<PAGE>
UNITED STATES
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Period Ended September 30, 2000
Commission File Number 1-14177
UNITED WISCONSIN SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin
(State of incorporation)
39-1931212
(I.R.S. Employer
Identification No.)
401 West Michigan Street, Milwaukee, Wisconsin
(Address of principal executive offices))
53203-2896
(Zip Code)
(414) 226-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all documents and
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock outstanding as of October 31, 2000 was 16,939,682.
<PAGE>
UNITED WISCONSIN SERVICES, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
For the Period Ended September 30, 2000
<TABLE>
<S> <C>
PART I
Financial Statements and Supplementary Data............................................... 3
Management's Discussion and Analysis of Financial Condition and Results of Operations.....11
Quantitative and Qualitative Disclosures about Market Risk................................17
PART II
Other Information.........................................................................18
Signature Page............................................................................19
</TABLE>
2
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------------------
(UNAUDITED) (NOTE A)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,196 $ 16,254
Investments--available-for-sale, at fair value 115,848 120,721
Premium receivables 34,857 24,215
Due from clinics and providers 15,167 16,629
Other receivables 28,353 29,156
Prepaid expenses and other current assets 25,024 29,438
------------------------------
Total current assets 250,445 236,413
Investments--held-to-maturity, at amortized cost 9,272 9,153
Property and equipment, net 10,602 9,938
Goodwill and other intangible, net 11,629 10,492
Other noncurrent assets 44,857 29,583
------------------------------
Total noncurrent assets 76,360 59,166
------------------------------
Total assets $ 326,805 $ 295,579
==============================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
3
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------------------
(UNAUDITED) (NOTE A)
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical and other benefits payable $ 88,344 $ 74,238
Advance premiums 45,326 36,248
Due to affiliates, net 7,841 11,462
Notes payable to affiliates 70,000 -
Payables and accrued expenses 13,189 15,033
Other current liabilities 34,409 22,164
---------------------------
Total current liabilities 259,109 159,145
Noncurrent Liabilities:
Notes payable to affiliates - 70,000
Medical and other benefits payable 30,549 24,104
Other noncurrent liabilities 12,489 11,298
---------------------------
Total noncurrent liabilities 43,038 105,402
---------------------------
Total liabilities 302,147 264,547
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, 16,939,682
issued and outstanding at September 30, 2000
and December 31, 1999.) 14,052 14,052
Retained earnings 12,943 20,242
Accumulated other comprehensive deficit (2,337) (3,262)
---------------------------
Total shareholders' equity 24,658 31,032
---------------------------
Total liabilities and shareholders' equity $ 326,805 $ 295,579
===========================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
4
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Health services revenue:
Premium $ 183,914 $ 163,007 $ 554,069 $ 484,207
Other 11,878 9,212 33,812 29,477
Investment results 1,788 3,022 5,967 9,509
-----------------------------------------------------------
Total revenues 197,580 175,241 593,848 523,193
Expenses:
Medical and other benefits 169,487 149,519 504,976 441,505
Selling, general and administrative 32,658 32,708 95,737 95,492
Profit (loss) sharing on provider arrangements 188 (540) 420 (820)
Interest 1,788 1,355 4,876 3,780
Amortization of goodwill and other intangibles 256 211 716 571
-----------------------------------------------------------
Total expenses 204,377 183,253 606,725 540,528
-----------------------------------------------------------
Pre-tax loss (6,797) (8,012) (12,877) (17,335)
Income tax benefit (3,272) (3,299) (5,578) (7,309)
-----------------------------------------------------------
Net loss $ (3,525) $ (4,713) $ (7,299) $ (10,026)
===========================================================
Basic and diluted loss per common share $ (0.21) $ (0.28) $ (0.43) $ (0.60)
===========================================================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
5
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
------------------------------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net loss $ (7,299) $ (10,026)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,422 2,652
