United Healthcare 2006 Annual Report Download - page 76

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December 31, 1994 through 2005, the interim periods contained therein, the quarter ended March 31, 2006 and
all earnings and press releases, including for the quarters ended June 30, 2006 and September 30, 2006, and
similar communications issued by the Company for such periods, and the related reports of the Company’s
independent registered public accounting firm, should no longer be relied upon. The Form 8-K also reported that
management had re-evaluated its assessment of the Company’s internal controls over financial reporting and had
concluded that, as of December 31, 2005, the Company had a material weakness solely relating to stock option
plan administration and accounting for and disclosure of stock option grants.
After completing its internal review of the accounting treatment for all option grants, management has
concluded, and the Audit Committee of the Board has approved the conclusion, that the Company used incorrect
measurement dates and made other errors described below in accounting for stock option grants and, accordingly,
that the Company’s previously issued financial statements should be restated.
Summary of the Restatement Adjustments
As of January 1, 2006, the Company adopted FAS 123R, using the modified retrospective transition method.
Under this method, all prior period financial statements are required to be restated to recognize compensation
cost in the amounts historically disclosed in our consolidated financial statements under FAS 123. Prior to
January 1, 2006, the Company accounted for share-based compensation granted under its stock option plans
using the recognition and measurement provisions of APB 25. Under APB 25, a company was not required to
recognize compensation expense for stock options issued to employees if the exercise price of the stock options
was at least equal to the quoted market price of the Company’s common stock on the “measurement date.” APB
25 defined the measurement date as the first date on which both the number of shares that an individual
employee was entitled to receive and the option or purchase price, if any, were known.
The restatement principally reflects additional stock-based compensation expense and related tax effects under
both FAS 123R, the Company’s current accounting method, and APB 25, the Company’s historical accounting
method, relating to the Company’s historic stock option practices. The restatement also reflects certain other
accounting adjustments, including adjustments unrelated to historic stock option practices, which are not material
either individually or in the aggregate to the current or prior periods.
The principal components of the restatement are as follows:
Revised Measurement Dates. Based on all available evidence, the Company applied the methodologies
described below to determine the appropriate measurement dates under both FAS 123 and APB 25 for grants in
the following categories: (1) grants of approximately 80 million shares on a split-adjusted basis to Section 16
officers (“Section 16 Grants”); (2) grants of approximately 260 million shares on a split-adjusted basis to middle
management and senior management employees (“Broad-Based Grants”); and (3) grants of approximately 50
million shares on a split-adjusted basis in connection with the hiring or promotion of employees (“New Hire and
Promotion Grants”). As a result of this analysis, the Company has determined that, in most cases, the stated grant
date was not the correct measurement date.
•Section 16 Grants — Section 16 Grants, generally made to eight to twelve officers, required approval by the
Compensation and Human Resources Committee of the Board (the “Compensation Committee”).
For the majority of Section 16 Grants, Compensation Committee approval was reflected in written actions.
The WilmerHale Report concluded that the written actions were generally executed subsequent to the stated
grant dates. (Under Minnesota corporate law, it is permissible to make a Written Action effective as of a date
other than the date on which the last of the required signers affixes his or her signature, even if that effective
date is before the last signature affixed.) Based on the available evidence, the Company has determined that
the appropriate measurement date for each of these Section 16 Grants is the earlier of (a) the date on which a
Form 4 (or other statement of changes in beneficial ownership) was filed with the SEC with respect to a
particular officer’s grant or (b) the date on which the written action with respect to that grant was likely
executed by a majority of the members of the Compensation Committee.
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