updated 11/8/2006 7:27:50 PM ET 2006-11-09T00:27:50

UnitedHealth Group Inc. warned investors on Wednesday that its stock option fiasco will cost much more than the $286 million it previously estimated, and said it would restate earnings all the way back to 1994.

The company's chief financial officer also resigned but will be assuming unspecified operational duties at the nation's second largest health insurer.

UnitedHealth said it has found problems with its handling of stock options as late as the end of 2005.

The company said it expects to take paper losses on prior earnings to account for stock options, and that it would take cash charges to pay the potential tax bill. It said it doesn't yet know how much those charges will be.

In May, UnitedHealth estimated that options-related restatements could slice $286 million from earnings from 2003 to 2005. On Wednesday it said it anticipates the final figure "will be significantly greater" than that.

Last month, a company-sponsored investigation concluded that stock options awarded to then-Chairman and CEO William McGuire were probably backdated. That means they weren't really issued when the company originally said they were — handing an instant profit to their recipients, especially McGuire. McGuire resigned as chairman and the company has said he will step down as CEO by Dec. 1. On Wednesday UnitedHealth spokesman Mark Lindsay said McGuire hasn't left yet, and that the final terms of his departure are still being negotiated.

McGuire and the company have worked out a written agreement to reprice his options to the highest point of each year between 1994 and 2002. That will cut about $200 million out of the value of McGuire's stock options, according to McGuire attorney David Brodsky.

UnitedHealth reported that McGuire had $1.78 billion in stock options as of the end of 2005. Brodsky said the repricing "means that Dr. McGuire will receive no benefit at all from dating issues in connection with his options." He said the remaining value of the options is due to the company's performance.

Repricing options
Incoming CEO Stephen Hemsley also agreed to reprice his options to the highest point of each year. Other company officers, leaders of UnitedHealth units, and retired general counsel David Lubben will reprice their options to the closing price for when the grants were really given, once that is determined, the company said. It also said they had agreed to a formula to account for the value of options that had already been exercised.

"The effect of these changes is to remove any potential whatsoever for these individuals to have financially benefited from any option misdating," the company said.

Notably, UnitedHealth also said Hemsley had agreed to give up a major 1999 stock option award that had been suspended and then reinstituted in 2000. It disclosed no such agreement with McGuire.

Hemsley said he gave up the 1999 options "in keeping with my personal goal of avoiding even the appearance of any unintended benefit from any past option grants to me." Giving up the 1999 grant and repricing the others would cost Hemsley about $190 million, the company said.

UnitedHealth said Hemsley had signed a new four-year contract as CEO. Lindsay didn't immediately have Hemsley's new base pay available.

UnitedHealth also said that CFO Patrick Erlandson resigned that post "as previously planned" but wouldn't say what his new responsibilities would be. It promoted executive G. Mike Mikan to CFO.

CRT Capital analyst Sheryl R. Skolnick said she wasn't surprised that the restatement will be big. She said she liked Erlandson but he should have done more to prevent the problems UnitedHealth now faces.

'He's the CFO ... He's gone'
"He's the CFO," she said. "He's responsible. Period. End of sentence. He's gone."

"My view is that this company has to change culturally, from a personality cult, greedy organization, to one that is still proud of its operating accomplishments and innovative accomplishments," she said.

UnitedHealth shares dropped $1.57, or 3.2 percent, to close at $48 on the New York Stock Exchange. Skolnick said she believes the drop had more to do with Democrats winning control of the House, than with the company's announcement. Several health insurers and pharmaceutical stocks fell on Wednesday on fears that potential changes by Democrats to Medicare and its prescription drug program would make those businesses less profitable.

UnitedHealth is the largest provider of the new Medicare prescription drug benefit.

Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware, said the changes UnitedHealth announced on Wednesday were in line with changes made at many of the other nearly 200 companies caught with stock option accounting problems.

"The interesting thing is that the response was a little delayed," he said of UnitedHealth.

And he wondered why McGuire isn't gone yet.

"You would hope that he would have left earlier," he said. "I think having someone around under a cloud like that doesn't help anyone. It puts everyone in an awkward position."

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