<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 JUNE 30, 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 July 31, 2000 was 16,939,682.
<PAGE>
UNITED WISCONSIN SERVICES, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
For the Period Ended June 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...........................10
Quantitative and Qualitative Disclosures about Market Risk......................................................15
PART II
Other Information...............................................................................................17
Signature Page..................................................................................................19
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-----------------------------------
(UNAUDITED) (NOTE A)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,166 $ 16,254
Investments--available-for-sale, at fair value 118,129 120,721
Premium receivables 31,283 24,215
Due from clinics and providers 13,862 16,629
Other receivables 33,019 29,156
Prepaid expenses and other current assets 25,042 29,438
-----------------------------------
Total current assets 237,501 236,413
Investments--held-to-maturity, at amortized cost 9,293 9,153
Property and equipment, net 10,475 9,938
Goodwill and other intangible, net 11,871 10,492
Other noncurrent assets 33,483 29,583
-----------------------------------
Total assets $ 302,623 $ 295,579
===================================
</TABLE>
See Notes to Interim Consolidated Financial Statements
3
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-----------------------------------
(UNAUDITED) (NOTE A)
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical and other benefits payable $ 76,748 $ 74,238
Advance premiums 38,561 36,248
Due to affiliates, net 1,940 11,462
Notes payable to affiliates 70,000 -
Payables and accrued expenses 13,385 15,033
Other current liabilities 36,266 22,164
-----------------------------------
Total current liabilities 236,900 159,145
Noncurrent Liabilities:
Notes payable to affiliates - 70,000
Medical and other benefits payable 26,534 24,104
Other noncurrent liabilities 11,825 11,298
-----------------------------------
Total noncurrent liabilities 38,359 105,402
-----------------------------------
Total liabilities 275,259 264,547
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 June 30, 2000
and December 31, 1999.) 14,052 14,052
Retained earnings 16,468 20,242
Accumulated other comprehensive deficit (3,156) (3,262)
-----------------------------------
Total shareholders' equity 27,364 31,032
-----------------------------------
Total liabilities and shareholders' equity $ 302,623 $ 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 Six months ended
June 30, June 30,
2000 1999 2000 1999
---------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Health services revenue:
Premium revenue $ 177,265 $ 160,879 $ 370,155 $ 321,200
Other revenue 11,407 10,940 21,934 20,265
Investment results 2,043 3,124 4,179 6,487
---------------------------------------------------------------
Total revenues 190,715 174,943 396,268 347,952
Expenses:
Medical and other benefits 159,895 153,050 335,489 291,986
Selling, general and administrative expenses 30,832 34,088 63,079 62,784
Profit (loss) sharing on provider arrangements 318 (150) 232 (280)
Interest 1,601 1,241 3,088 2,425
Amortization of goodwill and other intangibles 235 195 460 360
---------------------------------------------------------------
Total expenses 192,881 188,424 402,348 357,275
---------------------------------------------------------------
Pre-tax loss (2,166) (13,481) (6,080) (9,323)
Income tax benefit (958) (5,496) (2,306) (4,010)
---------------------------------------------------------------
Net loss $ (1,208) $ (7,985) $ (3,774) $ (5,313)
===============================================================
Basic and diluted loss per common share $ (0.07) $ (0.47) $ (0.22) $ (0.32)
==============================================================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
5
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
-------------------------------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net loss $ (3,774) $ (5,313)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,186 1,764
Realized investment losses (gains) 267 (1,789)
Deferred income tax benefit (3,258) (596)
Changes in operating accounts:
Premium receivables (7,068) 972
Other receivables (3,776) (1,477)
Due from clinics and providers 2,767 (565)
Medical and other benefits payable 4,940 (18,145)
Advance premiums 2,313 1,067
Due to affiliates, net (9,522) (679)
Prepaid taxes - current 4,386 (6,876)
Other, net (917) 221
-------------------------------
Net cash used in operating activities (11,456) (31,416)
Investing activities:
Acquisition of subsidiaries (net of cash and cash equivalents
acquired in 1999 of $253,000) (1,963) (3,168)
Purchases of available-for-sale investments (11,664) (80,890)
Proceeds from sale of available-for-sale investments 11,759 80,496
Proceeds from maturity of available-for-sale investments 2,460 8,650
Purchases of held-to-maturity investments (2,450) (459)
Proceeds from maturity of held-to-maturity investments 2,325 -
Additions to property and equipment (2,108) (1,104)
-------------------------------
Net cash (used in) provided by investing activities (1,641) 3,525
Financing activities:
Issuances of common stock - 2
Proceeds from line of credit, net 13,010 6,715
Proceeds from notes payable 80 -
Repayment of debt (81) (525)
-------------------------------
Net cash provided by financing activities 13,009 6,192
Cash and cash equivalents:
Decrease during period (88) (21,699)
Balance at beginning of year 16,254 26,385
-------------------------------
Balance at end of period $ 16,166 $ 4,686
===============================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
6
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 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 six months ended June 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
six months ended June 30, 2000.
