in Mr. Phanstiel’s conversation with Dr. McGuire and Mr. Hemsley. Also, during such time, representatives of MTS and Goldman, Sachs & Co., UnitedHealth Group’s financial advisor, also had several telephone conversations in which they explored possible business relationships between UnitedHealth Group and PacifiCare, with a focus on a possible strategic business combination. In these conversations between the companies and between their advisors, Mr. Phanstiel and MTS emphasized that in the event the companies pursued a possible strategic business combination, important issues to PacifiCare would be, among others, the value to be received by PacifiCare stockholders, the timing of a possible transaction and the certainty that a transaction, if agreed to, would be completed.

 

Between December 2004 and the spring of 2005, the PacifiCare board of directors was updated, met and reviewed with PacifiCare’s management and advisors the possibility of a transaction with the Target Company or UnitedHealth Group, including the strategic rationale for, and potential terms of, such transactions, as well as other potential strategic alternatives, including continuing as an independent company.

 

In the latter part of January 2005, Mr. Hemsley and several other officers of UnitedHealth Group, met with Mr. Phanstiel, Gregory Scott, Executive Vice President and Chief Financial Officer, and Bradford A. Bowlus, Executive Vice President and President, Health Plans Division, of PacifiCare. At this meeting, both parties provided an overview of their respective operations. In late January 2005, Mr. Hemsley informed Mr. Phanstiel that of the various possible business relationships that had been discussed, UnitedHealth Group was mainly interested in exploring a strategic business combination. Mr. Hemsley and Mr. Phanstiel also discussed potential terms and structure of a strategic business combination, including potential pricing parameters.

 

At regularly scheduled board meetings in February and May of 2005 management of UnitedHealth Group provided its board of directors with a general update of corporate development activities, including an update on the status of discussions with PacifiCare.

 

At its February 7th and February 17th meetings, the PacifiCare board of directors was presented with information regarding UnitedHealth Group and the preliminary discussion regarding a possible business combination, including potential pricing parameters. Although PacifiCare’s board of directors expressed an interest

 

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in exploring a possible business combination with UnitedHealth Group, it was not prepared at that time to proceed with finalizing a possible transaction based on the preliminary terms indicated by UnitedHealth Group up to that date.

 

Discussions between Mr. Phanstiel and Mr. Hemsley, and between Goldman Sachs and MTS, regarding a possible strategic business combination, continued throughout February and March 2005.

 

In early March 2005, Mr. Hemsley met with Mr. Phanstiel to discuss the potential transaction. At such meeting, Mr. Phanstiel discussed with Mr. Hemsley, among other things, that although PacifiCare’s board of directors was interested in exploring a possible transaction, it was not prepared at that time to proceed with a transaction on the terms discussed to date. Mr. Phanstiel also discussed with Mr. Hemsley the importance to the PacifCare board of directors that UnitedHealth Group be prepared to conduct any exploration of a possible transaction in an expeditious manner and only be conducted if a resulting transaction that might be entered into have a high degree of certainty that it would close.

 

In mid-March 2005, UnitedHealth Group provided a preliminary indication of interest to PacifiCare, pursuant to which the consideration to be received by PacifiCare stockholders would consist of a combination of shares of UnitedHealth Group’s common stock and cash in which the consideration to be received by PacifiCare stockholders per share would consist of a combination of 1.12 shares of UnitedHealth Group common stock and $21.62 cash, having an aggregate value at such time equal to $72.06. In late March 2005, Mr. Phanstiel and Mr. Hemsley had a conversation in which, at the direction of the PacifiCare board of directors, Mr. Phanstiel informed Mr. Hemsley that PacifiCare was not at that time in a position to further explore a business combination with UnitedHealth Group on the terms discussed and that PacifiCare was in the process of exploring another possible strategic alternative. Mr. Hemsley indicated that in such event UnitedHealth Group would be unwilling to proceed with further discussions. Mr. Phanstiel subsequently informed the PacifiCare board of directors that UnitedHealth Group and PacifiCare had discontinued discussions concerning a strategic business combination.

 

On April 11, 2005, PacifiCare and the Target Company terminated their discussions regarding exploring a business combination transaction after being unable to reach agreement on the terms of such a transaction. At a meeting held that day, PacifiCare’s board of directors discussed the possibility of renewing discussions with UnitedHealth Group concerning a strategic business combination transaction.

 

In early May 2005, Mr. Hemsley and Mr. Phanstiel resumed discussions concerning exploring a strategic business combination between PacifiCare and UnitedHealth Group. In early to mid-May 2005, Mr. Hemsley and Mr. Phanstiel had several conversations in which they explored the possible terms of a strategic business combination transaction between UnitedHealth Group and PacifiCare and UnitedHealth Group expressed a preliminary view that the consideration to be received by PacifiCare stockholders per share would consist of a combination of 1.06 shares of UnitedHealth Group common stock and $22.00 in cash, having an aggregate value at such time equal to $73.33 per share. During such time, representatives of MTS and Goldman Sachs also held telephone calls during which they discussed possible terms of a strategic business combination including general economic parameters.

 

In mid-May 2005, Mr. Phanstiel was contacted on an unsolicited basis by a senior officer of another public company in the health insurance industry, referred to as the Interested Party, who expressed an interest in meeting at some point over the summer to discuss exploring possible ways for the companies to work together, including, among others, a possible strategic business combination transaction in which the Interested Party would be the controlling party. Mr. Phanstiel informed the officer of the Interested Party that if the Interested Party was interested in exploring a possible strategic business combination transaction then the Interested Party would need to do so more quickly. Several telephone conversations followed between May 16 and May 19, 2005 (prior to the PacifiCare board of directors’ meeting held on May 19) in which Mr. Phanstiel and MTS, on behalf of PacifiCare, and several senior officers of the Interested Party discussed on a preliminary basis the possibility

 

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of exploring a strategic business combination and certain possible terms of such transaction (as described below). Such discussions never progressed beyond a preliminary exploratory phase.

 

Between May 16th and May 18th senior management of UnitedHealth Group and PacifiCare, and Goldman Sachs and MTS, had several conversations to negotiate and discuss the terms of a possible transaction. On May 18, 2005, Mr. Hemsley indicated to Mr. Phanstiel that UnitedHealth Group would be interested in exploring a business combination transaction with PacifiCare in which the consideration to PacifiCare stockholders would consist of a combination of 1.08 shares of UnitedHealth Group’s common stock and $21.50 in cash for each share of PacifiCare common stock, having an aggregate value at such time equal to $73.23, subject, among other things, to satisfactory completion of a due diligence review, retention of PacifiCare management and negotiation of transaction documents.

 

At a regularly scheduled PacifiCare board of directors meeting on May 19, 2005, the PacifiCare board of directors reviewed the renewed discussions with UnitedHealth Group and the inquiry from the Interested Party, as well as the process for exploring the possibility of a strategic business combination transaction with UnitedHealth Group or the Interested Party. At such meeting, PacifiCare management made a presentation regarding potential strategic alternatives available to PacifiCare, which presentation included discussions of PacifiCare’s strategic position, business strategy and objectives, an analysis of other companies in the health insurance industry and a discussion of certain of the opportunities and issues facing PacifiCare and the health insurance industry. In addition, the PacifiCare board of directors reviewed materials prepared by MTS analyzing a possible business combination of PacifiCare with UnitedHealth Group as well as with the Interested Party. The PacifiCare board of directors then discussed with PacifiCare’s senior management, representatives of MTS and PacifiCare’s legal counsel, Skadden, Arps, Slate, Meagher & Flom LLP, potential strategic alternatives available to PacifiCare, including the benefits, opportunities, risks and uncertainties associated with PacifiCare remaining an independent company, as well as the merits of a possible business combination transaction. The PacifiCare board of directors after careful consideration at the meeting, and as reviewed by the board again at both its June 1st and July 5th meetings, determined that a transaction with UnitedHealth Group would be preferable to one with the Interested Party for a number of reasons, including, among others: the benefits to PacifiCare stockholders of owning stock of UnitedHealth Group after a transaction; concerns about a possible negative market reaction to the announcement of a transaction with the Interested Party which would reduce the value to PacifiCare stockholders of a transaction with the Interested Party (by reducing the value of the mix of Interested Party stock and cash merger consideration included as part of the Interested Party’s preliminary indication of interest below the range of $73.00 to $76.00 per PacifiCare share based on the value of the Interested Party’s shares at the time it provided its indication of interest); a combination of PacifiCare and UnitedHealth had a stronger strategic rationale; negotiations with UnitedHealth Group were more advanced; there was greater certainty of consummating a transaction with UnitedHealth Group; and the concern that UnitedHealth Group would terminate discussions if PacifiCare sought to pursue negotiations with both parties.

 

Following the May 19th PacifiCare board of directors meeting, Mr. Phanstiel advised a senior officer of the Interested Party that at that time the terms set forth in its preliminary indication of interest would not be attractive enough to lead to further discussions. A representative of MTS also spoke with the Interested Party to seek to elicit more specific, firm information regarding its preliminary indication of interest, including whether the Interested Party was prepared to improve the terms of its indication of interest. However, the Interested Party declined to provide any further information.

