In addition, in conjunction with UWS' acquisition of the insurance operations of Family Health Plan Cooperative, Inc. in November 2000, UWS assumed a 10-year lease for a 60,000 square-foot facility in Brookfield, Wisconsin. UWS intends to sub-lease the Brookfield facility.
(2)Potentially dilutive securities are not included in the calculation of earnings per share because their inclusion would have an antidilutive effect.
(3)Represents medical and other benefits as a percentage of premium revenue.
(4)Represents selling, general and administrative expenses as a percentage of health services revenue.
All financial data in the Results of Operations section are gross numbers and, therefore, are not net of intercompany eliminations. For this reason, some of the financial data does not precisely match the selected consolidated financial data and audited financial statements.
Despite exiting substantially all of UWS' Medicaid HMO business effective April 1, 2000, total revenues in 2000 increased 15.6% to $814.4 million from $704.5 million in 1999. Total revenues in 1999 increased 7.1% from $657.6 million in 1998. These increases were due to significant rate increases and additional membership on commercial HMO business, a significant increase in the volume of workers' compensation business written, along with recent acquisitions of specialty business and the takeover of the insurance operations of Family Health Plan Cooperative, Inc. ("FHP") in November 2000.
Health Services Revenues. Despite the reduction in Medicaid members, HMO health services revenues in 2000 increased 15.4% to $640.3 million from $554.7 million in 1999. HMO health services revenues in 1999 increased 6.9% from $518.7 million in 1998. The increases are primarily due to an increase in average HMO premium revenue per member and increases in the average number of HMO medical members. Average insured HMO medical premium per member in 2000 increased 13.0% from 1999 and increased 4.5% in 1999 from 1998, as a result of premium increases. The average number of insured HMO medical members in 2000 increased 0.5% to 300,917 from 299,473 in 1999. In the fourth quarter of 2000, the Company expanded its HMO business through the takeover of the insurance operations of FHP, a health maintenance organization in Milwaukee, Wisconsin, which resulted in approximately 56,400 new members and $20.8 million in health services revenue. This increase is partially offset by the reduction of approximately 42,000 Medicaid members in the second quarter of 2000. The average number of insured HMO medical members in 1999 increased 2.4% from 292,588 in 1998.
Net Investment Results. Net investment results include investment income and realized gains and losses on investments. Net investment results in 2000 decreased 27.2% to $8.3 million from $11.4 million in 1999. Net investment results in 1999 decreased 40.0% from $19.0 million in 1998. Average annual investment yields, excluding net realized gains, were 6.4%, 5.8% and 5.6% for 2000, 1999 and 1998, respectively. The decrease in investment income in 2000 and 1999 was the result of lower invested asset balances. The reduction in investments resulted from UWS liquidating a portion of the bond portfolio (which were primarily in unrealized loss positions) to generate cash to fund ongoing operations.
The operating expense ratio related to the service products within specialty managed care products and services in 2000 was 88.8%, compared with 91.1% in 1999 and 90.9% in 1998. The improvement in the operating expense ratio during 2000 is due primarily to growth in the collections business, electronic claims clearing and software business, and the streamlining of operating procedures. The deterioration in 1999 compared to 1998 is mainly attributable to an increase in the allowance for doubtful accounts.
In 2000, UWS recorded $1.3 million in costs associated with the anticipated combination of UWS and BCBSUW. During 1999, UWS expensed approximately $2.8 million for reorganization costs consisting primarily of expenses associated with a proposed debt-for-equity swap transaction with BCBSUW (which was discontinued by BCBSUW in favor of market purchases), an unfavorable appellate court judgment in a dissenter's lawsuit relating to the 1994 acquisition of Unity, costs associated with the start-up of a new Compcare processing office and the combination of various specialty managed care service businesses into a single operating unit.
Amortization of goodwill in 2000 was $1.1 million, compared with $0.8 million in 1999 and $0.5 million in 1998. This increase is due to goodwill arising from recent acquisitions, including the acquisition of Seltzer in the second quarter of 2000 and the takeover of the insurance business of FHP in the fourth quarter of 2000.
BCBSUW with a maturity date of April 30, 2001. BCBSUW's board of directors has authorized the renegotiation of the note and the extension of the maturity date beyond December 31, 2001, pending approval of the OCI. Interest expense related to the $70.0 million debt to BCBSUW was $5.5 million, $4.8 million and $1.4 million in 2000, 1999 and 1998, respectively. Interest expense related to a bank line of credit was $1.0 million, $0.5 million and $0.1 million in 2000, 1999 and 1998, respectively. The increase in interest expense is primarily due to the increase in the variable interest rate on the debt to BCBSUW.