Options to purchase 2,786,259 and 2,742,013 common shares during the three
and six months ended June 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, 907,300 and 917,300 potentially dilutive common shares for the
three and six months ended June 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. In
conjunction with the planned change in corporate structure of BCBSUW, a
special committee of the Company's board of directors has been authorized to
explore the possibility of a merger with BCBSUW.
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 Six months ended
June 30, June 30,
2000 1999 2000 1999
-------------- -- --------------- --- --------------- --- -----------------
(In thousands)
<S> <C> <C> <C> <C>
Net loss per Consolidated
Statements of Operations $(1,208) $(7,985) $(3,774) $(5,313)
Unrealized gains (losses) on investments,
net of taxes (101) (523) 106 (1,757)
-------------- -- --------------- --- --------------- --- -----------------
Comprehensive loss $(1,309) $(8,508) $(3,668) $(7,070)
============== == =============== === =============== === =================
</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 $3.2 million and $3.3 million as of June 30, 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.
Financial data by segment is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
--------------- -------------- --- -------------- -----------------
(In thousands)
<S> <C> <C> <C> <C>
Health services revenue:
HMO products $147,748 $138,017 $311,923 $274,915
Specialty managed care products and services 45,860 37,931 90,571 74,640
Other operations (4,936) (4,129) (10,405) (8,090)
--------------- -------------- --- -------------- -----------------
Total consolidated $188,672 $171,819 $392,089 $341,465
=============== ============== === ============== =================
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment results:
HMO products $ 813 $1,478 $1,655 $3,460
Specialty managed care products and services 1,201 1,623 2,391 2,986
Other operations 29 23 133 41
-------------------------------------------------------------------
Total consolidated $2,043 $3,124 $4,179 $6,487
===================================================================
Pre-tax loss:
HMO products $(3,876) $(11,222) $(7,863) $(8,719)
Specialty managed care products and services 3,117 1,998 5,129 5,187
Other operations (1,407) (4,257) (3,346) (5,791)
-------------------------------------------------------------------
Total consolidated $(2,166) $(13,481) $(6,080) $(9,323)
===================================================================
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Total assets:
HMO products $124,773 $115,448
Specialty managed care products and services 184,364 168,993
Other operations (6,514) 11,138
------------------------------------
Total consolidated $302,623 $295,579
====================================
</TABLE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
-------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Health services revenue from transactions with
other operating segments:
HMO products $ 365 $ 528 $ 749 $ 988
Specialty managed care products and services 4,571 3,601 9,656 7,102
</TABLE>
Note F. Contingencies
Unity Health Plans Insurance Corporation ("Unity") is in the process of
negotiating a final settlement on its five-year profit-sharing agreements with
two providers. 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.
Note G. 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, 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 June 30, 2000
increased 9.0% to $190.7 million, compared to $174.9 million for the three
months ended June 30, 1999. For the six months ended June 30, 2000, total
revenues increased 13.9% to $396.3 million, compared to $348.0 million for the
six months ended June 30, 1999. These increases were due primarily to increased
commercial membership, general premium and rate increases and acquisitions of
specialty businesses.
