Our corporate headquarters are located in Milwaukee, Wisconsin in a 216,541 square foot leased building that is shared by our four reportable business segments: insured medical products, specialty managed care products and services, government services, and self-funded products. Each segment is charged a proportionate share of the cost of this facility under service agreements.
Three business segments (insured medical products, specialty managed care products and services, and self-funded products) also share common facilities and are charged a proportionate share of the cost of such facilities under service agreements. These facilities are located in Eau Claire, Fond du Lac, Evansville, and Oshkosh in approximately 88,500 combined leased square feet, 50,540 leased square feet in Waukesha, Wisconsin, 52,237 square feet in New Berlin, Wisconsin, 36,750 square feet in West Allis, Wisconsin, 22,602 square feet in Platteville, Wisconsin, 20,973 square feet in Stevens Point, Wisconsin, 15,270 square feet in Brookfield, Wisconsin, and one other location under 5,000 square feet. In addition, we lease and occupy 18,198 square feet in two locations in Illinois and 10,776 square feet in four locations in Michigan. We also own and occupy a 61,090 square foot facility in Pewaukee, Wisconsin, a 39,300 square foot facility in Sauk City, Wisconsin, and one additional location under 5,000 square feet.
Cobalt Corporation ("Cobalt," the "Company," or "we") is the leading managed care company in Wisconsin based on 2001 premium statistics published by the Office of the Commissioner of Insurance of the State of Wisconsin ("OCI") and we offer a broad portfolio of managed care and insurance products to employers, individuals, and government entities. We have an exclusive license to utilize the Blue Cross and Blue Shield service marks in Wisconsin, giving us a unique position in that market. As of December 31, 2002, we serviced 800,361 insured and self-funded members in our medical operations and 472,374 insured and self-funded members in our dental programs (including in both cases members obtained in the December 31, 2002 acquisition of Claim Management Services, Inc. ("CMSI")).
In implementing this plan, we exited the Medicare+Choice line of business as of January 1, 2002 and elected to not renew certain unprofitable customer contracts. We have also strengthened our senior actuarial and underwriting staff, adopted more stringent underwriting standards, and applied these standards to achieve better pricing for new contracts, as well as those contracts up for renewal. In addition, we have negotiated more favorable provider contracts and have improved our product mix by increasing enrollment in our Medicare supplement business and reducing unprofitable self-funded membership.
We have divested certain non-core assets. We sold our behavioral health and medical management subsidiary, Innovative Resource Group, LLC ("IRG"), for approximately $27.0 million, resulting in a pre-tax gain of approximately $11.0 million. Additionally, during 2002, we reduced our investment in American Medical Security Group, Inc. ("AMSG") common stock from 45.2% of the shares outstanding to 10.7%, relieving us of our statutory capital requirement relating to AMSG. On January 3, 2003, we sold our remaining shares of AMSG common stock.
Compcare Health Services Insurance Corporation ("CompcareBlue"), Valley Health Plan, Inc. ("Valley"), and Unity Health Plans Insurance Corporation ("Unity") utilize capitation and risk-sharing programs with certain physician groups and hospitals to manage the cost of health care provided to members. BCBSUW has not employed capitation or risk sharing arrangements to any significant extent. Capitation is an arrangement whereby we pay medical providers a set fee per member per month in exchange for providing health care services.
Costs associated with utilizing risk-sharing arrangements represented less than 1% of total medical and other benefits expense for all periods presented.
The number of "members" is equivalent to the number of persons covered by contracts in force. A covered person may be counted in more than one category. Member equivalents relating to individuals who access medical care under the BlueCard preferred provider organizations ("PPO") program are not included.
All financial data in the Results of Operations section are gross numbers and, therefore, are not net of intracompany eliminations.
Results for the fiscal year 2002 include the combined operations of BCBSUW and UWS (also known as Cobalt) for the entire year, with BCBSUW's investment in AMSG accounted for under the equity method as an investment in affiliate through May 31, 2002. Results for the fiscal year 2001 include the operations of BCBSUW for the entire year and UWS for the nine-month post-combination period, with BCBSUW's investment in AMSG accounted for under the equity method as an investment in affiliate.
Total revenues in 2002 increased 8.5% to $1,547.4 million compared to $1,425.7 million in 2001. This increase was primarily due to the Combination and resultant inclusion of an additional quarter of the UWS business. Premium rate increases on continuing insured medical products business, partially offset by a decline in insured membership, was another factor contributing to the increase.
Specialty managed care products and services revenue in 2002 increased 30.4% to $185.1 million from $142.0 million in 2001 primarily due to the Combination and resultant addition of one quarter of the UWS business. Premium rate increases, offset by decreases in total membership due to cancellations in the dental, disability, life, and accidental death and dismemberment lines, were other factors contributing to the 2002 results.
Government services revenue in 2002 decreased 4.7% to $111.7 million from $117.2 million in 2001. The decrease in revenues between 2002 and 2001 is largely due to a $7.4 million decrease in Medicare reimbursement partially offset by an approximately $1.9 million increase in Medicaid claim processing services. The decrease in Medicare revenue is largely attributable to implementing several expense reduction measures that saved the Medicare program $5.7 million between December 31, 2001 and December 31, 2002. Additionally, we recorded a one-time reimbursement of $1.7 million in 2001. The Medicaid revenues increased approximately $1.9 million due to new funding levels obtained from a contract extension effective January 1, 2002.
Average invested assets in 2002 increased 98.2% to $330.0 million from $166.5 million in 2001. The improvement in 2002 is primarily due to favorable cash flow from operations and proceeds from the sale of AMSG shares and the sale of IRG.
At December 31, 2002, lower than investment grade bonds represented 4.3% of our investment portfolio.
