<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 MARCH 31, 2000
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)
(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 April 30, 2000 was 16,939,682.
<PAGE>
UNITED WISCONSIN SERVICES, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
For the Period Ended March 31, 2000
PART I
Financial Statements and Supplementary Data................................... 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................10
Quantitative and Qualitative Disclosures about Market Risk....................15
PART II
Other Information.............................................................16
Signature Page................................................................17
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------------------------
(UNAUDITED) (NOTE A)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,197 $ 16,254
Investments--available-for-sale, at fair value 120,296 120,721
Premium receivables 31,009 24,215
Due from clinics and providers 13,172 16,629
Other receivables 35,551 30,731
Prepaid expenses and other current assets 28,818 29,438
------------------------------------
Total current assets 246,043 237,988
Investments--held-to-maturity, at amortized cost 9,389 9,153
Property and equipment, net 10,205 9,938
Goodwill and other intangible, net 10,230 10,492
Other noncurrent assets 30,705 29,583
------------------------------------
Total assets $ 306,572 $ 297,154
====================================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
3
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------------------------
(UNAUDITED) (NOTE A)
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical and other benefits payable $ 86,343 $ 74,238
Advance premiums 32,985 36,248
Due to affiliates - other 11,088 13,037
Payables and accrued expenses 14,931 15,033
Other current liabilities 24,878 22,164
---------------------------------
Total current liabilities 170,225 160,720
Noncurrent Liabilities:
Notes payable to affiliates 70,000 70,000
Medical and other benefits payable 26,216 24,104
Other noncurrent liabilities 11,458 11,298
---------------------------------
Total noncurrent liabilities 107,674 105,402
---------------------------------
Total liabilities 277,899 266,122
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 March 31, 2000
and December 31, 1999.) 14,052 14,052
Retained earnings 17,676 20,242
Accumulated other comprehensive deficit (3,055) (3,262)
---------------------------------
Total shareholders' equity 28,673 31,032
---------------------------------
Total liabilities and shareholders' equity $ 306,572 $ 297,154
=================================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
4
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
----------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C>
Revenues:
Health services revenue:
Premium revenue $ 192,890 $ 160,321
Other revenue 10,527 9,325
Investment results 2,136 3,363
----------------------------------
Total revenues 205,553 173,009
Expenses:
Medical and other benefits 175,594 138,936
Selling, general and administrative expenses 32,247 28,696
Loss sharing on provider arrangements (86) (130)
Interest 1,487 1,184
Amortization of goodwill and other intangibles 225 165
----------------------------------
Total expenses 209,467 168,851
----------------------------------
Pre-tax income (loss) (3,914) 4,158
Income tax expense (benefit) (1,348) 1,486
----------------------------------
Net income (loss) $ (2,566) $ 2,672
==================================
Basic and diluted earnings (loss) per common share $ (0.15) $ 0.16
==================================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
5
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
--------------------------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income (loss) $ (2,566) $ 2,672
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,212 833
Realized investment (gains) losses 60 (968)
Deferred income tax expense (benefit) (1,083) 705
Changes in operating accounts:
Premium receivables (6,794) (7,756)
Other receivables (4,206) 2,629
Due from clinics and providers 3,457 (839)
Medical and other benefits payable 14,254 (7,059)
Advance premiums (3,263) (1,253)
Due to/from affiliates (3,232) 2,157
Prepaid taxes - current 1,284 (767)
Other, net (396) (5,502)
--------------------------
Net cash used in operating activities (1,273) (15,148)
Investing activities:
Purchases of available-for-sale investments (6,508) (54,457)
Proceeds from sale of available-for-sale investments 5,865 42,532
Proceeds from maturity of available-for-sale investments 1,460 8,650
Purchases of held-to-maturity investments (1,756) (204)
Proceeds from maturity of held-to-maturity investments 1,535 -
Additions to property and equipment (1,170) (540)
--------------------------
Net cash used in investing activities (574) (4,019)
Financing activities:
Issuances of common stock - 1
Proceeds from line of credit 2,750 490
Proceeds from notes payable 80 -
Repayment of debt (40) (53)
--------------------------
Net cash provided by financing activities 2,790 438
Cash and cash equivalents:
Increase (decrease) during period 943 (18,729)
Balance at beginning of year 16,254 26,385
--------------------------
Balance at end of period $ 17,197 $ 7,656
==========================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
6
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 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-month period ended March 31, 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 months ended March
31, 2000.
Options to purchase 2,697,767 common shares during the three months ended
March 31, 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, 927,300
potentially dilutive common shares for the three months ended March 31, 2000
were not included because the Company had a net loss and their inclusion
would have been antidilutive.
7
<PAGE>
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. In
conjunction with the planned change in corporate structure of BCBSUW, the
Company plans to investigate the possible merger or other business combination
with BCBSUW, although no decision has been reached.
Note D. Comprehensive Income (loss)
A reconciliation from net income (loss) reported in the Consolidated Statements
of Operations to comprehensive income (loss) is stated below:
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
------------------------
(IN THOUSANDS)
<S> <C> <C>
Net income (loss) per Consolidated Statements of Operations $ (2,566) $ 2,672
Unrealized gains (losses) on investments, net of taxes 207 (1,234)
------------------------
Comprehensive income (loss) $ (2,359) $ 1,438
========================
</TABLE>
Comprehensive income (loss) is defined as all changes in equity during the
period except those resulting from shareholder equity contributions and
distributions. The accumulated effect of comprehensive income (loss) was a
reduction of equity of $3.1 million and $3.3 million as of March 31, 2000 and
December 31, 1999, respectively.
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.