Realized investment losses (gains) 588 (2,539)
Deferred income tax benefit (5,898) (1,777)
Changes in operating accounts, net of acquisitions:
Premium receivables (10,642) (2,603)
Other receivables 890 (1,684)
Due from clinics and providers 1,462 (2,101)
Medical and other benefits payable 20,551 (16,428)
Advance premiums 9,078 (806)
Due to affiliates, net (3,621) 1,146
Prepaid taxes - current 3,817 (9,039)
Other, net (7,843) 125
------------------------------
Net cash provided by (used in) operating activities 4,505 (43,080)
Investing activities:
Acquisition of subsidiaries (net of cash and cash equivalents
acquired in 1999 of $253,000) (1,977) (3,605)
Purchases of available-for-sale investments (16,864) (108,500)
Proceeds from sale of available-for-sale investments 20,355 125,388
Proceeds from maturity of available-for-sale investments 2,960 8,650
Purchases of held-to-maturity investments (2,450) (1,359)
Proceeds from maturity of held-to-maturity investments 2,325 --
Additions to property and equipment (3,147) (1,960)
------------------------------
Net cash provided by investing activities 1,202 18,614
Financing activities:
Issuances of common stock -- 5
Proceeds from line of credit, net 9,270 6,565
Proceeds from notes payable 80 --
Repayment of debt (115) (557)
------------------------------
Net cash provided by financing activities 9,235 6,013
Cash and cash equivalents:
Increase (decrease) during period 14,942 (18,453)
Balance at beginning of year 16,254 26,385
------------------------------
Balance at end of period $ 31,196 $ 7,932
==============================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
6
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2000
Note A. Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
three and nine months ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000. These
interim consolidated financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 1999
and footnotes thereto included in United Wisconsin Services, Inc. ("the
Company") Form 10-K, as filed with the Securities and Exchange Commission.
Note B. Net Income (Loss) Per Share
Basic earnings per common share are computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted earnings per
common share are computed by dividing net income by the weighted average number
of common shares outstanding, adjusted for the effect of dilutive securities for
employee and board of director stock options. When the Company reports a net
loss, potentially dilutive securities are not included in the calculation of
Earnings Per Share ("EPS") because their inclusion would have an antidilutive
effect.
The weighted average number of common shares outstanding used in the calculation
of both basic and diluted EPS are 16,939,682 for the three and nine months ended
September 30, 2000.
Options to purchase 2,780,099 and 2,754,708 common shares during the three and
nine months ended September 30, 2000 were not included in the computation of
diluted earnings per common share since the options' exercise prices were
greater than the average market price of the outstanding common shares. In
addition, 862,300 and 898,967 potentially dilutive common shares for the three
and nine months ended September 30, 2000 were not included because the Company
had a net loss and their inclusion would have been antidilutive.
Note C. Related Party
Blue Cross & Blue Shield United of Wisconsin's ("BCBSUW") Board of Directors
announced in June of 1999 its intention to convert BCBSUW from a service
insurance corporation to a stockholder owned corporation. BCBSUW owns
approximately 46% of the outstanding common stock of the Company. On March 28,
2000 the Wisconsin Commissioner of Insurance approved this conversion.
7
<PAGE>
Note D. Comprehensive Income (Loss)
A reconciliation from net loss reported in the Consolidated Statements of
Operations to comprehensive loss is stated below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss per Consolidated
Statements of Operations $(3,525) $(4,713) $(7,299) $(10,026)
Unrealized gains (losses) on
investments, Net of taxes 819 (2,323) 925 (4,080)
------- ------- ------- --------
Comprehensive loss $(2,706) $(7,036) $(6,374) $(14,106)
======= ======= ======= ========
</TABLE>
Comprehensive income (loss) is defined as all changes in equity during the
period except those resulting from shareholder equity contributions and
distributions.
Note E. Segment Reporting
The Company has two reportable business segments: Health Maintenance
Organization ("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
services, pharmaceutical management, managed behavioral health services, case
management and receivables management services, sold throughout the United
States.
