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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 1-14177
UNITED WISCONSIN SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1931212
(State of incorporation) (I.R.S. Employer
Identification No.)
401 WEST MICHIGAN STREET
MILWAUKEE, WISCONSIN 53203-2896
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (414) 226-6900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
------------------- ---------------------
Common Stock, no par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. |X|
As of February 28, 1999, there were issued and outstanding 16,812,118
shares of Common Stock; the aggregate market value of the shares of such
stock held by non-affiliates of the registrant was $117,684,828 as of the
same date, assuming solely for purposes of this calculation that all
directors and executive officers of the Registrant are "affiliates." This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of United Wisconsin Services, Inc. Proxy Statement dated
April 15, 1999 (Part III)
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UNITED WISCONSIN SERVICES, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1998
PAGE
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PART I
Item 1 Business....................................................... 3
Item 2 Properties..................................................... 16
Item 3 Legal Proceedings.............................................. 17
Item 4 Submission of Matters to a Vote of Security Holders............ 17
Item 4a Executive Officers of the Registrant........................... 17
PART II
Item 5 Market for Registrant's Common Equity.......................... 19
Item 6 Selected Consolidated Financial Data........................... 19
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 21
Item 7a Quantitative and Qualitative Disclosures about Market Risk..... 29
Item 8 Financial Statements and Supplementary Data.................... 30
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 62
PART III
Item 10 Directors and Executive Officers of the Registrant............. 62
Item 11 Executive Compensation......................................... 62
Item 12 Security Ownership of Certain Beneficial Owners
and Management............................................... 62
Item 13 Certain Relationships and Related Transactions................. 62
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................. 63
Schedule II - Condensed Financial Information of Registrant.... 64
Schedule IV - Reinsurance...................................... 67
Schedule V - Valuation and Qualifying Accounts................. 68
Signatures.............................................................. 69
Index to Exhibits....................................................... 70
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PART I
ITEM 1. BUSINESS
GENERAL
United Wisconsin Services, Inc. ("the Company" or "UWS") is a Wisconsin
corporation organized in May of 1998 for the purpose of owning and operating
the managed care companies and specialty business of the Company's
predecessor American Medical Security Group, Inc. ("AMSG") (formerly United
Wisconsin Services, Inc.). On May 27, 1998, the Board of Directors of AMSG
approved a formal plan to contribute the managed care companies and specialty
business and spin off UWS to its shareholders. The new corporation originally
was named Newco/UWS, Inc., and subsequently renamed United Wisconsin
Services, Inc. The spin off resulted in the distribution on September 25,
1998 of one share of common stock of UWS for each share of AMSG common stock
held as of September 11, 1998 ("Record Date"). AMSG received a private letter
ruling from the Internal Revenue Service that the spin off is tax free to
AMSG, UWS and their shareholders.
The Company's principal executive offices are located at 401 West
Michigan Street, Milwaukee, Wisconsin 53203 and its telephone number at that
address is (414) 226-6900. As used herein, the terms "the Company" or "UWS"
include United Wisconsin Services, Inc. and its subsidiaries. This Annual
Report on Form 10-K contains both historical and forward looking information.
The forward looking statements may be significantly impacted by risks and
uncertainties and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. There can be no assurance
that the Company can duplicate its past performance or that expected future
results will be achieved. Readers are cautioned that a number of factors,
which are described herein, could adversely affect the Company's ability to
achieve these results, including the effects of health care reform, the
continuation and renewal of the Company's provider arrangements, and the
effects of other general business conditions, including but not limited to,
competition, medical cost trends, changes in reserve estimates, terms of
provider contracts, premium rate changes, government regulation, capital
requirements, resolution of Year 2000 issues, administrative costs, general
economic conditions and the retention of key employees.
The Company is a leading provider of managed health care services and
employee benefit products sold primarily in Wisconsin, but also serves
markets in 38 other states. The products and services offered by the Company
comprise a broad range of group medical and related benefit products, which
provide employers with cost effective solutions to their employee benefits
needs. Managed health care services are delivered through health maintenance
organization ("HMO") and point-of-service ("POS") products, as well as other
related products that encourage or require the use of contracting providers.
HMO and POS products help control health care costs by various means,
including utilization controls such as pre-admission approval for hospital
inpatient services, pre-authorization of outpatient surgical procedures, and
capitated or discounted fee arrangements. The Company also offers various
specialty products and services including prepaid dental care, group life and
disability, workers' compensation products, managed care consulting,
electronic claim transmission services, pharmaceutical management, managed
behavioral health services and receivables management.
Compcare Health Services Insurance Corporation ("Compcare"), a wholly
owned subsidiary of the Company, was organized in 1971 and operates primarily
in Southeastern Wisconsin. Compcare is Wisconsin's oldest and second largest
HMO in terms of enrollment and premium revenues. Valley Health Plan, Inc.
("Valley"), an HMO in Northwestern Wisconsin, was acquired by the Company in
1992. Its major provider is Midelfort Clinic Ltd. ("Midelfort"). Unity Health
Plans Insurance Corporation ("Unity"), an HMO serving Southwestern and
Central Wisconsin, was formed by the combination of HMO of Wisconsin
Insurance Corporation ("HMOW") and the business of U-Care HMO, Inc.
("U-Care"). HMOW and U-Care were purchased by the Company effective October 1,
1994. Community Physicians' Network, Inc. ("CPN") and the University of
Wisconsin-Madison Medical Center, constitute the provider networks for Unity.
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The Company's HMO products are sold primarily by a salaried sales force
to employers and other groups including Medicaid-eligible individuals
throughout Wisconsin. Specialty products and services are sold through a
variety of distribution channels to employer groups and providers in
Wisconsin and throughout the United States.
Blue Cross & Blue Shield United of Wisconsin ("BCBSUW"), holds
approximately 37.8% of the outstanding common stock of UWS as of December 31,
1998 and is the Company's largest shareholder.
THE COMPANY'S STRATEGY
The Company believes current market conditions in health care favor
companies that provide quality health care products and services, while
ensuring meaningful cost containment for the buyer. The Company also believes
there are significant niches offering opportunities for companies that are
responsive to consumer demand for affordable health care. The Company is a
managed care leader in Wisconsin due to the quality and extent of its
provider network, the number of members, the breadth of its managed care
product offerings and the pricing of those products. The Company also
believes there are opportunities to develop or enhance specialty managed care
products and services which will leverage the Company's expertise in the
health care market. To take advantage of market opportunities, the Company
has developed the following business strategy:
- EMPHASIZE COST-EFFECTIVE ACCESS TO QUALITY HEALTH CARE OPTIONS.
The Company believes that rising health care costs continue to
cause buyers to seek cost-effective quality health care options
for employees. The Company plans to focus on this demand through
its HMO and specialty managed care products by offering a full
range of products coupled with state-of-the-art managed care
techniques and competitive administrative costs. The Company
markets its "United 24" product in selected Wisconsin counties
which combines health, disability and workers' compensation
coverage into a single lower premium product.
- PURSUE ACQUISITIONS AND DEVELOP STRATEGIC ALLIANCES. The Company
intends to continue to pursue strategic acquisitions and
alliances, including agreements with providers that it believes
will complement or enhance its existing products and/or markets.
Since 1996, the Company has expanded its HMO operations through
two new start-up HMO's in the northern half of Wisconsin in a
partnership arrangement with two major providers. The Company
also recently completed the acquisitions of Intercare Network,
Inc. ("Intercare") and Ladd Enterprises, Inc. ("Ladd"). Further,
the Company believes that additional strategic alliances will
enable the Company to provide additional products and services
in its existing markets.
- EXPAND GEOGRAPHICALLY. The Company intends to continue to expand
its activities outside of its traditional areas of operation both
inside and outside of Wisconsin. Compcare has continued to
increase its market share in southeastern Wisconsin by expanding
its provider networks in counties surrounding Milwaukee. The
Company is executing its plan to expand Heartland Dental Plan,
Inc. ("Heartland Dental"), its dental HMO product, to selected
market territories in a number of states in the upper Midwest.
The Company continues to expand its life and disability products
through a brokerage sales effort in the upper Midwest. The
workers' compensation product is being actively marketed in
Iowa and Illinois, and the Company seeks additional opportunities
to expand the workers' compensation business through acquisitions
or strategic joint ventures. In addition, the Company may acquire
other managed care companies or related lines of business in order
to enter new markets both inside and outside of Wisconsin.
- LEVERAGE BCBSUW RELATIONSHIP. When BCBSUW increases its ownership of
the Company to approximately 51%, Compcare intends to license and
use the Blue Cross and Blue Shield service marks with its products.
The Company believes this licensing and use will give Compcare a
marketing and sales advantage over its other managed care competitors
in its markets. In addition, as a result of its affiliation with
BCBSUW, including through the Service Agreements, the Company has
access to BCBSUW's extensive database of health care claims
information. The Company
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believes this database provides it with a competitive advantage since
it is able to utilize the database to design, underwrite, price and
administer its products more effectively. Given a stronger relationship
with BCBSUW, the individual specialty businesses can expand their
markets for specialty products and services to other blue cross and
blue shield plans nationwide. The Company currently has business
contracts with other blue cross and blue shield plans such as Empire
Blue Cross, Blue Cross & Blue Shield of Arizona and Blue Cross &
Blue Shield of Kansas.
HMO PRODUCTS
PRODUCTS
Compcare offers a variety of HMO and POS products throughout Wisconsin.
POS products have become the coverage of choice for a number of employers as
they provide a complete replacement for programs that include a preferred
provider organization ("PPO") plan or both traditional indemnity and HMO
coverages. Compcare offers its members a broad network of providers, which
include all three of the major integrated health care systems in Southeastern
Wisconsin.
Valley offers the following plans: (i) the Group Plan, a comprehensive
HMO plan; (ii) the Partner Plan, a traditional HMO plan which incorporates
co-payments; (iii) POS products, which combines a traditional HMO plan and an
out-of-network benefit with deductible and coinsurance; (iv) a Medicare
Supplement product, which is designed to close the gap between health care
costs incurred and government programs' allowed payments; (v) a small group
product, combining managed care with deductibles and co-payments; and (vi) an
HMO Medicaid plan, which is a comprehensive HMO plan for Medicaid recipients.
Unity offers a comprehensive group plan, which incorporates some
co-payments and deductibles, and a modified comprehensive group plan which
incorporates co-payments and deductibles as well as coinsurance on certain
benefits such as hospitalization and specialty care. Unity also offers an
individual plan, including an in-area conversion plan, and a Medicare
Supplement plan and markets POS plans with a wide variety of benefits.
The POS plans provide significant incentives for its members to utilize
the plans' managed care benefits and provide reduced benefits and increased
deductibles and co-payments when services are rendered by providers outside
of the POS network. In order to receive the higher level of benefits
available within the network, a member must follow referral and prior
authorization requirements by receiving care from a primary care physician
within the network or be referred to a specialist by the primary care
physician. These incentives lower the overall premium for the group, even
though the POS premiums tend to be slightly higher than comparable
traditional HMO products. POS plans provide a greater level of health care
cost control than a traditional HMO or an indemnity plan. POS plans are sold
generally as a complete replacement for an employer's HMO and indemnity
offerings.
MARKETING AND CUSTOMERS
Marketing HMO products generally is a two-step process. Presentations
are made first to employers. Once selected by an employer, the Company then
directly solicits members from the employee base. During periodic "open
enrollments," when employees are permitted to change health care programs,
the Company uses advertising and work site presentations to attract new
members. Virtually all of the HMO employer group contracts are renewable
annually.
Significant factors in HMO selection by employers and employees include
the composition of provider networks, quality of services, price, choice and
scope of benefits and market presence. To the extent permitted by OCI and the
federal government, the Company can offer an employer a wide spectrum of
benefit options, including federally qualified and non-federally qualified
products. To address rising health care costs, some employers now consider a
variety of health care options to encourage employees to use the most
cost-effective form of health care services. These options, which include HMO
and POS plans, may either be self-funded or provided by third parties.
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As of December 31, 1998, HMO membership consisted of the following (in
numbers of individuals):
<TABLE>
<CAPTION>
HMO POS MEDICAID TOTAL
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COMMERCIAL
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<S> <C> <C> <C> <C>
Compcare....................... 104,367 38,969 31,701 175,037
Valley......................... 24,732 12,675 3,875 41,282
Unity.......................... 67,161 15,974 4,789 87,924
------- ------ ------ -------
196,260 67,618 40,365 304,243
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------- ------ ------ -------
</TABLE>
Trends in membership over the last several years have shown that there
is strong growth in the Company's POS and Medicaid products, with slower
growth in HMO membership.
Compcare's operations in the six counties included in the Southeastern
Wisconsin region comprise approximately 86% of its total membership. The
remainder of Compcare's membership is spread throughout Wisconsin. Valley
operates in a 15 county area in Western Wisconsin, and Unity operates in a 28
county area in Southwestern and Central Wisconsin. During 1996, the Company
entered into two strategic partnerships to offer HMO products in Northern
Wisconsin. Compcare Northwest is a partnership with the Duluth Clinic to
bring managed care operations to the underserved rural market. Northwoods
Health Plans, LLC is a joint venture formed with Howard Young Health Care,
Inc., a leading provider of health care services in North Central Wisconsin.
The Company believes that expansion efforts should contribute to increased
enrollment by attracting new employer groups and by increasing penetration in
existing employer groups. Effective July 1, 1999 the State of Wisconsin will
implement BadgerCare, which offers affordable health care coverage to
uninsured families with income below 185% of the federal poverty level.
Coverage will be provided through the existing Medicaid network which
utilizes HMO's throughout the State. The Company's HMO's will participate in
providing health care coverage to BadgerCare participants.
The following table identifies the top ten group contracts with the
highest HMO earned premium for 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF
EARNED PREMIUMS
IN 1998
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<S> <C>
State of Wisconsin.................................... 12.3%
Medicaid.............................................. 11.0
Federal Employee Health Benefits Program.............. 4.1
Milwaukee County...................................... 3.4
General Motors Corporation............................ 2.9
Briggs and Stratton Corporation....................... 2.8
Milwaukee Public Schools.............................. 2.5
Construction Worker Health Fund....................... 2.0
City of Milwaukee..................................... 2.0
Northwestern Mutual Life Insurance Company............ 1.4
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Subtotal......................................... 44.4
Other employer groups (2,847 in number) 55.6
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100.0%
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</TABLE>
The HMOs have significant enrollment among federal, state and municipal
government employees, as well as employees represented by collective
bargaining units. The Company believes that health care will continue to be
an important negotiating issue with organized labor groups and the reputation
of the Company's HMOs are advantageous to its future marketing efforts.
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Through one of the Service Agreements, the Company utilizes BCBSUW's
salaried sales force that as of December 31, 1998, consisted of 15 account
representatives and customer relations personnel, 32 account executives, two
agency managers, five agency consultants, and five sales directors, to market
HMO products. The Company directly employs a sales staff of eight account
executives, one sales director, one agency manager and two agency consultants
who market products for Unity as well as BCBSUW.
PROVIDERS
Compcare, Valley and Unity contract with physicians and hospitals to
provide medical services to their members. Members designate one physician in
the network as their primary care provider and are required to seek
non-emergency care from this physician.
Compcare has an extensive provider network in Southeastern Wisconsin,
which included 3,610 physicians as of December 31, 1998. Compcare is the only
HMO that contracts with all eight of the largest multi-specialty clinics in
Milwaukee for the provision of health care services to its members. This
network is augmented by individual physicians; hospitals and independent
physician associations ("IPAs") affiliated with Milwaukee's largest
hospitals. Providers outside of Milwaukee consist of multi-specialty clinics
and hospitals. Ancillary services are provided under capitated arrangements
through sub-networks including chiropractic, mental health, oral surgery,
home care, durable medical equipment and vision. No single provider
represents a material relationship in Compcare's provider network. Compcare's
contracts with providers renew annually. Compcare considers its relationships
with its provider networks to be good and has been able to renew its provider
contracts on acceptable terms.
Approximately 54.6% of Valley's medical and other benefits are provided
under an arrangement with Midelfort and its affiliate, Luther Hospital, which
the Company believes is the leading medical services provider in Eau Claire,
Wisconsin. Arrangements with three smaller area clinics and five other
hospitals provide a majority of the other Valley medical and other benefits.
As of December 31, 1998, Valley's provider network consisted of 355
physicians. Approximately 79% of Valley's physician services are provided
under the Midelfort arrangement. Valley has contracts with six hospitals (one
of which is affiliated with Midelfort) which have provided a majority of
Valley's hospital services. The relationship with Midelfort is generated by
the Valley provider arrangement, which is renewable by the parties through
December 31, 2002. Valley's contracts with its other providers renew
annually. The Company considers its relationships with Midelfort and its
other providers for Valley to be good and has been able to renew provider
contracts on acceptable terms.
Unity contracts with CPN, an IPA and University Health Care ("UHC"), an
affiliate of the University of Wisconsin Hospital and Clinics, which together
provide the majority of physician services for Unity's membership throughout
its 28 county service area. The contracts with CPN and UHC are renewable
through October 1, 2004. CPN and UHC collectively contract with approximately
570 primary care providers and 2,470 specialists and ancillary health care
providers. In addition, Unity contracts directly with approximately 50 acute
care and specialty care hospitals. CPN and UHC have renewed their provider
contracts for 1999.
Compcare, Valley and Unity manage the cost of health care provided to
their members through the method of payment and risk-sharing programs with
physician groups and hospitals and with their utilization management
programs. The method of payment consists of a mixture of capitation, fee
schedules and discounted fee-for-service arrangements. Capitation allows the
payment of a fixed amount per member per month to providers, regardless of
services provided, which stabilizes medical and dental costs. Capitation
encourages providers to avoid unnecessary utilization of hospital, physician
and ancillary health care services. For the year ended December 31, 1998,
approximately 45.6%, 22.1% and 94.7% of Compcare's, Valley's and Unity's
medical benefits, respectively, were provided under capitated arrangements.
For certain medical providers, compensation for services is calculated
on a discounted fee-for-service basis. Under this arrangement, the Company
will reimburse physician groups for services rendered based upon negotiated
fee schedules or usual and customary charges less an agreed upon discount.
Hospitals may be reimbursed at a set per diem rate for each inpatient day, on
a flat rate per procedure basis, or on a discounted
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charge basis. In fee-for-service arrangements, risks associated with
utilization are retained by Compcare and Valley. However, such arrangements
provide Compcare and Valley with greater pricing flexibility and
opportunities to benefit by application of underwriting on a group specific
or individual basis. Furthermore, fee schedule-based compensation allows
Compcare and Valley to better target improvement in loss ratios through
product development and benefit modification. Such changes are more difficult
in a capitated system since capitation levels must be renegotiated before any
effective changes can be made to benefits or products.
One capitated physician group, two hospital systems and one mental
health facility in Compcare's provider network elect to participate in
stop-loss arrangements with the Company. For example, one integrated hospital
system elected a stop-loss arrangement in which the inpatient, outpatient and
professional service costs incurred for any eligible member cannot exceed
$75,000 in a given contract year. Any cumulative costs in excess of $75,000
per year are paid to the provider in addition to the capitation payments
previously paid. These arrangements limit the facility's or group's claim
liability to a fixed amount per member per year. Claim costs in excess of
stop-loss limits are reimbursed by Compcare to the participating providers
and represent approximately 0.1% of the total capitation payments in 1998.
OPERATIONS OF PROVIDER ARRANGEMENTS
Valley has a provider arrangement with Midelfort. The current term of
the provider arrangement is through January 1, 2000, with an option for an
additional three-year renewal term or renewal terms of one year each. During
the initial five-year term of the provider arrangement, after-tax profits
were shared equally with Midelfort. Effective January 1, 1997, 50% of pre-tax
profits are shared with Midelfort. Profit sharing with Midelfort equaled $1.2
million during 1998. Midelfort has an option to repurchase all the capital
stock of Valley on December 31, 1999 for Valley's net equity plus $400,000.
If Midelfort exercises its repurchase option, the Company would have no
ongoing interest in Valley.
