United Healthcare 2003 Annual Report Download - page 49

UnitedHealth Group 47
Stock-Based Compensation
We account for activity under our stock-based employee compensation plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued
to Employees.” Accordingly, we do not recognize compensation expense in connection with employee
stock option grants because we grant stock options at exercise prices not less than the fair value of our
common stock on the date of grant.
The following table shows the effect on net earnings and earnings per share had we applied the fair
value expense recognition provisions of Statement of Financial Accounting Standards (FAS) No. 123,
“Accounting for Stock-Based Compensation,” to stock-based employee compensation.
For the Year Ended December 31,
(in millions, except per share data) 2003 2002 2001
NET EARNINGS
As Reported $1,825 $1,352 $913
Compensation Expense, net of tax effect (122) (101) (82)
Pro Forma $1,703 $1,251 $831
BASIC NET EARNINGS PER COMMON SHARE
As Reported $3.10 $2.23 $1.46
Pro Forma $2.89 $2.06 $1.33
DILUTED NET EARNINGS PER COMMON SHARE
As Reported $2.96 $2.13 $1.40
Pro Forma $2.76 $1.97 $1.27
WEIGHTED-AVERAGE FAIR VALUE PER SHARE OF
OPTIONS GRANTED $11 $14 $12
Information on our stock-based compensation plans and data used to calculate compensation expense
in the table above are described in more detail in Note 10.
Net Earnings Per Common Share
We compute basic net earnings per common share by dividing net earnings by the weighted-average
number of common shares outstanding during the period. We determine diluted net earnings per
common share using the weighted-average number of common shares outstanding during the period,
adjusted for potentially dilutive shares that might be issued upon exercise of common stock options.
Derivative Financial Instruments
As part of our risk management strategy, we enter into interest rate swap agreements to manage our
exposure to interest rate risk. The differential between fixed and variable rates to be paid or received is
accrued and recognized over the life of the agreements as an adjustment to interest expense in the
Consolidated Statements of Operations. Our existing interest rate swap agreements convert a portion of
our interest rate exposure from a fixed to a variable rate and are accounted for as fair value hedges.
Additional information on our existing interest rate swap agreements is included in Note 8.
Recently Issued Accounting Standards
During 2003, we adopted the following accounting standards, which did not have a material impact on
our consolidated financial position or results of operations: 1) FAS No. 143, “Accounting for Asset
Retirement Obligations,” which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated retirement costs; 2) FAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities,” which requires companies to
recognize a liability for costs associated with exit or disposal activities when they are incurred, rather
than at the date of a commitment to an exit or disposal plan; 3) Interpretation No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others,” which requires that upon issuance of certain guarantees, a guarantor must