For our insurance subsidiaries, the selling, general, administrative, and other ("SGA") expense ratio includes commissions, administrative expenses, premium taxes and other assessments, and claim interest expense. For non-insurance subsidiaries, the SGA expense ratio includes operating expenses only.
The combined loss and expense ratio for specialty managed care products and services in 2002 improved to 95.6% from 98.0% in 2001. The improvement in 2002 is primarily due to a decrease in the combined loss and expense ratio for the specialty insurance lines, which is a result of the loss ratio for our disability business improving in 2002 to 64.3% from 85.6% in 2001. This significant improvement is due to rate increases and favorable claims experience.
The operating expense ratio for government services in 2002 improved to 98.6% from 99.3% in 2001. The improved expense ratio is primarily a result of the increased funding on an existing subcontract for the Medicaid claim processing services. The increased funding resulted from a contract extension that became effective January 1, 2002.
As a result of the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142 on January 1, 2002, there was no goodwill amortization recorded in 2002. This compares with goodwill amortization of $5.1 million recorded in 2001.
The results for 2001 include the operations of the combined UWS and BCBSUW entities effective March 31, 2001 with AMSG continuing to be accounted for using the equity method. Prior to March 31, 2001, the results include the operations of BCBSUW and its investment in UWS and AMSG accounted for using the equity method. The comparison between 2001 and 2000 is largely explained by the addition of UWS results for the last three quarters of 2001 following the Combination.
Total revenues in 2001 increased 121.8% to $1,425.7 million from $642.7 million in 2000. The increase in 2001 is due primarily to the Combination and the resultant addition of the UWS business. UWS contributed $686.8 million in revenue in 2001 or 106.9% of the total 121.8% increase for the year. Other factors contributing toward the increase in 2001 include premium rate increases on the insured medical product business, the re-pricing of self-funded products, and new government fee based contracts.
Specialty managed care products and services revenue in 2001 increased 374.9% to $142.0 million from $29.9 million in 2000. The increase in 2001 primarily resulted from the addition of $113.4 million in revenues from the UWS specialty business, which includes life, accidental death and dismemberment, dental, disability, workers' compensation products, along with electronic claim submission, cost containment, and receivables management services. The number of specialty managed care members in 2001 increased to 592,566 from 145,955 in 2000. The total increase in membership of 446,611 reflects a decrease of 13,981 members in BCBSUW insured dental membership, offset by the addition of 460,592 members from the UWS specialty risk business.
Net investment income and realized investment gains (losses) in 2001 increased 30.2% to $12.5 million from $9.6 million in 2000. The addition of UWS increased the 2001 investment income and realized investment gains (losses) by $7.9 million. However, offsetting this increase was the elimination of BCBSUW investment income related to intracompany financing arrangements with UWS, subsequent to March 31, 2001, due to the Combination. This intracompany investment income amounted to $5.5 million in 2000, as compared to $1.3 million in 2001, based on the amount recorded through March 31, 2001. Average annual investment yields, excluding net realized investment gains, intracompany investment income and other interest income were 5.8% and 7.0% for 2001 and 2000, respectively.
Net investment gains (losses) are realized in the normal investment process in response to market opportunities. Realized gains were $0.8 million in 2001 compared to realized losses of $0.5 million in 2000.
The insured medical products loss ratio for 2001 (which consists of the BCBSUW insured medical business for the full twelve months, and the HMO business after March 31, 2001) was 90.6%, compared with 93.5% for 2000 (which includes only the BCBSUW business). The decrease in the medical loss ratio in 2001 is primarily the result of pricing increases and other cost control measures instituted in response to higher than anticipated medical utilization and cost trends. In addition, the higher loss ratio for 2000 also reflects the effect of a premium deficiency reserve of $3.6 million recorded during the second half of 2000 on the Medicare+Choice business. The premium deficiency reserve amount recorded as of December 31, 2000 represented estimated losses throughout 2001. The remainder of the premium deficiency reserve was reversed in 2001, as a result of our exiting the business effective January 1, 2002.
The BCBSUW medical loss ratio for 2001 (excluding HMO business) was 85.7%, compared with 93.5% for 2000. This improvement is partially attributable to a reduction in the medical loss ratio in the Medicare+Choice business to 94.8% in 2001 from 127.3% in 2000, on comparable revenues. The loss ratio for 2001 for the HMO business was 94.4% compared with 95.2% in 2000. The slight improvement is the result of our re-pricing efforts and reduction of unprofitable business.
The insured medical products SGA expense ratio for 2001 was 9.6% compared with 12.0% for 2000. The improved SGA expense ratio in 2001 is the result of additional expense control measures instituted, combined with a higher premium base in 2001 due to pricing increases. In addition, the insured medical products SGA ratio in 2000 includes the effect of a $2.4 million write-off of deferred acquisition costs related to the Medicare+Choice business.
The expense ratio for government services in 2001 and 2000 remained constant at 99.3%.
We recorded an income tax benefit of $1.9 million in 2001 compared to tax expense of $0.5 million in 2000. The tax benefit recorded in 2001 was greater than a benefit calculated at the federal statutory income tax rate due primarily to the reversal of an accrual during 2001 in the amount of $1.5 million that was no longer deemed necessary. This accrual had been established by UWS prior to the Combination to cover estimated income tax exposures for the 1987 to 1994 tax years. Based on an analysis of tax liabilities performed at the end of 2001, management determined that the $1.5 million accrual was redundant with our full valuation allowance against net deferred tax assets, and the accrual was reversed into income.
Income from discontinued operations for 2001 of $1.0 million includes IRG's net operating results for the nine months ended December 31, 2001.