Unity has provider agreements with Community Health Systems, LLC ("CHS")
and UHC that provide for profit sharing. Under these agreements, 50% of the
pre-tax profits are shared, with CHS receiving 30% and UHC receiving 20%. The
combined profit sharing payments to CHS and UHC equaled $2.1 million in 1998.
CHS and UHC have options to repurchase the businesses originally sold to the
Company including the increased membership related to their respective
provider networks on November 1, 1999 or November 1, 2004. CHS has the right
to repurchase the former HMOW business related to the rural provider networks
and the Unity legal entity for the net assets of Unity related to the
business being repurchased. If CHS exercises this repurchase option, the
Company would need to transfer the remaining Unity business to one of its
other managed care companies. UHC has the option to repurchase the former
U-Care business related to the University of Wisconsin provider network
exercisable on November 1, 1999 for the value of the net assets of Unity
related to the business being repurchased plus $500,000. Exercise of the
repurchase option ends the agreement with respect to that party. If both
repurchase options are exercised the Company would have no ongoing interest
in Unity.
COST CONTAINMENT
The majority of medical management and cost containment services for
Compcare are provided by the Company's wholly owned subsidiary Meridian
Managed Care, Inc. Services for Valley and Unity are coordinated by medical
directors in conjunction with the medical staffs of their providers.
MANAGEMENT INFORMATION SERVICES
Each of the Company's HMOs utilizes information systems developed and/or
customized specifically to meet the needs of the HMO. The information systems
support marketing, sales, underwriting, contract administration, billing,
financial and other administrative functions as well as provider capitation
and claims administration, provider management, quality management and
utilization review.
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The Company continually evaluates, upgrades and enhances the information
systems that support its operations. Certain information system functions
utilized by Compcare and Valley are outsourced to a third party.
SPECIALTY MANAGED CARE PRODUCTS AND SERVICES
In the last few years, the Company has focused on growing the specialty
products and services it offers. Such products and services include prepaid
dental care, life and disability insurance, workers' compensation and managed
behavioral health benefits, managed care consulting, electronic claims
processing, case management, pharmaceutical and receivables management and
other medical benefits. Such specialty products are sold through a variety of
methods, including brokers, agents and an in-house sales force.
DENTAL
At year end 1997, a separate corporate entity, Heartland Dental, was
established to manage the Company's dental HMO operations (formerly known as
Dentacare). Heartland Dental was established as a separate entity to
facilitate growth of prepaid dental business outside of Wisconsin. Heartland
Dental performed its initial filing for licensure in Michigan and Ohio at the
end of 1998. Prepaid dental services were provided to 169,700 members as of
December 31, 1998, which makes Heartland Dental the largest dental HMO in
Wisconsin. Premium revenues attributable to Heartland Dental were $29.1
million for the year ended December 31, 1998. Heartland Dental contracts with
group dental practices on a capitated basis throughout Wisconsin and Northern
Illinois. Members receive services through their selected dental center. In
addition, Heartland Dental offers POS and out-of-area products. The Heartland
Dental provider network had 282 dental providers as of December 31, 1998. The
Company considers its relationship with its dental provider network to be
good and has been able to renew its dental provider contracts on acceptable
terms. Heartland Dental competes with other regional and national managed
care dental plans, indemnity dental insurance, self funded dental plans and
direct reimbursement dental programs.
Heartland Dental offers ten different products with varying benefit
options, most of which cover all preventive and diagnostic services. Other
services are offered at various levels of coverage. All products cover
pre-existing conditions and the full range of dental services, including
orthodontics.
LIFE AND DISABILITY
The Company offers group term life and accidental death and
dismemberment ("AD&D") coverages as well as dependent life and accelerated
death benefits. Short and long-term disability products have been designed to
provide income replacement for an employee who becomes disabled through a
non-work related situation. The Company's Rapid Pay plan is a unique
short-term disability product by which claimants receive benefits on a timely
basis with minimal up-front paperwork. As of December 31, 1998, the Company
had a total of 273,500 life and disability certificates. Premium revenue
related to life and disability products was $40.2 million and $34.0 million
for the years ended December 31, 1998 and 1997, respectively. Certain life
and disability products are underwritten by United Wisconsin Life Insurance
Company ("UWLIC"), a wholly owned subsidiary of AMSG, and ceded to United
Heartland Life Insurance Company ("UHLIC"), which is licensed in Ohio and
Wisconsin. UWLIC is licensed to do business in 38 states and the District of
Columbia. United Wisconsin Insurance Company ("UWIC"), which sells disability
products, is licensed in 35 states and the District of Columbia. The Company
competes with national providers of group life and disability coverage.
An insurance company's rating is an important factor in establishing its
competitive position. In 1998, UWIC, UWLIC and UHLIC were assigned ratings of
"A-" (Excellent) by A.M. Best Company, Inc. ("Best"). The "A-" rating is the
fourth highest rating given to insurance companies.
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MANAGED CARE WORKERS' COMPENSATION
Through United Heartland, Inc. ("United Heartland"), the Company applies
managed care techniques to the workers' compensation market in Wisconsin. The
workers' compensation coverage sold through United Heartland is underwritten
by UWIC in those states where UWIC is licensed to provide such coverage. A
reinsurer underwrites risk for coverage in those states where UWIC is not
licensed to provide workers' compensation coverage. Premium revenue
attributable to United Heartland approximated $21.5 million during 1998.
During 1998, the Company retained 60% of the workers' compensation risk and
ceded the other 40% to a reinsurer. The workers' compensation market, both
nationally and in the state of Wisconsin, is extremely competitive.
Competition has primarily come from the large, national multi-line property
and casualty insurance companies.
The Company believes the key elements to success in the workers'
compensation insurance business are service to employers and control of
workers' compensation costs through comprehensive loss control and claims
management procedures. As part of its underwriting process, United Heartland
performs a loss control review of each prospective insured prior to making a
commitment to provide coverage. It also examines the employer's commitment
toward developing or improving light duty/return to work programs, safety
awareness programs, supervisor training in accident investigation and
enforcement of safety in the workplace. United Heartland also reviews the
financial resources of the employers to verify an ability to follow through
on any commitments made that may require a capital expenditure.
United Heartland utilizes medical management resources to assist in the
adjustment of its claims, which include: (i) access to BCBSUW's usual and
customary charges database; (ii) the PPO network established by the Company
for United Heartland clients; and (iii) access to the hospital bill audit and
medical staff of the Company as needed in claims handling. The Company
believes this managed care capability, combined with a commitment to
communicating with employers, employees and medical providers, assists United
Heartland in monitoring the major cost factors of workers' compensation
claims. Cost savings have been demonstrated as United Heartland's customers
experienced a 16% drop in the cost of their workers' compensation claims over
the seven-year period ended December 31, 1998.
MANAGED CARE CONSULTING
Through Meridian Resource Corporation ("Meridian"), the Company
specializes in providing consulting and technical services to insurance
companies, employers, providers, government agencies, coalitions and other
organizations to help them make decisions regarding health care benefits and
more effective health care delivery. Consulting services include health care
data analysis, hospital cost indexing and analysis, feasibility studies and
economic analysis. Technical services include hospital bill audit, data
analysis and reporting, claims audit and subrogation recovery services.
Meridian also has established a niche in collecting salvage and subrogation
recoveries for self-insured groups and other health insurers. The Company
competes against other stand-alone companies that provide similar cost
reduction strategies and other large insurance companies that have these
functions. Revenues from managed care consulting services totaled $13.2
million for the year ended December 31, 1998.
The Company's combined medical management functions are conducted
through Meridian Managed Care, Inc. ("MMC"). MMC primarily serves the
population of Compcare and BCBSUW but also markets its programs to
non-affiliated organizations. MMC controls costs by promoting quality and
efficiency. Central to its effectiveness is promoting and developing
partnerships with providers.
MMC's utilization management program provides comprehensive,
custom-designed strategies that protect its members and control costs by
ensuring cost-effective, quality care. MMC's traditional utilization
management program offers inpatient prior authorization, admission review,
continued stay review, discharge planning, case management, patient
education, appropriateness review and outpatient procedure review.
Intercare is a catastrophic case management company that provides
services to reinsurance companies, 50 to 60 third party administrators,
indemnity insurers and employer groups nationwide. Intercare fully
10
<PAGE>
understands the intricacies of the self funded marketplace and provides
medical management and support to those groups. Support services include
catastrophic case management, hospital admission reviews, a special
investigation unit and a nurse review program for underwriters. The Company
acquired Intercare in August 1998. Revenues of Intercare totaled $1.4 million
for the year ended December 31, 1998.
ELECTRONIC CLAIM SUBMISSION
United Wisconsin Proservices, Inc. ("Proservices") provides software and
claim submission services and has created the largest provider/insurer
network for such services in Wisconsin, extending to over 200 hospitals and
clinics in Wisconsin and over 500 home health agencies nationwide.
Proservices electronically transmits more than seven million medical claims
annually for such clients as Medicare, Medicaid, private insurers, third
party administrators and re-pricers. Proservices competes with other hospital
software vendors and national suppliers of electronic claims processing.
PHARMACEUTICAL MANAGEMENT
Pharmacy management services promote appropriate and cost-effective
pharmaceutical utilization through formulary development, pharmacy network
management, pharmacy and therapeutic committees, and concurrent and
retrospective drug review. Central to the program is the pharmacy benefit
management company. The Right Rx, which performs rebate management for
Compcare, BCBSUW and non-affiliated clients, representing approximately 0.6
million lives.
MANAGED BEHAVIORAL HEALTH
CNR Health, Inc. ("CNR") is a managed care organization that provides
cost-effective behavioral health care management solutions to a variety of
customers. CNR's primary products include behavioral health management,
provider networks, employee assistance programs, medical management,
disability management, behavioral health claims administration and behavioral
health management software. Additionally, through YW Works, a partnership
formed with two local organizations, it manages the Milwaukee County Regional
contract of the Wisconsin Works ("W-2") program. W-2 is a new program that
replaced Aid to Families with Dependent Children with programs to prepare
individuals for the job market and help them find and keep those jobs.
CNR customers include insurance companies, self-funded employers, third
party administrators, Medicaid and other governmental entities. Through its
various programs, CNR manages approximately 992,200 lives as of December 31,
1998 and earned revenues for the year ended December 31, 1998 of $23.0
million.
RECEIVABLES MANAGEMENT
Ladd is a health care receivables management firm based in Michigan and
serves five mid-western states. Ladd provides collections and receivables
management services to hospitals in Michigan and other commercial clients in
Michigan, Ohio, Illinois, Indiana and Wisconsin. Receivables management
services provided within the health care industry represents 95% of 1998
total revenues of $3.8 million. The Company acquired Ladd in December 1998.
COMPETITION
The managed care industry is highly competitive. During the past few
years, the managed care industry in Wisconsin and the upper Midwest has
experienced consolidation. The Company believes the principal competitive
features affecting its ability to retain and increase its managed care
membership include the price of benefit plans offered, the composition of
provider networks, quality of service, responsiveness to user demands,
financial stability, comprehensiveness of coverage, diversity of product
offerings and market presence and reputation. Although the Company is a
leading provider of managed care services in Wisconsin, the Company may
experience increased competition in the future. The Company competes with
national competitors for its
11
<PAGE>
HMO products including Humana, Inc. and United HealthCare Corp. The Unity HMO
competes with Dean Health Plan, Inc. in the Madison area and surrounding
counties. Many of the Company's competitors are larger, have considerably
greater financial resources and distribution capabilities and offer more
diversified types of insurance coverage than the Company.
REINSURANCE
The Company manages the risk it retains through the use of reinsurance.
The Company maintains in force both "quota share" and "excess of loss"
reinsurance treaties. Quota share reinsurance is a contractual arrangement
whereby the reinsurer assumes an agreed percentage of certain risks insured
by the ceding insurer and shares premium revenue and losses proportionately.
The Company's quota share reinsurance treaties allocate the total amount of
business subject to the treaties between the Company and the respective
parties to the treaties. Through quota share reinsurance, UHLIC assumes 100%
of certain life coverages underwritten by UWLIC. UWIC cedes to BCBSUW 100% of
certain medical coverages. Approximately 40% of the Company's workers'
compensation business is ceded to an independent non-affiliated reinsurer.
Excess of loss reinsurance is used to cap the amount of loss retained by the
Company on individual claims or a series of claims. Excess of loss
reinsurance is utilized by the Company's HMOs to limit their exposure to
inpatient hospital claims or, in the case of Compcare, to organ transplants.
On the life and disability business, the Company limits its retention per
claim to $75,000. For workers' compensation claims, the Company retains the
first $250,000 of a loss, which it shares with its quota share reinsurer, and
cedes losses between $250,000 and $10,000,000 on an individual excess of loss
basis to third party reinsurers. Except for affiliates of the Company, all
reinsurers with which the Company contracts are rated "A-" (Excellent) or
better by Best.
SERVICE AGREEMENTS
The Company and several of its subsidiaries purchase services from, or
provide services to, BCBSUW pursuant to written agreements (the "Service
Agreements"). Services covered by these agreements include marketing,
information systems, legal, investment, actuarial, accounting, underwriting
and other administrative and management services. Fees under the Service
Agreements are calculated on a cost basis. Costs directly attributable to a
particular company are paid by such company. Costs that are not specific to
any particular company are allocated based on utilization and allocation
methods agreed to by the parties to the agreements. If the recipient can
obtain any of the services under more favorable terms by performing the
services itself or by procuring them from a third party, it is not obligated
to renew the Service Agreement for those services if the provider is
unwilling to substantially match such terms. The Service Agreements
automatically renew annually unless otherwise terminated. In addition, under
Wisconsin law, the OCI reviews the Service Agreements to ensure that the
agreements are reasonable and fair to the interests of the insurance
companies that are parties to the agreements. For the year ended December 31,
1998, the Company paid approximately $9.0 million for such services, and
received approximately $14.8 million from BCBSUW for the provision of such
services.
The Company may provide certain services to AMSG pursuant to a written
agreement (the "AMSG Service Agreement"). Services that AMSG may utilize
pursuant to the AMSG Service Agreement include investment management,
investment accounting, risk management, accounting and financial audit and
corporate communications. Fees under the AMSG Service Agreement for
investment management and investment accounting will be based on a percentage
of the portfolio plus a flat rate for each company whose investments are
being handled by the Company. Fees for risk management will be based on a
percentage of the annual premiums for risk management insurance. Fees for
accounting and financial audit and corporate communications will be based on
an hourly rate. The AMSG Service Agreement will terminate on December 31,
1999 unless terminated earlier upon appropriate notice. The AMSG Service
Agreement was submitted to OCI for its review and lack of disapproval.
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<PAGE>
INVESTMENTS
The Company attempts to minimize its business risk through conservative
investment policies. Investment guidelines set quality, concentration and
return parameters. The Company's investment guidelines permit investments in
various types of liquid assets, including U.S. Treasury obligations,
securities of various Federal agencies and commercial paper, and other assets
including corporate debt securities, municipal securities, asset-backed
securities, mortgage-backed securities, equity securities and mutual funds.
Up to 10% of the Company's fixed income portfolio (at the time of purchase)
may be invested in issues rated BB by Standard & Poor's Corporation or an
equivalent rating from another nationally recognized securities rating
organization. The remainder of the individual fixed income issues must carry
an investment grade rating at the time of purchase, and the ongoing average
portfolio rating must be "A-" or better, based on ratings of Standard &
Poor's Corporation or another nationally recognized securities rating
organization. The Company invests in securities authorized by applicable
state laws and regulations and follows investment policies designed to
maximize yield, preserve principal and provide liquidity. The Company's
portfolio contains no investments in mortgage loans or non-publicly traded
securities, except for investments in affiliates. However, at December 31,
1998, $31.1 million of the Company's investment portfolios were invested in
investment grade government agency mortgage-backed securities.
With the exception of short-term investments and securities on deposit
with various state regulators, investment responsibilities have been
delegated to external investment managers. Such investment responsibilities,
however, must be carried out within the investment parameters established by
the Company, which may be amended from time to time.
Securities which may be sold prior to maturity to support the Company's
investment strategies, such as in response to changes in interest rates, the
yield curve concentration or sector concentration, are classified as
available for sale and are stated at market value with unrealized gains and
losses reported as a component of shareholders' equity. Securities for which
the Company has both the positive intent and ability to hold to maturity are
recorded at amortized cost. Bonds, which are held to meet deposit
requirements of the various states, are classified as held to maturity. All
other bonds are classified as available for sale.
The table below reflects investment results for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1997 1998
---------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average invested assets(1)....................... $180,679 $179,505 $185,249
Net investment income(2)......................... 10,659 10,317 10,240
Average yield.................................... 5.90% 5.75% 5.53%
Net realized gains............................... 8,381 11,921 9,123
Net unrealized gains on stocks & bonds........... 6,272 4,795 1,895
- ------------------------
</TABLE>
(1) Average of aggregate investment amounts at the beginning and end of each
period.
(2) Amounts are calculated net of investment expenses, but prior to
adjustment for other interest income and expense.
REGULATION
GENERAL. Government regulation of employee benefit plans, including
health care coverage, health plans and the Company's specialty managed care
products, is a changing area of law that varies from jurisdiction to
jurisdiction and generally gives responsible administrative agencies broad
discretion. The Company believes that it is in compliance in all material
respects with the various federal and state regulations applicable to its
current operations. To maintain such compliance, it may be necessary for the
Company or a subsidiary to make
13
<PAGE>
changes from time to time in its services, products, structure or operations.
Additional government regulation or future interpretation of existing
regulations could increase the cost of the Company's compliance or otherwise
affect the Company's operations, products, profitability or business
prospects.
The Company is unable to predict what additional government regulations,
if any, affecting its business may be enacted in the future or how existing
or future regulations might be interpreted. A number of jurisdictions have
enacted small group insurance and rating reforms which generally limit the
ability of insurers and health plans to use risk selection as a method of
controlling costs for small group business. These laws may generally limit or
eliminate use of pre-existing condition exclusions, experience ratings and
industry class ratings, and limit the amount of rate increases from year to
year. Under these laws, cost control through provider contracting and
managing care may become more important, and the Company believes its
experience in these areas will allow it to compete effectively.
Federal legislation has significantly expanded regulation of group
health plans and health care coverage. The new laws place restrictions on the
use of pre-existing conditions and eligibility restrictions based upon health
status and prohibit cancellation of coverage due to claims experience or
health status. Federal regulations also prohibit insurance companies from
declining coverage to small employers. Additional federal laws, which took
effect in 1998, include prohibitions against separate, lower, dollar maximums
for mental health benefits and requirements relating to minimum coverage for
maternity inpatient hospitalization. The Company does not anticipate that
these laws will affect its comparable profitability or business prospects
because all insurance companies across the country are subject to the same
requirements. Furthermore, many requirements of the federal legislation are
similar to small group reforms that have been in place for many years. The
Company will be able to utilize and expand upon the cost control measures
initiated as a result of small group legislative reform.
Increasingly, States are considering various health care reform measures
which, if passed, may limit the ability of the Company and its health plans
to control which providers are part of their networks and hinder their
ability to manage utilization and cost effectively. "Patient Protection"
laws, which became effective in Wisconsin in late 1998, established a prudent
layperson standard for coverage of emergency room care and provided extended
access to providers who are no longer part of the plan's network. A number of
other States are considering similar legislation. While this could affect the
Company's operations in those States, comparable profitability and business
prospects should not be impacted because competing insurance companies would
be subject to the same legislation.
HMOS. Wisconsin and the other states in which the Company offers HMO
products have enacted statutes regulating the activities of those health
plans. Most states require periodic financial reports from HMOs licensed to
operate in their states and impose minimum capital or reserve requirements.
In addition, certain of the Company's subsidiaries are required by state
regulatory agencies to maintain restricted cash reserves represented by
interest-bearing instruments which are held by trustees or state regulatory
agencies to ensure that adequate financial resources are maintained or to act
as a fund for insolvencies of other HMOs in the State.
As a federally qualified HMO, Compcare must file periodic reports with,
and is subject to periodic review by, the Department of Health and Human
Services, the Health Care Financing Administration and the Office of Prepaid
Health Care. The Company's other HMOs are subject only to state regulation
because they are not federally qualified HMOs.
