United Wisconsin Services, Inc. (the Company) is a leading provider of managed health care services and employee benefit products. The Company's three primary product lines are (i) Health Maintenance Organization (HMO) products, including Compcare Health Services Insurance Corporation (Compcare), Valley Health Plan, Inc. (Valley), Unity Health Plans Insurance Corporation (Unity) and certain point-of-service (POS) and other related products managed by Compcare, Valley and Unity; (ii) small group managed care and life products sold through American Medical Security Holdings, Inc. (AMS), which owns United Wisconsin Life Insurance Company (UWLIC) and the companies owned by the Company's former joint venture partner, American Medical Security Group, Inc. (AMSG), and (iii) specialty managed care products and services, including dental, life, disability and workers' compensation products, managed care consulting, electronic claim submission, pharmaceutical management and managed behavioral health services. Operating results and statistics for these product groups are presented below for the periods noted.
The Company's effective tax rate was 37.6% in 1997, compared with 40.2% in 1996 and 31.9% in 1995. Excluding the impact of non-deductible goodwill related to the AMS Merger and other acquisitions, the Company's effective tax rate was 34.6% in 1997, compared with 38.7% in 1996 and 30.3% in 1995. The Company's effective tax rate fluctuates based upon the relative profitability of the Company's three product lines and the differing effective tax rates for each of those product lines. The higher effective tax rate in 1996 was due primarily to a higher proportion of the Company's income being generated by its HMO subsidiaries, which record higher effective tax rates than the Company's other subsidiaries due to state tax implications.
The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
Interest expense on the Notes totaled $3,479,000, $3,479,000 and $3,483,000 in 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, the fair value of the Notes approximated the Notes carrying value.
On October 30, 1996, the Company borrowed $70,000,000 from BCBSUW to fund the AMSG merger. The Company pledged the common stock of certain subsidiaries as collateral for the loan. Interest is payable quarterly at a rate equal to the London Interbank Offered Rate plus 1.25%, adjusted quarterly. The principal balance, included in long-term debt, is due on October 30, 1999. Interest expense on this note totaled $4,892,000 and $564,000 in 1997 and 1996, respectively.
Since July 1, 1994, the Company and most of its subsidiaries file a consolidated federal income tax return. AMS is included in the Company's consolidated federal income tax return from the date of acquisition. Certain subsidiaries of the Company file separate federal income tax returns. The Company and its subsidiaries file separate state franchise, income and premium tax returns as applicable. Prior to July 1, 1994, the Company was included in the consolidated federal income tax return of BCBSUW.