"Other Operations" includes operations not directly related to the business
segments, unallocated corporate items (i.e. 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. The accounting policies of
the reportable segments are the same as those described in the December 31, 1999
audited financial statements in the summary of significant accounting policies.
Financial data by segment is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
--------- ---------- -- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Health services revenue:
HMO products $152,458 $137,721 $464,381 $412,636
Specialty managed care products and
services 48,342 38,694 138,913 113,334
Other operations (5,008) (4,196) (15,413) (12,286)
--------- ---------- -- ---------- -----------
Total consolidated $195,792 $172,219 $587,881 $513,684
========= ========== == ========== ===========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
--------- ---------- -- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment results:
HMO products $ 638 $ 669 $2,293 $4,129
Specialty managed care products and
services 1,164 2,302 3,555 5,288
Other operations (14) 51 119 92
--------- ---------- -- ---------- -----------
Total consolidated $1,788 $3,022 $5,967 $9,509
========= ========== == ========== ===========
Pre-tax loss:
HMO products $(7,302) $(7,895) $(15,165) $(16,614)
Specialty managed care products and
services 3,743 2,450 8,872 7,637
Other operations (3,238) (2,567) (6,584) (8,358)
--------- ---------- -- ---------- -----------
Total consolidated $(6,797) $(8,012) $(12,877) $(17,335)
========= ========== == ========== ===========
<CAPTION>
September 30 December 31
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Total assets:
HMO products $137,217 $115,448
Specialty managed care products and services 193,917 168,993
Other operations (4,329) 11,138
------------- -------------
Total consolidated $326,805 $295,579
============= =============
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
--------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Health services revenue from
transactions with other operating segments:
HMO products $ 355 $ 483 $1,104 $ 1,471
Specialty managed care products and
services 4,653 3,713 14,309 10,815
</TABLE>
Note F. Contingencies
Unity Health Plans Insurance Corporation ("Unity") is in the process of
negotiating a final settlement on its five-year joint venture agreement that
ended December 31, 1999. The agreements were re-negotiated in 1999 for an
additional five-year period commencing January 1, 2000. The term of the previous
five-year agreement expired on December 31, 1999. In the opinion of management,
adequate provision has been made for losses which may result from this
negotiation and, accordingly, the outcome of these negotiations is not expected
to have a material adverse effect on the consolidated financial statements.
9
<PAGE>
Note G. New Business
Effective November 1, 2000, the Company completed its negotiations leading to
the takeover of insurance operations of Family Health Plan Cooperative, Inc.
("FHP"), a health maintenance organization in Milwaukee, Wisconsin. In
conjunction with this transaction, the Company will receive certain assets and
assume certain liabilities, which are subject to final determination based on
liquidation proceedings for FHP. As a result of the FHP transaction, the Company
expects to maintain approximately 40,000 additional members at premium rates
that have been increased from those previously offered by FHP to produce
targeted profitability.
Note H. Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 1999 to conform with the 2000 presentation.
10
<PAGE>
ITEM 2. 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
sold primarily in Wisconsin, 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 services, pharmaceutical management, managed behavioral health
services, case management and receivables management services, sold throughout
the United States. Operating results and statistics for these product groups are
presented below for the periods indicated.
The following Management's Discussion and Analysis should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1999 and footnotes thereto included in the Company's 1999
Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
TOTAL REVENUES
Despite exiting substantially all of the Company's Medicaid HMO business
effective April 1, 2000, total revenues for the three months ended September 30,
2000 increased 12.8% to $197.6 million, compared to $175.2 million for the three
months ended September 30, 1999. For the nine months ended September 30, 2000,
total revenues increased 13.5% to $593.8 million, compared to $523.2 million for
the nine months ended September 30, 1999. These increases were due to
significant rate increases and additional membership on commercial HMO business,
along with a significant increase in the volume of workers' compensation
business written due to market opportunities as a result of rating downgrades of
competitors.