8
<PAGE>
Financial data by segment is as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Health services revenue:
HMO products $164,175 $136,898
Specialty managed care products and services 44,711 36,709
Other operations (5,469) (3,961)
-------- --------
Total consolidated $203,417 $169,646
======== ========
Investment results:
HMO products $ 842 $ 1,982
Specialty managed care products and services 1,190 1,363
Other operations 104 18
-------- --------
Total consolidated $ 2,136 $ 3,363
======== ========
Pre-tax income (loss):
HMO products $ (3,987) $ 2,503
Specialty managed care products and services 2,012 3,189
Other operations (1,939) (1,534)
-------- --------
Total consolidated $ (3,914) $ 4,158
======== ========
March 31, December 31,
2000 1999
------------ ----------
(IN THOUSANDS)
Total assets:
HMO products $122,706 $115,448
Specialty managed care products and services 176,781 168,993
Other operations 7,085 12,713
-------- --------
Total consolidated $306,572 $297,154
======== ========
Three months ended March 31,
2000 1999
------------ ---------
(IN THOUSANDS)
Health services revenue from transactions with other
operating segments:
HMO products $ 384 $ 460
Specialty managed care products and services 3,074 3,669
</TABLE>
Note F. Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 1999 to conform with the 2000 presentation.
9
<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.
RESULTS OF OPERATIONS
TOTAL REVENUES
Total revenues for the three months ended March 31, 2000 increased 18.8% to
$205.6 million from $173.0 million for the three months ended March 31, 1999.
These increases were due primarily to increased membership in the major product
lines, general premium and rate increases and acquisitions of specialty
businesses.
HEALTH SERVICES REVENUES -- HMO health services revenues for the three
months ended March 31, 2000 increased 19.9% to $164.2 million from $136.9
million for the three months ended March 31, 1999. The increase is primarily due
to increases in the average HMO premium revenue per member and in the average
number of HMO medical members. Average insured HMO medical premium per member
for the three months ended March 31, 2000 increased 9.5% from the same period in
the prior year. The average number of insured HMO medical members for the three
months ended March 31, 2000 increased 9.4% to 325,713 from 297,609 for the three
months ended March 31, 1999.
Health services revenues for specialty managed care products and services
for the three months ended March 31, 2000 increased 21.8% to $44.7 million from
$36.7 million for the three months ended March 31, 1999. This was the result of
increases in covered lives and premium rates on insurance products, the
acquisition of Allegro in May of 1999, along with a decrease in the percentage
of ceded reinsurance. Health services revenue for Allegro totaled $0.5 million
for the three months ended March 31, 2000.
NET INVESTMENT RESULTS -- Investment results include investment income
and realized gains and losses on investments. Investment results for the
three months ended March 31, 2000 decreased 38.2% to $2.1 million from $3.4
million for the three months ended March 31, 1999. Average annual investment
yields, excluding net realized gains, were 6.2% for the three months ended
March 31, 2000 and 5.2% for the three months ended March 31, 1999. The
decrease in investment income during the first quarter of 2000 was the result
of lower investment asset balances. The reduction in investments resulted
from the Company liquidating a portion of the bond portfolio (which were
primarily in unrealized loss positions) to generate cash to fund operations
during 1999.
Average invested assets for the three months ended March 31, 2000 decreased
21.7% to $144.9 million from $185.1 million for the three months ended March 31,
1999. Changes in the levels of average invested assets relate to ongoing
operations, including the timing and level of claim payments.
10
<PAGE>
Investment gains and losses are realized as investments are liquidated
to fund operations and in the normal investment process in response to market
opportunities. Realized losses for the three months ended March 31, 2000 were
$0.1 million, compared to realized gains of $1.0 million for the three months
ended March 31, 1999.
EXPENSE RATIOS
LOSS RATIO -- The consolidated loss ratio represents the ratio of medical
and other benefits to premium revenue on a consolidated basis, and is therefore
a blended ratio for medical, life, dental, disability and other product lines.
The consolidated loss ratio was 91.0% for the three months ended March 31, 2000,
compared with 86.7% for the three months ended March 31, 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 March
31, 2000 was 93.6%, compared with 89.4% for the three months ended March 31,
1999. The increase is primarily due to higher claim costs, including continued
losses arising from the Medicaid business. In addition, the premium
deficiency reserve of $0.9 million that was established in the fourth quarter
of 1999, for future losses related to the Medicaid business, was reversed in
the first quarter of 2000. Effective April 1, 2000, the Company has
terminated its contract with the state of Wisconsin for Compcare's participation
in the Medicaid program, along with significantly reducing Unity and Valley's
participation in the program. 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 March 31, 2000 was 77.8%, compared with
74.1% for the three months ended March 31, 1999. The loss ratios principally
relates 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 ratio in the first quarter of 2000 is attributable to increased
claims and additional case reserves relative to 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 March 31, 2000 was 9.4%, compared with 10.3%
for the three months ended March 31, 1999. This improvement was primarily due to
an increase in membership and premium rates over the prior year, along with
additional costs in 1999 for the 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 March 31, 2000 was 24.1%,
compared with 23.5% for the three months ended March 31, 1999. The lower ratio
in 1999 was due to offsetting expense charges, which resulted from the Company's
participation in a reinsurance pool for the State of Wisconsin group life
insurance program.
The operating expense ratio related to the service products for the three
months ended March 31, 2000 remained stable at 89.3%, compared to 89.0% for the
three months ended March 31, 1999.
OTHER EXPENSES
Loss sharing on joint ventures was $0.1 million for the three months ended
March 31, 2000 and 1999. The Company is a party to certain provider arrangements
in conjunction with Unity and Valley, which include profit-sharing payments to
certain providers. Unity and Valley provider agreements were renegotiated at the
end of 1999 and the profit-sharing payments for Unity were eliminated starting
in 2000. In the fourth quarter of 1999 United Heartland, Inc., the Company's
workers' compensation subsidiary, 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. Such
profits were immaterial for the three months ended March 31, 2000.