The Company's HMOs which have Medicaid contracts are subject to both
federal and state regulation regarding services to be provided to Medicaid
enrollees, payment for those services and other aspects of the Medicaid
program. Medicaid has in force and/or has proposed regulations relating to
fraud and abuse, physician incentive plans and provider referrals which may
affect the Company's operations.
Several of the Company's health plans have contracts with the Federal
Employees Health Benefit Plan ("FEHBP"). These contracts are subject to
extensive regulation, including complex rules relating to the premiums
charged. FEHBP has the authority to retroactively audit the rates charged and
may seek premium refunds and
14
<PAGE>
other sanctions against health plans participating in the program. The
Company's health plans, which have contracted with FEHBP, are subject to such
audits and may be requested to make such refunds.
INSURANCE REGULATION. The Company's insurance subsidiaries are subject
to regulation by the Department of Insurance in each state in which the
entity is licensed. Regulatory authorities exercise extensive supervisory
power over insurance companies relating to the licensing of insurance
companies; the amount of reserves which must be maintained; the approval of
forms and insurance policies used; the nature of, and limitation on, an
insurance company's investments; periodic examination of the operations of
insurance companies; the form and content of annual statements and other
reports required to be filed on the financial condition of insurance
companies; and the establishment of capital requirements for insurance
companies. The Company's insurance company subsidiaries are required to file
periodic statutory financial statements in each jurisdiction in which they
are licensed. Additionally, such companies are examined periodically by the
insurance departments of the jurisdiction in which they are licensed to do
business.
The National Association of Insurance Commissioners ("NAIC") adopted the
Risk-Based Capital ("RBC") for Life and/or Health Insurers Model Act ("RBC
Model Act"), effective December 31, 1993, to evaluate the adequacy of
statutory capital and surplus in relation to investment and insurance risks
associated with: (i) asset quality; (ii) mortality and morbidity; (iii) asset
and liability matching; and (iv) other business factors. The RBC Model Act
formula is used by the States to monitor trends in statutory capital and
surplus for the purpose of initiating regulatory action. The NAIC adopted
similar RBC requirements for property and casualty insurance companies
effective December 31, 1994, and for health organizations, including HMOs,
effective December 31, 1998. The Company has calculated the risk-based
capital for its life, property and casualty, and HMO subsidiaries as of
December 31, 1998 using the applicable RBC formula. These calculations
produced risk-based capital levels that exceed the levels at which the RBC
formulas recommend intervention by regulatory authorities.
Under Wisconsin law, insurance companies must provide OCI with advance
notice of any dividend that is more than 15% larger than any dividend for the
corresponding period of the previous year. In addition, OCI may disapprove
any "extraordinary" dividend, defined as any dividend which, together with
other dividends paid by an insurance company in the prior twelve months,
exceeds the lesser of: (i) 10% of statutory capital and surplus as of the
preceding December 31; (ii) with respect to a life insurer, net income less
realized gains for the calendar year preceding the date of the dividend; or
(iii) with respect to a non-life insurer, the greater of (ii) above or the
aggregate net income less realized gains for the three calendar years
preceding the date of the dividend less distributions made within the first
two of those three years.
Based upon the financial results of the Company's combined insurance
subsidiaries for the year ended December 31, 1998, $7.7 million is available
for 1999 dividend payments to their parent without regulatory approval.
INSURANCE HOLDING COMPANY REGULATIONS. The Company is a holding company
that conducts all of its business through combined entities and is subject to
insurance holding company laws and regulations. Under Wisconsin law,
acquisition of control of the Company, and thereby indirect control of its
insurance subsidiaries, requires the prior approval of OCI. "Control" is
defined as the direct or indirect power to direct or cause the direction of
the management and policies of a person. Any purchaser of 10% or more of the
outstanding voting stock of a corporation is presumed to have acquired
control of the corporation and its subsidiaries unless OCI, upon application,
determines otherwise.
Each of the Company's combined insurance entities is subject to
regulation under state insurance holding company regulations. Such insurance
holding company laws and regulations generally require registration with that
state's department of insurance and the filing of certain reports describing
capital structure, ownership, financial condition, certain intercompany
transactions and general business operations. Various notice and reporting
requirements generally apply to transactions between companies within an
insurance holding company system, depending on the size and nature of the
transactions. Certain state insurance holding company laws and regulations
require prior regulatory approval or, in certain circumstances, prior notice
of, certain material
15
<PAGE>
intercompany transfers of assets as well as certain transactions between the
regulated companies, their parent holding companies and affiliates, and
acquisitions.
UTILIZATION REVIEW REGULATIONS. A number of states have enacted laws
and/or adopted regulations governing the provision of utilization review
activities. Generally, these laws and regulations require compliance with
specific standards for the delivery of services, confidentiality, staffing,
and policies and procedures of private review entities, including the
credentials required of personnel. Some of these laws and regulations may
affect certain operations of the Company's business units.
A few jurisdictions have enacted laws which hold managed care
organizations liable for damages resulting from wrongful denial of care or
payment for care. The Company provides utilization review services through
CNR in at least one state that has passed such legislation. The liability law
encompasses entities that do not provide insurance coverage, but merely
provide utilization review services. CNR has developed risk management
procedures and believes that it will be able to minimize potential liability
for coverage decisions.
ERISA. The provision of goods and services to or through certain types
of employee health benefit plans is subject to ERISA. ERISA is a complex set
of laws and regulations that are subject to periodic interpretation by the
federal courts and the United States Department of Labor. ERISA places
certain controls on how the Company's business units may do business with
employers covered by ERISA, particularly employers that maintain self-funded
plans. The Department of Labor is engaged in an ongoing ERISA enforcement
program, which may result in additional constraints on how ERISA-governed
benefit plans conduct their activities. There have been continued legislative
attempts to limit ERISA's preemptive effect on state laws. If such
limitations were to be enacted, they might increase the Company's liability
exposure under state law-based suits relating to employee health benefits
offered by the Company's health plans and specialty businesses and may permit
greater state regulation of other aspects of those businesses' operations.
EMPLOYEES
As of December 31, 1998, the Company had 1,236 full-time and 53
part-time employees, of whom 218 were managerial and supervisory personnel.
Of these employees, 55 were represented by a union. In addition, the Company
leases the services of 49 people who manage and operate one of its
subsidiaries. The Company considers its relations with its employees to be
good.
TRADEMARKS
"Compcare" is a federally registered service mark of the Company. The
Company has filed for and maintains various other trademarks and trade names
at the federal level and in the State of Wisconsin. Although the Company
considers its registered service marks, trademarks and trade names important
in the operation, of its business, the business of the Company is not
dependent on any individual service mark, trademark or trade name.
ITEM 2. PROPERTIES
The Company occupies common facilities with BCBSUW and is charged a
proportionate share of the cost of such facilities under the Service
Agreements. The Company's corporate headquarters are located in Milwaukee,
Wisconsin in a 235,000 square foot building leased by BCBSUW. The Company
also utilizes space in a Milwaukee regional office leased by BCBSUW, which
has approximately 217,000 square feet of office and warehouse space. In
addition, the Company's business is sold and serviced in five other Wisconsin
regional offices leased by BCBSUW. Unity owns a 40,000 square foot facility
in Sauk City, Wisconsin. Intercare and Ladd both lease facilities including
9,900 square feet in Hartford, Wisconsin and 10,000 combined square feet at
two locations in Michigan, respectively.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is currently, and is from time to time, subject to claims
and suits arising in the ordinary course of its business. Although the
results of litigation proceedings cannot be predicted with certainty, the
Company believes that the ultimate resolution of these proceedings will not
have a material adverse effect on its financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, title and business backgrounds of each of the executive
officers are set forth below. The individuals named below previously were
officers of AMSG and various of its subsidiaries prior to the spin off, and
had resigned from all positions held at AMSG or its remaining subsidiaries as
of the Effective Date of the Distribution. Individuals with comparable
positions as listed below were elected to serve the new company, UWS,
commensurate with the spin off. The business address of each of the executive
officers is 401 West Michigan Street, Milwaukee, Wisconsin 53203.
As of March 11, 1999, the executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Thomas R. Hefty 51 Chairman of the Board, President,
Chief Executive Officer and
Director
Stephen E. Bablitch 45 Vice President, General Counsel and Secretary
Devon W. Barrix 56 Vice President
Mark H. Granoff 52 Vice President and President of UWIC and UHLIC
Gail L. Hanson 43 Vice President and Treasurer
C. Edward Mordy 55 Vice President and Chief Financial Officer
Herbert B. Olson 43 Vice President and Chief Actuary
Emil E. Pfenninger 47 Vice President and President of United Heartland
Penny J. Siewert 42 Vice President of Regional Services
Mary I. Traver 48 Vice President
</TABLE>
Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are appointed. There are no family
relationships among any of the directors and/or executive officers of the
Company.
THOMAS R. HEFTY is the Chairman of the Board, President and Chief
Executive Officer of the Company. Mr. Hefty was elected President of UWS in
1986 and Chairman of the Board and Chief Executive Officer of UWS in 1991.
Since 1987, he has served in various capacities with the Company's
subsidiaries. Mr. Hefty has been Chairman of the Board and a director of
BCBSUW since 1988, having joined BCBSUW in 1982 and later serving as
President. From 1979 to 1982, Mr. Hefty was Deputy Insurance Commissioner for
OCI.
STEPHEN E. BABLITCH is Vice President, General Counsel and Secretary of
the Company. Mr. Bablitch joined UWS in 1996 as General Counsel, Vice
President and Secretary. He has been General Counsel, Vice President and
Secretary of BCBSUW since 1996 as well. He has also served in various
capacities with the Company's subsidiaries since 1996. Prior to joining UWS
and BCBSUW, Mr. Bablitch was an attorney with Dewitt, Ross and Stevens,
Madison, Wisconsin from 1991 to 1996.
17
<PAGE>
DEVON W. BARRIX is Vice President of the Company. He was elected a Vice
President of UWS in 1994 following the Company's acquisition of Unity and its
parent, HMO-W. Mr. Barrix was the Chief Executive Officer of Unity (f/k/a HMO
of Wisconsin Insurance Corporation) from 1985 to 1994 and was the President
of Unity from 1994 to 1996.
MARK H. GRANOFF is Vice President of the Company. Mr. Granoff was
elected a Vice President of UWS in 1991 and was elected President of UWIC in
1991 and UHLIC in 1996. He has served in various capacities with some of
UWS's other subsidiaries since 1991. Mr. Granoff has been a Vice President of
BCBSUW since 1990. Prior to joining BCBSUW, from 1988 to 1990, Mr. Granoff
served as Employee Benefits Marketing Vice President for Business Men's
Assurance Company of America, an insurance company.
GAIL L. HANSON is Vice President and Treasurer of the Company. Ms.
Hanson was Treasurer of UWS since 1987 and was elected a Vice President in
1996. She has served in various capacities with UWS's subsidiaries since
1984. Ms. Hanson was elected Vice President and Treasurer of BCBSUW in 1996
and had been Assistant Vice President and Treasurer since 1987, having joined
BCBSUW in 1984 as the Controller of UWIC.
C. EDWARD MORDY is Chief Financial Officer of the Company. Mr. Mordy was
elected Vice President in 1987 and was elected Chief Financial Officer of UWS
in 1991. He has served in various capacities with UWS's subsidiaries since
1987. Mr. Mordy has been a Vice President and Corporate Controller of BCBSUW
since 1986.
HERBERT B. OLSON is Vice President and Chief Actuary of the Company,
overseeing the actuarial department. Mr. Olson was elected Vice President and
Chief Actuary in December of 1998. Mr. Olson was Vice President and Managed
Care Actuary of John Alden Life Insurance Company from 1996 to 1998 and has
over 21 years experience in the life and health insurance industry.
EMIL E. PFENNINGER is Vice President of the Company. Mr. Pfenninger was
elected a Vice President of UWS in 1995 and President of United Heartland in
1990. Mr. Pfenninger was the Underwriting Manager with CNA Insurance
Companies from 1987 to 1990.
PENNY J. SIEWERT is Vice President of Regional Services of the Company.
Ms. Siewert was elected Vice President of Regional Services of UWS in 1995.
Ms. Siewert joined BCBSUW in 1977 and has served in various capacities. Ms.
Siewert was elected Vice President of Operations for BCBSUW in 1990, Vice
President of Special Markets for BCBSUW in 1992, and Vice President of
Regional Services for BCBSUW in 1995.
MARY I. TRAVER is Vice President of the Company. Ms. Traver was elected
Vice President of UWS in 1988. Ms. Traver was Vice President and General
Counsel of UWS from 1988 to 1996 and Secretary from 1992 to 1996. She has
served in various capacities with some of UWS's subsidiaries since 1987. Ms.
Traver was General Counsel of BCBSUW from 1988 to 1996, Secretary of BCBSUW
from 1992 to 1996, and a Vice President of BCBSUW since 1988. She assumed the
position of Regional Vice President for the Southeastern region of BCBSUW in
1997.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY.
The Common Stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "UWZ". The following table sets forth the per share high and low
sale prices for the Common Stock as reported on the NYSE for the periods
indicated and the cash dividends paid per share for those periods.
<TABLE>
<CAPTION>
HIGH LOW CASH DIVIDENDS PAID
---- --- -------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
First Quarter N/A N/A N/A
Second Quarter N/A N/A N/A
Third Quarter from September 28, 1998 $7.19 $5.81 -
Fourth Quarter $9.31 $4.81 $0.05
</TABLE>
An annual dividend of $0.05 per share was paid on December 30, 1998 to
shareholders of record at the close of business on December 23, 1998.
As of March 8, 1999, there were 262 shareholders of record of Common
Stock. Based on information obtained from the Company's Transfer Agent and
from participants in security position listings and otherwise, the Company
has reason to believe there are more than 2,900 beneficial owners of shares
of Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data present consolidated financial
information with respect to the Company. The balance sheet data as of
December 31, 1998, 1997, and 1996 and the statement of income data for each
of the four years in the period ended December 31, 1998, have been derived
from the audited consolidated financial statements and notes thereto of the
Company. The balance sheet data as of December 31, 1995, and 1994 and the
statement of income data for the year ended December 31, 1994 have been
derived from unaudited financial statements which, in the opinion of the
Company's management, include all adjustments necessary to present the
financial position and results of operations at and for the years presented.
The consolidated financial statements of the Company do not necessarily
reflect the results of operations or financial position that would have
resulted had the Company been a separate, independent company and are not
necessarily indicative of the results to be expected for any future fiscal
year. The following data should be read in conjunction with the Company's
consolidated financial statements, the related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
19
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
1994(3) 1995(3) 1996 1997 1998
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT OPERATING STATISTICS)
STATEMENT OF INCOME DATA: (UNAUDITED)
-----------
Revenues:
Health Services Revenues:
Premium revenue.............................. $355,025 $466,929 $493,092 $560,825 $608,917
Other revenue................................ 15,997 24,222 27,632 26,046 29,728
Investment results............................. 12,050 9,665 19,040 22,238 18,976
-------------------------------------------------------
Total revenues............................ 383,072 500,816 539,764 609,109 657,621
Expenses:
Medical and other benefits.................... 306,056 416,167 425,258 485,198 519,636
Selling, general and administrative
expenses................................... 58,026 72,576 83,839 94,496 103,517
Interest expenses with affiliate.............. - - - - 1,411
Profit sharing on provider arrangements....... 1,516 2,734 2,868 3,380 2,762
Amortization of goodwill and other
intangibles............................... 195 678 841 818 450
-------------------------------------------------------
Total expenses............................ 365,793 492,155 512,806 583,892 627,776
-------------------------------------------------------
Income before income tax expense.............. 17,279 8,661 26,958 25,217 29,845
Income tax expense............................ 5,072 3,277 10,617 9,433 11,767
-------------------------------------------------------
Net income....................................... $ 12,207 $ 5,384 $ 16,341 $ 15,784 $ 18,078
-------------------------------------------------------
-------------------------------------------------------
Pro forma net income (2)......................... $ 15,974 $ 12,722 $ 15,863
-------------------------------
-------------------------------
OPERATING STATISTICS:
Medical loss ratio............................ 86.2% 89.1% 86.2% 86.5% 85.3%
Selling, general and administrative expense
ratio (1)................................. 15.6% 14.8% 16.1% 16.1% 16.2%
BALANCE SHEET DATA: (UNAUDITED)
-----------
Cash and investments.......................... $154,201 $178,926 $182,431 $176,579 $192,558
Total assets.................................. 216,954 261,523 269,478 266,256 298,208
Note payable to affiliate..................... - - - - 70,000
Total shareholders' equity.................... 101,465 120,277 123,882 123,616 64,459
Pro forma note payable to affiliate (2)....... 70,000 70,000
Pro forma total shareholders' equity (2)........ 53,882 53,616
</TABLE>
(1) Ratios are based on health service revenues and selling, general and
administrative expenses.
(2) Reflects pro forma adjustments for interest expense on assumed debt.
See note 1 (Pro forma Earnings Per Common Share) in the accompanying
Consolidated Financial Statements.
(3) Commencing October 1, 1994, the Company's results of operations include
the results of operations of Unity. For the years ended December 31,
1994 and 1995, Unity accounted for $23,994,000 and $100,342,000 of the
Company's total premium revenue and $112,000 and $1,062,000 of the
Company's net income, respectively.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
United Wisconsin Services, Inc. (the "Company") is a leading
provider of managed health care services and employee benefit products. The
Company's two primary product lines are (i) Health Maintenance Organization
("HMO") products, including Compcare Health Services Insurance Corporation
("Compcare"), Valley Health Plan, Inc. ("Valley"), Unity Health Plans
Insurance Corporation ("Unity") and certain point-of-service ("POS") and
other related products managed by Compcare, Valley and Unity; and (ii)
specialty managed care products and services, including dental, life,
disability and workers' compensation products, managed care consulting,
electronic claim submission, pharmaceutical management, managed behavioral
health services, case management and receivables management, sold throughout
the United States. Operating results and statistics for these product groups
are presented below for the periods indicated.
On May 27, 1998, the Board of Directors of American Medical Security
Group, Inc. ("AMSG") (formerly United Wisconsin Services, Inc.) approved a
formal plan to spin off its managed care companies and specialty business to
its shareholders. The new corporation originally was named Newco/UWS, Inc.
and was subsequently renamed United Wisconsin Services, Inc. The spin off
resulted in the distribution on September 25, 1998 ("Spin off date") of one
share of common stock of the Company for each share of AMSG common stock held
as of September 11, 1998. AMSG received a private letter ruling from the
Internal Revenue Service that the spin off is tax free to AMSG, the Company
and their shareholders.
<TABLE>
<CAPTION>
SUMMARY OF OPERATING RESULTS AND STATISTICS
- -------------------------------------------
AT DECEMBER 31,
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Membership at end of period:
HMO products:
Compcare........................................... 175,037 173,241 149,636
Valley............................................. 41,282 37,906 33,434
Unity.............................................. 87,924 85,117 79,147
---------------------------------------
Total HMO products membership................... 304,243 296,264 262,217
---------------------------------------
---------------------------------------
Specialty managed care products and services:
Life/AD&D.......................................... 160,619 129,406 116,390
Dental HMO......................................... 169,709 169,823 169,063
Behavioral health.................................. 992,216 863,538 826,153
Workers' compensation.............................. 53,025 54,928 53,574
Disability and other............................... 125,357 97,727 81,462
---------------------------------------
Total specialty managed care products and
services membership......................... 1,500,926 1,315,422 1,246,642
---------------------------------------
---------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Premium revenue (as a percentage of the total):
HMO products....................................... 85.2 % 85.7 % 85.4 %
Specialty managed care products and services....... 15.3 % 14.7 % 15.0 %
Intercompany eliminations.......................... (0.5)% (0.4)% (0.4)%
-----------------------------------
-----------------------------------
Total 100.0% 100.0% 100.0%
-----------------------------------
-----------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Operating Statistics:
HMO Products:
Medical loss ratio (1).......................... 88.8% 90.1% 89.8%
Selling, general and administrative expense
ratio (2).................................... 9.6% 9.3% 9.3%
Specialty managed care products and services:
Loss ratio (1).................................. 70.9% 70.6% 69.8%
Consolidated:
Loss ratio (1).................................. 85.3% 86.5% 86.2%
Net income margin (3)........................... 2.7% 2.6% 3.0%
</TABLE>
- -----------
(1) Medical and other benefits as a percentage of premium revenue.