Our operating cash flow improved in 2002 compared to 2001. Cash provided by continuing operations improved to $55.6 million for the year ended December 31, 2002 from $11.1 million in cash provided by continuing operations for the year ended December 31, 2001. This reflects improved operating results in all four of our reporting business segments and improved cash collections related to balances due from clinics and providers. Cash used in investing activities for the year ended December 31, 2002 includes net proceeds of $73.9 million from the sale of 4.9 million shares of AMSG common stock, of which $68.6 million is reflected in proceeds from sale of investment in affiliate in our 2002 audited consolidated statement of cash flows. In addition, $17.0 million in cash proceeds were received from the sale of IRG. Cash used in investment activities for 2002 included $15.3 million cash used to acquire CMSI offset by $2.2 million cash acquired, and $10.8 million of net investments in property and equipment. Cash provided from financing activities during 2002 included net borrowings made of $22.1 million and proceeds received from the exercise of stock options of $7.3 million. The majority of the strong positive cash inflows for the year ended December 31, 2002 were used to purchase available-for-sale securities.
We also currently have a three-year revolving credit facility ("revolver") from M&I Marshall & Ilsley Bank that originated on August 7, 2002 and provides up to $30.0 million of available credit to us with the availability declining by $5.0 million after one year and an additional $10.0 million after two years. The revolver bears interest at a rate of LIBOR plus 1.50% to 2.50% depending on the timing and amount of borrowings. We have pledged the stock of our BCBSUW and CompcareBlue subsidiaries as collateral for the revolver. Our outstanding balance on the revolver was $30.0 million as of December 31, 2002.
Our investment portfolio consists primarily of investment-grade bonds and government securities, and has a limited exposure to equity securities. At December 31, 2002, $350.6 million or 90.7% of our total investment portfolio was invested in bonds and government securities compared with $178.2 million or 93.0% at December 31, 2001. Our investment in AMSG common stock represented approximately 5.0% of the total investment portfolio as of December 31, 2002. On January 3, 2003, we sold our remaining investment in AMSG shares, netting proceeds of $18.7 million, which were reinvested in bonds and government securities. The bond portfolio had an average quality rating by Moody's Investor Service of "Aa3" at December 31, 2002 and "Aa2" at December 31, 2001. At December 31, 2002, $373.9 million or 96.7% of our total investment portfolio was classified as available-for-sale compared with $180.7 million or 94.3% at December 31, 2001. The market value of the total investment portfolio was greater than amortized cost by $14.3 million and $0.3 million at December 31, 2002 and December 31, 2001, respectively.
Unrealized gains and losses on bonds classified as available-for-sale are included as a component of shareholders' equity, net of applicable deferred income taxes. We have no investments in mortgage loans, non-publicly traded securities (except for investments related to our affiliates), or real estate held for investment.
We have an outstanding line-of-credit in the amount of $15.0 million available to Health Professionals of Wisconsin, Inc., an affiliate of University Health Care, Inc. ("UHC"), which is a key provider for Unity. The balance was $3.0 million as of December 31, 2002. Interest is calculated using the quarterly prime rate and is due and payable annually on November 1.
We are required to maintain certain levels of statutory capital and surplus under the National Association of Insurance Commissioners ("NAIC") Risk Based Capital ("RBC")requirements. Wisconsin insurers are also subject to compulsory and security surplus requirements based upon a percentage of underwritten premiums, with the applicable percentage determined by line of business. In addition to statutory capital requirements, we, BCBSUW and CompcareBlue are required to maintain certain capital levels as determined by the Association. As of December 31, 2002 all of our insurance subsidiaries exceed the minimum capital requirements imposed by the State of Wisconsin and the Association.
o Reduce BCBSUW's investment in AMSG common stock from 45% of the shares outstanding to less than 20% through public or private offerings during 2002. We reduced our investment in AMSG to 10.7% as of December 31, 2002, raising $73.9 million in net proceeds at BCBSUW. On January 3, 2003, we sold our remaining investment in AMSG, raising an additional $18.7 million in net proceeds at BCBSUW.
o Obtain debt financing from one or more institutional lenders to fund holding company liquidity needs, including the repayment of the collateralized intracompany debt obligations between Cobalt and its regulated subsidiaries. We have obtained a $30.0 million revolver. During the third quarter of 2002, we repaid our intracompany obligation to United Wisconsin Insurance Company ("UWIC") of $22.8 million. As noted above, the remaining intracompany obligation between Cobalt and BCBSUW was satisfied through the contribution of CompcareBlue to BCBSUW.
o Achieve our 2002 projected core earnings, which anticipated breakeven operating results for CompcareBlue for the year ending December 31, 2002 as compared to an operating loss of $32.5 million for the year ended December 31, 2001. We exceeded our projected core earnings for the year ended December 31, 2002, including progress toward obtaining breakeven results for CompcareBlue for the year ended December 31, 2002.
Non-compliance with minimum capital requirements or any of the requirements described above may subject us to various regulatory actions by the OCI, including, among others, revocation of our licenses to sell insurance products in Wisconsin and placing us under state regulatory control. See Item 1, "Business -- Regulation -- Capital Requirements." In addition, the Association has termination rights if our subsidiary licensees' capital falls below the lowest licensure minimum capital levels or liquidity requirements established by the Association. See Item 1, "Business -- Blue Cross and Blue Shield Licenses." Our insurance subsidiaries are currently in compliance with the capital requirements calculated as required by the OCI and the Association.
On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," under which we are required to analyze recorded goodwill for possible impairment on a periodic basis. In assessing the recoverability of our goodwill and other intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded. Based on our most recent analysis, we have not recorded any impairment charges.
Medical and other benefits payable consist primarily of loss reserves established under a complex estimation process utilizing company-specific, industry-wide, and general economic information and data. The estimation process also involves continuous monitoring and evaluation of the submission, adjudication, and payment cycles of claims. We develop an estimate of ultimate claims based upon historical experience and other available information as well as assumptions about emerging trends, which vary by class of business. Significant assumptions used in the estimation process include trends in loss costs and changes in member demographics, utilization, provider contract terms and reimbursement strategies, frequency and severity of claims incurred, known and adjudicated claims, changes in the timing of the reporting of losses, and expected costs to settle unpaid claims.