UWS' effective tax rate was 39.7% in 2000, compared with 38.0% in 1999 and 39.4% in 1998. This rate fluctuates based upon the relative profitability of UWS' two reportable business segments and the differing effective tax rates for each subsidiary within those reportable segments. The effective tax rates by subsidiary generally range from 36% to 44%.
UWS' 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. UWS' investment policies are designed to maximize yield, preserve principal and provide liquidity to meet anticipated payment obligations.
Service of "Aa3" at December 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 $0.5 million at December 31, 2000 and less than amortized cost by $5.0 million at December 31, 1999. Unrealized holding gains and losses on bonds classified as available-for-sale are included as a component of shareholders' equity, net of applicable deferred taxes. UWS has 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 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 UWS' premium is written, these levels are based upon the amount and type of premiums written and are calculated separately for each subsidiary. During 2000, UWS contributed assets having an approximate net book value of $58.1 million to Compcare to bring Compcare's statutory capital and surplus to meet required levels.
UWS is a party to certain provider arrangements in conjunction with Unity and Valley, wholly owned HMO subsidiaries included in UWS' consolidated financial statements, which include profit-sharing payments to certain providers and repurchase provisions.
Under the terms of the Valley purchase and sale agreement, as amended, the seller retained an option to repurchase all of the capital stock of Valley as of December 31, 2002, at a price equal to Valley's net assets plus $0.4 million.
Pursuant to the terms of the Unity purchase agreements, as amended, the sellers retained options to repurchase the net assets of the acquired companies as of December 31, 2004. One seller has the option to repurchase a portion of Unity's business for $0.5 million plus the proportionate share of the net worth of such business less any unpaid amount of the maximum annual performance bonuses. The maximum annual performance bonuses are limited to $0.7 million in total. The other seller has the option to repurchase the remainder of the Unity business (as well as the legal entity) at a price equal to the net assets of such business.
In prior years, UWS discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, UWS completed its remediation and testing of systems. As a result of those planning and implementation efforts, UWS experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. UWS expensed approximately $3.6 million during 1999 in connection with remediating its systems. UWS is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties.
We have audited the accompanying consolidated balance sheets of United Wisconsin Services, Inc. (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2000. Our audits also include the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
Consoldiated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss)
At December 31, 2000, Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") owned approximately 46.6% of the Company's common stock. In addition, the Company is affiliated with BCBSUW through certain common officers and directors. On August 17, 1999, BCBSUW completed a purchase of 1,400,000 shares of the Company's common stock in the open market in connection with a previously disclosed plan for BCBSUW to increase its ownership in the Company. The ownership by BCBSUW, in combination with the ownership by the Company's employee benefit plans enables Compcare Health Services Insurance Corporation ("Compcare"), a wholly-owned subsidiary of the Company, to use the Blue Cross and Blue Shield brand on its products.
BCBSUW's Board of Directors announced in June of 1999 its intention to convert BCBSUW from a service insurance corporation to a stockholder owned corporation. On March 28, 2000 the Wisconsin Commissioner of Insurance issued an order that allows BCBSUW to convert to a stock form of ownership by completing a combination with the Company.
In the fourth quarter of 2000, the Company announced that it had executed a definitive agreement to combine with BCBSUW. Under the agreement, BCBSUW will become a wholly-owned subsidiary of the Company, and the Wisconsin United for Health Foundation, Inc. ("the Foundation") will receive 31,313,390 newly-issued shares of UWS stock. The Foundation was established for the sole purpose of benefiting public health in Wisconsin through the Medical College of Wisconsin and the University of Wisconsin Medical School.
The agreement is subject to approval by the Wisconsin Office of the Commissioner of Insurance and other regulatory approvals as well as by the shareholders of the Company.
Investments are classified as either held-to-maturity or available-for-sale. Investments, which the Company has the intent and ability to hold to maturity, are designated as held-to-maturity and are stated at amortized cost. All other investments are classified as available-for-sale and are stated at fair value based on quoted market prices, with unrealized gains and losses excluded from earnings and reported as a component of accumulated other comprehensive income (loss), net of income tax effects. Realized gains and losses from the sale of available-for-sale debt and equity securities are calculated using the first-in, first-out basis.