(2) Selling, general and administrative expenses (associated with premium
revenue) as a percentage of premium revenue.
(3) Net income as a percentage of total revenues.
The Company's revenues are derived primarily from premiums, while
medical benefits constitute the majority of expenses. Profitability is
directly affected by many factors including, among others, premium rate
adequacy, estimates of medical benefits, health care utilization, effective
administration of benefit payments, operating efficiency, investment returns
and federal and state laws and regulations.
RESULTS OF OPERATIONS
All financial data in the Results of Operations section are gross
numbers and, therefore, are not net of intercompany eliminations. For this
reason, some of the financial data does not precisely match the data in the
financial tables.
1998 COMPARED WITH 1997 AND 1997 COMPARED WITH 1996
TOTAL REVENUES
Total revenues in 1998 increased 8.0% to $657.6 million from $609.1
million in 1997. Total revenues in 1997 increased 12.8% from $539.8 million
in 1996. These increases were due primarily to membership and rate increases.
PREMIUM REVENUE-HMO premium revenue in 1998 increased 8.2% to $518.7
million from $479.2 million in 1997. HMO premium revenue in 1997 increased
13.8% from $421.2 million in 1996. The increases in both years are primarily
due to increases in average HMO premium revenue per member and increases in
the average number of HMO medical members. Average HMO medical premium per
member in 1998 increased 4.3% from 1997 and increased 3.0% in 1997 from 1996,
due to premium increases, partially offset by benefit reductions. The average
number of HMO medical members in 1998 increased 3.5% to 297,737 from 287,534
in 1997. The average number of HMO medical members in 1997 increased 10.8%
from 259,507 in 1996. This increase in 1997 was due in part to the
elimination of a key provider from the network of one of Compcare's
competitors, resulting in a shift of members to Compcare.
Premium revenue for specialty managed care products and services in
1998 increased 11.5% to $93.4 million from $83.8 million in 1997. This
increase was due primarily to an increase of $8.4 million in
22
<PAGE>
the life and disability products and $1.4 million in dental premiums. Premium
revenue in 1997 increased 13.6% from $73.8 million in 1996. The increase was
due primarily to an increase of $2.7 million in disability premiums, an
increase of $2.7 million in dental premiums and an increase of $1.9 million
in workers' compensation premiums. The increases in life and disability
premiums were driven by membership increases of 24.1% and 11.2% in 1998 and
1997, respectively. The increase in workers' compensation premiums in 1997
was due primarily to a change in the reinsurance agreement related to this
business. In 1998 and 1997, the Company ceded 40% of the workers'
compensation premiums written by United Heartland to a third-party reinsurer
while the percentage ceded to the outside reinsurer was 50% in 1996.
OTHER REVENUE- Other revenue from specialty managed care products
and services in 1998 increased 10.5% to $44.2 million from $40.0 million in
1997. This increase was due primarily to an increase in managed behavioral
health and managed care consulting. In addition, the acquisitions of
Intercare and Ladd during 1998 provided $0.6 million and $0.4 million of
additional revenue, respectively. Other revenue in 1997 increased 1.3% from
$39.5 million in 1996. Included in other revenue in 1996 is a $1.5 million
gain on the sale of the vision line of business which is non-recurring. After
adjusting for the gain on the sale of the vision line of business, other
revenue increased by 5.2% from 1996 to 1997. These increases are primarily
attributable to growth in managed behavioral health, electronic claim
transmission services and managed care consulting services.
INVESTMENT RESULTS-Investment results include investment income and
realized gains on the sale of investments. Investment results in 1998
decreased 14.4% to $19.0 million from $22.2 million in 1997. Investment
results in 1997 increased 16.8% from $19.0 million in 1996. Average annual
investment yields, excluding net realized gains, were 5.53%, 5.75% and 5.90%
for 1998, 1997 and 1996, respectively. Average invested assets in 1998
increased 3.2% to $185.2 million from $179.5 million in 1997. Average
invested assets in 1997 decreased 0.1% from $180.7 million in 1996. Changes
in levels of average invested assets relate to ongoing operations, including
collection of receivables and timing of claim payments. Investment results in
1997 also included $1.8 million of mutual fund distributions which were
recorded as investment income in December 1997. Net realized investment gains
decreased to $9.1 million in 1998 from $11.9 million in 1997. Net realized
investment gains in 1997 increased from $8.4 million in 1996. Investment
gains are realized in the normal investment process in response to market
opportunities. In addition, a portion of the gains realized during the second
half of 1997 were achieved as part of a portfolio restructuring to reduce the
overall level of equity investments.
EXPENSE RATIOS
LOSS RATIO-The consolidated loss ratio represents the ratio of
medical and other benefits to premium revenue for the Company on a
consolidated basis, and is therefore a blended ratio for medical, life,
dental, disability and other product lines. The consolidated loss ratio was
85.3% in 1998 compared with 86.5% in 1997 and 86.2% in 1996. The consolidated
loss ratio is influenced by the component loss ratio for each of the
Company's two primary product lines, as discussed below.
The medical loss ratio for HMO products for 1998 was 88.8%, compared
with 90.1% for 1997 and 89.8% for 1996. The decrease in the medical loss
ratio in 1998 for HMO products is due primarily to provider recontracting
with a continuing shift toward capitation in the southeastern Wisconsin HMO
market. For 1998, approximately 54.9% of the medical benefits were provided
under capitated arrangements, compared to 47.5% and 48.4% during 1997 and
1996, respectively. The lower loss ratio in 1998 is also attributable to
higher premium rate increases and a favorable development in the reserves as
of December 31, 1997. The increase in the medical loss ratio in 1997 is
attributable to the competitive market conditions in southeastern Wisconsin
where pricing pressures, coupled with increased utilization, had an adverse
impact on Compcare's loss ratio.
The loss ratio for the risk products within specialty managed care
products and services in 1998 was 70.9%, compared with 70.6% in 1997 and
69.8% in 1996. The loss ratios principally relate to the life, disability,
workers' compensation and dental product lines of business. These products
represent relatively
23
<PAGE>
small blocks of business, and as a result, the loss ratio can exhibit
significant volatility due to varying levels of claim frequency and severity.
Generally, the anticipated aggregate loss ratio for the four products should
range between 70% and 75%. The 1998 and 1997 loss ratios were impacted by a
higher level of life and disability claims in comparison to a more favorable
level of life and disability claims in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO-The Selling,
General and Administrative ("SGA") expense ratio includes commissions,
administrative expenses, and premium taxes and other assessments. The SGA
expense ratio for HMO products in 1998 was 9.6%, compared with 9.3% in 1997
and 9.3% in 1996. During 1998, Compcare incurred higher costs as a result of
a major system conversion and related training costs. A new claims
administrative system was necessary to replace the previous system for which
the service agreement expired, provide improved functionality and resolve the
Year 2000 Issue.
SGA expenses related to specialty managed care products and services
increased 9.7% in 1998 to $63.1 million from $57.5 million in 1997. SGA
expenses related to specialty managed care products and services increased
10.8% in 1997 from $51.9 million in 1996. Increases in SGA expenses correlate
to premium and other revenue increases which were 8.8% in 1998 compared with
1997 and 12.7% in 1997 compared with 1996. In addition, the mix of business
shifted over these yearly periods, as a result of greater growth in ancillary
lines of business that have higher SGA expense ratios.
OTHER EXPENSES
Profit sharing on provider arrangements was $2.8 million in 1998,
compared with $3.4 million in 1997 and $2.9 million in 1996, net of
intercompany eliminations. Included in this caption is expense related to the
Unity and Valley provider arrangements and income from the workers'
compensation agreements. Profit sharing expenses related to the Unity and
Valley provider arrangements were $3.2 million, $4.0 million and $3.0 million
in 1998, 1997 and 1996, respectively. Income from the workers' compensation
agreements was $0.4 million, $0.6 million and $0.1 million in 1998, 1997 and
1996, respectively.
Interest expense of $1.4 million was incurred in 1998 as a result
of the assumption of $70 million in debt owed to BCBSUW as of September 11,
1998.
Amortization of goodwill and other intangibles was $0.5 million for
1998 compared with $0.8 for 1997 and 1996. The reduction in 1998 is due to
full amortization of certain intangibles.
NET INCOME
Consolidated net income in 1998 increased 14.5% to $18.1 million
from $15.8 million in 1997. Consolidated net income in 1997 decreased 3.1%
from $16.3 million in 1996.
The Company's effective tax rate was 39.4% in 1998, compared with
37.4% in 1997 and 39.4% in 1996. The Company's effective tax rate fluctuates
based upon the relative profitability of the Company's two product lines and
the differing effective tax rates for each of those product lines.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of health
services revenues and investment income. The primary uses of cash include
medical and other benefits and operating expense payments. Positive cash
flows are invested pending future payments of medical and other benefits and
other operating expenses. The Company's investment policies are designed to
maximize yield, preserve principal and provide liquidity to meet anticipated
payment obligations.
On an historical basis, the Company has generated positive cash flow
from operations. For 1998, net cash provided by operating activities amounted
to $21.9 million, compared with $1.6 million for 1997. The increase in cash
flows from operations in 1998 compared to 1997 was due primarily to an
increase in
24
<PAGE>
operating income and an increase in medical and other benefits payable and
premium advances. Due to periodic cash flow requirements of certain
subsidiaries, the Company made borrowings under its bank line of credit
ranging up to $10.0 million during 1998 and $8.0 million during 1997 to meet
short-term cash needs. No balance was outstanding at December 31, 1998, 1997
or 1996.
The Company's investment portfolio consists primarily of investment
grade bonds, Government securities and has a limited exposure to equity
securities. At December 31, 1998, $133.1 million or 80.0% of the Company's
total investment portfolio was invested in bonds compared with $127.9 million
or 80.1% at December 31, 1997. The bond portfolio had an average quality
rating by Moody's Investor Service of Aa3 at December 31, 1998 and 1997. The
majority of the bond portfolio was classified as available for sale. The
market value of the total investment portfolio, which includes stocks and
bonds, exceeded amortized cost by $1.9 million and $4.8 million at December 31,
1998 and 1997, respectively. Unrealized holding gains and losses on bonds
classified as available for sale are included as a component of shareholders'
equity, net of applicable deferred taxes. The Company has no investments in
mortgage loans, no non-publicly traded securities, or financial derivatives.
From time to time, capital contributions are made to the
subsidiaries to assist them in maintaining appropriate levels of capital and
surplus for regulatory and rating purposes. Insurance subsidiaries are
required to maintain certain levels of statutory capital and surplus. In
Wisconsin, where a large percentage of the Company's premium is written,
these levels are based upon the amount and type of premiums written and are
calculated separately for each subsidiary. As of the balance sheet dates
presented, statutory capital and surplus for each of these insurance
subsidiaries exceeded required levels.
The amount of dividends which may be paid to the Company from
insurance subsidiaries are limited by state regulation. In the past, the
insurance subsidiaries have been allowed, with prior notification to the OCI,
to pay dividends in excess of the ordinary dividend levels prescribed by
regulation.
In conjunction with the distribution of assets pursuant to the spin
off, UWS assumed a $70 million note obligation to BCBSUW. The assumption of
debt was effective September 11, 1998. The obligation and related debt
service costs of $1.4 million, for the period subsequent to September 11,
1998, have been reflected in the accompanying consolidated financial
statements. The Company recognizes that its debt to equity ratio is high,
primarily as a result of its assumption of the $70.0 million loan from
BCBSUW. However, the Company believes that this ratio should improve to the
extent that BCBSUW purchases new shares of UWS common stock to increase its
ownership from 37.8% to approximately 51%. The purchase price for the shares
of common stock which are purchased directly from the Company will be paid
through either the cancellation of a corresponding portion or all of the
$70.0 million debt obligation or in cash. BCBSUW also may purchase some of
the shares of common stock in the open market.
In addition to internally generated funds and periodic borrowings on
its bank line of credit, the Company believes that additional financing to
facilitate long-term growth could be obtained through equity offerings, debt
offerings, financings from BCBSUW or bank borrowings, as market conditions
may permit or dictate.
The Company is party to certain provider arrangements in conjunction
with Unity and Valley as further described below.
Effective January 1, 1992, the Company acquired all of the
outstanding capital stock of Valley for cash approximating $2,800,000,
representing the net assets of Valley plus $400,000 as negotiated by the
Company. Valley, a health maintenance organization located in Eau Claire,
Wisconsin, was purchased from Midelfort, which continues to be Valley's
primary health care provider. Under the terms of the purchase and sale
agreement, Midelfort retained an option to repurchase all of the capital
stock of Valley, at a price determined by the formula used in computing the
purchase price paid by the Company, at any time until December 31, 1996. The
option to repurchase was subsequently amended to permit repurchase at
December 31, 1999. The acquisition was accounted for under the purchase
method of accounting.
25
<PAGE>
Effective October 1, 1994, the Company acquired all of the
outstanding common stock of HMO-W, Inc. for cash approximating $7,482,000
representing the net assets of HMO-W, Inc. as negotiated by the
Company. HMO-W, Inc. owned all of the outstanding common stock of HMOW.
Effective October 1, 1994, the Company acquired all of the assets of
U-Care and certain assets from an affiliate of U-Care for cash approximating
$3,772,000, representing net assets plus $500,000 as negotiated by the
Company.
Pursuant to the HMO-W, Inc. and U-Care purchase agreements, options
to repurchase the net assets of HMO-W, Inc. and U-Care were issued to the
respective primary provider groups, at prices determined by the formula used
in computing the purchase prices paid by the Company, effective on November 1,
1999 or 2004. The U-Care and HMO-W, Inc. acquisitions were accounted for
under the purchase method of accounting. The accompanying consolidated
financial statements include the results of operations of U-Care and HMOW
which have been merged to form Unity.
Total revenues subject to repurchase options, pursuant to the
various acquisition agreements, totaled $207,014,000, $186,318,000,
$169,341,000 for 1998, 1997 and 1996, respectively. Profit sharing expense
related to these provider arrangements is calculated based on the
profitability of the HMO subsidiary and totaled $3,171,000, $3,960,000,
$3,002,000 in 1998, 1997 and 1996, respectively. Total net income subject to
repurchase options, pursuant to the various acquisition agreements, totaled
2,358,000 $2,395,000, $2,629,000 for 1998, 1997 and 1996, respectively. Total
assets and total net assets subject to repurchase options were $44,798,000
and $21,362,000, respectively, at December 31, 1998 and $49,802,000 and
$20,632,000, respectively, at December 31, 1997.
Should the buy back options be exercised, the Company would receive
an amount equal to the premium over net assets but would lose rights to the
future profits on the HMO. The cash received by the Company pursuant to the
exercise of the buy back option could be redeployed to support additional
premium writings, acquire other businesses or be invested to earn a portfolio
return. Due to these alternative uses of capital, the potential buy back
arrangements do not represent material claims against the Company's liquidity
and capital resources.
INFLATION
Health care costs have been rising and are expected to continue to
rise at a rate that exceeds the consumer price index. The Company's cost
control measures, risk-sharing incentive arrangements with medical care
providers, and premium rate increases are designed to reduce the adverse
effect of medical cost inflation on its operations. In addition, the Company
utilizes its ability to apply appropriate underwriting criteria in selecting
groups and individuals and in controlling the utilization of health care
services. However, there can be no assurance that the Company's efforts will
fully offset the impact of inflation or that premium revenue increases will
equal or exceed increasing health care costs.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 in the accompanying Consolidated Financial
Statements for Statement of Financial Accounting Standards (SFAS) recently
adopted by the Company. These include SFAS 130, "Reporting Comprehensive
Income", SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information", and SFAS 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits".
26
<PAGE>
YEAR 2000 ISSUES
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company has identified required modifications or replacements of
its software and certain hardware so that those systems will properly utilize
dates beyond December 31, 1999. The Company presently believes that with
these modifications or replacements of existing software and certain
hardware, the Year 2000 Issue can be mitigated and will not pose significant
operational problems. However, if such modifications and conversions are not
made or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing, and implementation.
To date, the Company has fully completed its assessment of all systems that
could be significantly affected by the Year 2000 Issue. The completed
assessment indicated that most of the Company's significant information
technology systems could be affected, particularly the general ledger,
billing and processing of medical claims. That assessment also indicated that
software and hardware (embedded chips) used in building operations and office
equipment (hereafter also referred to as non-IT systems) also are at risk.
The Company does not believe that the Year 2000 Issue presents a material
exposure as it relates to the Company's non-IT systems. In addition, the
Company has inquired and gathered information about the Year 2000 readiness
status of its significant suppliers and vendors and continues to monitor
their readiness.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR
COMPLETION OF EACH REMAINING PHASE
As of December 31, 1998, the Company is approximately 77% complete
with the remediation phase for its information technology exposures. Once
software is reprogrammed or replaced for a system, the Company will begin
testing and implementation. These phases are expected to run concurrently for
different systems. For all systems where the Company has completed the
remediation phase, the Company has also completed the testing and
implementation phases. For those systems where remediation is still underway,
the Company expects to complete remediation, testing and implementation by
September 30, 1999.
The remediation phase of non-IT systems is nearly complete. Testing
of remediated non-IT systems is approximately 65% complete. Once testing is
complete, the non-IT systems are expected to be ready for immediate use. The
Company expects to complete its remediation efforts, testing and
implementation of affected non-IT systems by April 30, 1999.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE
YEAR 2000
The Company outsources and relies extensively on third party systems
to process selected payroll, membership and claims processing functions,
among others. The Company is in the process of working with third party
vendors to ensure that their systems are Year 2000 ready. Several third party
systems are currently not Year 2000 ready. Compcare utilizes a membership
system that is expected to complete its upgrades and testing by March 31,
1999. UWG is expected to be Year 2000 ready by September 30, 1999 for its
administrative, claims and billing systems. Based on discussions with these
key vendors, the Company is of the understanding that the vendor systems
utilized are or will be Year 2000 ready.
27
<PAGE>
The Company has initiated formal communications with its systems
processing vendors, government agencies and all large customers and providers
using electronic interfaces to determine the extent to which the Company's
interface systems are vulnerable to the failure of third parties to remediate
Year 2000 Issues. The Company is not aware of any significant interface
issues.
The Company has surveyed its significant suppliers and
subcontractors (external agents) that do not share information systems with
the Company. To date, the Company is not aware of any external agent with a
Year 2000 Issue that would materially impact the Company's results of
operations, liquidity or capital resources. However, the Company has no means
of ensuring that external agents will be Year 2000 ready. The inability of
external agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-compliance by
external agents is not determinable.
COST OF THE YEAR 2000 PROJECT
The Company has utilized both internal and external resources to
reprogram or replace, test and implement the software and non-IT systems for
the Year 2000 modifications. The total direct costs of the Year 2000 project
is estimated at $1.5 million and is being funded through operating cash
flows. To date, the Company has incurred $0.9 million of identifiable costs
related to all phases of the Year 2000 project. Remaining costs, to be
incurred to complete the Year 2000 project, are estimated to approximate $0.6
million. In addition, the Company has capitalized $2.7 million related to
other functionality enhancing system upgrades which also provide Year 2000
readiness. A number of other repairs to current systems are covered by
existing maintenance agreements and by normal upgrades and do not present
incremental additional expense.
BCBSUW leases the claims, membership and general ledger software
programs and subleases the use of these systems to the Company under the
service agreement. BCBSUW capitalized $16.5 million of implementation and
system enhancement costs that were incurred to replace these systems
primarily as a result of a service agreement expiration and for improved
functionality. These replacements also included Year 2000 readiness but were
not the result of acceleration due to Year 2000 Issues. Approximately 24% of
the amortized costs are allocated to the Company.
Costs related to maintenance of existing computer hardware and
software are expensed as incurred. Purchases of new hardware or software in
replacement of non-compliant hardware or software and reprogramming costs are
being capitalized in accordance with the Company's standard accounting
practices.