HEALTH SERVICES REVENUES - Even with the reduction in Medicaid members, HMO
health services revenues for the three months ended September 30, 2000 increased
10.7% to $152.5 million, compared to $137.7 million for the three months ended
September 30, 1999. The increase is primarily due to an increase in average HMO
premium revenue per member. Average insured HMO medical premium per member for
the three months ended September 30, 2000 increased 14.9% from the same period
in 1999. The average number of insured HMO medical members for the three months
ended September 30, 2000 decreased 3.7% to 285,708 from 296,798 for the three
months ended September 30, 1999. The decrease in the average number of insured
HMO medical members is primarily due to exiting the Medicaid business. HMO
health services revenues for the nine months ended September 30, 2000 increased
12.6% to $464.4 million from $412.6 million for the nine months ended September
30, 1999. Average insured HMO medical premium per member for the nine months
ended September 30, 2000 increased 11.4% from the same period in 1999. The
average number of insured HMO medical members for the nine months ended
September 30, 2000 increased 1.0% to 299,947, compared to 297,095 for the nine
months ended September 30, 1999.
Health services revenues for specialty managed care products and services
for the three months ended September 30, 2000 increased 24.8% to $48.3 million,
compared to $38.7 million for the three months ended September 30, 1999. Health
services revenue for specialty managed care products and services for the nine
months ended September 30, 2000 increased 22.6% to $138.9 million, compared to
$113.3 million for the nine months ended September 30, 1999. This was the result
of increases in covered lives for managed behavioral health services and
workers' compensation products and premium rates on insurance products, a
decrease in the percentage of workers' compensation business ceded and a
significant increase in the volume of workers' compensation business written. In
the second quarter of 2000, the Company expanded its specialty service business
through the acquisition of Seltzer/Delman, Inc. ("Seltzer"), a workers'
compensation case management company, resulting in an increase in health
services revenues of $0.4 million for the nine months ended September 30, 2000.
Also in 2000, under a "quota share" arrangement, the amount of business ceded to
the workers' compensation reinsurer was reduced from 30% to 20%, representing an
increase of $2.4 million for the nine months ended September 30, 2000. 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
11
<PAGE>
reinsurance treaties allocate the total amount of business subject to the
treaties between the Company and the respective parties to the treaties.
NET INVESTMENT RESULTS -- Investment results include investment income and
realized gains and losses on investments. Investment results for the three
months ended September 30, 2000 decreased 40.0% to $1.8 million, compared to
$3.0 million for the three months ended September 30, 1999. Average annual
investment yields, excluding net realized gains, were 5.9% for the three months
ended September 30, 2000, compared to 6.2% for the three months ended September
30, 1999. Investment results for the nine months ended September 30, 2000
decreased 36.8% to $6.0 million, compared to $9.5 million for the nine months
ended September 30, 1999. The decrease in investment income during the third
quarter of 2000 was the result of lower invested asset balances. The reduction
in investments resulted from liquidating a portion of the bond portfolio to
generate cash to fund ongoing operations.
Average invested assets for the three months ended September 30, 2000
decreased 4.4% to $143.4 million, compared to $150.0 million for the three
months ended September 30, 1999. Average invested assets for the nine months
ended September 30, 2000 decreased 15.1% to $142.6 million, compared to $167.9
million for the nine months ended September 30, 1999. Changes in the levels of
average invested assets relate to ongoing operations, including the timing and
level of claim payments.
Investment gains and losses are realized when investments are liquidated to
fund operations and in the normal investment process in response to market
opportunities. Realized losses for the three months ended September 30, 2000
were $0.3 million, compared to realized gains of $0.8 million for the three
months ended September 30, 1999. Realized losses for the nine months ended
September 30, 2000 were $0.6 million, compared to realized gains of $2.5 million
for the nine months ended September 30, 1999.