HEALTH SERVICES REVENUES - Even with the reduction in Medicaid members,
HMO health services revenues for the three months ended June 30, 2000 increased
7.0% to $147.7 million, compared to $138.0 million for the three months ended
June 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 June 30, 2000 increased 10.1% from the same period in
1999. The average number of insured HMO medical members for the three months
ended June 30, 2000 decreased 2.8% to 288,419 from 296,878 for the three months
ended June 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 six months ended June 30, 2000
increased 13.5% to $311.9 million from $274.9 million for the six months ended
June 30, 1999. Average insured HMO medical premium per member for the six months
ended June 30, 2000 increased 9.8% from the same period in 1999. The average
number of insured HMO medical members for the six months ended June 30, 2000
increased 3.3% to 307,067, compared to 297,245 for the six months ended June 30,
1999.
Health services revenues for specialty managed care products and
services for the three months ended June 30, 2000 increased 21.1% to $45.9
million, compared to $37.9 million for the three months ended June 30, 1999.
Health services revenue for specialty managed care products and services for
the six months ended June 30, 2000 increased 21.4% to $90.6 million, compared
to $74.6 million for the six months ended June 30, 1999. This was the result
of increases in covered lives and premium rates on insurance products; the
acquisitions of Allegro, Ltd. ("Allegro"), Comprehensive Collections
Services, Inc. ("CCS") and the managed care assets of HCX, Inc. ("HCX") in
the second quarter of 1999; along with a decrease in the percentage of ceded
reinsurance. In the second quarter of 2000, the Company also expanded its
specialty service business through the acquisition of Seltzer/Delman, Inc.
("Seltzer"), a workers' compensation case management company which
specializes in case management systems development, fraud and abuse detection
and expert witness services. This acquisition is another step in the
Company's strategy to expand nationally. Health services revenue for Allegro,
CCS, HCX and Seltzer totaled $2.5 million for the six months ended June 30,
2000, compared to $0.4 million for the six months ended June 30, 1999. In
addition,
10
<PAGE>
contributing to the increase in premiums is the reduction in the amount of
business ceded to the workers' compensation reinsurer under the "quota share"
arrangement. Quota share reinsurance is a contractual arrangement whereby the
reinsurer assumes an agreed percentage of certain risks insured by the ceding
insurer and shares premium revenue and losses proportionately. The Company's
quota share reinsurance treaties allocate the total amount of business
subject to the treaties between the Company and the respective parties to the
treaties. For business written in 2000, 20% of the business is ceded to an
independent non-affiliated reinsurer, compared to 30% for business written in
1999, representing an increase of $1.6 million.
NET INVESTMENT RESULTS -- Investment results include investment income
and realized gains and losses on investments. Investment results for the
three months ended June 30, 2000 decreased 35.5% to $2.0 million from $3.1
million for the three months ended June 30, 1999. Average annual investment
yields, excluding net realized gains, were 6.5% for the three months ended
June 30, 2000 and 5.5% for the three months ended June 30, 1999. Investment
results for the six months ended June 30, 2000 decreased 35.4% to $4.2
million from $6.5 million for the six months ended June 30, 1999. The
decrease in investment income during the second quarter of 2000 was the
result of lower investment asset balances. The reduction in investments
resulted from ongoing operations.
Average invested assets for the three months ended June 30, 2000
decreased 16.7% to $140.7 million from $168.9 million for the three months
ended June 30, 1999. Average invested assets for the six months ended June
30, 2000 decreased 19.8% to $142.2 million from $177.2 million for the six
months ended June 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 June 30, 2000 were
$0.2 million, compared to realized gains of $0.8 million for the three months
ended June 30, 1999. Realized losses for the six months ended June 30, 2000 were
$0.3 million, compared to realized gains of $1.8 million for the six months
ended June 30, 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 90.2% for the three months ended June 30, 2000,
compared to 95.1% for the three months ended June 30, 1999. The consolidated
loss ratio was 90.6% for the six months ended June 30, 2000, compared to 90.9%
for the six months ended June 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 June
30, 2000 was 93.3%, compared to 98.8% for the three months ended June 30, 1999.
This improvement is primarily due to exiting the Medicaid business during the
second quarter of 2000, premium rate increases over the prior year and higher
claim costs in 1999 associated with a computer system conversion. The medical
loss ratio for HMO products for the six months ended June 30, 2000 was 93.4%,
compared to 94.1% for the six months ended June 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 June 30, 2000 was 76.3%,
compared with 77.7% for the three months ended June 30, 1999. The loss ratio for
the risk products within specialty managed care products and services for the
six months ended June 30, 2000 was 77.1%, compared to 75.9% for the six months
ended June 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 relative to
the long-term disability line of business.