 

In late May 2005, Mr. Phanstiel and Joseph S. Konowiecki, Executive Vice President and General Counsel of PacifiCare, met with Dr. McGuire, Mr. Hemsley and David J. Lubben, Secretary and General Counsel of UnitedHealth Group. The next day, the same individuals, together with a representative of MTS, also met and discussed various issues regarding a possible business combination. These issues included the proposed due diligence process to be followed, the timing of a possible transaction, regulatory matters, UnitedHealth Group’s interest in retaining PacifiCare’s management after completion of a possible transaction and the steps that the parties would make in order to close the transaction. Following this discussion, UnitedHealth Group and PacifiCare executed a mutual confidentiality agreement.

 

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At the end of May 2005, UnitedHealth Group began a financial, operational and legal due diligence review of PacifiCare. This due diligence review continued throughout June and early July until the execution of definitive documentation on July 6, 2005. In addition, PacifiCare’s senior management, legal counsel and financial advisors conducted financial, operational and legal due diligence on UnitedHealth Group. This due diligence on UnitedHealth Group continued until the execution of definitive documentation on July 6, 2005. At the end of May 2005, UnitedHealth Group’s legal counsel, Weil Gotshal & Manges LLP, distributed an initial draft merger agreement to PacifiCare and Skadden Arps.

 

In late May and in June 2005, UnitedHealth Group had further discussions with PacifiCare regarding UnitedHealth Group’s interest in retaining PacifiCare’s management as part of a transaction. UnitedHealth Group required, as a condition to entering into the merger agreement, that a nucleus of key PacifiCare officers enter into employment agreements and separate non-compete agreements with UnitedHealth Group.

 

At a special PacifiCare board of directors meeting on June 1, 2005, the PacifiCare board of directors reviewed the status of discussions with UnitedHealth Group and with the Interested Party as well as the process for exploring the possibility of a business combination transaction with UnitedHealth Group and the Interested Party. At such meeting, the PacifiCare board of directors received a detailed presentation from MTS regarding a possible transaction with UnitedHealth Group or the Interested Party, and various analyses relating thereto. The PacifiCare board of directors further reviewed the potential rationale, opportunities, benefits, prospects, risks and disadvantages associated with each of the potential transactions, including, among other things, what value would potentially be achieved for PacifiCare’s stockholders in a transaction with either UnitedHealth Group or the Interested Party, as compared to remaining independent, and the benefits and disadvantages of holding shares of the Interested Party relative to shares of UnitedHealth Group. After extensive discussion, the PacifiCare board of directors determined that, without making any determination at such time to pursue a possible transaction or as to what terms thereof might be acceptable, PacifiCare’s management should continue its discussions with UnitedHealth Group and that it should not pursue discussions with the Interested Party at that time.

 

Until the execution of definitive documentation on July 6, 2005, UnitedHealth Group and PacifiCare and their respective legal advisors had extensive negotiations in meetings and conversations regarding the terms of the draft merger agreement including, among others, obtaining required regulatory approvals, closing conditions, responses to a third party making an unsolicited competing business combination proposal, and termination fees if the merger agreement was terminated.

 

On June 8, 2005, the PacifiCare board of directors met and received updates from the senior management of PacifiCare, MTS and Skadden Arps concerning the possible business combination transaction, the status of negotiations and certain aspects of the transaction. In addition, PacifiCare management provided an update to the PacifiCare board of directors on the ongoing due diligence process. Representatives of Skadden Arps also reviewed fiduciary and other legal considerations relating to the PacifiCare board of directors’ consideration of the possible business combination transaction.

 

As part of the discussions regarding a possible business combination transaction, UnitedHealth Group discussed with PacifiCare UnitedHealth Group’s desire to assure uninterrupted access for certain of UnitedHealth Group’s customers to certain third party healthcare provider networks after the announcement of a business combination transaction. As a result, it was essential to UnitedHealth Group’s willingness to proceed with a transaction, that it enter into a health services agreement pursuant to which PacifiCare, on behalf of itself and its affiliates, would be prepared under certain circumstances to make certain of its networks of healthcare providers available to such customers of UnitedHealth Group. On June 9, 2005, UnitedHealth Group distributed an initial draft health services agreement to PacifiCare. The parties agreed that UnitedHealth Group would also make available to PacifiCare certain of UnitedHealth Group’s networks of healthcare providers in certain other states. Until the execution of the definitive documentation on July 6, 2005, UnitedHealth Group and PacifiCare and their respective legal advisors negotiated the terms of the draft health services agreements. The negotiations between UnitedHealth Group and PacifiCare on the health services agreements focused on, among other things,

 

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the economic terms, the term of such agreements and circumstances under which such agreements terminated. (see the section entitled “Health Services Agreements” on page 82 of this proxy statement/prospectus)

 

On June 15, 2005, the PacifiCare board of directors met and received updates from senior management of PacifiCare and representatives of MTS and Skadden Arps concerning the possible transaction, the status of negotiations and certain aspects of the transaction, including the ongoing due diligence process. On June 26, 2005, PacifiCare retained Morgan Stanley in connection with a possible business combination transaction with UnitedHealth Group to provide a second fairness opinion in the event the PacifiCare board of directors decided to consider approval of a transaction with UnitedHealth Group.

 

In mid and late June 2005, senior management of UnitedHealth Group provided updates to its board of directors regarding the background of the proposed transaction with PacifiCare, the strategic reasons for the proposed transaction, the status of UnitedHealth Group’s due diligence review of PacifiCare, UnitedHealth Group’s assessment of the senior management team at PacifiCare and the status of key documents being prepared in connection with the possible transaction.

 

On June 30, 2005, the PacifiCare board of directors held a special meeting to evaluate the possible business combination with UnitedHealth Group. Prior to the meeting, the PacifiCare board of directors was provided with materials, including a current draft of the merger agreement, materials relating to employee benefits matters and presentations from Skadden Arps. At the meeting, Mr. Phanstiel updated the PacifiCare board of directors on the status of discussions with UnitedHealth Group. In addition, (i) representatives of Skadden Arps presented a detailed review of the terms of the draft merger agreement and identified the remaining open issues, (ii) PacifiCare management presented an overview of the terms of the health services agreements and identified the remaining open issues and (iii) MTS and Morgan Stanley reviewed the financial aspects of the proposed combination as well as the processes and methodologies that would be used by each of them in rendering a fairness opinion. At such meeting, the PacifiCare board of directors also reviewed, among other things, (i) with representatives from Skadden Arps, the Board’s legal duties and responsibilities and other considerations regarding the proposed business combination transaction, the draft merger agreement, the health services agreements and employee matters and (ii) with PacifiCare’s senior management, MTS, Morgan Stanley and Skadden Arps, potential strategic alternatives available to PacifiCare, including the benefits, opportunities, risks and uncertainties associated with PacifiCare remaining an independent company, as well as the merits of a possible business combination transaction with UnitedHealth Group. After discussion, the PacifiCare board of directors authorized PacifiCare’s management to continue negotiations with UnitedHealth Group to seek to resolve the remaining outstanding issues in the draft merger agreement and other proposed definitive documentation.

 

On July 5, 2005, at a special meeting of UnitedHealth Group’s board of directors, senior management reviewed the proposed terms of the transaction and updated the board on the remaining issues. Goldman Sachs, J.P. Morgan and CitiGroup Global Markets, UnitedHealth Group’s financial advisors, consulted with the board with respect to financial aspects of the merger. At the conclusion of the meeting, the UnitedHealth Group directors unanimously approved the merger agreement and the transactions contemplated by the merger agreement, including the merger, based on the financial parameters presented to UnitedHealth Group’s board.

 

On July 5, 2005, the PacifiCare board of directors held a special meeting. Prior to this meeting, the PacifiCare board of directors was provided with materials, including a current draft of the merger agreement, materials with respect to employee benefits matters (including, among other things, draft form employment agreements), which had previously been reviewed and considered by the Compensation Committee of PacifiCare’s board of directors at several of its meetings in consultation with an independent compensation consultant and presentations by PacifiCare’s management, MTS, Morgan Stanley and Skadden Arps. At the meeting, the PacifiCare board of directors received an update from PacifiCare’s senior management and financial and legal advisors as to developments since the PacifiCare board of directors meeting on June 30th. Following the

 

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update, among other things: (i) representatives of Skadden Arps reviewed with the PacifiCare board of directors the status of negotiations with UnitedHealth Group, the changes that had been made to the draft merger agreement since June 30th and the remaining open issues in the draft merger agreement, (ii) representatives of Skadden Arps made a presentation regarding fiduciary and other legal considerations that the PacifiCare directors should consider in their deliberations regarding the proposed business combination transaction, the draft merger agreement, and the health services agreements, (iii) representatives of Skadden Arps and an independent compensation consultant reviewed employment agreements and employee benefits matters relating to the proposed business combination transaction, (iv) PacifiCare’s management made a presentation regarding the due diligence review that had been undertaken by PacifiCare of UnitedHealth Group, (v) PacifiCare’s management made a presentation regarding the health services agreements, (vi) PacifiCare’s management reviewed the strategic rationale for, and the potential benefits and risks of, the proposed business combination transaction and other potential strategic alternatives, (vii) representatives of each of MTS and Morgan Stanley made presentations concerning the financial aspects of the potential strategic business combination of PacifiCare and UnitedHealth Group, including their respective preliminary views concerning the fairness from a financial point of view of the merger consideration to be received by PacifiCare stockholders, and (viii) PacifiCare’s management and representatives of Skadden Arps made a presentation regarding regulatory approval matters relating to the possible business combination transaction. At the meeting, each of MTS and Morgan Stanley expressed its view that, subject to a review of the final negotiated terms of the merger agreement and based on and subject to the assumptions and limitations in its written opinion, it believed that it should be able to deliver at such time as the PacifiCare board of directors considered approving the transaction an opinion that, as of the date of such opinion, the merger consideration to be received by PacifiCare stockholders pursuant to the merger agreement would be fair from a financial point of view to PacifiCare stockholders. Following the presentations, a thorough discussion took place among the PacifiCare directors concerning the possible business combination transaction, including a discussion of the potential strategic benefits of the business combination, the risks associated with the transaction, the financial aspects of the transaction, and other potential strategic alternatives available to PacifiCare, including the benefits, opportunities, risks and uncertainties associated with PacifiCare remaining an independent company. At the conclusion of the meeting, the PacifiCare board of directors authorized management to continue negotiations with UnitedHealth Group to seek to resolve the remaining outstanding issues.