EXPENSE RATIOS
LOSS RATIO -- The consolidated loss ratio represents the ratio of medical
and other benefits to premium revenue on an aggregate basis, and is therefore a
blended ratio for medical, life, dental, disability and other product lines. The
consolidated loss ratio was 92.2% for the three months ended September 30, 2000,
compared to 91.7% for the three months ended September 30, 1999. The increase in
the consolidated loss ratio for the quarter is attributable to higher health
care cost trends. The consolidated loss ratio was 91.1% for the nine months
ended September 30, 2000, compared to 91.2% for the nine months ended September
30, 1999. The consolidated loss ratio is influenced by the component loss ratios
for each of the Company's primary product lines, as discussed below.
The medical loss ratio for HMO products for the three months ended
September 30, 2000 was 95.8%, compared to 96.1% for the three months ended
September 30, 1999. This improvement is primarily due to premium rate increases
on group renewals and exiting the Medicaid business. The medical loss ratio for
HMO products for the nine months ended September 30, 2000 was 94.2%, compared to
94.8% for the nine months ended September 30, 1999. In general, the medical loss
ratio in any quarter will be impacted by the development of prior period
reserves which are re-evaluated each quarter.
The loss ratio for the risk products within specialty managed care products
and services for the three months ended September 30, 2000 was 75.8%, compared
to 73.9% for the three months ended September 30, 1999. The loss ratio for the
risk products within specialty managed care products and services for the nine
months ended September 30, 2000 was 76.6%, compared to 75.2% for the nine months
ended September 30, 1999. The loss ratios principally relate to the life,
disability, workers' compensation and dental product lines of business. These
products represent relatively small blocks of business. Therefore, the loss
ratio can exhibit significant volatility due to varying levels of claim
frequency and severity. Generally, the anticipated aggregate loss ratio for
specialty risk products should range between 70% and 75%. The higher loss ratios
in 2000 are attributable to increased reported life claims, higher-than-
anticipated short-term disability claims, along with additional case reserves on
the long-term disability line of business.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE RATIO -- The selling, general
and administrative ("SGA") expense ratio includes commissions, administrative
expenses, premium taxes and other assessments. The SGA expense ratio for HMO
products for the three months ended September 30, 2000 was 9.3%, compared to
10.5% for the three months ended September 30, 1999. The SGA expense ratio for
HMO products for the nine months ended September
12
<PAGE>
30, 2000 was 9.5%, compared to 10.4% for the nine months ended September 30,
1999. This improvement was due to an increase in membership and premium rates
over the prior year in combination with reduced costs. Also, in 1999, additional
costs were incurred to reduce claim backlog and process claims adjustments,
which were attributed to the system conversion as part of an implementation of a
Year 2000 readiness program.
The SGA expense ratio related to the risk products within specialty managed
care products and services for the three months ended September 30, 2000 was
23.0%, compared to 25.0% for the three months ended September 30, 1999. The SGA
expense ratio related to the risk products within specialty managed care
products and services for the nine months ended September 30, 2000 was 23.6%,
compared to 25.1% for the nine months ended September 30, 1999. In 1999, the
Company incurred costs attributable to the implementation of its Year 2000
readiness program.
The operating expense ratio related to the service products within
specialty managed care products and services for the three months ended
September 30, 2000 was 85.5%, compared to 100.1% for the three months ended
September 30, 1999. The operating expense ratio related to the service products
within specialty managed care products and services for the nine months ended
September 30, 2000 was 86.8%, compared to 92.8% for the nine months ended
September 30, 1999. The improvement in the operating expense ratio during 2000
is due primarily to growth in the electronic claims clearing and software
business.
In addition, the Company recorded charges of approximately $2.8 million for
various transactions and reorganization costs during 1999. These charges
consisted primarily of expenses associated with the proposed debt-for-equity
swap transaction with Blue Cross & Blue Shield United of Wisconsin ("BCBSUW")
(which was discontinued by BCBSUW in favor of market purchases), an unfavorable
appellate court judgement in a dissenter's lawsuit relating to the 1994
acquisition of Unity, costs associated with the start-up of a new Compcare
processing office and the combination of various specialty managed care service
businesses into a single operating unit.
