United Healthcare 2004 Annual Report Download - page 49

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UNITEDHEALTH GROUP 47
POLICY ACQUISITION COSTS
For our health insurance contracts, costs related to the acquisition and renewal of customer contracts
are charged to expense as incurred. Our health insurance contracts typically have a one-year term and
may be cancelled upon 30 days notice by either the company or the customer.
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) 2004 2003 2002
NET EARNINGS
As Reported
$2,587
$1,825 $1,352
Compensation Expense, net of tax effect
(132)
(122) (101)
Pro Forma
$2,455
$1,703 $1,251
BASIC NET EARNINGS PER COMMON SHARE
As Reported
$4.13
$3.10 $2.23
Pro Forma
$3.92
$2.89 $2.06
DILUTED NET EARNINGS PER COMMON SHARE
As Reported
$3.94
$2.96 $2.13
Pro Forma
$3.74
$2.76 $1.97
WEIGHTED-AVERAGE FAIR VALUE PER SHARE OF
OPTIONS GRANTED
$19
$11 $14
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 9.
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 7.