11
<PAGE>
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 June 30, 2000 was 9.7%,
compared to 10.5% for the three months ended June 30, 1999. The SGA expense
ratio for HMO products for the six months ended June 30, 2000 was 9.6%, compared
to 10.4% for the six months ended June 30, 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 June 30, 2000 was
23.8%, compared to 26.8% for the three months ended June 30, 1999. The SGA
expense ratio related to the risk products within specialty managed care
products and services for the six months ended June 30, 2000 was 24.0%, compared
to 25.1% for the six months ended June 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 June 30,
2000 was 85.8%, compared to 89.6% for the three months ended June 30, 1999. The
operating expense ratio related to the service products within specialty managed
care products and services for the six months ended June 30, 2000 was 87.5%,
compared to 89.3% for the six months ended June 30, 1999. The improvement in the
operating expense ratio during 2000 is due primarily to higher service product
revenues in comparison to the corresponding prior periods. In the second half of
1999, Meridian Managed Care, Inc., Allegro and Intercare Network, Inc. merged
into CNR Health, Inc., which subsequently changed its name to Innovative
Resource Group, Inc. ("IRG"). Joining the strengths and resources of these
companies allows IRG to provide a broad array of coordinated care management
services. The merging of these companies has enabled the Company to consolidate
operating facilities, merge management information system resources and reduce
expenses.
In addition, the Company recorded charges of approximately $2.8 million
for various transactions and reorganization costs during the second quarter of
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 regional 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 June
30, 2000 was $0.3 million, compared to $(0.2) million for the three months ended
June 30, 1999. Profit (loss) sharing on joint ventures for the six months ended
June 30, 2000 was $0.2 million, compared to $(0.3) for the six months ended June
30, 1999. The increase in both periods in 2000 resulted from an adjustment to
settle the prior agreement. 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 provisions for Unity were
eliminated beginning in 2000, except for certain limited profit-sharing
provisions with a provider. 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"), which began operations in October 1999. The
Company shares equally in all profits and losses on this newly-formed joint
venture, United Heartland of Illinois, Inc. Such profits were immaterial for the
three and six months ended June 30, 2000.
Amortization of goodwill and other intangibles for the three months ended
June 30, 2000 and 1999 was $0.2 million. Amortization of goodwill and other
intangibles for the six months ended June 30, 2000 was $0.5 million, compared to
$0.4 million for the six months ended June 30, 1999. This increase is due to
goodwill arising from the acquisitions of Allegro, CCS and HCX in the second
quarter of 1999, and Seltzer in the second quarter of 2000.
12
<PAGE>
Included in other operations is interest expense of $1.6 million and $3.1
million for the three and six months ended June 30, 2000, respectively. This
compares to interest expense of $1.2 million and $2.4 million for the three and
six months ended June 30, 1999, respectively. Interest expense related to the
$70 million debt (which matures on April 30, 2001) was $1.3 million and $2.6
million for the three and six months ended June 30, 2000, respectively. This
compares to interest expense of $1.1 million and $2.3 million for the three and
six months ended June 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
interest rate on the debt to BCBSUW.
NET LOSS FROM OPERATIONS
Consolidated net loss from operations for the three months ended June 30,
2000 improved by $6.8 million to $1.2 million from $8.0 million for the three
months ended June 30, 1999. Consolidated net loss from operations for the six
months ended June 30, 2000 improved by $1.5 million to $3.8 million from $5.3
million for the six months ended June 30, 1999. The reduced loss in 2000
demonstrates continued improvement in operating results over the prior year. The
improving operating trends are attributable to decreases in the medical loss
ratio and SGA ratios, partially offset by a reduction in investment income.
The Company's effective tax rate was 44.2% for the three months ended
June 30, 2000, compared with 40.8% for the three months ended June 30, 1999. The
increase in the effective tax rate for the second quarter 2000 is primarily due
to a prior year tax benefit of $0.3 million. The Company's effective tax rate
was 37.9% for the six months ended June 30, 2000, compared with 43.0% for the
six months ended June 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 33% to 47%.