OTHER EXPENSES
Profit (loss) sharing on joint ventures for the three months ended
September 30, 2000 was $0.2 million, compared to $(0.5) million for the three
months ended September 30, 1999. Profit (loss) sharing on joint ventures for
the nine months ended September 30, 2000 was $0.4 million, compared to $(0.8)
million for the nine months ended September 30, 1999. The change in profit
(loss) sharing in both periods in 2000 resulted from a final settlement
relative to Valley's prior joint venture agreement. The Company is a party to
certain provider arrangements in conjunction with Unity and Valley, which
include profit-sharing payments to certain providers. The Unity and Valley
provider agreements were renegotiated at the end of 1999 and the
profit-sharing provisions for Unity were eliminated beginning in 2000, except
for certain limited profit-sharing provisions with a provider. In October
1999, the Company formed a joint venture with Health Care Service
Corporation, a mutual legal reserve company doing business as Blue Cross Blue
Shield of Illinois ("HCSC"). The Company shares equally in all profits and
losses on this newly-formed joint venture, United Heartland of Illinois,
Inc., which provides workers' compensation administration services. As of
September 30, 2000, the worker's compensation joint venture completed its
first year of operations.
Amortization of goodwill and other intangibles for the three months ended
September 30, 2000 was $0.3 million, compared to $0.2 million for the three
months ended September 30, 1999. Amortization of goodwill and other intangibles
for the nine months ended September 30, 2000 was $0.7 million, compared to $0.6
million for the nine months ended September 30, 1999. This increase is due to
goodwill arising from the acquisition of Seltzer in the second quarter of 2000.
13
<PAGE>
Included in other operations is interest expense of $1.8 million and $4.9
million for the three and nine months ended September 30, 2000, respectively.
This compares to interest expense of $1.4 million and $3.8 million for the three
and nine months ended September 30, 1999, respectively. Interest expense related
to the $70.0 million debt (which matures on April 30, 2001) was $1.4 million and
$4.1 million for the three and nine months ended September 30, 2000,
respectively. This compares to interest expense of $1.2 million and $3.5 million
for the three and nine months ended September 30, 1999, respectively. The
remainder of the interest expense relates to the Company's participation in a
bank line-of-credit with BCBSUW. The increase in interest expense is primarily
due to the increase in the variable interest rate on the debt to BCBSUW.
NET LOSS FROM OPERATIONS
Consolidated net loss from operations for the three months ended September
30, 2000 improved by $1.2 million to $3.5 million from $4.7 million for the
three months ended September 30, 1999. Consolidated net loss from operations for
the nine months ended September 30, 2000 improved by $2.7 million to $7.3
million from $10.0 million for the nine months ended September 30, 1999.
The Company's effective benefit tax rate was 47.9% for the three months
ended September 30, 2000, compared to 41.2% for the three months ended September
30, 1999. The increase in the effective tax rate for the third quarter 2000 is
primarily due to a tax benefit of $0.5 million recorded at the Company's life
subsidiary for the small life insurance company deduction and prior period tax
refunds. The Company's effective tax rate was 43.2% for the nine months ended
September 30, 2000, compared to 42.2% for the nine months ended September 30,
1999. This rate fluctuates based upon the relative profitability of the
Company's two reportable business segments and the differing effective tax rates
for each subsidiary within those reportable segments. The effective tax rates by
subsidiary range from 32% to 43%.
SUMMARY OF OPERATING RESULTS AND STATISTICS
Operating results and statistics for the two primary product groups are
presented below for the periods indicated.