 

On July 5 and July 6, 2005, UnitedHealth Group and certain officers of PacifiCare agreed on the terms of employment agreements that officers of PacifiCare would be entering into with UnitedHealth Group at the time of signing the merger agreement, to be effective upon completion of the merger.

 

On the morning of July 6, 2005, several national news organizations began reporting rumors of a possible transaction between UnitedHealth Group and PacifiCare. Because of such reports trading in shares of both UnitedHealth Group and PacifiCare was halted. Also on the morning of July 6, 2005, Mr. Phanstiel contacted Mr. Hemsley to propose final changes to the terms of the transaction, including that the merger consideration be increased. Negotiations ensued as a result of which UnitedHealth Group agreed to increase the stock portion of the merger consideration to 1.1 shares of UnitedHealth Group’s common stock per share of PacifiCare common stock, for an aggregate merger consideration of 1.1 shares of UnitedHealth Group common stock per share of PacifiCare common stock and $21.50 in cash.

 

Thereafter, Dr. McGuire, Mr. Hemsley or Mr. Lubben spoke individually with each member of UnitedHealth Group’s board of directors to confirm for each board member that the final financial terms of the transaction had been established within the parameters authorized by the board. During these conversations, the directors confirmed their approval of the transaction.

 

Later in the morning on July 6, 2005, the PacifiCare board of directors met telephonically and reviewed the proposed terms of the transaction. PacifiCare’s management and outside financial and legal advisors reviewed the increase in the proposed merger consideration and discussed the resolution of the remaining issues in the

 

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draft merger agreement and other proposed definitive documentation. Each of MTS and Morgan Stanley confirmed its financial analysis regarding the proposed business combination transaction, and rendered to the PacifiCare board of directors its oral opinion, subsequently confirmed by delivery of a written opinion dated July 6, 2005, to the effect that, as of the date of the opinion and based on and subject to the various assumptions and limitations described in the opinion, the merger consideration to be received by PacifiCare stockholders pursuant to the merger agreement was fair from a financial point of view to such holders. Such opinions are attached hereto as Annexes B and C (see the section entitled “Opinion of PacifiCare’s Financial Advisors” on page 58 of this proxy statement/prospectus). After deliberation, the PacifiCare board of directors unanimously determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are advisable, fair to and in the best interests of PacifiCare and its stockholders. The PacifiCare board of directors then unanimously approved the merger agreement and resolved to recommend to PacifiCare stockholders approval and adoption of the merger agreement.

 

Following the PacifiCare board of directors meeting, PacifiCare, Point Acquisition LLC and UnitedHealth Group executed the merger agreement and subsidiaries of PacifiCare and UnitedHealth Group which were parties to the health services agreements executed such health services agreements. Additionally, UnitedHealth Group entered into employment agreements and separate non-compete agreements with twenty-one officers of PacifiCare, to be effective upon completion of the merger. Thereafter, PacifiCare and UnitedHealth Group each issued a press release announcing the transaction.

 

UnitedHealth Group’s Reasons for the Merger

 

In approving, adopting and authorizing the merger and the merger agreement, the UnitedHealth Group board of directors considered a number of factors, including, among others, the facts discussed in the following paragraphs. Although the foregoing discussion sets forth the material factors considered by the UnitedHealth Group board in reaching its recommendation, it may not include all of the factors considered by the UnitedHealth Group board. In light of the number and wide variety of factors considered in connection with its evaluation of the merger, the UnitedHealth Group board did not consider it practicable to, and did not attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination. The board viewed its position and recommendations as being based on all of the information available and the factors presented to and considered by it. In addition, individual directors may have given different weight to different factors. This explanation of UnitedHealth Group’s reasons for the merger and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed in the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 40 of this proxy statement/prospectus.

 

In reaching its decision, the board consulted with UnitedHealth Group’s management with respect to strategic and operational matters and with UnitedHealth Group’s legal counsel with respect to the merger agreement and the transactions contemplated thereby. The board also consulted with Goldman Sachs, J.P. Morgan and CitiGroup. UnitedHealth Group’s financial advisors, with respect to the financial aspects of the merger.

 

The decision of the UnitedHealth Group Board to enter into the merger agreement was the result of careful consideration by the UnitedHealth Group Board of numerous factors, including the following positive factors that it believes will contribute to the success of the combined enterprise:

 

    broader customer access to a stronger and more diverse network of doctors and other care providers;

 

    enhanced and expanded affordable health care services that address the needs of older Americans, including those under new Medicare programs, by combining UnitedHealth Group’s extensive Medicare services with PacifiCare’s Medicare HMO products and the nationally prominent Secure Horizons brand to provide consistent quality of care and service across the country;

 

    the potential for the merger to leverage UnitedHealth Group’s expertise and investment in technology to improve the delivery of health care services to the people currently served by PacifiCare;

 

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    the application of more consumer-oriented offerings and service capabilities that align with the rapidly developing confluence of health and financial services;

 

    quality enhancements and efficiency gains for hospitals, physicians and other health professionals;

 

    the strength of PacifiCare’s care provider network in the Western United States particularly California, which complements UnitedHealth Group’s position in the Eastern and Central United States and provides an opportunity to offer a significantly expanded and integrated nationwide health care network;

 

    PacifiCare’s strong specialty businesses, including a growing behavioral health business that fits well with United Behavioral Health, and high quality dental and vision businesses;

 

    the strength of PacifiCare’s growing pharmacy benefits management business;

 

    the merger provides cross-selling opportunities for specialty products and services from UnitedHealth Group such as consumer health information, specialty networks, and ancillary care to existing PacifiCare customers;

 

    PacifiCare’s financial strength and strong cash flow from operations;

 

    the experience and strength of PacifiCare’s management team;

 

    UnitedHealth Group’s commitment to transactions that provide long-term value for shareholders and markets that do not rely on synergies to produce a viable and well-capitalized company;

 

    the merger consideration to be paid in the merger is consistent with recent comparable transactions in the health benefits industry, including UnitedHealth Group’s recent acquisitions of Oxford and MAMSI; and

 

    the intended treatment of the merger for U.S. federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Code with the results described in the section entitled “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 91 of this proxy statement/prospectus;

 

 

The UnitedHealth Group board also considered the structure of the transaction and the terms of the merger agreement and related documents, including:

 

    the consideration to be paid to PacifiCare’s stockholders;

 

    the representations and warranties of PacifiCare;

 

    the covenants of UnitedHealth Group and PacifiCare;

 

    the conditions required to be satisfied or waived, if permissible, prior to completion of the merger;

 

    the rights of UnitedHealth Group or PacifiCare to terminate the merger agreement in certain circumstances; and

 

    the terms relating to third party offers, including the (1) limitations on the ability of PacifiCare to solicit offers for competing business combination proposals, (2) requirement that PacifiCare’s stockholders vote on the adoption of the merger agreement even if the PacifiCare board of directors changes or withdraws its recommendation of the merger and (3) ability to receive a termination fee if the merger agreement is terminated under certain circumstances.

 

The UnitedHealth Group board also identified and considered a number of uncertainties and risks. Those negative factors included:

 

    the risk that the potential benefits of the merger might not be realized;

 

    the risk that the merger may not be completed;

 

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    the challenges, costs, resource constraints and risks of integrating the businesses of UnitedHealth Group and PacifiCare and the potential management, customer, supplier, provider, partner and employee disruption that may be associated with the merger;

 

    the conditions to the merger agreement requiring receipt of certain regulatory consents and approvals; and

 

    various other applicable risks associated with the combined company and the merger, including those described under the section entitled “Risk Factors” beginning on page 32 of this proxy statement/prospectus.