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>
June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Members at end of period:
HMO MEMBERS BY BUSINESS UNIT:
Compcare 165,944 174,898
Valley 35,770 42,225
Unity 91,250 87,099
--------------- ---------------
Total HMO members 292,964 304,222
=============== ===============
HMO MEMBERS BY PRODUCT TYPE:
Commercial 197,482 183,191
Point-of-Service 84,957 74,528
Medicaid 3,957 39,885
--------------- ---------------
Total insured members 286,396 297,604
Self-insured members 6,568 6,618
--------------- ---------------
Total HMO members 292,964 304,222
=============== ===============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Members at end of period:
SPECIALTY MANAGED CARE PRODUCTS AND SERVICES:
UWG Life/AD&D 165,621 159,802
Dental - HMO 180,612 175,500
Behavioral Health & Medical Management 1,113,692 978,781
Workers' Compensation 67,797 54,115
Disability and other 135,537 127,392
--------------- ---------------
Total Specialty managed care products
and services members 1,663,259 1,495,590
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
----------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Health services revenues (as a percentage of the total):
HMO products 78.3% 80.3% 79.6% 80.5%
Specialty managed care products and services
Service Products 7.4 8.4 6.9 8.0
Risk Products 16.9 13.7 16.2 13.9
Intercompany eliminations (2.6) (2.4) (2.7) (2.4)
----------- -------------- -------------- -------------
Total 100.0% 100.0% 100.0% 100.0%
=========== ============== ============== =============
Operating statistics:
HMO products:
Medical loss ratio (1) 93.3% 98.8% 93.4% 94.1%
Selling, general, & administrative
expense ratio (2) 9.7 10.5 9.6 10.4
----------- -------------- ------------- --------------
Combined loss and expense ratio 103.0% 109.3% 103.0% 104.5%
=========== ============== ============= ==============
Specialty managed care products and services:
Service products:
Operating expense ratio 85.8% 89.6% 87.5% 89.3%
Risk products:
Loss ratio (1) 76.3% 77.7% 77.1% 75.9%
Selling, general, & administrative
expense ratio (2) 23.8 26.8 24.0 25.1
----------- -------------- ------------- --------------
Combined risk loss and expense ratio 100.1% 104.5% 101.1% 101.0%
=========== ============== ============= ==============
Consolidated:
Loss ratio (1) 90.2% 95.1% 90.6% 90.9%
Net income margin (3) N/A N/A N/A N/A
</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.
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.
14
<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 has improved over the previous year. For the six
months ended June 30, 2000, net cash used in operating activities was $11.5
million, compared with net cash used in operating activities of $31.4 million
for the six months ended June 30, 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 June 30, 2000 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 six
months of 2000, compared to $14.8 million during the first six months of 1999.
The outstanding balance on the line-of-credit at June 30, 2000 was $24.6
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 June 30, 2000, $103.1 million, or 80.9%, 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 June 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 $4.6 million at June 30, 2000 and was less than
amortized cost by $5.0 million at December 31, 1999. As of June 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 the second quarter of
2000, the Company contributed capital to Compcare in order 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.
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.
15
<PAGE>
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.
16
<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 (approximately $600,000),
plus interest.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 31,
2000, at which the following matters were voted upon:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
Nominees for Director
Three-Year Term
Expiring 2003
Richard A. Abdoo 16,421,086 38,868 -- --
Barry K. Allen 16,425,348 34,606 -- --
Eugene A. Menden 16,423,688 36,266 -- --
</TABLE>
The term of office of the following other Directors continued after the
meeting: Michael D. Dunham, James L. Forbes, Thomas R. Hefty, James C.
Hickman, William C. Rupp, M.D. and Carol N. Skornicka.
ITEM 5. OTHER INFORMATION
None
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Assumption and Administration Agreement by and
among Wellmark, Inc., Wellmark Community
Insurance, Inc., Blue Cross & Blue Shield
United of Wisconsin and United Wisconsin
Insurance Company, effective June 1, 2000.
10.2 Executive Severance Agreement by and between
United Wisconsin Services, Inc. and Senior Vice
President Michael E. Bernstein.
(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: 8/14/00
UNITED WISCONSIN SERVICES, INC.
/s/ Gail L. Hanson
------------------------------------------
Gail L. Hanson
Vice President and Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
19