RISKS ASSOCIATED WITH YEAR 2000
Company management believes it has an effective program in place to
resolve the Year 2000 Issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 program. In the
event that the Company is unable to complete the remaining phases, the
Company would selectively be unable to bill and collect premiums, adjudicate
medical and other claims, manage the utilization of medical services or
perform actuarial determinations. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also materially adversely
affect the Company. The Company could be subject to litigation on a loss of
business in the event it failed to complete certain of the remaining
remediation and implementation steps. The amount of any potential liability
and lost revenue cannot be reasonably estimated at this time. No provision
for any such liability or lost revenue has been recorded.
CONTINGENCY PLANS
The Company is developing contingency plans for certain critical
applications and is working on such plans with major data center vendors.
These contingency plans are being developed in the event the system
conversions and their functionality or the readiness of Year 2000 are not
completed on a timely basis. These contingency plans involve, among other
actions, manual workarounds, reducing claim inventories prior to December 31,
1999, and adjusting staffing strategies.
28
<PAGE>
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Of the $192.6 million of cash and investments held by the Company at
December 31, 1998, approximately $26.4 million were cash and cash equivalents
and $7.7 million were securities that were being held to maturity. The
remaining $158.5 million available for sale securities is comprised of $33.4
million equities and $125.1 million of principally US domestic fixed income
securities with an average quality of Aa3. The Company also has access to an
adjustable-rate line-of-credit and has an adjustable-rate loan with its
majority shareholder. The total borrowings as of December 31, 1998 were $70.0
million.
Because of the Company's investment policies, the primary market
risks associated with the Company's portfolio are interest rate risk, credit
risk and the risk related to fluctuations in equity prices. With respect to
interest rate risk, a reasonably near-term rise in interest rates could
negatively affect the fair value of the Company's bond portfolio; however,
because the Company considers it unlikely that the Company would need or
choose to substantially liquidate its portfolio, the Company believes that
such an increase in interest rates would not have a material impact on future
earnings or cash flows. In addition, the Company is exposed to the risk of
loss related to changes in credit spreads. Credit spread risk arises from the
potential that changes in an issuer's credit rating or credit perception may
affect the value of financial instruments.
The overall goal of the investment portfolios is to support the
ongoing operations of the Company's business units. The Company's philosophy
is to actively manage assets to maximize total return over a multiple-year
time horizon, subject to appropriate levels of risk. The Company manages
these risks by establishing gain and loss tolerances, targeting asset-class
allocations, diversifying among assets classes and segments within various
asset classes, and using performance measurement and reporting.
The Company uses a sensitivity model to assess the interest rate
risk of its fixed income investments. The model includes all fixed income
securities held as of December 31, 1998 and incorporates assumptions
regarding the impact of changing interest rates on expected cash flows for
certain financial assets with prepayment features, such as callable bonds and
mortgage-backed securities. The reduction in the fair value of the Company's
modeled financial assets resulting from a hypothetical instantaneous 100
basis point increase in the U.S. Treasury yield curve is estimated at $3.9
million as of December 31, 1998.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Form 10-K
Page Number
-----------
Report of Independent Auditors ..........................................31
Consolidated Financial Statements
Consolidated Balance Sheets..............................................32
Consolidated Statements of Income........................................34
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income............................................... 35
Consolidated Statements of Cash Flows....................................36
Notes to Consolidated Financial Statements...............................37
30
<PAGE>
Report of Independent Auditors
Board of Directors
United Wisconsin Services, Inc.
We have audited the accompanying consolidated balance sheets of United
Wisconsin Services, Inc. (the Company) as of December 31, 1998 and 1997, and
the related statements of income, changes in shareholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also include the financial statement
schedules listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth herein.
Milwaukee, Wisconsin ERNST & YOUNG, LLP
February 12, 1999
31
<PAGE>
United Wisconsin Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,385 $ 17,033
Investments - available for sale 158,463 151,653
Other receivables 65,464 54,066
Prepaid and other current assets 6,778 7,304
------------------------------------
Total current assets 257,090 230,056
Investments - held to maturity 7,710 7,893
Property and equipment, net 8,963 6,978
Goodwill and other intangibles, net 7,751 5,005
Other noncurrent assets 16,694 16,324
------------------------------------
Total assets $298,208 $266,256
------------------------------------
------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical and other benefits payable $ 70,659 $ 60,724
Advance premiums 30,584 24,060
Note payable to affiliates 70,000 -
Due to affiliates - other 7,513 3,867
Payables and accrued expenses 19,129 20,926
Other current liabilities 10,527 7,745
------------------------------------
Total current liabilities 208,412 117,322
Other noncurrent liabilities 25,337 25,318
------------------------------------
Total liabilities 233,749 142,640
Shareholders' equity:
Preferred stock (no par value, 1,000,000 shares authorized) - -
Common stock (no par value, no stated value, 50,000,000
shares authorized, 16,812,081 shares issued and
outstanding at December 31, 1998) 13,378 -
Retained earnings 50,088 -
Investments by and advances from AMSG - 120,405
Unrealized gains on investments, net of taxes 993 3,211
------------------------------------
Total shareholders' equity 64,459 123,616
------------------------------------
Total liabilities and shareholders' equity $298,208 $266,256
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
33
<PAGE>
United Wisconsin Services, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------------------------------------------------------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Health services revenues:
Premium revenue $608,917 $560,825 $493,092
Other revenue 29,728 26,046 27,632
Investment results 18,976 22,238 19,040
----------------------------------------------------------
Total revenues 657,621 609,109 539,764
Expenses:
Medical and other benefits 519,636 485,198 425,258
Selling, general and administrative expenses 103,517 94,496 83,839
Profit sharing on provider arrangements 2,762 3,380 2,868
Interest expense with affiliate 1,411 - -
Amortization of goodwill and other intangibles 450 818 841
----------------------------------------------------------
Total expenses 627,776 583,892 512,806
----------------------------------------------------------
Income before income tax expense 29,845 25,217 26,958
Income tax expense 11,767 9,433 10,617
----------------------------------------------------------
Net income $ 18,078 $ 15,784 $ 16,341
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
34
<PAGE>
<TABLE>
<CAPTION>
United Wisconsin Services, Inc.
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
Accumulated
Other
Common Investments by Comprehensive Total
Shares Common Retained and Advances Income, net Shareholders'
Outstanding Stock Earnings from AMSG of taxes Equity
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at December 31, 1995 - $ - $ - $116,766 $ 3,511 $120,277
Comprehensive income:
Net income - - - 16,341 16,341
Change in unrealized gains (losses) on investments 448 448
----------
Comprehensive income 16,789
----------
Change in investment by and advances from AMSG - - - (13,184) (13,184)
------------- --------------------------------------------------------------
Balance at December 31, 1996 - - - 119,923 3,959 123,882
Comprehensive income:
Net income - - - 15,784 15,784
Change in unrealized gains (losses) on investments (748) (748)
----------
Comprehensive income 15,036
----------
Change in investment by and advances from AMSG - - - (15,302) (15,302)
------------- --------------------------------------------------------------
Balance at December 31, 1997 - - - 120,405 3,211 123,616
Comprehensive income:
Net income - - 3,572 14,506 18,078
Change in unrealized gains (losses) on investments (2,218) (2,218)
---------
Comprehensive income 15,860
---------
Cash dividends paid on common stock - - (839) - (839)
Change in investment by and advances from AMSG - - - (76,133) (76,133)
Distribution of equity to the Company from AMSG - 11,423 47,355 (58,778) -
Issuances of common stock, no par value, in
connection with the spin off 16,573,202 - - - -
Issuances of common stock, no par value, related to
acquisition and dividend reinvestment plan 238,879 1,955 - - 1,955
------------- ---------------------------------------------------------------
Balance at December 31, 1998 16,812,081 $13,378 $50,088 $ - $ 993 $ 64,459
------------- ---------------------------------------------------------------
------------- ---------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
35
<PAGE>
United Wisconsin Services, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
-----------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 18,078 $ 15,784 $ 16,341
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,199 1,964 2,341
Realized investment gains (9,123) (11,921) (8,381)
Deferred income tax benefit 839 (1,023) (901)
Changes in other operating accounts net
of acquisitions in 1998:
Other receivables (3,495) (5,246) 2,802
Due from clinics and providers (6,784) (338) -
Medical and other benefits payable 8,392 6,501 1,415
Advance premiums 6,524 (1,983) 4,062
Due to/from affiliates 3,392 7,782 (10,327)
Other, net 831 (9,901) (532)
-----------------------------------------------------
Net cash provided by operating activities 21,853 1,619 6,820
INVESTING ACTIVITIES
Acquisition of subsidiaries (net of cash and cash
equivalents acquired of $549,000) (1,181) - -
Purchases of available for sale investments (241,661) (452,906) (413,648)
Proceeds from sale of available for sale investments 233,974 433,012 364,321
Proceeds from maturity of available for sale investments 6,500 34,252 43,031
Purchases of held to maturity investments (313) (2,894) (2,573)
Proceeds from maturity of held to maturity investments 405 3,567 2,171
Proceeds from sale of property and equipment 3 112 2,861
Additions to property and equipment (3,572) (1,356) (1,564)
Purchase of minority interest in subsidiary - (2,218) -
-----------------------------------------------------
Net cash provided by (used in) investing activities (5,845) 11,569 (5,401)
FINANCING ACTIVITIES
Cash dividends paid (839) - -
Issuances of common stock 316 - -
Decrease in investments by and advances from AMSG (6,133) (15,302) (15,352)
-----------------------------------------------------
Net cash used in financing activities (6,656) (15,302) (15,352)
-----------------------------------------------------
Cash and cash equivalents:
Increase (decrease) during year 9,352 (2,114) (13,933)
Balance at beginning of year 17,033 19,147 33,080
-----------------------------------------------------
Balance at end of year $ 26,385 $ 17,033 $ 19,147
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
See accompanying notes.
36
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continuted)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
United Wisconsin Services, Inc. ("the Company") is a leading provider of
managed health care services and employee benefit products. The Company's two
primary product lines are (i) Health Maintenance Organization ("HMO")
products, sold primarily in Wisconsin, and (ii) specialty managed care
products and services, including dental, life, disability and workers'
compensation products, managed care consulting, electronic claim submission,
pharmaceutical management, managed behavioral health services and receivables
management, sold throughout the United States.
On May 27, 1998, the Board of Directors of American Medical Security Group,
Inc. ("AMSG") (formerly United Wisconsin Services, Inc.) approved a formal
plan to spin off its managed care companies and specialty business to its
shareholders. The spin off involved the creation of a new corporation
originally named Newco/UWS, Inc., subsequently renamed United Wisconsin
Services, Inc. ("UWS"). The spin off resulted in the distribution of one
share of common stock of UWS on September 25, 1998 ("Spin off date") for each
share of AMSG common stock held as of September 11, 1998. AMSG received a
private letter ruling from the Internal Revenue Service that the spin off is
tax free to AMSG, UWS and their shareholders. A further description of the
spin off and certain transactions with AMSG is included in Notes 1, 6, 7 and
10.
The Company is affiliated with Blue Cross & Blue Shield United of Wisconsin
("BCBSUW") through certain common officers and directors. At December 31,
1998, BCBSUW owns approximately 38% of the Company's common stock.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
The consolidated financial statements present the Company's financial
position, operations and cash flows as if the Company had been an
independent, public company for all years presented. The Company consolidates
majority owned subsidiaries that are
37
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
controlled by the Company. All material intercompany transactions have been
eliminated. For those subsidiaries for which repurchase options exist (see
Note 2), the Company consolidates those subsidiaries when control is deemed
to be other than temporary. Management believes that control of Unity Health
Plans Insurance Corporation ("Unity") and Valley Health Plan, Inc. ("Valley")
is not temporary as exercise of the repurchase options is not probable. Any
repurchase would not provide a substantial economic benefit to the option
holders and would require regulatory approval pursuant to change of control
regulations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include operating cash and short-term investments
with original maturities of three months or less. These amounts are recorded
at cost, which approximates market.
INVESTMENTS
Investments are classified as either held to maturity or available for sale.
Investments which the Company has the intent and ability to hold to maturity
are designated as held to maturity and are stated at amortized cost. All
other investments are classified as available for sale and are stated at fair
value based on quoted market prices, with unrealized gains and losses
excluded from earnings and reported in accumulated other comprehensive
income, net of income tax effects. Realized gains and losses from the sale of
available for sale debt securities and equity securities are based on the
first-in, first-out basis.
OTHER RECEIVABLES
Receivables are stated at net realizable value, net of allowances of $727,000
and $394,000 at December 31, 1998 and 1997, respectively, based upon
historical collection trends and management's judgment of the ultimate
collectibility. In late December 1998, Compcare Health Services Insurance
Corporation ("Compcare") provided $13,421,000 of interest bearing notes to
certain contracted health care providers primarily due in full on April 1,
1999. The Company retained the ability to offset claim payments to these
health care providers after April 1, 1999 and has included the advances in
other receivables on the consolidated balance sheet.
38
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives,
which are 20 to 30 years for land improvements, 10 to 40 years for buildings
and building improvements, 3 to 5 years for computer equipment and software
and 3 to 10 years for furniture and other equipment.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of cost over the fair market value of net
assets acquired. Goodwill and other intangible assets are being amortized on
a straight-line basis over a period of 15 years or less. Accumulated
amortization was $1,947,000 and $1,347,000 at December 31, 1998 and 1997,
respectively.
The Company periodically evaluates whether events and circumstances have
occurred which may affect the estimated useful life or the recoverability of
the remaining balance of its intangibles. At December 31, 1998, the Company's
management believed that no material impairment of goodwill or other
intangible assets existed.
REVENUE RECOGNITION
Health services premiums and managed behavioral health fees are recognized as
revenue in the period in which enrollees are entitled to care. Managed care
consulting revenues are generally recognized when services are rendered.
MEDICAL AND OTHER BENEFITS
Medical and other benefits expense consists principally of capitation
expenses, health and disability claims and life insurance benefits. In
addition to actual paid claims and capitation, these expenses include the
change in estimates of reported and unreported claims and accrued capitation
fees and adjustments, which are unpaid as of the balance sheet date. The
estimates of reported and unreported claims and accrued capitation fees and
adjustments, which are unpaid as of the balance sheet date, are based on
historical payment patterns using actuarial techniques. Processing costs are
accrued as operating expenses based on an estimate of the costs necessary to
process these claims.
39
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continuted)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's year-end claim liabilities are substantially satisfied through
claim payments in the subsequent year. Any adjustments to prior period estimates
are reflected in the current period. Capitation represents fixed per member per
month payments to participating physicians, other medical specialists and
hospital systems, as compensation for providing comprehensive health or dental
care services. In addition, certain subsidiaries have risk-sharing, stop-loss,
and bonus arrangements with certain providers. Accruals relating to these
arrangements are developed based on historical payment patterns using actuarial
techniques. The noncurrent portion of medical and other benefits payable
pertaining to long-term disability, workers' compensation and certain life
insurance products is $19,375,000 and $20,918,000 at December 31, 1998 and 1997,
respectively. The noncurrent portion of long-term disability, worker's
compensation and certain life insurance products is estimated using actuarial
techniques based on historical patterns. Amounts estimated to be paid more than
one year from the balance sheet date are considered noncurrent.
REINSURANCE
Certain premiums and benefits are assumed from and ceded to other insurance
companies under various reinsurance agreements. The ceded reinsurance agreements
provide the Company with increased capacity to write larger risks and maintain
its exposure to loss within its capital resources. The ceding company is
contingently liable on reinsurance ceded in the event that the reinsurers do not
meet their contractual obligations. Premiums ceded totaled $45,755,000,
$49,522,000 and $46,549,000 in 1998, 1997 and 1996, respectively. Ceded benefits
totaled $35,038,000, $42,003,000 and $32,073,000 in 1998, 1997 and 1996,
respectively. Premiums assumed totaled $28,682,000, $33,514,000 and $32,642,000
in 1998, 1997 and 1996, respectively. Assumed benefits totaled $22,694,000,
$28,213,000 and $21,722,000 in 1998, 1997 and 1996, respectively.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes.
40
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA EARNINGS PER COMMON SHARE (UNAUDITED)
Historical earnings per share ("EPS") has been omitted since the Company was
not a separate entity with a capital structure of its own throughout any of
the years presented.
Pro forma net income per common and common equivalent share is calculated as
if the spin off had occurred at the beginning of fiscal year 1996, and is
adjusted in 1998, 1997 and 1996 for additional interest expense, net of
related income tax. Pro forma EPS are based on the pro forma weighted average
number of shares of outstanding Company common stock and dilutive common
equivalent shares from stock options, giving effect to the distribution of
one share of Company stock for each share of AMSG common stock. Pro forma
dilutive common equivalent shares from stock options are stated at the
historical AMSG dilutive common equivalent share level.
The following table sets forth the pro forma computation of basic and diluted
EPS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996
------------- ----------------- --------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Net income as reported $18,078 $15,784 $16,341
Pro forma adjustment - interest expense, net of tax 2,215 3,062 367
-------------- ----------------- ------------------
Pro forma net income $15,863 $12,722 $15,974
-------------- ----------------- ------------------
-------------- ----------------- ------------------
Pro forma basic weighted average common shares 16,560,382 16,423,270 12,892,431
Pro forma dilutive weighted average common shares (1) 16,563,165 16,423,270 12,892,431
EPS on net income as reported - basic and diluted (2) $1.09 $0.96 $1.27
----- ----- -----
----- ----- -----
EPS on pro forma net income - basic and diluted (3) $0.96 $0.77 $1.24
----- ----- -----
----- ----- -----
</TABLE>
(1) Pro forma calculations for dilutive securities for the period January 1,
1996 thru September 25, 1998, assume that the price of the stock and the
strike price of the options is the same for the periods prior to the Spin
off date.
41
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(2) EPS on net income as reported are computed by dividing net income as
reported, by the pro forma weighted average number of common shares
outstanding. There is no dilutive effect on securities for the period
prior to the Spin off date (1).
(3) EPS on pro forma net income are computed by dividing pro forma net income
by the pro forma weighted average number of common shares outstanding.
There is no dilutive effect on securities for the period prior to the
Spin off date (1).
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 130, "Reporting Comprehensive Income". SFAS 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no impact on
the Company's net income or shareholders' equity. SFAS 130 requires
unrealized gains or losses, net of taxes, on the Company's available for sale
securities, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income.
SEGMENT REPORTING
At December 31, 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS 131 establishes new
rules for identification and disclosure of segment information.
PENSION PLAN REPORTING
At December 31, 1998, the Company adopted SFAS 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS 132 establishes new
rules for the disclosure of pension plan information.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for 1997 and 1996 to conform with the 1998 presentation.
42
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
2. PROVIDER ARRANGEMENTS
The Company is party to certain provider arrangements in conjunction with
Unity and Valley, wholly owned HMO subsidiaries included in the Company's
consolidated financial statements, which include profit-sharing payments to
certain providers and repurchase provisions.
Under the terms of the Valley purchase and sale agreement, as amended, the
seller retained an option to repurchase all of the capital stock of Valley as
of December 31, 1999, at a price equal to Valley's net assets plus $400,000.
Pursuant to the Unity related purchase agreements, options to repurchase the
net assets of the acquired companies were issued to the sellers effective as
of November 1, 1999 or 2004. One seller has the option to repurchase a
portion of Unity's business at a price equal to the net assets of such
business plus $500,000. The other seller has the option to repurchase the
remainder of the Unity business at a price equal to the net assets of such
business.
Total revenues subject to repurchase options, pursuant to the various
acquisition agreements, totaled $207,014,000, $186,318,000 and $169,341,000
for 1998, 1997 and 1996, respectively. Profit sharing expense related to
these provider arrangements is calculated based on the profitability of the
HMO subsidiary and totaled $3,171,000, $3,960,000 and $3,002,000 in 1998,
1997 and 1996, respectively. Total net income subject to repurchase options,
pursuant to the various acquisition agreements, totaled $2,358,000,
$2,395,000 and $2,629,000 for 1998, 1997 and 1996, respectively. Total assets
and total net assets subject to repurchase options were $44,798,000 and
$21,362,000, respectively, at December 31, 1998 and $49,802,000 and
$20,632,000, respectively, at December 31, 1997.