 

The board weighed the benefits, advantages and opportunities against the negative factors described above, including challenges inherent in the combination of two businesses of the size of UnitedHealth Group and PacifiCare and the possible resulting diversion of management attention for an extended period of time. The board realized that there can be no assurance about future results, including results expected or considered in the factors listed above. However, the board concluded that the potential benefits significantly outweighed the potential risks of consummating the merger.

 

After taking into account these and other factors, the board unanimously determined that the merger agreement and the transactions contemplated thereby were fair to, and in the bests interests of, UnitedHealth Group and its shareholders, and approved, adopted and authorized the merger agreement and the transactions contemplated thereby, including the merger.

 

PacifiCare’s Reasons for the Merger

 

The PacifiCare board of directors has unanimously approved the merger agreement and determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger are advisable, fair to and in the best interests of PacifiCare and its stockholders. The decision of the PacifiCare board of directors to enter into the merger agreement was the result of careful consideration by the PacifiCare board of directors of numerous factors, including the following positive factors:

 

    the value of the merger consideration, which, based on the closing price per UnitedHealth Group common share on July 5, 2005 (the last full trading day before announcement of the proposed merger) implied a value of $80.05 per share of PacifiCare common stock, representing a premium of approximately 10.1% over the closing price per share of PacifiCare common stock on July 5, 2005, the last full trading day immediately preceding the announcement of the transaction, and a premium of approximately 30.2% over the closing price per share of PacifiCare common stock on May 20, 2005 the date which was 30 trading days prior to July 5, 2005;

 

    the financial presentations of PacifiCare’s financial advisors, MTS and Morgan Stanley, including their opinions as to the fairness, from a financial point of view, of the merger consideration to be paid to PacifiCare stockholders pursuant to the merger agreement, as more fully described in the section entitled “The Merger—Opinions of PacifiCare’s Financial Advisors” beginning on page 58 of this proxy statement/prospectus;

 

    because a substantial portion of the merger consideration is UnitedHealth Group stock and the exchange ratio is fixed, PacifiCare stockholders will benefit from any increase in the trading price of UnitedHealth Group common shares between the announcement of the merger and the closing of the merger;

 

    because a portion of the merger consideration is cash, the certainty of the value of the cash component of the merger consideration;

 

   

the PacifiCare board of directors’ analysis and understanding of PacifiCare’s “stand-alone” strategic alternative in the context of the increasingly competitive health insurance industry, and the PacifiCare board of directors’ analysis of the business, operations, financial performance, earnings and prospects of

 

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PacifiCare on a stand-alone basis, and the PacifiCare board of directors’ belief, based on its analysis and understanding, that the combined company, would be better able to succeed in light of the risks and potential rewards associated with PacifiCare continuing to operate on a stand-alone basis and other alternatives reasonably available to PacifiCare, including growth through the acquisition of or merger with other companies or assets;

 

    the fact that PacifiCare had reviewed potential strategic alternatives and, in connection therewith, it and its representatives had held preliminary discussions with several other parties regarding their potential interest in a strategic transaction with PacifiCare (see the section entitled “The Merger—Background of the Merger” beginning on page 45 of this proxy statement/prospectus). In light of these discussions, the PacifiCare board of directors did not believe that it was likely that another party would make or accept an offer to engage in a transaction with PacifiCare that would be more favorable to PacifiCare and its stockholders than the merger;

 

    given the current environment in the health insurance industry, the advantages that the PacifiCare board of directors considered that large companies with national reach have, including the PacifiCare board of director’s belief that access to UnitedHealth Group’s size and scope would place PacifiCare in a better position to take advantage of growth opportunities; meet competitive pressures; serve customers more efficiently; and develop, introduce and administer new products to respond to the need for affordable healthcare;

 

    broader customer access to a stronger and more diverse network of doctors and other care providers which would provide enhanced opportunities for growth for the combined company;

 

    the potential for the merger to leverage UnitedHealth Group’s expertise and investment in technology to improve the delivery of health care services to the people currently served by PacifiCare;

 

    UnitedHealth Group’s behavioral health business that fits well with PacifiCare’s strong specialty business, including its growing behavioral health business;

 

    the opportunity for PacifiCare stockholders to participate, as UnitedHealth Group shareholders, in a significantly larger, financially stable and more diversified company that is one of the leading providers of products and services in the health care industry;

 

    the merger will provide PacifiCare with access to significantly greater financial and operational resources than PacifiCare would have on a stand-alone basis and the financial strength of UnitedHealth Group and its subsidiaries should permit PacifiCare’s businesses to obtain better economies of scale relative to PacifiCare on a stand-alone basis, thereby enabling PacifiCare to fund its business development efforts at a lower cost;

 

    the post-merger combined businesses of UnitedHealth Group and PacifiCare would provide greater opportunity for the development, growth and enhancement of PacifiCare’s membership and revenue by utilizing UnitedHealth Group’s size and scope, and leveraging UnitedHealth Group’s national care provider network, wide range of ancillary products and services, as well as UnitedHealth Group’s operational capabilities;

 

    the PacifiCare board of directors’ understanding of the information concerning PacifiCare’s and UnitedHealth Group’s respective businesses, financial performance, and condition, operations, management, competitive positions, prospects and stock performance, including the report of PacifiCare’s management on the results of PacifiCare’s due diligence review of UnitedHealth Group and its assets, liabilities, earnings, financial condition, business and prospects, which confirmed the otherwise publicly available information regarding UnitedHealth Group, confirmed the positive view of UnitedHealth Group’s business, supported the PacifiCare board of directors’ determination that the combined company would have a strong foundation for growth and improved performance;

 

    the proven capability of each of UnitedHealth Group’s and PacifiCare’s management team to deliver stockholder value, integrate businesses and successfully execute strategies, including UnitedHealth Group’s successful track record with respect to previous acquisitions and integrations;

 

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    the ability to complete the merger within a reasonable period of time, including the likelihood of receiving necessary regulatory approvals in light of the efforts PacifiCare and UnitedHealth Group agreed to use in order to complete the transaction;

 

    the merger agreement provisions permitting PacifiCare to provide confidential due diligence information to, and engage in discussions with, a third party that makes an unsolicited bona fide written proposal to engage in a business combination transaction, provided that the PacifiCare board of directors determines in good faith, after receiving the advice of a financial advisor of nationally recognized reputation and its outside legal counsel, that there is a reasonable probability that failure to take such action would result in the PacifiCare board of directors breaching its fiduciary duties under applicable law and determines in good faith, after receiving the advice of a financial advisor of nationally recognized reputation and its outside legal counsel, that the proposal would reasonably be expected to result in a transaction that, if consummated, would be more favorable to PacifiCare stockholders than the merger (see the section entitled “The Merger Agreement—No Solicitation of Transactions” beginning on page 106 of this proxy statement/prospectus);

 

    the merger agreement provisions permitting the PacifiCare board of directors to, under certain circumstances, withdraw, modify or change its recommendation with respect to the merger if the PacifiCare board of directors determines in good faith, after receiving the advice of a financial advisor of nationally recognized reputation and its outside legal counsel, that there is a reasonable probability that the failure to take such action would result in the PacifiCare board of directors breaching its fiduciary duties under applicable law (see the section entitled “The Merger Agreement—No Solicitation of Transactions” beginning on page 106 of this proxy statement/prospectus); and

 

    the structure of the transaction and the terms of the merger agreement, including the fact that the merger is intended to qualify as a “reorganization” within the meaning of the Code and is, therefore, not expected to be taxable to PacifiCare stockholders, other than with respect to the cash portion of the merger consideration, cash received in lieu of fractional UnitedHealth Group common shares, and cash received by dissenting PacifiCare stockholders, if any.

 

The PacifiCare board of directors also identified and considered the following potentially negative factors in its deliberations:

 

    because a substantial portion of the merger consideration is UnitedHealth Group stock and the exchange ratio is fixed, PacifiCare stockholders will be adversely affected by any decrease in the sale price of UnitedHealth Group common shares between the announcement of the transaction and the completion of the merger, which would not have been the case had the consideration been based solely on a fixed value (that is, a fixed dollar amount of value per share in all cases); and PacifiCare is not permitted to terminate the merger agreement solely because of changes in the market price of UnitedHealth Group common shares;

 

    the possible disruption to PacifiCare’s business that may result from the announcement of the transaction;

 

    the difficulty inherent in integrating diverse businesses and the risk that the cost savings, synergies and other benefits expected to be obtained in the transaction might not be fully realized;

 

    the terms of the merger agreement regarding the restrictions on the operation of PacifiCare’s business during the period between the signing of the merger agreement and the completion of the merger;

 

    the $243.6 million termination fee to be paid to UnitedHealth Group if the merger agreement is terminated under circumstances specified in the merger agreement, which is approximately 3% of the net equity value of the merger based on the closing price per share of UnitedHealth Group’s common stock on July 5, the last full trading day immediately preceding the announcement of the transaction, may discourage other parties that may otherwise have an interest in a business combination with, or an acquisition of, PacifiCare (see the section entitled “The Merger Agreement—Termination of the Merger Agreement” beginning on page 110 of this proxy statement/prospectus);

 

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    the terms of the merger agreement placing limitations on the ability of PacifiCare to solicit alternative business combination transactions and to provide confidential due diligence information to, or engage in discussions with, a third party interested in pursuing an alternative business combination transaction (see the section entitled “The Merger Agreement—No Solicitation of Transactions” beginning on page 106 of this proxy statement/prospectus);

 

    the fact that if a third party makes a more favorable competing offer for PacifiCare, PacifiCare will not be able to terminate the merger agreement prior to the time at which the PacifiCare stockholders vote on the merger agreement (see the section entitled “The Merger Agreement—Termination of the Merger Agreement” beginning on page 110 of this proxy statement/prospectus);

 

    the amount of time it could take to complete the merger, including the fact that completion of the transaction depends on factors outside of PacifiCare’s control;

 

    the risk that, notwithstanding the likelihood of the merger being completed, the merger might not be completed and the effect of the resulting public announcement of termination of the merger agreement on:

 

    the market price of PacifiCare common stock,

 

    PacifiCare’s operating results, particularly in light of the costs incurred in connection with the transaction, and

 

    PacifiCare’s ability to attract and retain customers and personnel;

 

    the possibility of significant costs and delays resulting from seeking regulatory approvals necessary for completion of the proposed merger and the possibility of nonconsummation of the proposed merger if these approvals are not obtained;

 

    the fact that gains arising from the cash portion of the merger consideration would be taxable to PacifiCare stockholders for United States federal income tax purposes; and

 

    the risks described in the section entitled “Risk Factors” beginning on page 32 of this proxy statement/prospectus.