<TABLE>
<CAPTION>
September 30,
2000 1999
-----------------------
<S> <C> <C>
Members at end of period:
HMO MEMBERS BY BUSINESS UNIT:
Compcare 167,512 175,755
Valley 36,049 41,978
Unity 87,192 86,749
-----------------------
Total HMO members 290,753 304,482
=======================
HMO MEMBERS BY PRODUCT TYPE:
Commercial 195,553 182,738
Point-of-Service 84,598 75,312
Medicaid 4,144 39,903
-----------------------
Total insured members 284,295 297,953
Self-insured members 6,458 6,529
-----------------------
Total HMO members 290,753 304,482
=======================
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
September 30,
2000 1999
----------------------
<S> <C> <C>
Members at end of period:
SPECIALTY MANAGED CARE PRODUCTS AND SERVICES:
UWG Life/AD&D 159,007 166,275
Dental - HMO 179,741 175,900
Behavioral Health & Medical Management 1,103,966 971,535
Workers' Compensation 76,858 53,677
Disability and other 128,791 134,028
-----------------------
Total Specialty managed care
products and services
members 1,648,363 1,501,415
=======================
</TABLE>
<TABLE>
<CAPTION>
Three months Nine months ended
ended September 30, September 30,
2000 1999 2000 1999
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Health services revenues (as a percentage of the total):
HMO products 77.9% 80.0% 79.0% 80.3%
Specialty managed care products and services
Service Products 7.5 7.4 7.1 7.8
Risk Products 17.2 15.0 16.5 14.3
Intercompany eliminations (2.6) (2.4) (2.6) (2.4)
-------- --------- --------- ---------
Total 100.0% 100.0% 100.0% 100.0%
======== ========= ========= =========
Operating statistics:
HMO products:
Medical loss ratio (1) 95.8% 96.1% 94.2% 94.8%
Selling, general, & administrative
expense ratio (2) 9.3 10.5 9.5 10.4
-------- --------- --------- ---------
Combined loss and expense ratio 105.1% 106.6% 103.7% 105.2%
======== ========= ========= =========
Specialty managed care products and services:
Service products:
Operating expense ratio 85.5% 100.1% 86.8% 92.8%
Risk products:
Loss ratio (1) 75.8% 73.9% 76.6% 75.2%
Selling, general, & administrative
expense ratio (2) 23.0 25.0 23.6 25.1
-------- --------- --------- ---------
Combined risk loss and expense ratio 98.8% 98.9% 100.2% 100.3%
======== ========= ========= =========
Consolidated:
Loss ratio (1) 92.2% 91.7% 91.1% 91.2%
Net income margin (3) N/A N/A N/A N/A
(1) Medical and other benefits as a percentage of premium revenue.
(2) Selling, general and administrative expenses as a percentage of premium revenue.
(3) Net income as a percentage of total revenues.
</TABLE>
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.
15
<PAGE>
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.
The Company's cash flow continues to improve over the previous year. For
the nine months ended September 30, 2000, net cash provided by operating
activities was $4.5 million, compared to net cash used in operating activities
of $43.1 million for the nine months ended September 30, 1999. This improvement
was due to a significant increase in the volume of business written as a result
of an improved market and increases in medical and other benefits payable
resulting from fewer capitated provider arrangements and the associated funding
requirements in relation to the comparable prior period. Due to periodic
short-term cash flow needs of certain subsidiaries, the Company made borrowings
under its bank line-of-credit ranging up to $24.6 million during the first nine
months of 2000, compared to $14.8 million during the first nine months of 1999.
The outstanding balance on the line-of-credit at September 30, 2000 was $20.8
million, compared to $11.6 million at December 31, 1999.