11
<PAGE>
Amortization of goodwill and other intangibles for the three months ended
March 31, 2000 and 1999 was $0.2 million. For the three months ended March 31,
2000 this amount represents only goodwill, which is the excess of cost over the
fair value of net assets acquired.
Included in other operations for the three months ended March 31, 2000
is $1.5 million of interest expense, compared to $1.2 million for the three
months ended March 31, 1999. The Company assumed a $70 million debt owed to
BCBSUW as of September 11, 1998. The note has a maturity date of April 30,
2001. Interest expense related to the $70 million debt was $1.3 million for
the three months ended March 31, 2000 and $1.1 million for the three months
ended March 31, 1999. The Company also participates with BCBSUW in a bank
line-of-credit, which permits aggregate borrowings up to $30 million.
Interest expense related to the bank line-of-credit was $0.2 million for the
three months ended March 31, 2000 and $0.1 million for the three months ended
March 31, 1999.
NET INCOME FROM OPERATIONS
Consolidated net income (loss) from operations for the three months ended
March 31, 2000 decreased to $(2.6) million from $2.7 million for the three
months ended March 31, 1999. The loss in the first quarter of 2000 resulted from
higher-than-anticipated medical costs and continued losses arising from the
Medicaid business.
The Company's effective tax rate was 34.4% for the three months ended
March 31, 2000, compared with 35.7% for the three months ended March 31,
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 46%.
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>
March 31,
2000 1999
-------------------------
<S> <C> <C>
Members at end of period:
HMO MEMBERS BY BUSINESS UNIT:
Compcare 200,310 175,656
Valley 40,080 41,953
Unity 94,077 86,491
-------------------------
Total HMO members 334,467 304,100
=========================
HMO MEMBERS BY PRODUCT TYPE:
Commercial 200,975 184,414
Point-of-Service 81,229 73,300
Medicaid 45,782 39,894
-------------------------
Total insured members 327,986 297,608
Self-insured members 6,481 6,492
-------------------------
Total HMO members 334,467 304,100
=========================
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
March 31,
2000 1999
----------------------------
<S> <C> <C>
Members at end of period:
SPECIALTY MANAGED CARE PRODUCTS AND SERVICES:
UWG Life/AD&D 165,591 159,776
Dental - HMO 183,383 172,000
Behavioral Health & Medical Management 1,158,530 961,774
Workers' Compensation 58,509 54,142
Disability and other 135,835 124,752
----------------------------
Total Specialty managed care
products and services members 1,701,848 1,472,444
============================
Three months ended
March 31,
2000 1999
----------------------------
Health services revenues (as a percentage of the total):
HMO products 80.7% 80.7%
Specialty managed care products and services
Service Products 6.5 7.5
Risk Products 15.5 14.1
Intercompany eliminations (2.7) (2.3)
----------------------------
Total 100.0% 100.0%
============================
Three months ended
March 31,
2000 1999
----------------------------
Operating statistics:
HMO products:
Medical loss ratio (1) 93.6% 89.4%
Selling, general, & administrative
expense ratio (2) 9.4 10.3
Combined loss and expense ratio 103.0 99.7
Specialty managed care products and services:
Service products:
Operating expense ratio 89.3% 89.0%
Risk products:
Loss ratio (1) 77.8 74.1
Selling, general, & administrative
expense ratio (2) 24.1 23.5
Combined loss and expense ratio 101.9 97.6
Consolidated:
Loss ratio (1) 91.0% 86.7%
Net income margin (3) N/A 1.5
</TABLE>
(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.
13
<PAGE>
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.
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 position has improved over the previous year. For
the three months ended March 31, 2000, net cash used in operating activities was
$1.3 million, compared with net cash used in operating activities of $15.1
million for the three months ended March 31, 1999. This improvement was due
primarily to increases in medical and other benefits payable resulting from
fewer capitated provider arrangements and the associated funding requirements
during the period ended March 31, 2000. Due to periodic short-term cash flow
needs of certain subsidiaries, the Company made borrowings under its bank
line-of-credit ranging up to $14.4 million during the first quarter of 2000,
compared to $8.9 million during the first quarter of 1999. The outstanding
balance on the line-of-credit at March 31, 2000 was $14.3 million, compared to
$11.6 million at December 31, 1999.
The Company's investment portfolio consists primarily of investment
grade bonds and Government securities, and has a limited exposure to equity
securities. At March 31, 2000, $104.8 million, or 80.8%, of the Company's
total investment portfolio was invested in bonds, compared with $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 March 31, 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 $4.5 million at
March 31, 2000 and was less than amortized cost by $5.0 million at December
31, 1999. As of March 31, 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. Insurance subsidiaries are required to maintain
certain levels of capital and surplus under the National Association of
Insurance Commissioners ("NAIC") and the state of Wisconsin requirements. 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 March 31, 2000, all of the Company's
insurance subsidiaries were in compliance with Wisconsin's capital and
surplus requirements. Under the NAIC Managed Care Organization Risk Based
Capital requirements, the Company has submitted a risk based capital plan for
Compcare to the Office of the Commissioner of Insurance ("OCI"). The Company
is awaiting OCI approval of the plan.
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.
14
<PAGE>
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 December 31, 1999, 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.
15
<PAGE>
PART II. OTHER INFORMATION
UNITED WISCONSIN SERVICES, INC.
ITEM 1. LEGAL PROCEEDINGS
None
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
10.1 Second Amended and Restated Joint Venture Agreement by and
between Blue Cross & Blue Shield United of Wisconsin, United
Wisconsin Services, Inc., Valley Health Plan, Inc. and
Midelfort Clinic, Ltd., Mayo Health System, dated January 1,
2000.
(b) Reports on Form 8-K
None
16
<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: 5/12/00
-----------
UNITED WISCONSIN SERVICES, INC.