 

The PacifiCare board of directors also considered the interests that certain executive officers and directors of PacifiCare may have with respect to the merger in addition to their interests as stockholders of PacifiCare generally (see the section entitled “—Interests of Certain Persons in the Merger” beginning on page 83 of this proxy statement/prospectus), which the PacifiCare board of directors considered as being neutral in its evaluation of the proposed transaction.

 

Although the foregoing discussion sets forth the material factors considered by the PacifiCare board of directors in reaching the PacifiCare board of directors’ recommendation, it may not include all of the factors considered by the PacifiCare board of directors, and each director may have considered different factors or given different weights to different factors. In view of the variety of factors and the amount of information considered, the PacifiCare board of directors did not find it practicable to, and did not, make specific assessments of, quantify or otherwise assign relative weights to the specific factors considered in reaching its recommendation. The PacifiCare board of directors realized that there can be no assurance about future results, including results expected or considered in the factors above. However, the PacifiCare board of directors concluded that the potential positive factors described above significantly outweighed the neutral and negative factors described above. The recommendation was made after consideration of all of the factors as a whole. This explanation of PacifiCare’s reasons for the merger and the other information presented in this section are forward-looking in nature and, therefore, should be read in light of the factors discussed in the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 40 of this proxy statement/prospectus.

 

THE PACIFICARE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND DETERMINED THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, INCLUDING THE MERGER, ARE ADVISABLE,

 

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FAIR TO AND IN THE BEST INTERESTS OF PACIFICARE AND ITS STOCKHOLDERS. ACCORDINGLY, THE PACIFICARE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE PACIFICARE STOCKHOLDERS VOTE “FOR” APPROVAL OF THE MERGER AGREEMENT.

 

In considering the recommendation of the PacifiCare board of directors with respect to the merger agreement, you should be aware that certain of PacifiCare’s directors and officers have arrangements that cause them to have interests in the transaction that are different from, or are in addition to, the interests of PacifiCare stockholders generally. See the section entitled “The Merger—Interests of Certain Persons in the Merger” beginning on page 83 of this proxy statement/prospectus.

 

PacifiCare Board of Directors Recommendation

 

At a special meeting held on July 6, 2005, the PacifiCare board of directors determined that the merger and the merger agreement are advisable, fair to and in the best interests of PacifiCare and its stockholders. Accordingly, the PacifiCare board of directors unanimously approved and adopted the merger agreement and unanimously recommends that PacifiCare stockholders vote “FOR” the adoption of the merger agreement.

 

Opinion of PacifiCare’s Financial Advisors

 

Opinion of MTS Health Partners, L.P.

 

MTS delivered an oral opinion to PacifiCare’s board of directors on July 6, 2005, subsequently confirmed in writing, to the effect that, as of July 6, 2005, and based upon and subject to the factors and assumptions set forth in the opinion, the merger consideration to be received by the holders of the outstanding shares of PacifiCare common stock pursuant to the merger was fair from a financial point of view to those holders.

 

The full text of the written opinion of MTS, dated July 6, 2005, which sets forth the assumptions made, procedures followed, matters considered, and limitations on the review undertaken in connection with the opinion, is attached as Annex B to this proxy statement/prospectus. The summary of MTS’ fairness opinion set forth in this document is qualified in its entirety by reference to the full text of the opinion. Stockholders should read this opinion carefully and in its entirety. MTS provided its opinion for the information and assistance of PacifiCare’s board of directors in connection with its consideration of the merger. MTS’ opinion is not a recommendation as to how any holder of PacifiCare common stock should vote with respect to the merger. PacifiCare’s stockholders are encouraged to read the opinion in its entirety.

 

In connection with rendering the opinion described above and performing its related financial analyses, MTS reviewed:

 

    a draft copy of the merger agreement dated July 6, 2005 and certain documents related thereto;

 

    annual reports to stockholders and Annual Reports on Form 10-K of each of PacifiCare and UnitedHealth Group for the five years ended December 31, 2004;

 

    Quarterly Reports on Form 10-Q of each of PacifiCare and UnitedHealth Group for the quarters ended March 31, 2004, June 30, 2004, September 30, 2004, and March 31, 2005;

 

    Current Reports on Form 8-K of each of PacifiCare and UnitedHealth Group for the period from January 1, 2004 through July 5, 2005;

 

    certain financial projections concerning PacifiCare for the year ending December 31, 2005 prepared by PacifiCare’s management;

 

    certain public research reports concerning PacifiCare prepared by certain research analysts (including the financial projections contained therein) for the years ending December 31, 2005 and 2006;

 

    certain financial projections concerning UnitedHealth Group prepared by UnitedHealth Group’s management;

 

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    certain public research reports concerning UnitedHealth Group prepared by certain research analysts (including financial projections contained therein) for the years ending December 31, 2005 and 2006;

 

    a range of revenue enhancements and cost savings estimated to be realized from the merger prepared by PacifiCare’s management, referred to as the Estimated Synergies;

 

    the historical reported prices and trading multiples of shares of PacifiCare common stock and UnitedHealth Group common stock;

 

    publicly available financial data, stock market performance data and trading multiples of certain companies the securities of which are publicly traded, as MTS deemed appropriate;

 

    the financial terms, to the extent publicly available, of certain recent business combinations that MTS considered to be comparable to the merger; and

 

    the pro forma consolidated financial results, financial condition and capitalization of the combined company after giving effect to the merger.

 

In addition, MTS held discussions with members of the management of each of PacifiCare and UnitedHealth Group regarding the businesses, operations, financial condition and prospects of their respective companies. MTS also discussed the public research reports (including financial projections) concerning PacifiCare referred to above with the management of PacifiCare and the public research reports (including financial projections) concerning UnitedHealth Group referred to above with the management of UnitedHealth Group. MTS also performed such other financial studies, analyses and investigations as it deemed appropriate.

 

In arriving at the opinion set forth above, MTS assumed and relied upon, without independent verification, the accuracy and completeness of the information reviewed by it for purposes of its opinion. MTS did not conduct any independent verification of the financial projections of PacifiCare, UnitedHealth Group or the combined company or the Estimated Synergies. With respect to the financial projections prepared by the management of PacifiCare, MTS assumed, without independent verification, that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of PacifiCare. For purposes of its analysis of PacifiCare and after discussions with PacifiCare’s management, with the consent of the PacifiCare board of directors, MTS also used and relied on publicly available projections of certain equity research analysts who report on PacifiCare. MTS assumed, without independent verification and with the consent of the PacifiCare board of directors and based upon discussions with PacifiCare’s management, that such projections represented reasonable estimates and judgments as to the future financial performance of PacifiCare. With respect to the financial projections prepared by the management of UnitedHealth Group, MTS assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of UnitedHealth Group. For purposes of MTS’ analysis of UnitedHealth Group and after discussions with UnitedHealth Group’s management, with the consent of the PacifiCare board of directors, MTS also used and relied on publicly available projections of certain equity research analysts who report on UnitedHealth Group. MTS also assumed, without independent verification and with the consent of the PacifiCare board of directors and based upon discussions with UnitedHealth Group’s management, that such projections represented reasonable estimates and judgments as to the future financial performance of UnitedHealth Group. In addition, MTS also assumed, with PacifiCare’s consent, without independent verification, that the Estimated Synergies represent reasonable estimates and judgments of the management of PacifiCare.