43
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS
<TABLE>
<CAPTION>
Investment results comprise the following: YEAR ENDED DECEMBER 31,
1998 1997 1996
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest on bonds $ 8,223 $ 9,075 $10,097
Dividends on equity securities 916 1,103 636
Realized gains 12,518 15,317 13,463
Realized losses (3,395) (3,396) (5,082)
Interest on cash equivalents and other investment income 1,609 473 922
-------------- -------------- --------------
Gross investment results 19,871 22,572 20,036
Investment expenses (508) (424) (467)
Other interest income (expense) (387) 90 (529)
-------------- -------------- --------------
$18,976 $22,238 $19,040
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Proceeds from sales of stocks during 1998 was $73,156,000. Proceeds from
sales of bonds classified as available for sale during 1998, excluding
maturities, was $160,818,000.
Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for debt securities classified as available for
sale or cost for equity securities. A summary of the net increase (decrease)
in unrealized gains, less deferred income taxes, which is included in
accumulated other comprehensive income, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt securities $(1,248) $ 1,582 $(2,884)
Equity securities (1,837) (3,134) 3,542
Provision for deferred income tax (benefit) 867 804 (210)
-------------- -------------- --------------
$(2,218) $ (748) $ 448
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
44
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair values of investments are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
At December 31, 1998: (IN THOUSANDS)
Available for sale:
U.S. Treasury securities $ 10,858 $ 4 $ (50) $ 10,812
State and municipal securities 1,301 59 - 1,360
Foreign government securities 6,457 135 (111) 6,481
Corporate debt securities 74,748 1,294 (689) 75,353
Government agency mortgage-backed
securities 30,961 150 (36) 31,075
Equity securities 32,527 2,149 (1,294) 33,382
---------------- --------------- --------------- ---------------
156,852 3,791 (2,180) 158,463
Held to maturity:
U.S. Treasury securities 7,710 284 - 7,994
---------------- --------------- --------------- ---------------
$164,562 $4,075 $(2,180) $166,457
---------------- --------------- --------------- ---------------
---------------- --------------- --------------- ---------------
At December 31, 1997:
Available for sale:
U.S. Treasury securities $ 30,618 $ 330 $ (2) $ 30,946
State and municipal securities 2,487 67 - 2,554
Foreign government securities 7,337 113 (111) 7,339
Corporate debt securities 56,017 1,314 (59) 57,272
Government agency mortgage-backed
securities 21,466 376 (25) 21,817
Equity securities 29,033 3,716 (1,024) 31,725
--------------- --------------- --------------- ---------------
146,958 5,916 (1,221) 151,653
Held to maturity:
U.S. Treasury securities 7,893 109 (9) 7,993
--------------- --------------- --------------- ---------------
$154,851 $6,025 $(1,230) $159,646
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
45
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair values of debt securities at December 31,
1998, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Available for sale:
Due in one year or less $ 1,565 $ 1,566
Due after one through five years 36,219 36,662
Due after five through ten years 42,674 42,942
Due after ten years 12,906 12,836
------------ ------------
93,364 94,006
Government agency mortgage-backed securities 30,961 31,075
------------ ------------
$ 124,325 $ 125,081
------------ ------------
Held to maturity:
Due in one year or less $ - $ -
Due after one through five years 7,710 7,994
------------ ------------
$ 7,710 $ 7,994
------------ ------------
------------ ------------
</TABLE>
At December 31, 1998, the insurance subsidiaries had debt securities and cash
equivalents on deposit with various state insurance departments with carrying
values of approximately $7,627,000, which are included in investments held to
maturity on the balance sheet.
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
----------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements $ 398 $ 394
Building and building improvements 3,766 3,611
Computer equipment and software 9,953 6,259
Furniture and other equipment 4,365 4,484
--------------- ---------------
18,482 14,748
Less accumulated depreciation (9,519) (7,770)
--------------- ---------------
$ 8,963 $ 6,978
--------------- ---------------
--------------- ---------------
</TABLE>
46
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
5. DEBT
As of December 31, 1998, the Company and several subsidiaries participate
with BCBSUW in a bank line of credit, which permits aggregate borrowings up
to $10,000,000 for UWS and its subsidiaries. Prior to this date the line of
credit permitted aggregate borrowings up to $30,000,000. Periodic borrowings
have been made on these lines of credit. There was no balance outstanding at
December 31, 1998 and 1997.
6. RELATED-PARTY TRANSACTIONS
As of September 11, 1998, the Company assumed a $70,000,000 note obligation
to BCBSUW in connection with the spin off (see note 1). The Company pledged
the common stock of certain subsidiaries as collateral for the note
obligation. Interest is payable quarterly at a rate equal to the London
Interbank Offered Rate plus 1.25%, adjusted quarterly. The principal balance
is due on October 30, 1999 and is classified as note payable to affiliates in
the consolidated balance sheet. Interest expense and interest paid for the
period from September 12, 1998 thru December 31, 1998 totaled $1,411,000.
The Company provides marketing, underwriting, actuarial and certain
administrative services for BCBSUW. In addition, BCBSUW provides health
insurance to the employees of the Company and provides office space to the
Company. These activities are reimbursed at amounts approximating cost, which
resulted in allocations to the Company of $14,757,000, $14,564,000 and
$13,315,000 in 1998, 1997 and 1996, respectively, and allocations to BCBSUW
of $8,964,000, $9,278,000 and $7,474,000 in 1998, 1997 and 1996,
respectively. These amounts are included in selling, general and
administrative expenses.
Certain subsidiaries of the Company provide health, life and other insurance
benefits to the employees of BCBSUW. Premium revenue received from BCBSUW
totaled $4,547,000, $4,537,000 and $4,370,000 in 1998, 1997 and 1996,
respectively.
The Company has an agreement with United Wisconsin Life Insurance Company
("UWLIC"), a subsidiary of AMSG, whereby United Wisconsin Insurance Company
("UWIC") underwrites certain small group health care and life, dental, drug
and disability products in Minnesota as UWLIC products have not yet been
approved for sale in Minnesota. The Company ceded to UWLIC 100% of the
premium revenue of these products sold in Minnesota. The ceded premium
revenue approximated $26,875,000, $27,014,000 and $24,739,000 in 1998, 1997
and 1996, respectively.
47
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
6. RELATED-PARTY TRANSACTIONS (CONTINUED)
The Company has an agreement with UWLIC whereby UWLIC underwrites certain
life and disability products on behalf of United Heartland Life Insurance
Company ("UHLIC"). The Company also had agreements with UWLIC, through
September 30, 1998, whereby UWLIC underwrote certain health care, dental and
pharmaceutical products on behalf of Compcare, Heartland Dental Plan, Inc.,
and CNR Health, Inc. The Company assumes 100% of the premium revenues on
these products from UWLIC. The assumed premium revenue approximated
$23,295,000, $36,177,000 and $30,573,000 in 1998, 1997 and 1996, respectively.
Management believes the above stated related-party activity was entered into
on a reasonable basis and includes all costs of doing business.
Prior to the spin off, the Company's operations have been financed through
its operating cash flows and investments by and advances from AMSG.
Amounts due from/to affiliates are related primarily to operating expenses
and reinsurance arrangements. The amounts due from/to affiliates are
generally settled on a monthly basis for operating expenses and are settled
in accordance with industry practice for reinsurance agreements. The amounts
due from/to affiliates are typically less than $10,000,000 at any point in
time during the fiscal year, excluding the $70,000,000 note obligation due to
BCBSUW.
7. INCOME TAXES
Income tax expense has been calculated as if the Company filed separate
federal income tax returns. Prior to the spin off, the Company has been
included in the consolidated federal income tax return filed by AMSG, except
as noted below. UHLIC has filed separate federal income tax returns due to
specific provisions of the Internal Revenue Code of 1986, as amended, related
to consolidation of life insurance entities. The entities included in these
consolidated financial statements file separate state franchise, income and
premium tax returns as applicable.
48
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The Company had a net federal income tax payable of $1,650,000, included in
other current liabilities, and a net federal income tax receivable of
$436,000, included in other current assets, at December 31, 1998 and 1997,
respectively. Federal and state income tax payments, net of refunds, totaled
$2,327,000, $3,243,000 and $1,545,000 in 1998, 1997 and 1996, respectively.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 8,994 $ 8,870 $ 9,642
State 1,934 1,586 1,876
-------------- -------------- --------------
10,928 10,456 11,518
Deferred:
Federal 737 (651) (222)
State 102 (372) (679)
-------------- -------------- --------------
839 (1,023) (901)
-------------- -------------- --------------
$11,767 $ 9,433 $10,617
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The differences between taxes computed at the federal statutory rate and
recorded income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at federal statutory rate $10,446 $ 8,826 $ 9,435
Goodwill amortization 136 154 254
Tax-exempt interest and dividends
received deduction (141) (230) (246)
State income and franchise taxes, net
of federal benefit 1,161 827 820
Other, net 165 (144) 354
-------------------------------------------
$11,767 $ 9,433 $ 10,617
-------------------------------------------
-------------------------------------------
</TABLE>
49
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The components of deferred income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Reserve discounting $ 161 $ - $(1,050)
Employee benefits (698) - 434
Depreciation and amortization 272 (1,299) 81
Net operating loss carryforwards 414 - (482)
Prepaid expenses 683 - -
Other, net 7 276 116
-------------- -------------- --------------
$ 839 $(1,023) $ (901)
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Significant components of the Company's federal and state deferred tax
liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------- ----------------------------
Federal State Federal State
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Deferred tax liabilities:
Depreciation $ (944) $ (203) $ (721) $ (512)
Claims-based receivables (1,864) (303) (1,331) (945)
Pension accrual (2,350) (449) (2,158) (1,532)
Unrealized gains on investments (516) (104) (1,367) (970)
Prepaid expenses (1,077) (119) - -
Other, net (268) (36) (825) (586)
-------------- ------------- -------------- -------------
(7,019) (1,214) (6,402) (4,545)
Deferred tax assets:
Postretirement benefits other
than pensions 1,465 311 1,387 1,138
Advance premium discounting 1,303 265 1,080 886
Deferred compensation 2,063 421 1,387 1,138
Medical and other benefits
payable discounting 1,004 117 1,142 937
Business loss carryforwards 127 241 509 -
Other, net 564 148 435 774
-------------- ------------- -------------- -------------
6,526 1,503 5,940 4,873
-------------- ------------- -------------- -------------
Net deferred tax assets
(liabilities) $ (493) $ 289 $ (462) $ 328
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
</TABLE>
50
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The federal deferred benefit arising from the deductibility of state deferred
tax is included as a component of other federal deferred taxes. The net
deferred tax assets and liabilities are included in other current or other
noncurrent assets and liabilities, as applicable.
8. CONTINGENCIES
The Company is involved in various legal actions occurring in the normal
course of its business. In the opinion of management, adequate provision has
been made for losses which may result from these actions and, accordingly,
the outcome of these proceedings is not expected to have a material adverse
effect on the consolidated financial statements.
9. SHAREHOLDERS' EQUITY
STATUTORY FINANCIAL INFORMATION
Insurance companies are subject to regulation by the Office of the
Commissioner of Insurance of the State of Wisconsin and certain other state
insurance regulators. These regulations require, among other matters, the
filing of financial statements prepared in accordance with statutory
accounting practices prescribed or permitted for insurance companies. The
statutory surplus of insurance subsidiaries at December 31, 1998 and 1997
aggregated $106,069,000 and $95,211,000, respectively. The statutory net
income of insurance subsidiaries aggregated $15,893,000, $17,380,000 and
$24,159,000 in 1998, 1997 and 1996, respectively.
State insurance regulations also require the maintenance of a minimum
compulsory surplus based on a percentage of premiums written. In addition,
the Company's insurance subsidiaries are subject to risk-based capital
("RBC") requirements promulgated by the National Association of Insurance
Commissioners. The RBC requirements establish minimum levels of capital and
surplus based upon the insurer's operations. At December 31, 1998, the
Company's insurance subsidiaries were in compliance with these capital
surplus requirements.
51
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
9. SHAREHOLDERS' EQUITY (CONTINUED)
RESTRICTIONS ON DIVIDENDS FROM SUBSIDIARIES
Dividends paid by insurance subsidiaries are limited by state insurance
regulations. The insurance regulator in the state of domicile may disapprove
any dividend which, together with other dividends paid by an insurance
company in the prior twelve months, exceeds the regulatory maximum as
computed for the insurance company based on its statutory surplus and net
income.
Based upon the financial statements of the insurance subsidiaries included in
these consolidated financial statements as of December 31, 1998, as filed
with the insurance regulators, the aggregate amount available for dividends
in 1999 without regulatory approval is $7,700,000.
10. EMPLOYEE BENEFIT PLANS
PENSION BENEFITS
The Company and certain of its subsidiaries participate with BCBSUW in two
multiple employer defined benefit pension plans. The plans provide retirement
benefits to covered employees based primarily on compensation and years of
service. Since the plans are overfunded, no contributions were made in 1998,
1997 or 1996.
Prior to December 31, 1998, separate salaried and hourly pension plans
existed. These plans were merged into a single plan in an effort to reduce
administrative expenses and streamline communication with plan participants.
The merger had no material effect on pension assets, liabilities or funding
levels.
Effective January 1, 1997, the Company amended the salaried pension plan and
the hourly pension plan with respect to non-union participants, which include
expansion of the lump-sum payment provisions and changes in the methods and
formulae used for the calculation of benefit accruals.
Prior to January 1, 1997, the salaried pension plan provided for benefit
payments based on compensation, years of service, year of birth and date of
retirement and the hourly pension plan provided for benefit payments of
stated amounts based on number of hours worked and years of credited service.
52
<PAGE>
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes the change in the pension plan's benefit
obligation:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1997
-----------------------
(IN THOUSANDS)
<S> <C> <C>
Benefit obligation at beginning of year $17,568 $15,781
Service cost 1,849 1,335
Interest cost 1,362 1,259
Actuarial (gains) losses 1,662 (104)
Company transfers 270 -
Benefits paid (1,835) (703)
-----------------------
Benefit obligation at end of year $20,876 17,568
-----------------------
-----------------------
</TABLE>
The pension plans' assets are comprised primarily of debt, equity and other
marketable securities.
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-----------------------
(IN THOUSANDS)
<S> <C> <C>
Fair value of plan assets at beginning of year $36,082 $29,310
Actual return on plan assets (529) 7,475
Company transfers 270 -
Benefits paid (1,835) (703)
-----------------------
Fair value of plan assets at end of year $33,988 $36,082
-----------------------
-----------------------
</TABLE>
53
<PAGE>
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table provides a reconciliation of the funded status of the
pension plan to the prepaid pension costs:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-----------------------
(IN THOUSANDS)
<S> <C> <C>
Funded status of plan at end of year $13,112 $18,514
Unrecognized net transition asset (777) (1,051)
Unrecognized prior service cost (5,456) (6,146)
Unrecognized net gain (169) (5,151)
-----------------------
Prepaid pension cost at end of year $ 6,710 $ 6,166
-----------------------
-----------------------
</TABLE>
Weighted-average assumptions used as of September 30, 1998 and 1997, the
measurement date, in developing the projected benefit obligation are as
follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------
<S> <C> <C>
Discount rate 7.00% 8.00%
Expected return on plan assets 9.00 9.00
Rate of compensation increase 4.75 4.75
</TABLE>
The unrecognized net asset is being amortized over the remaining estimated
service lives of participating employees at January 1, 1986: 15.4 years for
salaried employees and 16.9 years for hourly employees.
The components of the pension credit, which is included in selling, general
and administrative expenses, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1997
-----------------------
(IN THOUSANDS)
<S> <C> <C>
Service cost $ 1,849 $ 1,335
Interest cost 1,362 1,260
Expected return on plan assets (2,791) (2,553)
Net amortization of transition asset (274) (274)
Amortization of prior service cost (690) (690)
-----------------------
Pension credit $ (544) $ (922)
-----------------------
-----------------------
</TABLE>
54
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
After giving effect to all administrative expense allocations between the
Company and BCBSUW, the pension credit was $622,000, $945,000 and $1,288,000
in 1998, 1997 and 1996, respectively.
DEFINED CONTRIBUTION AND BONUS PLANS
The Company and certain of its subsidiaries participate in defined
contribution plans whereby the employer contributes a percentage of
participants' qualifying compensation up to certain limits, as defined by the
plans. The Company and certain of its subsidiaries also participates with
BCBSUW in various other profit sharing and bonus programs. Expenses related
to all of these plans, after giving effect to all administrative expense
allocations between the Company and BCBSUW, totaled $2,475,000, $2,042,000
and $2,932,000 in 1998, 1997 and 1996, respectively.
STOCK-BASED COMPENSATION PLANS
As of December 31, 1998, the Company has a stock-based compensation plan
covering employees and directors that allows for granting of options for up
to 4,625,000 shares of common stock as incentive or nonqualified stock
options ("NQSOs").
At the Spin off date, certain of the options to purchase AMSG common stock
held by the Company's employees were converted to Company stock options. AMSG
options totaling 2,232,334 were converted into an equal amount of Company and
AMSG options, including 1,000,000 options related to an acquisition. The
options were converted at exercise prices that maintained the amount of
unrealized stock appreciation that existed immediately prior to the Spin off
date. The vesting dates and expiration periods of the options were not
affected by the conversion.
In 1992, certain executive officers of AMSG were awarded stock appreciation
rights ("SARs") in AMSG. At the Spin off date, 67,500 AMSG SARs were
converted into SARs of the Company to provide equivalent value.
55
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company follows Accounting Principles Board Opinion No. 25 under which no
compensation expense is recorded when the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant. The Company's pro forma information, as if the options granted
subsequent to the Spin off date had been expensed in accordance with SFAS
123, "Accounting for Stock-Based Compensation", is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C>
Pro forma net income $ 18,021
Pro forma earnings per common share:
Basic $ 1.09
Diluted $ 1.09
</TABLE>
In determining compensation cost pursuant to SFAS 123, the fair value for the
options granted subsequent to the Spin off date were estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions for 1998: risk-free interest rate of 4.62%;
dividend yield of 0.70%; volatility factor of the expected market price of
the Company's common stock of 0.45; and a weighted average expected life of
the options of 6.00 years. As calculated using the Black-Scholes model, the
weighted average, grant-date fair value of options granted in which the
exercise price equaled the market price on the date of the grant was $3.34
per share for 1998.
56
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
Stock option activity for all plans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-------------------
<S> <C>
TOTAL NUMBER OF NQSOS
Outstanding at beginning of year -
Conversion of AMSG options 2,232,334
Granted 456,700
Exercised -
Forfeited -
-------------------
Outstanding at end of year 2,689,034
-------------------
-------------------
Exercisable at end of year 1,640,637
Available for grant at end of year 1,935,966
WEIGHTED AVERAGE EXERCISE PRICE OF NQSOS
Outstanding at beginning of year -
Conversion of AMSG options - range of excercise prices $9.61 - 16.81
Granted - Exercise price equals market price on grant date $7.19
Exercised -
Forfeited -
Outstanding at end of year $11.58
Exercisable at end of year $11.61
NQSOS BY EXERCISE PRICE RANGE
Exercise price $7.19
Weighted average exercise price $7.19
Weighted average remaining contractual life 11.75
Outstanding at end of year 456,700
Exercisable at end of year -
Weighted average exercise price of options exercisable at end of year -
Exercise price $9.61 - 12.85
Weighted average exercise price $11.25
Weighted average remaining contractual life 8.95
Outstanding at end of year 1,166,437
Exercisable at end of year 613,002
Weighted average exercise price of options exercisable at end of year $11.36
</TABLE>
57
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-------------------
<S> <C>
Exercise price $13.53
Weighted average exercise price $13.53
Weighted average remaining contractual life 2.93
Outstanding and exercisable at end of year (1) 1,000,000
Weighted average exercise price of options exercisable at end of year $13.53
Exercise price $14.94 - $16.81
Weighted average exercise price $15.66
Weighted average remaining contractual life 9.58
Outstanding at end of year 65,897
Exercisable at end of year 27,635
Weighted average exercise price of options exercisable at end of year $15.56
</TABLE>
(1) Options were issued in 1996 at 125% of market value as consideration
for an acquisition.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Since the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
58
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
Quarter
---------------------------------------------------
First Second Third Fourth Total
--------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1998
Total revenues $159,158 $163,782 $165,093 $169,588 $657,621
Income before income tax expense 7,459 9,471 6,604 6,311 29,845
Net income 4,716 5,699 4,091 3,572 18,078
Earnings per common share (1):
Basic - - - 0.22 -
Diluted - - - 0.21 -
1997
Total revenues $146,993 $150,790 $154,479 $156,847 $609,109
Income before income tax expense 6,607 6,141 6,091 6,378 25,217
Net income 3,998 3,889 3,859 4,038 15,784
</TABLE>
(1) Earnings per share data has not been provided for periods prior
to the fourth quarter of 1998 since the Company was not an
independent, public entity prior to the Spin off date.