/s/ Gail L. Hanson
------------------------------------------
Gail L. Hanson
Vice President and Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
17
<PAGE>
SECOND AMENDED AND RESTATED
JOINT VENTURE AGREEMENT
-----------------------
THIS SECOND AMENDED AND RESTATED JOINT VENTURE AGREEMENT (the "Agreement")
is made and entered into as of the 1st day of January 2000, by and between Blue
Cross & Blue Shield United of Wisconsin, a Wisconsin Chapter 613 insurance
corporation ("Blue Cross"), United Wisconsin Services, Inc., a Wisconsin Chapter
180 business corporation ("UWS"), Valley Health Plan, Inc., a Wisconsin Chapter
611 insurance corporation ("VHP"), and Midelfort Clinic, Ltd., Mayo Health
System, a Wisconsin Chapter 181 business corporation (the "Clinic").
PREAMBLE
--------
WHEREAS, Blue Cross and the Clinic entered into a Joint Venture Agreement
dated January 1, 1992 for the purpose of enhancing their respective businesses
by offering managed care products which utilize a provider network;
WHEREAS, the January 1, 1992 Joint Venture Agreement was subsequently
amended and restated effective January 1, 1997;
WHEREAS, the parties wish to amend the January 1, 1997 Agreement by
entering into a new agreement to become effective January 1, 2000 (the "Second
Amended and Restated Joint Venture Agreement") and to amend the prior joint
venture agreements as set forth herein;
WHEREAS, the Clinic has sold Midelfort Health Plan, Inc.
<PAGE>
("MHP", n/k/a VHP) to UWS while retaining an option to repurchase, under a
Purchase and Sale Agreement dated as of January 1, 1992 ("Purchase and Sale
Agreement"), amended effective January 1, 1997 and subsequently amended
effective January 1, 2000;
WHEREAS, the parties wish to coordinate the design and marketing of various
managed care insurance products which utilize a provider network, including,
without limitation, Point of Service ("POS") and Health Maintenance Organization
("HMO") products and programs;
WHEREAS, the Clinic shall participate in the offering of these products by
serving as the primary provider and by assisting in the design and marketing of
the products;
WHEREAS, the underwriters shall be liable for losses incurred by the
products, but shall share with the Clinic the collective profits of the products
as specified in Article 5, herein; and
WHEREAS, Midelfort Clinic, Ltd. (which has been acquired by Mayo Foundation
for Medical Education and Research) and the other parties to this Agreement have
consented to the assignment by Midelfort Clinic, Ltd. to Midelfort Clinic, Ltd.,
Mayo Health System, all of its rights, title and interest in, to and under the
prior joint venture agreements and this Second Amended and Restated Joint
Venture Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
-2-
<PAGE>
1. SCOPE OF AGREEMENT
----------------------
1.1 Blue Cross shall be defined herein to include all its respective
subsidiaries and affiliates except where UWS is referred to
specifically. The Clinic shall be defined herein to include all its
respective subsidiaries and affiliates in which the Clinic has an
ownership interest (but not its sole member).
1.2 The parties to this Agreement have entered into a series of related
contracts with one another in order to produce, market, and administer
managed care insurance products which utilize a provider network. The
relationships between and among the parties are that of independent
contractors working together in a cooperative arrangement. It is not
the intent of the parties to create, nor should this Agreement be
construed to create, a partnership or an employment relationship
between or among the parties.
1.3 This Agreement shall not create any agency relationship between or
among the parties other than those specifically enumerated in provider
agreements and administrative services agreements entered into between
Blue Cross and/or VHP, as the underwriters, and the Clinic. This
Agreement creates no fiduciary relationship between or among any of
the parties.
-3-
<PAGE>
2. PRODUCTS
------------
2.1 The parties will design and market various insured managed care
products which utilize a provider network, including POS and HMO
products. Hereafter, these products may be collectively referred to
as "Insured Products."
2.2 Blue Cross shall be the underwriter of the indemnity segment of POS
plans and VHP shall be the underwriter of the HMO plans (Blue Cross
and VHP are in this role collectively referred to as the
"Underwriters").
2.3 The Clinic shall be the primary provider for all products contemplated
by this Agreement. The Clinic shall enter into provider agreements
with the Underwriters to carry out the purposes of this Agreement.
2.4 It is the intent of Blue Cross and the Clinic to cooperate in the
design and development of a Medicare Risk product and a managed care
Workers' Compensation product at such time that the parties mutually
agree that economic and market conditions are favorable.
3. GOVERNING BOARD
-------------------
3.1 The cooperative arrangement contemplated by this Agreement shall be
directed through a Governing Board. Blue Cross and the Clinic shall
each select four
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<PAGE>
members of the Governing Board. The Governing Board
may select a smaller executive committee to manage the joint venture
on a day-to-day basis subject to the control of the Governing Board.
3.2 With respect to the Insured Products, all major policies and decisions
regarding the Underwriter's business plan, marketing, benefit design,
public relations, provider contracting (including capitation and fee
schedule contracts), administrative services agreements, and medical
underwriting guidelines shall be subject to approval by the Governing
Board. Notwithstanding the foregoing, the direct Underwriter shall
have ultimate authority on Insured Products in setting rates, medical
underwriting functions and reinsurance. VHP shall arrange for
reinsurance for plans it underwrites through a competitive bid
process. Selection of the reinsurer shall be based on price and cost
control services offered by the reinsurer. Notwithstanding the
foregoing, VHP's selection of a reinsurer is subject to the prior
approval of the Governing Board.
3.3 In the event the positions of Director of VHP and/or the primary
Medical Director for VHP become vacant, the recommended candidate for
either position will require the approval of the Governing Board.
3.4 The four members of the Governing Board selected by
-5-
<PAGE>
Blue Cross shall be responsible for selecting, negotiating and
terminating contracts with other independent providers, who are not
otherwise affiliates of the Clinic or members of the Mayo Health
System, on behalf of the Underwriters subject to the following
conditions and restrictions:
(a) The four members of the Governing Board selected by the Clinic
shall be solicited to offer comments relating to the selection of
and contracting with independent providers or their termination.