Due to the numerous factors influencing this liability, we develop a series of estimates based upon generally accepted actuarial projection methodologies using various scenarios with respect to claim submission and payment patterns and cost trends. Our policy is to record our best estimate of medical and other benefits payable that adequately provides for future payments of claims incurred but not paid under moderately adverse conditions. Deviations (positive or negative) between actual experience and estimates used to establish the liability are recorded in the period of claim payment. We continually monitor the reasonableness of the assumptions and judgments used in prior estimates by comparison with actual claim patterns and consider this information in future estimates.
The loss reserve recorded at December 31, 2001, 2000, and 1999 exceeded actual claims paid in the subsequent period by $22.9 million, $10.6 million, and $7.8 million, respectively.
We and our affiliates are involved in various legal actions occurring in the normal course of business. We accrue our best estimate of the probable cost for the resolution of these claims. These estimates are developed in consultation with internal and outside legal counsel who are handling our defense in these matters and are based upon a combination of litigation and settlement strategies. To the extent additional information arises or strategies change, it is possible that our best estimate of our probable liability in these matters may change. In the opinion of management, we have made adequate provision for losses, which may result from these actions. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to these proceedings. We recognize the costs of legal defense in the periods incurred. Accordingly, the future costs of defending claims are not included in our estimated liability.
In addition, the IRS has proposed adjustments to all of our tax years from 1987 forward claiming that deductions for the write-off of certain intangible assets on hand as of January 1, 1987 are not allowable. This is a national issue with the IRS and is currently being litigated by another Blue Plan. This issue may prevent us from closing tax years even after the above litigation with the IRS is settled. The benefits of this deduction have not been recorded in our consolidated financial statements. Should this issue be resolved in our favor, either individually or as to Blue Plans generally, a benefit will be recorded. Our consolidated financial statements also do not reflect the potential tax benefits that could result from a $193 million deduction taken on our 2001 federal income tax return relating to the transfer of the stock of BCBSUW to the Foundation on March 23, 2001. The IRS recently revoked favorable private letter rulings issued to other Blue Plans in similar situations, and additional guidance is expected from the IRS. We are awaiting additional developments and guidance in this area before considering recording an income tax benefit from this deduction.
A number of factors specific to Cobalt or related to our business may impact our financial performance and the performance of Cobalt common stock. Among these factors are the following:
At the request of the OCI, we prepared a plan of action in early 2002 for strengthening the capital position of our insurance subsidiaries. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Management's Plan." Our insurance subsidiaries are currently in compliance with the minimum capital requirements imposed under Wisconsin law, calculated as required by the OCI.
Our right to use the Blue Cross and Blue Shield names and service marks in our service area is derived from a license agreement we have with the Association. The Association imposes certain financial and service performance standards on Cobalt, our BCBSUW subsidiary, and CompcareBlue, including capital requirements based on RBC.
Any new minimum capital requirements adopted in the future by the Association or by the OCI may require us to increase our capital levels, which we may not be able to do.
OUR BLUE CROSS AND BLUE SHIELD LICENSE AGREEMENTS COULD TERMINATE UPON THE OCCURRENCE OF EVENTS SPECIFIED IN THE LICENSE AGREEMENTS, AND TERMINATION WOULD SIGNIFICANTLY HARM OUR BUSINESS.
Under license agreements with the Association, we have the right to use the Blue Cross and Blue Shield names and service marks in our Blue Cross and Blue Shield service area and to participate in the BlueCard PPO Program. We believe that our exclusive right to use the Blue Cross and Blue Shield names and service marks provides us with an important marketing advantage in our service area. Loss of these licenses would significantly harm our ability to compete in our markets and subject us to a significant monetary penalty to the Association.
o termination of the voting trust and divestiture agreement between us and the Foundation before the Foundation's ownership of our common stock falls to less than 5%;
o the acquisition of our company without the prior consent of a majority of the other disinterested licensees of the Association and a majority of the then current weighted vote of the other disinterested licensees of the Association;
o a determination by the Association that fewer than 80% of our directors are independent; and
o failure to brand medical and dental business as required by the Association.
Our Amended and Restated Articles of Incorporation include ownership limitations required by the Association. Under these ownership limitations:
o no non-institutional owner may beneficially own 5% or more of the combined voting power of all of our outstanding securities; and
WE MAY NOT BE ABLE TO MAINTAIN PROFITABILITY, AND OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO ACCURATELY ESTIMATE AND CONTROL FUTURE HEALTH CARE COSTS.
o an increase in the cost of health care services and supplies, including pharmaceuticals;
o periodic renegotiation of contracts with hospitals, physicians, and other providers;
o changes in the demographics of our members and medical trends affecting them;
Our profitability depends upon our ability to contract on cost-effective terms with hospitals, physicians, and other health care providers. Our provider contracts typically provide for automatic term renewals unless either party notifies the other of its intention not to renew within 90 days prior to the expiration of the contract's term. If we fail to obtain health care provider contracts, or renew those we have, on favorable terms, we may lose some of our members or incur higher medical costs. In addition, our inability to contract with providers, or the inability of providers to provide adequate care, could significantly harm us.
Our Unity and Valley HMOs rely in large part on three separate health care provider systems for the provision of health care services to their members. Our largest five providers of our core Blue Cross and Blue Shield branded and HMO business, in terms of claims paid and incurred for the year ended December 31, 2002, are Aurora Healthcare, UHC, Covenant Healthcare, Columbia St. Mary's, and Luther/Midelfort. These top five providers collectively accounted for 40.4% of our medical and other benefits expense for our core business during that period. If one or more of our relationships with these systems were to be terminated, we would be adversely affected. See Item 1, "Business -- Our Provider Network."