 

MTS is not an actuarial firm and its services did not include any actuarial determinations or evaluations by it or an attempt to evaluate actuarial assumptions. In that respect, MTS made no analysis of, and has expressed no opinion as to, the adequacy of the reserves of PacifiCare or UnitedHealth Group and relied upon information supplied to it by PacifiCare and UnitedHealth Group as to such adequacy. MTS also assumed that all conditions precedent to the consummation of the merger set forth in the merger agreement will be satisfied in accordance with such agreement without material modification, waiver or delay, and that all governmental, regulatory or

 

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other consents and approvals necessary for the consummation of the merger will be obtained without any material adverse effect, in any way meaningful to MTS’ analysis, on PacifiCare or UnitedHealth Group or the expected benefits of the merger. In addition, MTS has not made any independent evaluations or appraisals of the assets or liabilities (including any contingent derivatives, off-balance-sheet assets or liabilities, or otherwise) of PacifiCare or UnitedHealth Group or any of their respective subsidiaries, and MTS was not furnished with any such evaluations or appraisals.

 

MTS’ opinion was based on economic, market, financial and other conditions as they existed as of the date of the opinion, and on the information made available to MTS, as of the date of the opinion. Although subsequent developments may affect the conclusion reached in the opinion, MTS has no obligation to update, revise or reaffirm the opinion. MTS’ opinion did not address the underlying business decision of PacifiCare to proceed with the merger, the relative merits of the merger compared to other alternatives available to PacifiCare, or whether such alternatives existed. MTS’ opinion did not constitute a recommendation to the PacifiCare board of directors as to how such board should vote with respect to the merger or the merger agreement. In addition, MTS did not express any opinion as to the prices or ranges of prices at which shares of PacifiCare or UnitedHealth Group common stock would trade at any time following the announcement or consummation of the merger.

 

The following summarizes the material financial analyses presented by MTS to PacifiCare’s board of directors on July 5, 2005, which was followed by a PacifiCare board of directors meeting on July 6, 2005 during which MTS rendered its opinion orally. At the time of MTS’ July 5, 2005 presentation, the proposed merger consideration per share of PacifiCare common stock consisted of 1.08 shares of UnitedHealth Group common stock and $21.50 in cash. Accordingly, MTS’ financial analyses were based on an exchange ratio of 1.08 shares of UnitedHealth Group common stock per share of PacifiCare common stock for the stock portion of the merger consideration. On July 6, 2005, prior to the PacifiCare board of directors meeting, UnitedHealth Group agreed to increase the equity portion of the merger consideration per share of PacifiCare common stock from 1.08 to 1.1 shares of UnitedHealth Group common stock. The conclusions reached by MTS as a result of its financial analyses based on the 1.08 exchange ratio also support the conclusions stated in its opinion regarding the increased exchange ratio of 1.1 shares of UnitedHealth Group common stock.

 

Following the July 6, 2005 meeting of the PacifiCare board of directors, MTS delivered its written opinion, as of such date, based upon and subject to the factors and assumptions set forth in the opinion, including the composition and amount of such merger consideration, as so revised.

 

The following summary does not purport to be a complete description of the financial analyses performed by MTS. The order of analyses described does not represent the relative importance or weight given to those analyses by MTS. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of MTS’ financial analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before July 1, 2005 (the last full trading day prior to the July 5, 2005 meeting of the PacifiCare board of directors), and is not necessarily indicative of current market conditions.

 

Historical Stock Price Performance Review

 

PacifiCare

 

MTS noted that, on July 1, 2005, the closing price per share of PacifiCare common stock was $72.52. MTS also reviewed the average of the closing prices per share of PacifiCare common stock, as well as the low and high closing price per share of PacifiCare common stock, over the 30 trading-day, three-month, six-month and one-year periods ending on July 1, 2005. MTS noted an implied merger consideration for a share of PacifiCare common stock of $78.53 as of July 1, 2005 (calculated as the sum of $21.50 in cash plus 1.08 times the number

 

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of shares of UnitedHealth Group common stock having a value of $52.81 based on the closing price of a share of UnitedHealth Group common stock on July 1, 2005). The results of this review are noted in the table below.

 

Specified Period


   Highest
Closing Price Over
Specified Period


   Average of Closing Prices
Over Specified Period


   Lowest
Closing Price Over
Specified Period


30 Trading Days

   $ 72.52    $ 66.73    $ 61.50

Three Months

     72.52      62.22      53.49

Six Months

     72.52      61.59      53.49

One Year

     72.52      50.31      29.70

 

UnitedHealth Group

 

MTS noted that, on July 1, 2005, the closing price per share of UnitedHealth Group common stock was $52.81. MTS also reviewed the average of the closing prices per share of UnitedHealth Group common stock, as well as the low and high closing price per share of UnitedHealth Group common stock, over the 30 trading-day, three-month, six-month and one-year periods ending on July 1, 2005. The results of this review are noted in the table below.

 

Specified Period


   Highest
Closing Price Over
Specified Period


   Average of Closing Prices
Over Specified Period


   Lowest
Closing Price Over
Specified Period


30 Trading Days

   $ 53.14    $ 50.81    $ 48.25

Three Months

     53.14      47.19      45.08

Six Months

     53.14      47.09      42.87

One Year

     53.14      41.59      30.04

 

Relative Performance

 

MTS calculated the percentage increase in the closing price per share of common stock of each of PacifiCare and UnitedHealth Group over the 30 trading day, one-year and three-year periods ended July 1, 2005. MTS compared these percentage increases to the percentage increases in the Standard & Poor’s Managed Care Index and the Standard & Poor’s 500 Index over the corresponding periods. The results of this comparison are noted in the table below.

 

Specified Period


  

Increase in
Price of
Common Stock
of PacifiCare

Over
Specified Period


   

Increase in Price of
Common Stock of
UnitedHealth Group
Over

Specified Period


   

Increase in
Standard & Poor’s
500 Index

Over

Specified Period


   

Increase in
Standard & Poor’s
Managed

Care Index

Over

Specified Period


 

30 Trading Days

   17.9 %   9.5 %   0.1 %   9.6 %

One Year

   91.3 %   70.9 %   5.8 %   65.9 %

Three Years

   461.1 %   128.7 %   23.3 %   102.8 %

 

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Historical Exchange Ratio Analysis

 

MTS calculated average implied exchange ratios derived from the closing prices of PacifiCare common stock as compared to the closing prices of UnitedHealth Group common stock over the 10 trading-day, one-month, three-month, six-month and one-year periods ended July 1, 2005. The results of these ratio calculations are reflected in the following table.

 

Specified Period


   Average
Implied Exchange Ratio
Over Specified Period


10 trading-day average for period ended July 1, 2005

   1.350x

One month average for period ended July 1, 2005

   1.321x

Three month average for period ended July 1, 2005

   1.265x

Six month average for period ended July 1, 2005

   1.309x

One year average for period ended July 1, 2005

   1.192x

 

MTS noted that the highest and lowest one-day implied exchange ratios during the one-year period ended July 1, 2005 were 1.479x and 0.947x, respectively, and that the one-day implied exchange ratio for July 1, 2005 was 1.373x.

 

MTS calculated an implied merger exchange ratio of 1.487x based on (i) the $52.81 per share closing price for UnitedHealth Group common stock as of July 1, 2005 and (ii) an implied merger consideration price of $78.53 per share of PacifiCare common stock as of July 1, 2005.

 

Historical Premium Analysis

 

MTS calculated the premiums of the $78.53 implied merger consideration to the closing price per share of PacifiCare common stock on July 1, 2005, the last trading day immediately prior to the beginning of each of the 10- and 30-trading-day periods ended July 1, 2005, and the highest and lowest intra-day prices per share of PacifiCare common stock during the 52-week period ended July 1, 2005. The results of these premium calculations are reflected in the following table.

 

Specified Period


   Premium Based
on Price on
Specified Period


 

July 1, 2005

   8.3 %

10 Trading Days

   16.0 %

30 Trading Days

   27.7 %

52-Week High

   8.2 %

52-Week Low

   167.6 %

 

MTS also compared the implied merger exchange ratio of 1.487x to the average implied exchange ratios shown above reflecting the closing prices of PacifiCare common stock as compared to the closing prices of UnitedHealth Group common stock over the 10 trading-day, one-month, three-month, six-month and one-year periods ended July 1, 2005.

 

Specified Period


  

Premium Based on

Average Closing

Prices Over
Specified Period


 

10 trading-day average for period ended July 1, 2005

   10.2 %

One month average for period ended July 1, 2005

   12.6 %

Three month average for period ended July 1, 2005

   17.6 %

Six month average for period ended July 1, 2005

   13.6 %

One year average for period ended July 1, 2005

   24.8 %

 

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In particular, MTS noted that the implied merger exchange ratio of 1.487x represented premiums of 0.6% and 57.1%, respectively, to the highest and lowest one-day implied exchange ratios during the 52-week period ended July 1, 2005.

 

Earnings Estimates

 

PacifiCare

 

MTS received and reviewed financial projections concerning PacifiCare for the year ending December 31, 2005 that were prepared by PacifiCare’s management. These projections included estimated earnings of $3.81 per share of PacifiCare common stock for such period. MTS did not receive any projections prepared by PacifiCare regarding its financial performance for the year ending December 31, 2006 or any period thereafter.