Upon receipt of comments offered by the Clinic's Governing Board
members, a majority vote solely of the four Blue Cross members of
the Governing Board shall determine which such providers are
selected, the contract terms offered and afforded them and if and
when their contracts are terminated.
(b) Notwithstanding the foregoing, if any such independent providers
are afforded contract terms which are, in whole or in particular
part, more favorable to such providers than those afforded the
Clinic under its provider agreements with the Underwriters, such
more favorable terms shall automatically and without further
action of the parties be incorporated in such agreements with the
Clinic and shall remain in place so long as such terms are
afforded one or more independent
-6-
<PAGE>
providers.
(c) In selecting independent providers, the Blue Cross members of the
Governing Board shall duly consider: the medical credentials of
such providers; whether the provider's credentials meet standards
set by the National Committee for Quality Assurance or other
accrediting agency acceptable to the Governing Board; whether
there is a need for their participation in order to provide an
adequate and appropriate level of medical services to insureds;
whether the addition of such providers and the contract terms to
be afforded them are consistent with and will promote the
provision of managed medical care on a cost-efficient basis; and
such other factors as are reasonably deemed relevant by the Blue
Cross members of the Governing Board.
(d) Each application of an independent provider shall be duly
considered by the Blue Cross members of the Governing Board on a
timely basis and such members' decision on each such application
shall be timely communicated to the applicant.
-7-
<PAGE>
4. SERVICE AGREEMENTS AND PAYMENT TERMS
----------------------------------------
4.1 The Governing Board and executive committee members shall be
compensated for their services to the joint venture through
administrative services agreements. It is anticipated that the
Clinic, through administrative services agreements, will provide
quality assurance and medical management services to the
Underwriters. All administrative services agreements must be approved
by the Governing Board.
4.2 The terms of the administrative services agreements shall provide that
the Clinic and Blue Cross shall be compensated for their services on
an Actual Cost basis such that all administrative profit remains with
the Underwriters to be shared through the profit sharing arrangements
set forth in Article 5 below. "Actual Cost" as used herein, shall be
defined as direct costs and indirect cost allocation as provided for
in the administrative services agreements.
4.3 VHP will enter into provider agreements with the Clinic to be the
primary provider within the network for the HMO and POS products and
the Medicare Supplement product. The terms of the provider agreements
shall provide:
(a) POS PRODUCT: Effective January 1, 2000, VHP will reimburse the
Clinic at the Clinic's charges less a discount of thirteen
percent (13%) for VHP's POS
-8-
<PAGE>
product.
(b) MEDICARE SUPPLEMENT PRODUCT: Effective January 1, 2000, the
capitation rate for VHP's Medicare Supplement product will be
increased by five percent (5%) over the rate in effect for
calendar year 1999. In calendar years 2001 and 2002,
respectively, the capitation rate will be increased by five
percent (5%) over the rate in effect for calendar years 2000 and
2001, respectively.
(c) COMMERCIAL HMO PRODUCTS: Effective January 1, 2000, the
capitation rate for VHP's commercial HMO products will be
increased by twelve percent (12%) over the rate in effect for
calendar year 1999 as set forth in Attachment A. Effective
January 1, 2001, the capitation rate shall be the capitation rate
for calendar year 2000 increased by the medical care component of
the Consumer Price Index ("CPI") plus two percent (2%), subject
to a minimum increase of eight percent (8%) and a maximum
increase of ten percent (10%). Effective January 1, 2002, the
capitation rate shall be the capitation rate for calendar year
2001 increased by the medical care component of CPI plus two
percent (2%), subject to a minimum increase of six percent (6%)
and a maximum increase of ten percent
-9-
<PAGE>
(10%). As used herein, "CPI" means the medical care component of
the Consumer Price Index for all urban consumers, United States
City Average, during the preceding twelve month period running
from October 1 through September 30.
(d) CAPITATION ADJUSTMENT: The capitation shall be adjusted to
reflect the following factors: age, sex, family status (e.g.,
single, two individuals, family), product line, and variable
office copayment. The capitation amount paid to the Clinic for
each product line shall be actuarially determined to reflect the
anticipated utilization of services. However, regardless of the
foregoing, the Clinic agrees that it shall offer to the joint
venture its "Best Price" as set forth in Article 6 of this
Agreement. Clinic reimbursement will be reviewed annually at the
request of the Clinic to consider the impact on the capitation
rate of new technology not reflected in the CPI, the effect of
new insurance mandates, changes in plan design, and unexpected
changes in applicable community standards of practice.
Adjustments to the capitation rate will be negotiated if
appropriate and, if the parties cannot agree upon an appropriate
adjustment, the Governing Board shall determine the appropriate
-10-
<PAGE>
adjustment, if any.
(e) FEE SCHEDULE ADJUSTMENT: The Clinic agrees to provide written
notice to VHP of any increase in the fee schedule by December 1
of each year, and any increase will become effective on the
following January 1.
(f) CONTRACT TERM: The contract shall have an initial term ("Initial
Term" as defined in Section 7.1, herein) of three (3) years and
may be renewed for an additional three (3) year term by mutual
agreement; otherwise renewal shall be for one year terms unless
written notice of termination is given at least 120 days prior to
the end of the then current term. A party may terminate the
contract at the end of the Initial Term if proper notice is
given.
(g) CONTINUED ACCESS TO CARE: The contract shall include a provision
under which the Clinic agrees, if requested, to (i) extend
continued services to all groups affected by a termination of a
provider contract until the end of each such group's benefit year
or as necessary to comply with state and federal law relating to
accessibility of providers following contract termination; and
(ii) accept reimbursement terms and other contract terms in
effect prior to the termination during
-11-
<PAGE>
the period of any such extension.