In certain markets, we compete with organizations which have a substantial market share. In other markets, competing health plans may be owned by providers. Portions of the Wisconsin market are dominated by a relatively small number of provider-owned health plans, with a large influence on the markets in which we compete. Organizations with sizable market share or provider-owned plans may be able to obtain favorable financial arrangements from health care providers that are not available to us. Without such arrangements, we may not be able to compete effectively in such markets.
In addition, legislation has been introduced in the U.S. House of Representatives that is intended to increase competition for government contracts for processing claims for the Medicare program. Similar legislation may be introduced in the U.S. Senate as a stand-alone program or as part of a larger Medicare reform package. Our UGS subsidiary serves as a fiscal intermediary for the Medicare program. If this legislation is adopted, it could affect our ability to compete effectively for Medicare contracts.
We depend in part on the services of independent agents and brokers in the marketing of health care plans, particularly to individual and small employer group members. Independent agents and brokers are typically not exclusively dedicated to one company and market health care products of our competitors. In addition, we face intense competition for the services and allegiance of independent agents and brokers. These persons may choose to direct business to other managed care companies or may direct less desirable sales prospects to us.
In addition, as long as we use the Blue Cross and Blue Shield names and marks in marketing our health benefits products and services, any negative publicity concerning the Association or other Association licensees may adversely affect us and the sale of our health benefits products and services.
We use third party service providers for claims processing and enrollment functions, and therefore have only limited control over data management associated with these functions.
OUR INVESTMENT PORTFOLIO IS SUBJECT TO VARYING ECONOMIC AND MARKET CONDITIONS, AS WELL AS REGULATION.
A DOWNGRADE IN OUR SUBSIDIARIES' RATINGS MAY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In February 2002, A.M. Best downgraded its rating of our insurance subsidiaries to B+ ("Very Good," which is the 6th highest rating out of 16 categories). A.M. Best ratings evaluate an insurer's financial strength and ability to pay claims. A.M. Best ratings are not recommendations to buy, sell or hold securities. The A.M. Best rating principally impacts our ability to underwrite workers' compensation business. When the rating of UWIC, which underwrites our workers' compensation product, was downgraded from A- ("Excellent," which is the 4th highest rating out of 16 categories) to B++ ("Very Good," which is the 5th highest rating out of 16 categories) in June 2001, we arranged with a reinsurer to use its insurance company, which had an A+ ("Superior," which is the 2nd highest rating out of 16 categories) rating by A.M. Best, to serve as underwriter for customers that required the higher rating for their workers' compensation coverage. In exchange for the use of the reinsurer's license, we were required to increase the portion of the workers' compensation business ceded to the underwriter from 20% to 35%. We intend to continue to write workers' compensation insurance, but any future downgrade of the rating of our subsidiaries, should one occur, or our inability to access an "A" rated underwriter on acceptable terms, could negatively impact our ability to underwrite workers' compensation business to customers that require the "A" rating for their workers' compensation coverage.
WE CONDUCT BUSINESS IN A HEAVILY REGULATED INDUSTRY, AND CHANGES IN REGULATIONS OR VIOLATIONS OF REGULATIONS COULD SIGNIFICANTLY HARM US.
Our business is heavily regulated on federal, state and local levels as we discuss under Item 1, "Business -- Regulation." For example, we need to obtain and maintain regulatory approvals to market many of our products. Delays in obtaining or failure to obtain or maintain these approvals could significantly harm us.
We are also subject to various governmental reviews, audits, and investigations designed to monitor our compliance with applicable rules and regulations. Any adverse review, investigation, or audit findings could result in:
o loss of a license to act as an insurer or HMO or to otherwise provide a service;
o loss of the right to participate in various federal programs, including the Medicare supplement programs; or
o increases in minimum capital, reserves, and other financial viability requirements;
o imposition of more stringent standards of review of our coverage determinations;
A portion of our revenues relate to Medicare supplement programs. Changes in these programs, particularly changes affecting enrollment or changes in premium payment or reimbursement levels, could significantly harm our business and decrease our profitability.
Our UGS subsidiary serves as a fiscal intermediary for the Medicare program. The laws and regulations governing fiscal intermediaries for the Medicare program are complex and subject to interpretation and can expose a fiscal intermediary to penalties for non-compliance. Fiscal intermediaries may be subject to criminal fines, civil penalties, or other sanctions as a result of periodic audits or reviews. Other companies in this business have recently been subject to significant fines and censures for non-compliance. While we believe that we are in compliance in all material respects with the regulations governing fiscal intermediaries, we cannot assure you of this.
COSTS OF COMPLIANCE WITH PRIVACY LAWS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
o disputes with our providers or agents over compensation and termination of contracts;
We currently have, and expect to maintain, liability insurance coverage for some of the potential legal liabilities we may incur. Potential liabilities that we incur may not, however, be covered by insurance, our insurers may dispute coverage, our insurers may be unable to meet their obligations, or the amount of our insurance coverage may be inadequate. We cannot assure you that we will be able to obtain insurance coverage in the future, or that insurance will continue to be available on a cost effective basis, if at all.
We are also subject to other types of claims and potential claims, which could have a material adverse effect on our financial condition and results of operations. See Item 3, "Legal Proceedings" and Item 1, "Business - Management Information Systems."
Our Amended and Restated Articles of Incorporation and Bylaws include provisions required by the Association for its for-profit licensees, which the Association designed to protect the independence of its for-profit licensees from any single shareholder. These provisions include ownership limitations that prohibit institutional investors from owning 10% or more of the voting power of our outstanding securities and prohibit other investors from owning 5% or more of the voting power of our outstanding securities. The approximately 60% of our outstanding shares currently owned by the Foundation are exempt from these limitations; however, at least 80% of our directors must be independent directors who are not affiliated or associated with the Foundation or any shareholder that owns our shares in excess of the ownership limits.