 

MTS reviewed the individual estimates of independent research analysts of the financial performance of PacifiCare for the years ending December 31, 2005 and 2006, and the consensus of such estimates, in each case as published by the Institutional Brokers Estimate System, referred to as IBES, as of July 1, 2005. MTS noted that such consensus estimates included estimated earnings of $3.79 and $4.55 per share of PacifiCare common stock for the years ending December 31, 2005 and 2006, respectively. Certain of the earnings estimates used by IBES did not (i) take into account PacifiCare’s participation in Medicare’s Part D prescription drug benefit program, referred to as the Part D program, and/or (ii) exclude start-up development costs of PacifiCare during the years ending December 31, 2005 and 2006 with respect to PacifiCare’s participation in the Part D program. MTS calculated the averages of those earnings estimates used by IBES that (i) took into account PacifiCare’s participation in the Part D program and (ii) excluded start-up development costs of PacifiCare during the years ending December 31, 2005 and 2006 with respect to such participation. The averages of such IBES earnings estimates were $3.81 and $4.78 per share of PacifiCare common stock for the years ending December 31, 2005 and 2006, respectively.

 

For purposes of MTS’ analyses, two estimates of the earnings per share of PacifiCare common stock for each of the years ending December 31, 2006 through 2010 were calculated based on discussions with PacifiCare’s management, taking into account pessimistic and optimistic scenarios based on the possible effect on PacifiCare’s financial performance during such periods of PacifiCare’s participation in the Part D program. These scenarios, referred to as the pessimistic Part D scenario and the optimistic Part D scenario, respectively, are based on differing assumptions on the part of the PacifiCare management as to future growth in PacifiCare’s membership, increases in its medical costs, premium increases to be charged to PacifiCare members and increases in PacifiCare’s administrative expenses. The pessimistic Part D scenario and the optimistic Part D scenario (including the financial projections reflected therein) were approved by the PacifiCare management for the purpose of inclusion in the calculation of the earnings estimates referred to in this paragraph for use in MTS’ analyses. For the year ending December 31, 2005, the earnings per share estimate for PacifiCare based on both the pessimistic Part D scenario and the optimistic Part D scenario was $3.81. For the years ending December 31, 2006 through 2010, the pessimistic Part D scenario reflects a more negative outlook as a result of the above variables. In particular, for the year ending December 31, 2006, the earnings per share estimates for PacifiCare based on the pessimistic Part D scenario and the optimistic Part D scenario were $4.58 and $4.80, respectively.

 

UnitedHealth Group

 

MTS reviewed the individual estimates of independent research analysts of the future financial performance of UnitedHealth Group for the years ending December 31, 2005 and 2006, and the consensus of such estimates, in each case as published by IBES as of July 1, 2005. MTS noted that such consensus estimates included estimated earnings of $2.45 and $2.84 per share of UnitedHealth Group common stock for the years ending December 31, 2005 and 2006, respectively. MTS noted that the estimates for the year ended December 31, 2005 provided by the management of UnitedHealth Group (which estimates had previously been made public as guidance in UnitedHealth Group’s earnings releases) to MTS were consistent with the consensus estimates, published by IBES for the year ended December 31, 2005, as of July 1, 2005.

 

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Common Stock Comparison of Regional Health Insurers

 

MTS compared selected publicly available financial information, multiples and other data for PacifiCare and the following selected regional health insurance companies:

 

    Coventry Health Care, Inc.

 

    HealthNet, Inc.

 

    Humana, Inc.

 

    Sierra Health Services, Inc.

 

    WellChoice, Inc.

 

MTS calculated and compared the following multiples for each of the selected companies and PacifiCare:

 

    the enterprise value of each of the companies as a multiple of such company’s earnings before interest, taxes, depreciation and amortization, based on the latest publicly available information, for the last four quarters of each of the companies ended March 31, 2005, referred to as the LTM period;1 and

 

    the closing price per share of common stock of each of the companies, as of July 1, 2005, as a multiple of the consensus of the IBES earnings estimates as of July 1, 2005 for such company for each of the years ending December 31, 2005 and 2006;

 

For purposes of this analysis, the enterprise value of each of the companies was calculated by multiplying the closing price per share of common stock of such company as of July 1, 2005 by the number of such company’s fully diluted outstanding shares and adding to that result such company’s debt, preferred stock and minority interests, in each case as disclosed in such company’s most recent SEC filings.

 

The results of MTS’ calculations and comparisons are summarized in the table below.

 

    

Selected Regional Health Insurers

(Including PacifiCare)


    
     High

   Mean

  

Harmonic

Mean


   Median

   Low

   PacifiCare

Enterprise Value as a Multiple of EBITDA for LTM Period

   13.7x    12.1x    11.9x    12.2x    9.7x    11.6x

Price Per Share as a Multiple of Estimated Earnings Per Share for the Year Ending December 31, 2005

   20.9x    18.5x    18.2x    18.9x    15.5x    19.1x

Price Per Share as a Multiple of Estimated Earnings Per Share for the Year Ending December 31, 2006

   18.5x    16.1x    15.8x    15.9x    13.6x    15.9x

 

MTS calculated an implied price range of $59 to $80 per share of PacifiCare common stock, using (i) the range of forward price/earnings multiples of 15.5x to 20.9x set forth in the above table with respect to the year ending December 31, 2005 and (ii) PacifiCare’s 2005 earnings per share estimate of $3.81. MTS noted that the per share implied merger consideration for PacifiCare was $78.53 as of July 1, 2005.

 


1 In the case of Coventry, EBITDA for the LTM period was adjusted on a pro forma basis to reflect acquisitions by Coventry during such period. In the case of PacifiCare, EBITDA was adjusted to include $43.1 million of EBITDA attributable to American Medical Security Group, Inc. during its last three quarters for the fiscal year ended December 31, 2004.

 

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MTS calculated an implied price range of $62 to $85 per share of PacifiCare common stock, using (i) the range of forward price/earnings multiples of 13.6x to 18.5x set forth in the above table with respect to the year ending December 31, 2006 and (ii) PacifiCare’s 2006 earnings per share estimate of $4.58 per share based on the pessimistic Part D scenario. MTS noted that the per share implied merger consideration for PacifiCare was $78.53 as of July 1, 2005.

 

MTS calculated an implied price range of $65 to $89 per share of PacifiCare common stock, using (i) the range of forward price/earnings multiples of 13.6x to 18.5x set forth in the above table with respect to the year ending December 31, 2006 and (ii) PacifiCare’s 2006 earnings per share estimate of $4.80 per share based on the optimistic Part D scenario. MTS noted that the per share implied merger consideration for PacifiCare was $78.53 as of July 1, 2005.

 

No company utilized in this comparison is identical to PacifiCare. In evaluating the selected companies, MTS made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of PacifiCare and UnitedHealth Group, such as the impact of competition on their respective businesses and the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of such companies or the industry or in the financial markets in general.

 

Selected Historical Transactions Analysis

 

MTS reviewed publicly available information for the following merger or acquisition transactions (Target /Acquiror—Announcement Date):

 

    Oxford Health Plans Inc./UnitedHealth Group Incorporated—April 26, 2004

 

    WellPoint Health Networks Inc./Anthem, Inc.—October 27, 2003

 

    Mid Atlantic Medical Services, Inc./UnitedHealth Group Incorporated—October 27, 2003

 

    Cobalt Corporation/WellPoint Health Networks Inc.—June 3, 2003

 

    Trigon Healthcare, Inc./Anthem, Inc.—April 29, 2002

 

    RightCHOICE Managed Care, Inc./WellPoint Health Networks Inc.—October 18, 2001

 

    Cerulean Companies, Inc./WellPoint Health Networks Inc.—November 30, 2000

 

MTS calculated and compared the following multiples, premiums and other information with respect to the merger to similar information for each of the selected transactions:

 

    the aggregate value of each transaction as a multiple of the target’s revenue and EBITDA, based on the latest publicly available information, for the four quarterly periods prior to the announcement (or, in the case of the merger, the twelve-month period ended March 31, 2005), referred to as the Target LTM period;2

 

    the purchase price per target share payable, in the case of each transaction, as a multiple of the IBES median earnings per share estimate for the target for the calendar year following the announcement (or, if the announcement occurred before July 1, the calendar year in which the announcement occurred), and, in the case of the merger, as a multiple of the IBES median earnings per share estimate for PacifiCare for the year ending December 31, 2005, in each case referred to as the forward P/E ratio;

 

    the aggregate value of each transaction divided by the number of medical members based on the latest information publicly available for each target prior to the announcement, and, in the case of the merger, prior to July 1, 2005; and

 

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2 In the case of the acquisition of Mid Atlantic Medical Services by UnitedHealth Group, the multiples, premiums and other information referred to above were calculated based on a Target LTM period consisting of the twelve-month period ended September 30, 2003.


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    the premium over the target’s share price one day and 30 trading days prior, in the case of each transaction, to the announcement of the transaction reflected by the announced per share transaction price and, in the case of the merger, to the implied merger consideration for PacifiCare of $78.53.

 

For purposes of this analysis, the aggregate value of the target in each transaction was calculated by multiplying the announced per share transaction price by the number of the target’s fully diluted outstanding shares as disclosed in the target’s most recent SEC filings prior to the announcement of such transaction and adding to that result the target’s debt, preferred stock and minority interests, as disclosed in the target’s most recent SEC filings prior to the announcement of such transaction. The enterprise value of PacifiCare was calculated by multiplying (i) $78.53 (being the implied merger consideration as of July 1, 2005), by (ii) the number of PacifiCare’s fully diluted outstanding shares (including its 3% convertible subordinated debentures on an as-converted basis) as provided to MTS by PacifiCare as of June 29, 2005 and adding to that result PacifiCare’s debt, as disclosed in PacifiCare’s most recent SEC filings as of March 31, 2005.