5. PROFIT SHARING
------------------
5.1 Underwriting losses of the Insured Products shall be the liability of
the Underwriters. Notwithstanding the above, fifty percent (50%) of
the net profits relating to HMO products and fifty percent (50%) of
the net profits relating to the POS products shall be paid to the
Clinic as set forth in this Article 5.
5.2 Net profit/loss of HMO products and POS products shall be separately
calculated. Net profit/loss of HMO products shall be calculated on an
aggregate basis following the Initial Term of this Agreement as
defined in Section 7.1 herein. Notwithstanding the foregoing, net
profit/loss of HMO products shall be determined on an annual basis,
and interim profit-sharing shall occur as set forth in Sections 5.3
and 5.4, below. Net profit/loss of POS products shall be determined
annually at the end of each calendar year during the term of this
Agreement, and profit-sharing shall occur at the end of each such
calendar year as set forth in Section 5.5, below. A listing of HMO
products and POS products is attached to this Agreement and
incorporated herein as Attachment B.
5.3 Aggregate net profit of HMO products shall be the sum
-12-
<PAGE>
of net profits and losses of VHP over the entire Initial Term of
this Agreement. Such net profit/loss shall be determined by applying
the same accounting principles applied in preparing VHP's December 31,
1999 financial statement. As further clarification, calculation of
net profit/loss shall not take into account any adjustments to the
reconciled purchase price as outlined in Section 4.4 of the Purchase
and Sale Agreement, any profit sharing payments made pursuant to this
Agreement, or any provision for the payment of taxes. A party's share
of aggregate net profit shall not include any investment income
attributable to the other party's share of aggregate net profit. A
sample profit-sharing calculation is attached to this Agreement and
incorporated herein as Attachment C. Notwithstanding actual
administrative expenses incurred, total administrative expenses which
may be charged against income in calculating net profit/loss of VHP
shall be the lesser of: (i) actual costs incurred by VHP; or (ii)
eight and one-half percent (8 1/2%) of the gross premiums received for
that benefit year by VHP.
5.4 Notwithstanding that the aggregate net profit/loss of the HMO product
is determined over the entire Initial Term of this Agreement, the
Clinic is interested in sharing net profits with the Underwriters on
an interim
-13-
<PAGE>
basis and the Underwriters are interested in recouping, on an interim
basis, from the Clinic any profits shared for which loss carry backs
indicate an overpayment was made. Interim profit sharing and
recoupment shall be as follows:
(a) Within 120 days following the end of the first Benefit Year, UWS
shall determine the net profit or loss as described in Section
5.2, above for that Benefit Year alone. "Benefit Year" is
defined as a calendar year beginning on January 1 and ending on
December 31 of the same year for all years falling within the
Initial Term of this Agreement. If an aggregate net profit is
present, UWS shall make available to the Clinic a line of credit,
within 150 days following the end of the first Benefit Year,
equal to the Clinic's fifty percent (50%) share of the aggregate
net profit. The Clinic may draw on the line of credit. Any
monies so drawn on by the Clinic shall herein be referred to as
the "Balance Drawn".
(b) Within 120 days following the end of the second Benefit Year, UWS
shall determine the aggregate net profit or loss as described in
Section 5.2 above, for the first two Benefit Years, accounting
for both loss carry forwards and loss carry backs.
(i) Within 150 days following the end of each
-14-
<PAGE>
such Benefit Year, the amount of the line of credit shall be
adjusted so as to be equal to the Clinic's fifty percent
(50%) share of the aggregate net profit so calculated.
(ii) If after such adjustment to the amount of the line of credit
the Balance Drawn by the Clinic exceeds the adjusted line of
credit ("Overdraft"), the Clinic shall repay to UWS the
amount of the Overdraft plus accruing interest. Repayment
shall be in twelve equal installments beginning on the first
of the month 150 days following the end of the last Benefit
Year. Interest on the monies owed by the Clinic shall
accrue at the prime rate, plus 100 basis points, as
determined by M & I Marshall & Ilsley Bank, Milwaukee,
Wisconsin, on the close of business on the last business day
of the month preceding when the first installment is due.
Interest shall accrue beginning on the first of the month
150 days following the end of the last Benefit Year. The
Clinic may repay all or part of the Overdraft at any time.
(c) Within 180 days following the end of the third Benefit Year of
the Initial Term, UWS shall determine the aggregate net profit or
loss as
-15-
<PAGE>
determined in Section 5.2 above for all Benefit Years which
comprise the Initial Term of this Agreement, accounting for
both loss carry forwards and loss carry backs.
(i) If an aggregate net profit is present, UWS shall pay to the
Clinic, within 210 days following the end of the third
Benefit Year of the Initial Term, the Clinic's respective
fifty percent (50%) share of the aggregate net profit. The
Clinic's share of such aggregate net profit shall be paid to
it by UWS first canceling the Balance Drawn by the Clinic,
up to the Clinic's share of such aggregate net profit. If
after such cancellation, aggregate net profit remains to be
paid to the Clinic by UWS, an appropriate cash payment shall
be made by UWS to the Clinic. If after such cancellation an
Overdraft remains to be paid by the Clinic on the line of
credit, the Clinic shall repay such Overdraft as set forth
in item (ii) below.
(ii) If an aggregate net loss is present, the Clinic shall repay
UWS the Overdraft. Repayment shall be within 210 days
following the end of the third Benefit Year of the
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<PAGE>
Initial Term. Interest on the monies owed by the Clinic
shall accrue at the prime rate, plus 100 basis points, as
determined by M & I Marshall & Ilsley Bank, Milwaukee,
Wisconsin, on the close of business on the last business day
of the month preceding when repayment is due. Interest
shall accrue beginning on the first of the month 210 days
following the end of the final Benefit Year of the Initial
Term. The Clinic may repay all or part of the amount owed
at any time.