As mentioned in Item 1, "Business - Blue Cross and Blue Shield Licenses", if a non-Blue entity were to acquire Cobalt, our license with the Association could be terminated. If terminated, Cobalt would have to pay a fee equal to $25 multiplied by the number of our members receiving products or services sold or administered under the Blue Cross or Blue Shield names or service marks. The fee would be reduced to the extent the payment of the fee would cause us to fall below certain capital requirements established by the Association.
In addition, under the OCI order issued in connection with the Combination, we are required to obtain the approval of the OCI prior to any issuance of our common stock. This approval is required until the OCI determines that its oversight is no longer necessary to protect the Foundation against improper dilution of its equity interest.
o inhibit our ability to invest in technology and other products and services that we may need;
As of February 28, 2003, the Foundation beneficially owns approximately 60% of the outstanding shares of our common stock. The Foundation has placed all of its shares in a voting trust for a trustee to vote and dispose of under the terms of the Voting Trust and Divestiture Agreement.
The trustee of the voting trust must, as a general matter, vote all of the Foundation's shares held in the voting trust as directed by a majority of our independent directors and a majority of all of our directors on all proposals or matters that may come before our shareholders, except for matters relating to proposed combination and sale transactions if our shareholders will not own a majority of the shares of the resulting company. Thus, except for votes relating to business combination or sale transactions, so long as the Foundation beneficially owns a number of shares sufficient to control the outcome of a shareholder vote and more than 20% of our outstanding shares, our board of directors will be able to control the outcome of most matters brought before our shareholders for a vote. In addition, so long as the Foundation beneficially owns more than 20% of our outstanding shares, any amendment to the Articles of Incorporation or Bylaws requires approval by the OCI.
In any election of directors, the trustee of the voting trust must vote the Foundation's shares in favor of each nominee approved by a majority of our directors who are deemed to be "independent" under the Association's standards and a majority of all of our directors. As a result, our directors will likely be able to ensure their re-election and designate their successors for as long as the Foundation owns a substantial number of shares of our common stock.
TRADING VOLUME FOR OUR COMMON STOCK HAS BEEN LIMITED, AND SIGNIFICANT SALES OF OUR COMMON STOCK BY THE FOUNDATION, OR THE EXPECTATION OF THESE SALES, COULD CAUSE OUR STOCK PRICE TO FALL.
From the completion of the Combination on March 23, 2001 through December 31, 2002, the average daily trading volume of our common stock was 51,735 shares per day. Given the limited trading volume of our common stock, significant sales of our common stock by the Foundation, or the expectation of these sales, could cause our stock price to fall.
OUR STOCK AND THE STOCKS OF OTHER COMPANIES IN THE HEALTH CARE INDUSTRY ARE SUBJECT TO STOCK PRICE AND TRADING VOLUME VOLATILITY.
o press releases or publicity relating to us or our competitors or relating to trends in our markets;
As discussed in Notes 2, 6 and 23 to the consolidated financial statements, in 2002 the Company adopted Statement of Financial Accounting Standards No. 141, Business Combinations, and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
The Combination was accounted for as a purchase by BCBSUW of the remaining 9,096,303 shares of UWS that it did not already own at a market price of $6.15 per share on the closing date. In accordance with accounting principles generally accepted in the United States ("GAAP"), goodwill was recorded representing the excess of the market price over the adjusted book value of UWS for the 53.4% of UWS that BCBSUW did not already own. Total goodwill recorded by Cobalt as a result of the Combination amounted to $65,577,000, of which $21,651,000 related to the recognition of a valuation allowance on the net deferred income tax assets recorded by UWS prior to the Combination.
The Company acquired all of the outstanding stock of Claim Management Services, Inc. ("CMSI"), a third-party administrator of self-funded employee benefit plans with annual revenue of approximately $22.0 million, on December 31, 2002 (see Note 23). The accompanying consolidated balance sheet includes the accounts of CMSI as of that date. Consolidated results of operations will include CMSI for periods subsequent to the acquisition date.
The Company actively manages its cash and cash equivalents position to maintain optimal asset levels. Cash and cash equivalents include operating cash and short-term investments with original maturities of three months or less. These amounts are recorded at cost, which approximates fair value.
Receivables, consisting of premium receivables, due from clinics and providers, and other receivables, are stated at net realizable value, net of allowances for uncollectible amounts, based upon historical collection trends and management's best estimate of the ultimate collectibility.
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which is 3 years for computer equipment and software, 5 to 10 years for furniture and other equipment, 30 years for land improvements, and 10 to 40 years for buildings and building improvements. Any gain or loss realized upon retirement or disposal is reflected in selling, general, administrative, and other expenses in the Company's consolidated statement of operations. On an on-going basis, the Company reviews events or changes in circumstances that may indicate that the carrying value of an asset may not be recoverable.
The Company contracts with various health care providers for the provision of certain medical care services to its members and generally compensates those providers on a fee-for-service basis or pursuant to certain risk-sharing arrangements. Medical and other benefits expense also consists of capitation expenses, health and disability benefit claims, and life insurance benefits. Medical and other benefits payables consist primarily of loss reserves established for reported and unreported claims and accrued capitation fees and adjustments, which are unpaid as of the balance sheet date, under a complex estimation process utilizing company-specific, industry-wide, and general economic information and data. The estimation process also involves continuous monitoring and evaluation of the submission, adjudication, and payment cycles of claims. The Company estimates ultimate claims based upon historical experience and other available information as well as assumptions about emerging trends, which vary by class of business. Significant assumptions used in the estimation process include trends in loss costs and changes in member demographics, utilization, provider contract terms and reimbursement strategies, frequency and severity of claims incurred, known and adjudicated claims, changes in the timing of the reporting of losses, and expected costs to settle unpaid claims.