Premium receivables are stated at net realizable value, net of allowances for uncollectible amounts of $3,262,000 and $2,858,000 at December 31, 2000 and 1999, respectively, based upon historical collection trends and management's best estimate of the ultimate collectibility.
Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, which range from 3 to 5 years for computer equipment and software, 3 to 10 years for furniture and other equipment, 20 to 30 years for land improvements and 10 to 40 years for buildings and building improvements.
Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill is being amortized on a straight-line basis over a weighted average period of approximately 17 years. Accumulated amortization was $3,304,000 and $2,239,000 at December 31, 2000 and 1999, respectively.
The Company periodically evaluates whether events and circumstances have occurred which may affect the estimated useful life or the recoverability of the remaining balance of goodwill. At December 31, 2000, the Company's management believed that no material impairment of goodwill existed.
(1)Pro forma calculations for dilutive securities through September 25, 1998, assume that the price of the stock and the strike price of the options is the same for the periods prior to the Spin-off date.
(2)EPS on net income, as reported, are computed by dividing net income, as reported, by the pro forma weighted average number of common shares outstanding.
(3)EPS on pro forma net income are computed by dividing pro forma net income by the pro forma weighted average number of common shares outstanding. Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Under the terms of the Valley purchase and sale agreement, as amended, the seller retained an option to repurchase all of the capital stock of Valley as of December 31, 2002, at a price equal to Valley's net assets plus $400,000.
Unrealized gains (losses) are computed as the difference between estimated fair value and amortized cost for debt securities classified as available-for-sale or cost for equity securities. A summary
of the change in unrealized gains/losses, less deferred income taxes, which is included in accumulated other comprehensive income (loss), is as follows:
Depreciation expense totaled $2,817,000, $2,221,000 and $2,242,000 in 2000, 1999 and 1998, respectively.
The Company participates with BCBSUW in a bank line of credit, which permits aggregate borrowings up to $20,000,000. Periodic borrowings have been made on these lines of credit. At December 31, 2000, $13,525,000 was included in short-term debt related to borrowings on the line of
The Company provides marketing, underwriting, actuarial and certain administrative services to BCBSUW. In addition, BCBSUW provides office space and certain other administrative services to the Company. These activities are reimbursed at amounts approximating cost, which resulted in allocations to the Company of $11,610,000, $11,659,000 and $8,964,000 in 2000, 1999 and 1998, respectively, and allocations to BCBSUW of $12,193,000, $11,959,000 and $14,757,000 in 2000, 1999 and 1998, respectively. These amounts are included in selling, general and administrative expenses.
Certain subsidiaries of the Company provide health, life and other insurance benefits to the employees of BCBSUW. Premium revenue received from BCBSUW totaled $5,435,000, $4,921,000 and $4,547,000 in 2000, 1999 and 1998, respectively. In addition, BCBSUW provides health insurance to certain of the Company's employees. Premium revenue paid by the Company totaled $3,681,000, $2,653,000 and $2,025,000 in 2000, 1999 and 1998, respectively. These amounts are included in selling, general and administrative expenses.
The Company has an agreement with United Wisconsin Life Insurance Company ("UWLIC"), a subsidiary of AMSG, whereby United Wisconsin Insurance Company ("UWIC"), a wholly-owned subsidiary of the Company, underwrites certain small group health care and life, dental, drug and disability products in Minnesota as UWLIC products have not yet been approved for sale in Minnesota. The Company ceded to UWLIC 100% of the premium revenue of these products sold in Minnesota. The ceded premium revenue approximated $5,380,000, $15,562,000 and $26,875,000 in 2000, 1999 and 1998, respectively.
The Company has an agreement with UWLIC whereby UWLIC underwrites certain life and disability products on behalf of United Heartland Life Insurance Company ("UHLIC"), a wholly-owned subsidiary of the Company. The Company also had agreements with UWLIC, through September 30, 1998, whereby UWLIC underwrote certain health care, dental and pharmaceutical products on behalf of Compcare, Heartland Dental Plan, Inc., and Innovative Resource Group, Inc., all wholly-owned subsidiaries. The Company assumes 100% of the premium revenues on these products from UWLIC. The assumed premium revenue approximated $19,945,000, $20,162,000 and $22,980,000 in 2000, 1999 and 1998, respectively.
The Company had a net federal income tax payable of $2,483,000 included in other current liabilities on the accompanying December 31, 2000 balance sheet and a net federal income tax receivable of $5,768,000 included in other current assets on the accompanying December 31, 1999 balance sheet. Federal and state income tax refunds, net of payments, totaled $8,422,000 in 2000 and federal and state income tax payments, net of refunds, totaled $3,486,000 and $2,327,000 in 1999 and 1998, respectively.