12. SEGMENT REPORTING
The Company has two reportable business segments: HMO products sold primarily
in Wisconsin, and specialty managed care products and services, including
dental, life, disability and workers' compensation products, managed care
consulting, electronic claim submission, pharmaceutical management, managed
behavioral health services, and receivables management sold throughout the
United States.
"Other Operations" includes operations not directly related to the business
segments, unallocated corporate items (i.e. corporate interest expense on
corporate debt, amortization of goodwill and intangibles and unallocated
overhead expenses) and intercompany eliminations. The Company evaluates
segment performance based on profit or loss from operations before income
taxes. Management has determined that it is impractical to prepare segment
information for the year ended December 31, 1996. The accounting policies of
the reportable segments are the same as those described in the summary of
significant accounting policies.
59
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
12. SEGMENT REPORTING (CONTINUED)
Financial data by segment as of and for the years ended December 31, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------
(In thousands)
<S> <C> <C>
Health services revenue:
HMO products $518,700 $479,182
Specialty managed care products and services 137,652 123,859
Other operations (17,707) (16,170)
-------------------------
Total consolidated $638,645 $586,871
-------------------------
-------------------------
Investment results:
HMO products $ 9,182 $ 6,889
Specialty managed care products and services 9,516 17,309
Other operations 278 (1,960)
-------------------------
Total consolidated $ 18,976 $ 22,238
-------------------------
-------------------------
Income (loss) before income tax expense:
HMO products $ 15,145 $ 6,355
Specialty managed care products and services 17,693 23,257
Other operations (2,993) (4,395)
-------------------------
Total consolidated $ 29,845 $ 25,217
-------------------------
-------------------------
Total assets:
HMO products $138,272 $118,595
Specialty managed care products and services 151,845 144,520
Other operations 8,091 3,141
-------------------------
Total consolidated $298,208 $266,256
-------------------------
-------------------------
Health services revenue from transactions with other operating segments:
HMO products $ 1,853 $ 1,726
Specialty managed care products and services 15,488 14,417
</TABLE>
60
<PAGE>
United Wisconsin Services, Inc.
Notes to Consolidated Financial Statements (continued)
13. SUBSEQUENT EVENT
On February 9, 1999, the Company announced that it had begun negotiations
with BCBSUW for the purchase by BCBSUW of approximately 2,750,000 shares of
the Company's common stock to be issued in a privately negotiated
transaction. This purchase is part of the previously disclosed plan for
BCBSUW to increase its ownership in the Company to allow Compcare to use the
Blue Cross and Blue Shield brand on its products.
61
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item with respect to directors is
included under the heading "Election of Directors" in the Company's
definitive Proxy Statement, to be dated April 26, 1999 relating to the 1999
Annual Meeting of Shareholders currently scheduled for May 26, 1999, (the
"1999 Proxy Statement") which will be filed with the Commission separately
pursuant to Rule 14a-6 under the 1934 Act and in accordance with General
Instruction G(3) to Form 10-K, not later than 120 days after the end of the
Company's fiscal year, and which section is hereby incorporated by reference.
Information with respect to executive officers of the Company appears at the
end of Part I, Pages [17 through 18] of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this item is included under the heading
"Executive Compensation" in the 1999 Proxy Statement, which section is hereby
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this item is included under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the 1999
Proxy Statement, which section is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item is included under the heading
"Certain Transactions" in the 1999 Proxy Statement, which section is hereby
incorporated by reference.
62
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1 and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE(S) IN
FORM 10-K
REPORT
------
<S> <C>
The following consolidated financial statements of United Wisconsin Services, Inc. and
subsidiaries are included in Item 8:
Report of Independent Auditors ............................................................. 31
Consolidated Balance Sheets at December 31, 1998 and 1997 .................................. 32
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 34
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for
the years ended December 31, 1998, 1997 and 1996 ........................................ 35
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and
1996..................................................................................... 36
Notes to Consolidated Financial Statements ................................................ 37
The following financial statement schedules of United Wisconsin Services, Inc. and
subsidiaries are included in Item 14(d):
Schedule II - Condensed Financial Information of Registrant.............................. 64
Schedule IV - Reinsurance................................................................ 67
Schedule V - Valuation and Qualifying Accounts........................................... 68
</TABLE>
All other schedules for which provision is made in applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
3. EXHIBITS
Reference is made to the separate Exhibit Index contained on Pages 70 through
72 hereof.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
(c) EXHIBITS
Reference is made to the separate Exhibit Index contained on Pages 70 through
72 hereof.
(d) FINANCIAL STATEMENT SCHEDULES
Reference is made to the financial statement schedules contained on Pages 64
through 68 hereof.
63
<PAGE>
SCHEDULE II
UNITED WISCONSIN SERVICES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed balance sheets of United Wisconsin Services, Inc. (the
"Company") (parent company only) as of December 31, 1998 and 1997, and the
condensed statements of income and cash flows for the years ended December
31, 1998, 1997 and 1996 are as follows:
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents $ 1,000 $ 3,669
Investments - 5,789
Investment in and advances to affiliates 128,820 112,564
Accounts receivable 3,158 482
Other assets 9,433 7,261
-------- --------
Total assets $142,411 $129,765
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Due to affiliates $ 68,362 $ 537
Payables, accrued expenses and other liabilities 9,590 5,612
-------- --------
Total liabilities 77,952 6,149
Shareholders' equity:
Investments by and advances from AMSG - 120,405
Common stock 13,378 -
Retained earnings 50,088 -
Unrealized gains on investments 993 3,211
-------- --------
Total shareholders' equity 64,459 123,616
-------- --------
Total liabilities and shareholders' equity $142,411 $129,765
-------- --------
-------- --------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
UNITED WISCONSIN SERVICES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
--------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Dividends from consolidated subsidiaries $ 5,046 $ 20,676 $ -
Investment income 313 885 1,397
Other revenue (expense) 4 (94) (52)
-------- -------- -------
Total revenues 5,363 21,467 1,345
Expenses:
Administrative expenses 1,298 1,467 1,138
Amortization of goodwill and other intangibles 600 398 818
Interest expense with affiliate 1,411 - -
-------- -------- -------
Total expenses 3,309 1,865 1,956
-------- -------- -------
Income before income tax benefit and equity
in the undistributed net income (loss)
of subsidiaries 2,054 19,602 (611)
Income tax benefit (961) (402) (241)
-------- -------- -------
Income before equity in the undistributed
net income (loss) of subsidiaries 3,015 20,004 (370)
Equity in the undistributed net income
(loss) of subsidiaries 15,063 (4,220) 16,711
-------- -------- -------
Net income $ 18,078 $ 15,784 $ 16,341
-------- -------- -------
-------- -------- -------
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
UNITED WISCONSIN SERVICES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income $ 18,078 $ 15,784 $ 16,341
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Equity in the undistributed net
(income) loss of subsidiaries (15,063) 4,220 (16,711)
Depreciation and amortization 503 668 429
Deferred income tax benefit 56 (1,023) 1,104
Changes in other operating accounts:
Due to affiliates (2,175) 3,950 (473)
Payables and accrued expenses (165) (3,086) 731
Other - net (545) (1,774) (495)
------- ------- -------
Net cash provided by operating
activities 689 18,739 926
Investing activities:
Acquisitions of subsidiaries (1,405) (2,213) -
Purchases of available for sale investments (1,866) (36,283) (8,903)
Proceeds from sale of available
for sale investments 4,893 13,557 13,953
Proceeds from maturity of available
for sale investments 2,775 26,735 146
Additions to property and equipment (281) - -
Investment in and advances to
consolidated affiliates (818) (2,500) (108)
------- ------- -------
Net cash provided by (used in)
investing activities 3,298 (704) 5,088
Financing activities:
Investments by and advances from AMSG (6,133) (15,302) (13,184)
Cash dividends paid (839) - -
Issuances of common stock and options 316 - -
------- ------- -------
Net cash used in financing activities (6,656) (15,302) (13,184)
------- ------- -------
Cash and cash equivalents:
Increase (decrease) during year (2,669) 2,733 (7,170)
Balance at beginning of year 3,669 936 8,106
------- ------- -------
Balance at end of year $ 1,000 $ 3,669 $ 936
------- ------- -------
------- ------- -------
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IV
UNITED WISCONSIN SERVICES, INC.
REINSURANCE
Percentage
Ceded to Assumed of amount
Gross other from other assumed to
amount companies companies Net amount net
------ --------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Life insurance in force $ 0 $ 977,000 $ 9,112,000 $ 8,135,000 112.0%
--------- ---------- ----------- ------------ ------
--------- ---------- ----------- ------------ ------
Premiums:
Health and disability $ 506,999 $ 44,595 $ 14,418 $ 476,822 3.0%
Life 0 1,954 18,224 16,270 112.0%
--------- ---------- ----------- ------------
Total premiums $ 506,999 $ 46,549 $ 32,642 $ 493,092 6.6%
--------- ---------- ----------- ------------ ------
--------- ---------- ----------- ------------ ------
Year ended December 31, 1997:
Life insurance in force $ 0 $1,124,895 $ 9,130,121 $ 8,005,226 114.1%
--------- ---------- ----------- ------------ ------
--------- ---------- ----------- ------------ ------
Premiums:
Health and disability $ 576,833 $ 46,992 $ 12,153 $ 541,994 2.2%
Life 0 2,530 21,361 18,831 113.4%
--------- ---------- ----------- ------------
Total premiums $ 576,833 $ 49,522 $ 33,514 $ 560,825 6.0%
--------- ---------- ----------- ------------ ------
--------- ---------- ----------- ------------ ------
Year ended December 31, 1998:
Life insurance in force $ 0 $1,538,283 $11,517,565 $ 9,979,282 115.4%
--------- ---------- ----------- ------------ ------
--------- ---------- ----------- ------------ ------
Premiums:
Health and disability $ 625,990 $ 43,402 $ 5,047 $ 587,635 0.9%
Life 0 2,353 23,635 21,282 111.1%
--------- ---------- ----------- ------------
Total premiums $ 625,990 $ 45,755 $ 28,682 $ 608,917 4.7%
--------- ---------- ----------- ------------ ------
--------- ---------- ----------- ------------ ------
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE V
UNITED WISCONSIN SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Net
charges
Balance (credits) Write-offs Balance
beginning to net against end of
of period income allowance period
--------- --------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for possible losses on:
Premium receivables $ 260 $ (28) $ - $ 232
Other 14 50 (12) 52
------- --------- ---------- --------
Total allowance $ 274 $ 22 $ (12) $ 284
------- --------- ---------- --------
------- --------- ---------- --------
Year ended December 31, 1997:
Allowance for possible losses on:
Premium receivables $ 232 $ 77 $ - $ 309
Other 52 (5) 38 85
------- --------- --------- --------
Total allowance $ 284 $ 72 $ 38 $ 394
------- --------- --------- --------
------- --------- --------- --------
Year ended December 31, 1998:
Allowance for possible losses on:
Premium receivables $ 309 $ 391 $ - $ 700
Other 85 (58) - 27
------- --------- --------- --------
Total allowance $ 394 $ 333 $ - $ 727
------- --------- --------- --------
------- --------- --------- --------
</TABLE>
68
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNITED WISCONSIN SERVICES, INC.
By: /s/ Thomas R. Hefty
-----------------------------
Thomas R. Hefty, President and
Chief Executive Officer
Date: March 26, 1999
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Thomas R. Hefty Chairman, President and Chief Executive March 26, 1999
- ---------------------------------------- Officer (Principal Executive Officer) and
Thomas R. Hefty Director
/s/ C. Edward Mordy Vice President and Chief Financial Officer March 26, 1999
- ---------------------------------------- (Principal Financial and Accounting
C. Edward Mordy Officer)
/s/Richard A. Abdoo Director March 26, 1999
- ----------------------------------------
Richard A. Abdoo
/s/Michael D. Dunham Director March 26, 1999
- ----------------------------------------
Michael D. Dunham
/s/James L. Forbes Director March 26, 1999
- ----------------------------------------
James L. Forbes
/s/James C. Hickman Director March 26, 1999
- ----------------------------------------
James C. Hickman
/s/William R. Johnson Director March 26, 1999
- ----------------------------------------
William R. Johnson
/s/Eugene A. Menden Director March 26, 1999
- ----------------------------------------
Eugene A. Menden
/s/William C. Rupp Director March 26, 1999
- ----------------------------------------
William C. Rupp
/s/Carol N. Skornicka Director March 26, 1999
- ----------------------------------------
Carol N. Skornicka
</TABLE>
69
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ------------------------------------------------------------
<C> <S>
2.1 Form of Distribution and Indemnity Agreement (as
amended).(1)
3.1 Articles of Incorporation of Registrant.(1)
3.2 By-Laws of Registrant.(1)
4.1 Specimen Common Stock Certificate.(1)
4.2 Registrant's United Wisconsin Services, Inc.'s Dividend
Reinvestment and Direct Stock Purchase Plan: Terms and
Conditions.(3)
10.1 Form of Employee Benefits Agreement (as amended).(1)
10.2 Form of Tax Allocation Agreement (as amended).(1)
10.3 Settlement Agreement by and between United Wisconsin
Services, Inc. ("UWS"), on behalf of itself and on behalf
of Registrant, Wallace J. Hilliard and Ronald A. Weyers,
dated April 1, 1998.(1)
10.4 Consolidated Federal Income Tax Allocation Agreement among
Blue Cross & Blue Shield United of Wisconsin ("BCBSUW"),
United Wisconsin Insurance Company ("UWIC"), UWS, United
Wisconsin Proservices, Inc. ("UWPS"), Leasing Unlimited,
Inc., United Wisconsin Life Insurance Company ("UWLIC"),
Compcare Health Services Insurance Corporation
("COMPCARE"), ProHealth, Inc. and Take Control, Inc., as
amended by Amendments dated August 6, 1993 and May 9,
1994, respectively.(1)
10.5 Comprehensive Tax Allocation Agreement dated July 1, 1994
among BCBSUW, UWS and various subsidiaries thereof.(1)
10.6 Federal Income Tax Allocation Agreement among BCBSUW, UWS,
UWIC, UWLIC, UWPS, Compcare, Take Control, Inc., Meridian
Resource Corporation ("MRC"), Valley Health Plan, Inc.
("VALLEY") and United Wisconsin Capital Corporation
("UWCC") for the period commencing January 1, 1993, as
amended.(1)
10.7 Consolidated Federal Income Tax Allocation Agreement among
UWS, UWIC, Compcare, Meridian Managed Care, Inc. ("MMC"),
MRC, Valley, UWCC, Your Health Plan, Inc. ("YHP"), HMO of
Wisconsin Insurance Corporation ("HMOW"), HMO-W, Inc. and
Hometown Insurance Services, Inc. ("HTWN") commencing
October 1, 1994.(1)
10.8 Consolidated Federal Income Tax Allocation Agreement among
UWS, UWIC, UWPS, Compcare, MMC, MRC, Valley, UWCC, YHP,
HMOW, HMO-W, Inc., HTWN, United Heartland, Inc. ("UHI")
and Meridian Marketing Services, Inc. ("MMS") commencing
January 1, 1995.(1)
10.9 Consolidated Federal Income Tax Allocation Agreement among
UWS, UWIC, UWPS, Compcare, MMC, MRC, Valley, AMS HMO
Holdings, Inc. (f/k/a UWCC), Unity Health Plans Insurance
Corporation ("UNITY") (f/k/a HMOW), HMO-W, Inc., HTWN, UHI
and MMS for the period commencing January 1, 1996, and
American Medical Security Holdings, Inc., American Medical
Security, Inc., American Medical Insurance Company,
Continental Plan Services, Inc., Nurse Healthline, Inc.,
Accountable Health Plans, Inc., AMS Provider Partnerships,
Inc., Unity HMO of Illinois, Inc., American Medical
Security Insurance Company of Ohio and American Medical
Security Insurance Company of Georgia for the period
commencing December 3, 1996.(1)
10.10 Federal Income Tax Allocation Agreement among UWS, UNITY, HTWN,
HMO-W, INC., VALLEY, COMPCARE, UWIC, MMS, UHI, UWPS, MRC, MMC,
CNR HEALTH, INC. ("CNR"), Intercare Network, Inc. ("INI"),
Heartland Dental Plan, Inc. ("HDP") and Heartland Dental Plan of
Michigan, Inc. ("HDPM") dated September 25, 1998.
10.11 Amended and Restated Joint Venture Agreement by and among
BCBSUW, UWS (assigned to the Registrant), Valley and
Midelfort Clinic, Ltd., effective January 1, 1997.(1)
10.12 Intercompany Service Agreement between BCBSUW, UWS (assigned
to the Registrant) and UWIC, effective January 1, 1998.(1)
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ------------------------------------------------------------
<C> <S>
10.13 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and UWIC, effective January 1, 1998.(1)
10.14 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and UHI, effective January 1, 1998.(1)
10.15 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MMC, effective January 1, 1998.(1)
10.16 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant), MMC and Compcare on behalf of its
Pharmacy Services department, effective January 1,
1998.(1)
10.17 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant), MMC and Compcare on behalf of its
RxCel department, effective January 1, 1998.(1)
10.18 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant), MMC and Compcare, effective January 1,
1998.(1)
10.19 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MRC on behalf of its Investigation
and Recovery Services department, effective January 1,
1998.(1)
10.20 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MRC on behalf of its Consulting
Services department, effective January 1, 1998.(1)
10.21 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MRC on behalf of its Audit Services
department, effective January 1, 1998.(1)
10.22 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and UWPS, effective January 1, 1998.(1)
10.23 Service Agreement between BCBSUW and Valley, effective
January 1, 1993.(1)
10.24 Service Agreement between UWS (assigned to the Registrant)
and Community Health Systems, LLC, dated November 1,
1994.(1)
10.25 Form of Service Agreement between United Wisconsin Services,
Inc. (f/k/a Newco/UWS, Inc.) and American Medical Security
Group, Inc. (f/k/a United Wisconsin Services, Inc.).(1)
10.26 Amended and Restated Joint Venture Agreement among BCBSUW,
UWS (assigned to the Registrant), University Health Care,
Inc. ("UHC" ), U-Care HMO, Inc. ("U-CARE") and Health
Professionals, Inc. ("HPI") dated October 31, 1994.(1)
10.27 Agreement of Merger and Joint Venture by and among UWS
(assigned to the Registrant), UWS Acquisition Corporation,
BCBSUW, HMO-W, Inc. and HMOW dated October 11, 1994.(1)
10.28 Service Agreement between UWS (assigned to the Registrant)
and HPI dated November 1, 1994.(1)
10.29 License Agreement between UWS (assigned to the Registrant)
and U-Care dated November 1, 1994.(1)
10.30 Joint Venture Agreement among UWS (assigned to the
Registrant), BCBSUW, Compcare and Northwoods Health Care,
LLC dated July 1, 1996, as amended October 24, 1996.(1)
10.31 Information System Service Agreement among Blue Cross Blue
Shield of South Carolina and Blue Cross & Blue Shield
United of Wisconsin dated August 23, 1996, as amended
January 1, 1997.(1)
10.32 Form of Trademark Assignment Agreement by and among UWS, the
Registrant and UWLIC.(1)
10.33 Registrant's Equity Incentive Plan as revised.(2)
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ------------------------------------------------------------
<C> <S>
10.34 1998 Management Incentive Plan.(1)
10.35 Registrant's Deferred Compensation Plan for Directors.(1)
10.36 Registrant/BCBSUW 401(k) Plan.(1)
10.37 Registrant/BCBSUW Union Employees 401(k) Plan.(1)
10.38 Unity Health Plans Insurance Corp. 1998 Profit Sharing
Plan.(1)
10.39 Registrant's and BCBSUW's 1998 Profit Sharing Plan.(1)
10.40 Registrant Voluntary Deferred Compensation Plan.(1)
10.41 Registrant Deferred Compensation Trust.(1)
10.42 Registrant/BCBSUW Hourly Pension Plan.(1)
10.43 Registrant/BCBSUW Salaried Pension Plan.(1)
10.44 Registrant/BCBSUW Supplemental Executive Retirement Plan.(1)
10.45 Registrant Stock Appreciation Rights Plan.(1)
10.46 Note and Pledge Agreement dated October 30, 1996, between
BCBSUW and United Wisconsin Services, Inc. (assumed by and
assigned to the Registrant).(1)
10.47 Administrative Services Agreement between UWSI and HMO of
Wisconsin Insurance Corporation, effective November 1,
1994.(1)
10.48 Amendment to Employee Benefits Agreement between Registrant
and American Medical Security Group, Inc. effective
September 21, 1998.(2)
11 Statement regarding computation of per share earnings. (See
Note 2 of Notes to Combined Financial Statements).(1)
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Incorporated by reference to Registrant's Registration Statement on Form 10
declared effective September 11, 1998.