The Company's year-end medical and other benefits payable are substantially satisfied through claim payments in the subsequent year. Any adjustments to prior period estimates are reflected in the current period. Capitation represents fixed payments on a per member per month basis to participating physicians, dentists, other medical specialists, and hospital systems as compensation for providing comprehensive health or dental care services. The portion of medical and other benefits payable pertaining to long-term disability, workers' compensation, and certain life insurance products, which is estimated to be paid more than one year from the balance sheet date, is included as other benefits payable on the accompanying consolidated balance sheets.
The Company records a liability for future policy benefits relating to certain individual product contracts when premium revenue is recognized. As of December 31, 2002, approximately $2.0 million of such reserves were recorded and are included in Medical and Other Benefits Payable in the accompanying consolidated balance sheets.
Premium deficiency reserves ("PDR") are recognized when it is probable that the future costs associated with a group of existing contracts will exceed the anticipated future premiums on those contracts. For purposes of determining whether a premium deficiency exists, contracts are grouped in a manner consistent with the Company's method of acquiring, servicing, and measuring profitability of such contracts. The Company calculates expected PDR based on budgeted revenues and applicable expenses excluding investment income.
The Company has two defined benefit pension plans covering a majority of its work force. The plans provide pension payments based primarily on years of service and employee compensation. Pension costs are accrued in accordance with SFAS No. 87, "Employers' Accounting for Pensions," and are funded based on the minimum contribution requirements of the Employee Retirement Income Security Act of 1974. The actuarial cost method used is the projected unit credit method.
Retrospective premium adjustments are recognized for certain groups for which actual claims experience differs from that which was anticipated when the related premium rates were established. Financial arrangements vary based upon the group and line of insurance involved. The amount of premium that was subject to retrospective premium adjustments in 2002, 2001, and 2000, was $17,483,000, $14,365,000, and $16,441,000, respectively.
The Company's profitability depends in large part on accurately predicting and effectively managing health care costs. The Company continually reviews its premium and benefit structure to reflect its underlying claims experience and revised actuarial data; however, several factors could affect the medical cost ratios. Certain of these factors, which include changes in health care practices, inflation, new technologies, major epidemics, natural disasters, and malpractice litigation, are beyond any health plan's control and could affect the Company's ability to accurately predict and effectively manage health care costs. Costs in excess of those anticipated could have a material adverse effect on the Company's results of operations.
The following table illustrates the effect on net income and earnings (loss) per share as if the Company had applied the fair value expense recognition provisions of SFAS No. 123.
Year Ended December 31, 2002 2001 ------------------------------------ Assumptions: Risk-free interest rate 5.22% 5.44% Dividend yield 0.42% 0.67% Volatility factor 0.57 0.55 Weighted average expected life 6 years 6 years
In December of 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends certain disclosure requirements of SFAS No. 123. The Company has complied with the revised disclosure requirements in these notes to consolidated financial statements and does not intend to change to a fair value based method of accounting for stock options at this time.
Certain reclassifications have been made to the consolidated financial statements for 2001 and 2000 to conform to the 2002 presentation including reporting of discontinued operations (see Note 21).
The components of the change in medical and other benefits payable, net of reinsurance, are as follows:
Subsequent to September 11, 2001, the Company observed significant variability in its claims patterns. Experience for claims incurred appeared to be artificially low, and the Company attributed a portion of this variability to an estimated increase in lag times between the dates claims were incurred and submitted to the Company. In addition, the Company anticipated increased utilization relating to business it was exiting at the end of 2001, including certain CompcareBlue groups and Medicare+Choice. The Company's ultimate experience relating to these matters was more favorable than estimated.
The amortized cost, gross unrealized gains (losses), and estimated fair values of investments are as follows:
The amortized cost and estimated fair values of debt securities at December 31, 2002, by contractual maturity, are shown in the following tables. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
Held-to-maturity: Due in one year or less $ - $ - Due after one through five years 12,780 13,452 ------------------------------ $12,780 $13,452 ==============================
Proceeds from sales of equity securities classified as available-for-sale during 2002, 2001, and 2000 were $17,920,000, $10,571,000, and $6,134,000, respectively. Proceeds from sales of fixed maturities classified as available-for-sale during 2002, 2001, and 2000, excluding maturities, were $81,092,000, $133,193,000, and $19,652,000, respectively.
Unrealized gains (losses) are computed as the difference between estimated fair value and amortized cost for fixed maturities classified as available-for-sale or cost for equity securities. A summary of the net change in unrealized gains/losses, less deferred income taxes, which is included in accumulated other comprehensive income (loss), is as follows:
Income (loss) from investment in affiliates, net of tax, consisted of the following:
Included in AMSG's total assets was $103,934,000 of goodwill and other intangible assets as of December 31, 2001.
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under the new statement, goodwill is no longer amortized but is subject to annual impairment tests. As of June 30, 2002, management completed the Company's initial annual impairment test and determined that no impairment of goodwill existed at that date. The Company updated its analysis and determined that no impairment existed at December 31, 2002. Total goodwill amortization on continuing operations was $5,136,000 and $622,000 for the years ended December 31, 2001 and 2000, respectively. Accumulated amortization was $7,455,000 at December 31, 2002 and 2001. On a pro forma basis (as if the Combination occurred at the beginning of the reporting period), goodwill amortization of $6,470,000 and $5,464,000 would have been recorded for the years ended December 31, 2001 and 2000, respectively.
The amount of goodwill recorded by the Company by segment as of December 31, 2002 was (in thousands):
There were no significant changes in the allocation of goodwill between segments during 2002.
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, 2005, at a price equal to Valley's net assets plus $400,000.