The Company's investment portfolio consists primarily of investment grade
bonds and U.S. Government securities, and has a limited exposure to equity
securities. At September 30, 2000, $100.5 million, or 80.3%, of the Company's
total investment portfolio was invested in bonds, compared to $105.0 million, or
80.9%, at December 31, 1999. The bond portfolio had an average quality rating by
Moody's Investor Service of Aa3 at September 30, 2000 and December 31, 1999. 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, was
less than amortized cost by $2.5 million at September 30, 2000 and was less than
amortized cost by $5.0 million at December 31, 1999. As of September 30, 2000,
the Company had no investments in mortgage loans, non-publicly traded
securities, real estate held for investment or financial derivatives (except for
principal only strips of U.S. Government securities).
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. In accordance with requirements of the National
Association of Insurance Commissioners ("NAIC") and the state of Wisconsin,
insurance subsidiaries are required to maintain certain levels of 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. During 2000, the Company
contributed capital to Compcare to bring Compcare's statutory capital and
surplus above required levels.
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.
16
<PAGE>
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements with respect to
the financial condition, results of operation and business of the Company. Such
forward looking statements are subject to inherent risks and uncertainties that
may cause actual results or events to differ materially from those contemplated
by such forward looking statements. Forward-looking statements may include, but
are not limited to, projections of revenues, income or losses, capital
expenditures, plans for future operations, financing needs or plans, compliance
with financial covenants in loan agreements, plans relating to products or
services of the Company, assessments of materiality, predictions of future
events, the ability to obtain additional financing, the Company's ability to
meet obligations as they become due, as well as assumptions relating to the
foregoing. In addition, when used in this discussion, the words 'anticipates,'
'believes,' 'estimates,' 'expects,' 'intends,' 'plans' and similar expressions
are intended to identify forward-looking statements. Factors that may cause
actual results to differ materially from those contemplated by such forward
looking statements include, among others, rising health care costs, economic and
business conditions and competition in the managed care industry, development of
claims reserves, developments in health care reform and other regulatory issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption
`Liquidity and Capital Resources' under Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
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 to 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 asset classes and segments within various asset classes, and
using performance measurement and reporting.
The Company uses a sensitivity model to assess the inherent rate risk
of its fixed income investments. The model includes all fixed income securities
held 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. Since last
reported as of June 30, 2000, no significant changes have occurred in the
determination of the reduction in the fair value of the Company's modeled
financial assets as a result of a hypothetical instantaneous 100 basis point
increase in market interest rates.
17
<PAGE>
PART II. OTHER INFORMATION
UNITED WISCONSIN SERVICES, INC.
ITEM 1. LEGAL PROCEEDINGS
Following the merger in 1994 between the Company and HMO-Wisconsin,
Inc. ("HMOW"), certain minority shareholders of HMOW filed a demand for payment
under the dissenter's rights statute. The Company brought a special proceeding
in Sauk County Circuit Court to determine the fair value of the shares. The
court accepted HMOW's valuation and further applied a minority discount to the
amount allocable to the dissenting shareholders. A dissenting shareholder filed
an appeal, HMO-W INCORPORATED V. SSM HEALTH CARE SYSTEM AND NEILLSVILLE CLINIC,
S.C., No. 98-2834, in the Wisconsin Court of Appeals, District IV. On June 17,
1999, the Court of Appeals upheld the trial court's determination of fair value,
but reversed the application of the minority discount. The Company believed the
application of a minority discount was appropriate, and filed a petition for
review of the Appellate Court's decision with the Wisconsin Supreme Court on
July 16, 1999. The dissenter also filed a cross petition on the underlying
valuation question. On June 7, 2000, the Wisconsin Supreme Court affirmed the
Court of Appeals in all respects; the trial court's valuation (i.e. HMOW's
valuation) of the shares stands, but no minority discount is applicable. As a
result, the Company will pay the dissenter an amount equal to the value of the
minority discount plus interest (approximately $830,000). The Company has
recorded a liability for this amount.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
DATE: 11/13/00
UNITED WISCONSIN SERVICES,INC.
/s/ GAIL L. HANSON
---------------------------------------------
Gail L. Hanson
Vice President and Chief Financial Officer
(Principal Financial Officer
Chief Accounting Officer)
19