(d) If, after the Initial Term, this Agreement is renewed for an
additional three year term or terms in accordance with Section
7.1, aggregate net profit shall be shared on an interim basis as
described in (a) and (b), above, with final reconciliation
occurring following the third year of each such three year term
as described in (c) above. If this Agreement is renewed for one
or more one-year terms, final reconciliation shall occur at the
end of each such one-year term.
5.5 Net profit/loss of POS products shall be determined as of the end of
each calendar year during the term of this Agreement, and
profit-sharing payments, if any, shall be paid to the Clinic within
150 days following the end of each such calendar year as set forth
below:
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<PAGE>
(a) The Net profit/loss of POS products shall equal the sum of (i) and
(ii):
(i) UNDERWRITING PROFIT/LOSS. Net underwriting profit/loss shall be
calculated as net earned premium less the sum of incurred claims
and administrative expenses. Total administrative expenses used
in calculating net underwriting profit/loss shall not exceed the
Actual Cost incurred by the Underwriter pursuant to the
administrative services agreements referenced in Section 4.2 of
this Agreement.
(ii) EXCESS LOSS REINSURANCE. Net profit/loss of excess loss
reinsurance provided by Blue Cross or an insurer affiliated with
Blue Cross for each POS plan underwritten by VHP and offered
through this joint venture shall be calculated as reinsurance
premium paid to the reinsurer, less: (i) claims paid plus; (ii)
a reserve for claims reported but not yet paid, and claims
incurred but not yet reported; and (iii) administrative expenses
or fees related to the reinsurance policy.
(c) VHP shall pay fifty percent (50%) of annual net profit for the POS
product to the Clinic subject to the following limitations: (i) for
calendar year 2000, the Clinic's share of profit may not exceed
$100,000, nor may its share of loss exceed $100,000; (ii) for
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<PAGE>
calendar year 2001, the Clinic's share of profit may not exceed
$150,000, nor may its share of loss exceed $150,000; and (iii) for
calendar year 2002, the Clinic's share of profit may not exceed
$200,000, nor may its share of loss exceed $200,000.
6. EXCLUSIVITY
---------------
6.1 During the Initial Term of this Agreement (as defined in Section 7.1
herein) or any subsequent term(s), unless otherwise agreed by the
Governing Board, (i) the Underwriters and UWS agree that they will not
market any insured HMO or POS product within the Exclusive Area (as
defined below) except through VHP; and (ii) the Clinic agrees that it
will not participate in the provider network for any employer offering
an insured HMO or POS product within the Exclusive Area except through
VHP. As used in this Article, "Exclusive Area" means the Wisconsin
counties of Chippewa, Eau Claire or Dunn.
6.2 Regardless of anything provided in Section 6.1 to the contrary, the
Underwriters and the Clinic may participate in the offering of a
competing insured HMO or POS product with respect to an employer which
has multiple locations, one or more of which is located within the
Exclusive Area, if the employer's headquarters are located outside the
Exclusive Area;
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<PAGE>
provided, however, that if the employer is the federal government or
the State of Wisconsin, the insured HMO or POS product shall be
offered only through the joint venture.
6.3 The Clinic agrees to offer its Best Price to VHP for all products
offered under this Agreement within the Exclusive Area and within the
Wisconsin county of Barron. As used herein, "Best Price" means a
price that is equal to or lower than the price the Clinic accepts from
any other non-governmental payor with respect to insured HMO and/or
POS products. In the event the Clinic offers a price to any other
payor that is less than the Best Price offered to the joint venture
for like services, the lower price will also be extended to the joint
venture and immediately and automatically become the new Best Price.
6.4 The parties to this Agreement acknowledge that Blue Cross has an
existing contract with the Clinic to serve as a provider for the Blue
Cross "Quality Choice" POS product and agree that such contract does
not violate the provisions of this Article 6.
6.5 The parties to this Agreement acknowledge and agree that the
provisions of this Article 6 are binding on those subsidiaries and
affiliates of the Clinic existing on January 1, 1992, and shall be
binding on later acquired or established subsidiaries or
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<PAGE>
affiliates only if such entities signify in writing their intent to
be bound.
7. TERM AND TERMINATION
------------------------
7.1 The Initial Term of this Second Amended and Restated Joint Venture
Agreement shall be for three years, commencing on January 1, 2000 and
continuing in effect through December 31, 2002. This Agreement may be
renewed for an additional three year term or terms, commencing on
January 1, 2003, by mutual written agreement of the parties; otherwise
the joint venture shall automatically renew for one year terms unless
written notice of termination is given at least 120 days prior to the
end of the then current term. This Agreement may be terminated at the
end of the Initial Term if proper notice is given.
7.2 Notwithstanding the above, if, in accordance with the Purchase and
Sale Agreement, Clinic exercises its right to repurchase all
outstanding shares of VHP stock from UWS at the end of the Initial
Term of this Second Amended and Restated Joint Venture Agreement, or
its termination, whichever is earlier, this Agreement shall terminate
unless the parties mutually agree otherwise in writing. Additionally,
in the event that a party substantially breaches any material term or
condition of this Agreement, notice of the specific breach shall
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<PAGE>
be given to the breaching party. The breaching party shall have sixty
(60) days to cure such breach. In the event the breaching party fails
to cure said breach, the non-breaching party shall have the right to
terminate this Agreement on thirty (30) days prior written notice.
7.3 Notwithstanding the termination of this Agreement, all provider and
administrative services agreements entered into by the parties shall
continue according to the provisions contained in those provider
agreements until their scheduled termination date.
8. MISCELLANEOUS
-----------------
8.1 The parties agree to utilize their best efforts in carrying out their
respective duties and obligations under this Agreement to ensure that
the purposes of this undertaking are accomplished.