 

The results of MTS’ calculations and comparisons are summarized in the table below.

 

     High

    Mean

   

Harmonic

Mean


   Median

    Low

   

Proposed

Merger


 

Transaction aggregate value as a multiple of the Target LTM Period

                                           

•   Revenue

     1.39x       0.94x     0.78x      0.97x     0.36x       0.67x  

•   EBITDA

     15.9x       11.6x     11.2x      11.7x     8.4x       12.7x  

Forward P/E Ratio

     21.2x       17.1x     16.6x      17.1x     13.1x       20.6x  

Transaction aggregate value per medical member

   $ 3,493     $ 1,711     N/A    $ 1,372     $481     $ 2,750  

Premium over market price prior to announcement (or, in the case of the merger, July 1, 2005)

                                           

•   One Day

     46.3 %     22.8 %   N/A      18.2 %   14.2 %     8.3 %

•   30 Trading Days

     54.5 %     34.1 %   N/A      32.5 %   18.6 %     27.7 %

 

No company or transaction utilized in this selected transactions analyses is identical to PacifiCare, UnitedHealth Group or the merger and, accordingly, these analyses involve complex considerations and judgments concerning differences in financial and operating characteristics of PacifiCare, UnitedHealth Group and the other companies that were considered as well as other factors that would affect the acquisition values in the selected transactions, including the size and demographic and economic characteristics of the markets of each company and the competitive environment in which it operates. In evaluating the selected transactions, MTS made judgments and assumptions with regard to industry performance, business, economic, market and financial conditions and other matters, many of which are beyond the control of PacifiCare and UnitedHealth Group, such as the impact of competition on their respective businesses or the industries in which they are principally engaged, the growth of these industries and the absence of any material adverse change in their financial condition or prospects or the industries in which they are principally engaged or in the financial markets in general, which could affect their respective public trading values and the aggregate value of the transactions to which they are being compared. MTS also noted that the merger and acquisition transaction environment varies over time because of macroeconomic factors such as interest rate and equity market fluctuations and microeconomic factors such as industry results and growth expectations.

 

Discounted Cash Flow Analysis

 

MTS performed discounted cash flow analyses to determine ranges of implied present values per share of PacifiCare common stock as of June 30, 2005, under both the pessimistic Part D scenario and the optimistic Part

 

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D scenario, for the period from June 30, 2005 through December 31, 2010. Using discount rates ranging from 8.0% to 10.5%, reflecting estimates of PacifiCare’s weighted average cost of capital, MTS derived a range of implied enterprise values for PacifiCare by discounting to present value (a) the expected unlevered free cash flow of PacifiCare over the period from June 30, 2005 through December 31, 2010 and (b) the implied terminal values for PacifiCare as of December 31, 2010 calculated by applying terminal perpetual growth rates ranging from 2.50% to 3.50% to PacifiCare’s projected unlevered free cash flow for the year ending December 31, 2010. To calculate ranges of implied present values per share of PacifiCare common stock, MTS then subtracted from the range of implied enterprise values for PacifiCare the amount of PacifiCare’s debt as disclosed in PacifiCare’s most recent SEC filings prior to June 30, 2005 and divided the result by the number of PacifiCare’s fully diluted shares outstanding as provided to it by PacifiCare’s management as of June 29, 2005.

 

Based on the foregoing calculations, MTS derived a range of implied present values of $54.30 to $100.07 per share of PacifiCare common stock based on the pessimistic Part D scenario and a range of implied present values of $56.81 to $104.47 per share of PacifiCare common stock based on the optimistic Part D scenario. MTS noted that the per share implied merger consideration for PacifiCare was $78.53 as of July 1, 2005.

 

Analysis of Illustrative Present Values of a Share of Common Stock of PacifiCare Based on Hypothetical Future Stock Prices

 

MTS calculated an illustrative range of implied present values as of June 30, 2005 for a share of PacifiCare common stock based on hypothetical future prices for a share of PacifiCare common stock using the PacifiCare earnings per share estimates for the year ending December 31, 2007, under both the pessimistic Part D scenario and the optimistic Part D scenario.

 

For purposes of this analysis, MTS first calculated the $72.52 closing price of a share of PacifiCare common stock as of July 1, 2005 as a multiple of the $4.55 estimated earnings per share of PacifiCare common stock for the year ending December 31, 2006 based on the consensus IBES earnings estimates. This multiple of 15.9x is referred to as the PacifiCare baseline forward multiple. MTS then adjusted the PacifiCare baseline forward multiple by 10% downward and by 10% upward, resulting in adjusted multiples of 14.3x and 17.5x, respectively. MTS then calculated a range of hypothetical prices, as of June 30, 2006, for a share of PacifiCare common stock using the PacifiCare baseline forward multiple, such adjusted multiples and an earnings per share estimate for the PacifiCare common stock for the year ending December 31, 2007 based on PacifiCare earnings per share estimates under the pessimistic and optimistic Part D scenarios. MTS next applied a series of discount rates, ranging from 9.5% to 12.5% to reflect estimates of PacifiCare’s equity cost of capital, to such range of hypothetical share prices to calculate an illustrative range of implied present values, as of June 30, 2005, for a share of PacifiCare common stock. The results of these calculations are summarized in the table below.

 

    

Illustrative Range of Present

Values per share of PacifiCare

Common Stock


Pessimistic Part D Scenario

   $ 65.56-$82.32

Optimistic Part D Scenario

   $ 67.87-$85.22

 

MTS noted that the per share implied merger consideration for PacifiCare was $78.53 as of July 1, 2005.

 

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Relative Contribution Analysis

 

MTS’ analyses included the calculation of the relative potential contributions of PacifiCare and UnitedHealth Group to revenue and EBITDA of the combined company for the LTM ended March 31, 2005 and for the year ending December 31, 2005. The results of these calculations are summarized in the table below.

 

    

Relative Contributions of PacifiCare

and UnitedHealth Group

to the Combined Company


 
     Revenue

    EBITDA

 

Period


   PacifiCare

   

UnitedHealth

Group


    PacifiCare

   

UnitedHealth

Group


 

LTM Ended March 31, 2005

   23.4 %   76.6 %   12.2 %   87.8 %

Year Ending December 31, 2005

   24.9 %   75.1 %   12.0 %   88.0 %

 

MTS noted that, by comparison, the implied enterprise value of PacifiCare, based on the merger consideration as of July 1, 2005, would be approximately 10.3% of the implied enterprise value of the combined company as a result of the merger, pro forma for the issuance of the merger consideration to PacifiCare using UnitedHealth Group’s closing price per share as of July 1, 2005.

 

In addition, MTS calculated the relative contributions of each of PacifiCare and UnitedHealth Group to the projected net income of the combined company for the year ending December 31, 2006. These calculations were based on the IBES median earnings per share estimate for UnitedHealth Group for such period published by IBES as of July 1, 2005 and on the PacifiCare earnings per share estimates, under both the pessimistic Part D scenario and the optimistic Part D scenario, for the year ending December 31, 2006. The results of these calculations are summarized in the table below.

 

    

Relative Contributions of

PacifiCare and UnitedHealth Group

to the Combined Company

Estimated Net Income


 

Period


   PacifiCare

   

UnitedHealth

Group


 

Year Ending December 31, 2006
(Optimistic Part D Scenario)

   10.8 %   89.2 %

Year Ending December 31, 2006
(Pessimistic Part D Scenario)

   10.4 %   89.6 %

 

MTS noted that, by comparison, the aggregate merger consideration to be paid to PacifiCare stockholders (including $21.50 in cash per share) as of July 1, 2005 would be approximately 9.8% of the sum of such aggregate merger consideration paid to PacifiCare stockholders, plus the aggregate equity value of UnitedHealth Group as of July 1, 2005.

 

Pro Forma Combined Company Analysis—Earnings Per Share Accretion

 

MTS calculated the implied range of accretion with respect to the estimated earnings per share of the combined company for the year ending December 31, 2006, based on (i) the PacifiCare earnings per share estimates, under both the pessimistic Part D scenario and the optimistic Part D scenario, for the year ending December 31, 2006 and the IBES EPS estimates for UnitedHealth Group for such period and (ii) Estimated Synergies ranging from $0 to $160 million. MTS then calculated such accretion as increases in the estimated earnings per share of the combined company on both a dollar and percentage basis relative to IBES EPS

 

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estimates, as of July 1, 2005, for UnitedHealth Group for such period. The results of such calculations are set forth in the following table.

 

    

Accretion to Estimated Earnings Per Share of Combined Company
For the Year Ending December 31, 2006

As a Result of Estimated Synergies


 
                       Estimated Range of Potential Synergies                  

 

($ in millions)


   $0.0

    $40.0

    $80.0

    $120.0

    $160.0

 

Pessimistic Part D Scenario

   $