(2) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1998.
(3) Incorporated by reference to Registrant's Registration Statement on Form
S-1 declared effective November 25, 1998.
72
<PAGE>
FEDERAL INCOME TAX ALLOCATION AGREEMENT
Federal Income Tax Allocation Agreement ("Agreement") made and entered into
as of this 25th day of September, 1998, by and between United Wisconsin
Services, Inc., a Wisconsin corporation, herein after referred to as the
"Parent", and Unity Health Plans Insurance Corporation, Hometown Insurance
Services, Inc., HMO-W, Inc., Valley Health Plan, Inc., Compcare Health Services
Insurance Corporation, United Wisconsin Insurance Company, Meridian Marketing
Services, Inc., United Heartland, Inc., United Wisconsin Proservices, Inc.,
Meridian Resource Corporation, Meridian Managed Care, Inc., CNR Health, Inc.,
Intercare Network, Inc., Heartland Dental Plan, Inc., Heartland Dental Plan of
Michigan, Inc. herein after referred to as the "Subsidiaries." Parent and
Subsidiaries are sometimes hereinafter referred to severally as the "Member
Company," and collectively as the "Affiliated Group."
WITNESSETH:
WHEREAS, Parent owns, directly or indirectly, at least 80 percent of the
issued and outstanding stock of each of the Subsidiaries as defined in Section
1504(a)(2) of the Internal Revenue Code of 1986 (the "Code") and the related
Treasury Regulations ("Regulations"); and
WHEREAS, the Member Companies are an affiliated group within the meaning
of Code Section 1504(a) and the related Regulations, therefore, are eligible
to file a consolidated income tax return for federal income tax purposes; and
WHEREAS, the Affiliated Group intends to file consolidated federal income
tax returns for so long as Parent shall determine; and
WHEREAS, the Affiliated Group desires to establish a method for allocating
the consolidated federal income tax liability of the Affiliated Group among the
Member Companies in an agreed fashion and to compensate any Member Company for
use of its net operating and net capital losses, and tax credits utilized in
computing consolidated federal taxable income, and to provide for the allocation
and payment of any refund arising from a carryback of net operating or capital
losses, or tax credits generated in subsequent taxable years.
NOW THEREFORE, in consideration of their mutual covenants herein, the
Member Companies agree as follows:
1. CONSOLIDATED RETURN ELECTION. If at any time and from time to time
Parent so elects, all Member Companies will join in the filing of a
consolidated federal income tax return for the Affiliated Group for such
initial period, and for any subsequent taxable period for which the
Affiliated Group is required or permitted to file such a return. Each
Member Company agrees to file such consents, elections and other documents
and take such other action as may be necessary or appropriate to carry out
the purpose of this Paragraph 1. Any
Page 1
<PAGE>
period for which a Member Company is included in a consolidated federal
income tax return filed by the Affiliated Group is referred to in this
Agreement as a "Consolidated Return Year."
2. APPOINTMENT OF PARENT AS AGENT. Parent is hereby appointed as agent for
the Subsidiaries in payment of consolidated federal income taxes, pursuant
to the applicable provisions of the Code for the tax year ended December
31, 1998, and any tax year thereafter where 80 percent or more of the
issued and outstanding stock of the Subsidiaries as defined in Code Section
1504(a)(2) and the related Regulations is owned directly or indirectly by
the Parent for all or any portion of such tax year.
3. PAYMENT TO PARENT BY SUBSIDIARIES. The Subsidiaries agree to pay Parent
for all years or portions of years where the Subsidiaries are included in
the consolidated federal income tax return with Parent, the portions of the
consolidated federal income tax liability attributable to the Subsidiaries
as determined in accordance with Paragraph 4, below.
4. COMPUTATION OF TAX LIABILITY TO PARENT FOR CONSOLIDATED RETURN YEAR.
a) Each Subsidiary agrees to pay to Parent, at the times specified in
Paragraphs 5 and 6, below, the amount (if any) of the consolidated
federal income tax liability attributable to each Subsidiary as
contained in Regulation Sections 1.1552-1(a)(2) and 1.1502-33(d)(3). The
fixed percentage used to reflect the absorption of one Member's tax
attributes by another Member under Regulation Section 1.1502-33(d)(3)
shall be 100 percent. The alternative minimum tax exemption provided by
Code Section 55(d)(2) shall be allocated to Parent.
b) Parent shall calculate the payments due to it from each Subsidiary
under this Paragraph 4, and Paragraphs 5 and 6, in a manner consistent
with the tax elections, methods of accounting, and other positions taken
by Parent on the Affiliated Group's consolidated federal income tax
return.
5. INTERIM ESTIMATED PAYMENTS. Prior to the end of any Consolidated Return
Year, each Subsidiary shall advance to Parent (within a reasonable
period after request by Parent) amounts necessary to reimburse Parent
for that portion of any estimated federal income tax payments
attributable to the inclusion of such Subsidiary in the Affiliated
Group. These amounts shall be computed on an interim basis as described
in Paragraph 4. Any amounts so paid in any year shall be credited
against the amount payable to Parent following the end of such year
pursuant to Paragraph 4, and any excess resulting from such payments
shall promptly be refunded by Parent to such Subsidiary.
6. TAX ADJUSTMENTS.
a) In the event of any adjustment to the tax returns of the Affiliated
Group as filed (by reason of an amended return, claim for refund, or an
audit by the Internal Revenue Service (IRS)), the liabilities of the
Member Companies, including Parent, under Paragraphs 4 and 5, shall be
re-determined to give effect to any such adjustment as if it was made as
part of the original computation of tax liability. Corresponding
adjusting payments among Member Companies will be made within 30 days
after any such payments
Page 2
<PAGE>
are made to or refunds are received from the IRS or, in the case of
contested proceedings, within 30 days after a final resolution of the
dispute. To the extent that interest and penalties are imposed by the
IRS or interest is included in any refund, any adjusting payment among
the Member Companies shall reflect the same in an equitable manner. All
amounts shall be settled with cash or other securities eligible as
investments pursuant to the Wisconsin Insurance Code.
b) It is agreed that Parent shall be responsible for coordinating and
overseeing any IRS agent's examinations. All expenses of the
examination and of defending any final or proposed adjustments directly
identifiable with a Member Company shall be borne by that Member. All
costs and expenses not specifically identifiable with a Member Company
shall be allocated based upon relevant facts and circumstances as Parent
deems just and proper.
c) The Subsidiaries agree that they will inform Parent promptly of
all questions raised by IRS agents conducting an examination of federal
income tax returns and shall cooperate with Parent's accountants, tax
advisors, and counsel in preparing responses to IRS information requests
and proposed adjustments.
d) The Subsidiaries agree that any adjustments to their tax
liabilities arising out of an examination by the IRS shall be computed
on the basis of agreement reached by Parent and the IRS, or on the basis
of the decision of a court of applicable jurisdiction.
e) Each Subsidiary hereby waives any and all present and future
claims against Parent relating to a compromise, arrangement or agreement
between Parent and the IRS based upon an allegation that such
compromise, arrangement or agreement improperly causes overstatements of
their liabilities to Parent, or that such Subsidiary could have reached
more favorable agreements with the IRS on a separate company basis,
unless such overstatements result from gross negligence or fraudulent
conduct on the part of Parent, its agents, or representatives.
7. NEW MEMBER COMPANIES. All subsidiaries of Parent from time to time shall
be subject to this Agreement. If at any time Parent acquires or creates
one or more Subsidiary corporations that become corporations of the
Affiliated Group, they shall be subject to this Agreement, and the term
Affiliated Group as used herein shall be deemed to include such
Subsidiaries. Each newly acquired or created corporation along with Parent
will need to sign an attachment to this agreement. This signature will
acknowledge agreement on behalf of the newly acquired or created
corporation to the conditions specified in this agreement and also state
the effective date of the agreement for the newly acquired or created
corporation.
8. INTENT OR INTERPRETATION. The liability of each Member Company as
established under this Agreement shall be computed in a manner
consistent with the provisions of Regulation Sections 1.1502-33(d)(3)
and Section 1.1552-1(a)(2). The intent of this Agreement is that each
Subsidiary shall make Parent whole, but not more than whole, by
reimbursing Parent only to the extent of such Subsidiary's actual
federal income tax expense incurred. The
Page 3
<PAGE>
determination of the regularly-employed independent certified
accountants for the Affiliated Group as to this calculation and all
others required by this Agreement will be binding and conclusive on all
parties to this Agreement.
9. SUCCESSORS. This Agreement shall be binding on and inure to the benefit
of successors to all the parties hereto (including without limit any
successor of any Member Company succeeding to the tax attributes of such
Member Company under Section 381 of the Code), to the same extent as if
such successor had been an original party to the Agreement.
10. EXECUTION OF DOCUMENTS. Each Member Company agrees to cause its proper
officers to execute the documents, including, but not limited to,
statements, elections, certificates, and schedules deemed necessary by
the Parent's tax advisors to the Affiliated Group's federal income tax
return in order to carry out the intent of the provisions of the
applicable law and regulations thereunder in effect from time to time.
11. TERMINATION. This Agreement shall be terminated if:
a) The Member Companies agree in writing to such termination; or
b) The Affiliated Group fails to file a consolidated federal income
tax return for any taxable year; or
c) A Subsidiary ceases to be a member to the Affiliated Group but,
then, termination of this Agreement is only with respect to such
Subsidiary.
d) Termination of this Agreement shall not affect the obligations of
the Member Companies for any taxable year ending on or prior to
termination, except that no carryback from a year to which this
Agreement does not apply shall be taken into account in applying this
Agreement to any taxable year ending on or prior to termination.
12. DEPARTING MEMBERS.
a) Except as provided in Paragraph 11, a Member Company whose
membership in the Affiliated Group ceases or is terminated for any
reason whatsoever shall not have any further remedies, rights, or
obligations under this Agreement.
b) Notwithstanding the termination of a Member Company, the provisions
of this Agreement will remain in effect with respect to such Member,
with respect to any period of time during the tax year in which the
departure occurs, for which the income of the departing member must be
included in the consolidated federal income tax return.
13. AVAILABILITY OF RECORDS. Notwithstanding termination of this
Agreement, all material including, but not limited to, returns,
supporting schedules, workpapers, correspondence and other documents
relating to the consolidated return shall be available to any Member
Company during regular business hours.
14. ASSIGNABILITY. This Agreement shall not be assigned by any Member
Company without the prior written consent of the other Member Companies.
Page 4
<PAGE>
15. NOTICES. All notices and other communications hereunder shall be deemed
to have been duly given if delivered by hand or mailed, by certified or
registered mail with postage prepaid, addressed to the party to which
notice or other communication is given
a) if to the Parent, at:
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53203
Attn: Ms. Gail Hanson, Treasurer
b) if to a Subsidiary, at addresses listed in Attachment A, or
c) such other addresses as may be designated by notice in the
manner herein provided.
16. APPLICABLE LAW. Tax calculations shall be made pursuant to the Code and
Regulations. In all other respects this Agreement shall be construed in
accordance with the laws of the State of Wisconsin without regard to
conflict of law provisions.
17. MODIFICATION. The Subsidiaries agree that Parent shall have the authority
to make any necessary alterations to this Agreement to comply with any
changes or amendments in the provisions of the Code or Regulations enacted
thereunder relating to consolidated federal income tax returns. The Member
Companies hereby consent to the application of all Code and Regulations
sections relating to the filing of consolidated federal income tax returns.
Subject to the rights of Parent to modify the provisions of this Agreement
for purposes of conforming with the applicable provisions of the Code
related to filing consolidated federal income tax returns, and the
Regulations thereunder, all alterations, modifications, and amendments of
this Agreement shall be in writing and signed by all Member Companies.
IN WITNESS THEREOF, the parties hereto have duly executed this
Agreement by authorized officers thereof as of the date first above written.
PARENT'S NAME: UNITED WISCONSIN SERVICES, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
SUBSIDIARY NAME: COMPCARE HEALTH SERVICES INSURANCE CORPORATION
By: _____________________________________
Gail L. Hanson
Treasurer
Page 5
<PAGE>
SUBSIDIARY NAME: VALLEY HEALTH PLAN, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
SUBSIDIARY NAME: INTERCARE NETWORK, INC.
By: _____________________________________
Vicky Hekkers
President
SUBSIDIARY NAME: UNITY HEALTH PLANS INSURANCE CORPORATION
By: _____________________________________
Gail L. Hanson
Treasurer
SUBSIDIARY NAME: HOMETOWN INSURANCE SERVICES, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
SUBSIDIARY NAME: HMO-W, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
SUBSIDIARY NAME: UNITED WISCONSIN INSURANCE COMPANY
By: _____________________________________
Gail L. Hanson
Treasurer
SUBSIDIARY NAME: MERIDIAN MARKETING SERVICES, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
Page 6
<PAGE>
SUBSIDIARY NAME: UNITED HEARTLAND, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
SUBSIDIARY NAME: UNITED WISCONSIN PROSERVICES, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
SUBSIDIARY NAME: MERIDIAN RESOURCE CORPORATION
By: _____________________________________
Gail L. Hanson
Treasurer
SUBSIDIARY NAME: MERIDIAN MANAGED CARE, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
SUBSIDIARY NAME: CNR HEALTH, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
SUBSIDIARY NAME: HEARTLAND DENTAL PLAN, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
SUBSIDIARY NAME: HEARTLAND DENTAL PLAN OF MICHIGAN, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
Page 7
<PAGE>
ATTACHMENT A
TO
FEDERAL INCOME TAX ALLOCATION AGREEMENT
Subsidiary Name: Compcare Health Services Insurance Corporation
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Subsidiary Name: Valley Health Plan, Inc.
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Subsidiary Name: Intercare Network, Inc.
Subsidiary Address: 285 Forest Grove Drive, Suite 100
Pewaukee, WI 53072
Attn: Tax Department
Subsidiary Name: Unity Health Plans Insurance Corporation
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Subsidiary Name: Hometown Insurance Services, Inc.
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Subsidiary Name: HMO-W, Inc.
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Subsidiary Name: United Wisconsin Insurance Company
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Subsidiary Name: Meridian Marketing Services, Inc.
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Page 8
<PAGE>
Subsidiary Name: United Heartland, Inc.
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Subsidiary Name: United Wisconsin Proservices, Inc.
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Subsidiary Name: Meridian Resource Corporation
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Subsidiary Name: Meridian Managed Care, Inc.
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Subsidiary Name: CNR Health, Inc.
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Subsidiary Name: Heartland Dental Plan, Inc.
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Subsidiary Name: Heartland Dental Plan of Michigan, Inc.
Subsidiary Address: 401 West Michigan Street
Milwaukee, WI 53203
Attn: Tax Department
Page 9
<PAGE>
ATTACHMENT TO
FEDERAL INCOME TAX ALLOCATION AGREEMENT
SUBSIDIARY NAME: LADD ENTERPRISES, INC.
By: _____________________________________
Scott Ladd
President
PARENT NAME: UNITED WISCONSIN SERVICES, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
Effective date of subsidiary's participation in Agreement: December 17, 1998
Page 10
<PAGE>
ATTACHMENT TO
FEDERAL INCOME TAX ALLOCATION AGREEMENT
SUBSIDIARY NAME: MICHIGAN HEALTHCARE COLLECTIONS, INC.
By: _____________________________________
Scott Ladd
President
PARENT NAME: UNITED WISCONSIN SERVICES, INC.
By: _____________________________________
Gail L. Hanson
Treasurer
Effective date of subsidiary's participation in Agreement: December 17, 1998
Page 11
<PAGE>
Exhibit 21
Subsidiaries of Registrant
United Wisconsin Insurance Company - a Wisconsin insurance corporation
United Wisconsin Proservices, Inc. - a Wisconsin corporation
United Heartland Life Insurance Company - a Wisconsin insurance company
Compcare Health Services Insurance Corporation - a Wisconsin corporation
Meridian Managed Care, Inc. - a Wisconsin corporation
Meridian Resource Corporation - a Wisconsin corporation
Meridian Marketing Services, Inc. - a Wisconsin corporation
Valley Health Plan, Inc. - a Wisconsin corporation
United Heartland, Inc. - a Wisconsin corporation
CNR Health, Inc. - a Wisconsin corporation
HMO-W, Incorporated - a Wisconsin corporation
Unity Health Plans Insurance Corporation - a Wisconsin corporation
Hometown Insurance Services, Inc. - a Wisconsin corporation
Heartland Dental Plan, Inc. - a Wisconsin corporation
Heartland Dental Plan of Michigan, Inc. - a Michigan corporation
Intercare Network, Inc. - a Wisconsin corporation
Ladd Enterprises, Inc. - a Michigan corporation
Michigan Healthcare Collections, Inc. - a Michigan corporation
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Nos. 333-67917 and 333-67909) on Form S-8 pertaining to the UWSI/BCBSUW 401
(k) Plan and the United Wisconsin Services, Inc. Equity Incentive Plan,
respectively, of our report dated February 12, 1999 with respect to the
consolidated financial statements of United Wisconsin Services, Inc. included
in the Company's Annual Report (Form 10-K) for the year ended December 31,
1998, filed with the Securities and Exchange Commission.
Milwaukee, Wisconsin ERNST & YOUNG, LLP
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 (AUDITED) AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 (AUDITED)
</LEGEND>
<CIK> 0001062780
<NAME> UNITED WISCONSIN SERVICES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 26,385
<SECURITIES> 166,173
<RECEIVABLES> 66,191
<ALLOWANCES> 727
<INVENTORY> 0
<CURRENT-ASSETS> 257,090
<PP&E> 8,963
<DEPRECIATION> 9,519
<TOTAL-ASSETS> 298,208
<CURRENT-LIABILITIES> 208,412<F1>
<BONDS> 0<F1>
0
0
<COMMON> 13,378
<OTHER-SE> 51,081
<TOTAL-LIABILITY-AND-EQUITY> 208,412
<SALES> 638,645
<TOTAL-REVENUES> 657,621
<CGS> 623,153
<TOTAL-COSTS> 623,153
<OTHER-EXPENSES> 3,212
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,411
<INCOME-PRETAX> 29,845
<INCOME-TAX> 11,767
<INCOME-CONTINUING> 18,078
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,078
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>$70 MILLION OF AFFILIATED DEBT INCLUDED IN CURRENT LIABILITIES
<F2>EPS DATA HAS NOT BEEN PROVIDED, SINCE THE COMPANY WAS NOT AN INDEPENDENT,
PUBLIC ENTITY PRIOR TO THE SPIN OFF DATE.
</FN>
</TABLE>