8.2 In the event of a dispute between the parties relating to this
Agreement, such dispute shall be resolved by arbitration in accordance
with the rules of the American Arbitration Association. The inability
of the Governing Board to take action with regard to a particular
matter due to an impasse shall not be treated as a dispute affording
either party the right to demand arbitration to resolve such impasse.
-22-
<PAGE>
8.3 This Agreement supersedes all prior agreements, proposals, offers or
letters of intent, including the prior joint venture agreements,
relating to the subject matter hereof. Any amendment to this
Agreement must be in writing, executed by, and delivered to, each of
the parties.
8.4 In the event that a court, regulator, or administrative judge of
competent jurisdiction declares any provision of this Agreement to be
invalid or unenforceable, such declaration shall have no effect on the
validity or enforceability of the remainder of this Agreement;
provided, however, that the basic purposes of this Agreement may be
achieved through the remaining valid provisions.
8.5 The parties acknowledge that all material and information of a given
party which has or will come into the possession of another party in
connection with this Agreement consists of confidential and
proprietary data. Each party agrees to hold such material and
information in strictest confidence, not to make use thereof other
than for the performance of this Agreement, and not to release or
disclose it to any third party other than for the performance of this
Agreement.
8.6 Failure by any party to insist upon compliance with any term or
provision of this Agreement at any time or
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<PAGE>
under any set of circumstances will not operate to waive or modify
that provision or render it unenforceable at any other time.
8.7 This Agreement shall be construed according to the laws of the State
of Wisconsin.
8.8 All notices required or permitted by this Agreement shall be sent to
the following addresses, or to such other persons or locations
indicated in writing by the parties:
BLUE CROSS:
Penny J. Siewert, Vice President of Regional Services
N17 W24340 Riverwood Drive
Waukesha, WI 53188
UWS:
Thomas R. Hefty, President
401 West Michigan Street
Milwaukee, WI 53203
VHP:
Norman L. Keller, President
Valley Health Plan, Inc.
2270 EastRidge Center
Eau Claire, WI 54701
CLINIC:
Robert Downs, Executive Vice President
Midelfort Clinic, Ltd., Mayo Health System
1400 Bellinger Street
P. O. Box 1510
Eau Claire, WI 54702
8.9 No party may assign its rights or delegate its duties under this
Agreement without the prior written consent of the other parties.
Such approved assignment or delegation shall inure to the benefit of
the parties, their successors, and their permitted assigns or
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<PAGE>
delegates.
8.10 Each signatory hereto represents and warrants that his/her execution
of this Agreement on behalf of his/her respective party has been duly
authorized and approved by the parties' Board of Directors and/or
shareholders (if legally required).
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective representatives.
Attest: BLUE CROSS & BLUE SHIELD
UNITED OF WISCONSIN
- ---------------------
By:
-------------------------
Title:
----------------------
Attest: UNITED WISCONSIN SERVICES, INC.
- ---------------------
By:
-------------------------
Title:
----------------------
Attest: VALLEY HEALTH PLAN, INC.
- ---------------------
By:
-------------------------
Title:
----------------------
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<PAGE>
Attest: MIDELFORT CLINIC, LTD., MAYO
HEALTH SYSTEM
- ---------------------
By:
-------------------------
Title:
----------------------
ns01.c
-26-
<PAGE>
ATTACHMENT B
HMO AND POS PLANS
-----------------
HMO PLANS INCLUDE THE FOLLOWING PLANS:
- State of Wisconsin Plan
- Federal Employees Program
- Partner Plan
- Medicare Supplement Plan
- Medicaid Program
- BadgerCare Program
- Agricare Plan
- Agrihealth Plan
- Agrihealth Plan II
POS PLANS INCLUDE THE FOLLOWING PLANS:
All the accounts that have purchased the VHP POS product. These Plans are
uniquely identified by a group number in the 5000 series. In the event the
block of numbers in this series becomes exhausted, however, it may be necessary
to select another series of numbers for future expansion.
-27-
<PAGE>
ATTACHMENT C
SAMPLE PROFIT-SHARING CALCULATION
---------------------------------
The following references lines of Report #2: "State of Revenues, Expenses,
and Net Worth" which is filed annually by Valley Health Plan, Inc. with the
Wisconsin Office of the Commissioner of Insurance as of December 31.
Line 29 Income (Loss)
PLUS
Line 30 Extraordinary Item
MINUS
Line 14 Incentive Pool and Withhold Adjustments
(only the joint venture profit-sharing portion)
EQUALS
TOTAL AMOUNT BEFORE IMPACT OF INTEREST ON WITHDRAWALS PLUS OR MINUS
IMPACT OF INTEREST ON PREVIOUS YEARS WITHDRAWALS EQUALS TOTAL AMOUNT
AFTER IMPACT OF INTEREST ON WITHDRAWALS
DIVIDED BY 2
EQUALS EACH PARTNER'S BEFORE TAX SHARE OF PROFIT
-28-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 (UNAUDITED) AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED).
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 17,197
<SECURITIES> 129,685
<RECEIVABLES> 79,732
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 246,043
<PP&E> 10,205
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 306,572
<CURRENT-LIABILITIES> 170,225
<BONDS> 0
0
0
<COMMON> 14,052
<OTHER-SE> 14,621
<TOTAL-LIABILITY-AND-EQUITY> 306,572
<SALES> 203,417
<TOTAL-REVENUES> 205,553
<CGS> 207,841
<TOTAL-COSTS> 207,841
<OTHER-EXPENSES> 139
<LOSS-PROVISION> 0<F3>
<INTEREST-EXPENSE> 1,487
<INCOME-PRETAX> (3,914)
<INCOME-TAX> (1,348)
<INCOME-CONTINUING> (2,566)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,566)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
<FN>
<F1>INCLUDED IN #13 (RECEIVABLES)
<F2>INCLUDED IN #17 (PROPERTY, PLANT & EQUIPMENT)
<F3>INCLUDED IN #29 (CGS)
</FN>
</TABLE>