The differences between taxes computed at the federal statutory rate and recorded income taxes in net operating income (loss) are as follows:
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, requires that the tax benefit of temporary differences, including net operating losses ("NOL"), be recorded as assets to the extent that management believes it is "more likely than not" that such tax benefits will be realized. In determining that it is "more likely than not" the net deferred tax asset will be realized, management has considered various tax planning strategies of selling certain non-insurance subsidiaries to supplement its taxable income from operations. However, future levels of operating income as well as the fair value of the subsidiaries are dependent upon economic conditions largely beyond the Company's control. Consequently, management periodically reviews its tax planning strategies based upon changes in facts and circumstances and, accordingly, considers potential adjustments to the deferred tax asset valuation allowance. Based on the Company's expectations and available tax planning strategies, management believes there will be sufficient taxable income to realize the entire tax benefit of the federal NOL carryovers and substantially all of the state NOL carryovers prior to their expiration. The Company is unaware of any circumstances or events, other than the proposed combination with BCBSUW, which would adversely effect the deferred tax assets.
UWS and its affiliates have a federal NOL carryforward of $46,000,000 which expires in the years 2019 and 2020. UWS and its affiliates have state NOL carryforwards totaling $84,462,000, which expire in the years 2011 through 2020.
Insurance companies are subject to regulation by the Office of the Commissioner of Insurance ("OCI") of the State of Wisconsin and certain other state insurance regulators. These regulations require, among other matters, the filing of financial statements prepared in accordance with statutory accounting practices prescribed or permitted for insurance companies. The statutory surplus of insurance subsidiaries at December 31, 2000 and 1999 aggregated $67,072,000 and $76,958,000, respectively. The statutory net income (loss) of insurance subsidiaries aggregated $(12,357,000), $(25,512,000) and $15,884,000 in 2000, 1999 and 1998, respectively.
During 1998, the National Association of Insurance Commissioners ("NAIC") adopted Codification of Statutory Accounting Principles ("Codification") which provides interpretive guidance on statutory accounting principles and will replace the current manual of Accounting Practices and Procedures adopted by the NAIC commissioners. In addition, the NAIC is now considering amendments to Codification that would be effective retroactively on the recommended implementation date of January 1, 2001. Such amendments could have a significant impact on Codification guidelines. Codification provides new interpretive guidance for existing statutory accounting principles. Management believes Codification will have a significant negative impact on the statutory surplus of certain of the insurance subsidiaries of UWS. Depending on the final resolution of pending amendments to Codification and collection of provider receivables, UWS may be required to obtain additional capital or implement other measures, such as securing new reinsurance treaties, to mitigate the impact of Codification on surplus.
("BCA"). While exceeding the minimum standards to maintain its license, Compcare is subject to ongoing monitoring by the BCA.
Dividends paid by insurance subsidiaries are limited by state insurance regulations. The insurance regulator in the state of domicile may disapprove any dividend which, together with other dividends paid by an insurance company in the prior twelve months, exceeds the regulatory maximum as computed for the insurance company based on its statutory surplus and net income. As of December 31, 2000, the Company's insurance subsidiaries are unable to pay dividends to the Company in 2001 without regulatory approval.
The following table summarizes the change in the pension and postretirement benefit obligations as of December 31, 2000 and 1999:
The following table summarizes the change in the pension and postretirement plan assets as of December 31, 2000 and 1999:
The following table provides a reconciliation of the funded status of the plans to the prepaid pension and (accrued) postretirement costs at December 31, 2000 and 1999:
Weighted-average assumptions used as of September 30, 2000, the measurement date, in developing the projected benefit obligations are as follows:
After giving effect to all administrative expense allocations between the Company and BCBSUW, the pension credit was $1,247,000, $1,127,000 and $622,000 in 2000, 1999 and 1998, respectively.
In 1992, certain executive officers of AMSG were awarded stock appreciation rights ("SARs") in AMSG. At the Spin-off date, 67,500 AMSG SARs were converted into SARs of the Company to provide equivalent value.
As calculated using the Black-Scholes model, the weighted average, grant-date fair value of options granted in which the exercise price equaled the market price on the date of the grant was $2.54, $4.27 and $3.34 per share for 2000, 1999 and 1998, respectively.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Since the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.