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. These agreements provide for an extension through December 31, 2009. One seller has the option to repurchase a portion of Unity's business for $500,000 plus the proportionate share of the net worth of such business less any unpaid amount of the maximum performance bonuses. The maximum performance bonuses are limited to $650,000 in total, of which $200,000 for 2002 has been accrued and $125,000 for 2001 has been paid. 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.
Land and land improvements $ 1,658 $ 1,316 Building and building improvements 14,971 11,351 Computer equipment and software 53,393 48,875 Furniture and other equipment 24,846 21,646 ------------------------------ 94,868 83,188 Less accumulated depreciation (60,701) (51,777) ------------------------------ $ 34,167 $ 31,411 ==============================
Reinsurance contracts are accounted for in a manner consistent with the underlying business.
The Company has reinsurance recoverable amounts outstanding of $54,223,000 and $45,377,000 as of December 31, 2002 and 2001, respectively, included in other current assets and reinsurance recoverables in the accompanying consolidated balance sheets based on the expected settlements.
Term note, due 2002 $ - $ 7,500 Revolving credit agreement, due 2003-2005 29,950 - Bank line of credit, due 2003 7,500 7,850 Accrued interest 1 19 ------------------------------ Total debt 37,451 15,369 Less current portion 12,451 12,369 ------------------------------ Long-term debt $25,000 $ 3,000 ==============================
As of December 31, 2002, the outstanding balance on the revolver is $29,950,000 and bears interest at a rate of 3.94%. Funds drawn on the revolver during 2002 were used by Cobalt to repay certain intracompany balances and to repay the remaining balance of $6,000,000 due on the term note. Interest expense recorded during 2002 on the revolver was $396,000 at a weighted average interest rate of 4.30%. The current portion of the revolver ($4,950,000) has been classified as short-term debt in the accompanying consolidated balance sheets as of December 31, 2002, and the remaining $25,000,000 balance is classified as long-term debt.
Debt covenants under the revolver include compliance with a minimum tangible net worth, minimum debt-service/liquidity ratio, and risk-based capital ("RBC") requirements (see Note 15) on a quarterly basis. As of December 31, 2002, the Company is in compliance with the covenants of the revolver.
The schedule of principal payments on debt is as follows (in thousands):
During 1998, UWS entered into a $70,000,000 note obligation due to BCBSUW in connection with the spin-off in 1998 of AMSG's managed care companies and specialty business. UWS pledged the common stock of CompcareBlue as collateral for the note obligation. Interest was payable quarterly at a rate equal to 9.75% and 8.06% as of December 31, 2001 and 2000, respectively. The note was amended and the maturity date was extended to January 2, 2003 at an interest rate of 7.38% on February 14, 2002. In October 2002, the $70,000,000 obligation due BCBSUW was satisfied in full through the transfer to BCBSUW of all of the common stock of CompcareBlue.
The Company had net federal and state income tax payments (refunds) of $1,518,000, $368,000, and $(194,000) in 2002, 2001, and 2000, respectively.
Current: Federal $ 6,513 $(2,359) $ - State 1,298 130 - ------------------------------------------ 7,811 (2,229) - Deferred: Federal (2,416) 183 548 State 1,909 175 - ------------------------------------------ (507) 358 548 ------------------------------------------ Total $ 7,304 $(1,871) $548 ==========================================
The Company is entitled to an income tax deduction resulting from the exercise of non-qualified employee stock options. The tax benefits related to these deductions amounted to $3,975,000, $0, and $0 for the years ended December 31, 2002, 2001, and 2000, respectively. These benefits were recorded as an increase to common stock and are not included in the table above.
A reconciliation of income tax expense (benefit) computed at the federal statutory rate to recorded income tax expense (benefit) is as follows:
The deferred tax valuation allowance also includes amounts related to the net deferred tax assets of UWS at the date of the Combination. This valuation allowance increased goodwill by $22.1 million at that date. Subsequent reversals of this valuation allowance are recorded as reductions to goodwill. At December 31, 2002 and 2001, the remaining Combination date valuation allowance was $19.9 million and $22.1 million, respectively.
Claims processed and administrative fees received related to these services were as follows:
The Company has operating leases for office space, electronic data processing equipment, automobiles, software, and terminal lines. Future minimum payments under noncancelable operating leases with initial or remaining terms in excess of one year at December 31, 2002 were as follows (in thousands):
2003 $ 8,956 2004 7,605 2005 6,072 2006 3,511 2007 1,659 Thereafter 2,522 ---------- Total $30,325 ==========
Rental expense totaled $15,528,000, $13,835,000, and $9,538,000 in 2002, 2001, and 2000, respectively.
The Company has an outstanding revolving line-of-credit in the amount of $15,000,000 available to Health Professionals of Wisconsin, Inc., which originated in 1997. The outstanding balance at December 31, 2002 and 2001 was $3,000,000. Interest is accrued based on the quarterly prime rate, with interest payments due annually on November 1. Interest income amounted to $132,000, $308,000, and $451,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
At December 31, 2002, the Company had an outstanding letter of credit of $10,278,000, which expires on July 31, 2003, issued primarily to support a portion of its workers' compensation line of business. There have been no draw-downs under this letter of credit.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") includes administrative provisions imposing significant requirements relating to maintaining the privacy of medical information ("Privacy"), establishing uniform health care provider and employer identifiers, requiring use of standardized transaction formats ("Transactions"), and seeking protections for confidentiality and security of patient data ("Security"). The Privacy and Transactions provisions require implementation in 2003. Final HIPAA Security rules were published on February 20, 2003, and the implementation and compliance date is April of 2005. HIPAA is far-reaching and complex, and proper interpretation and practice under the law continue to evolve. Consequently, the Company's efforts to measure, monitor, and adjust its business practices to comply with HIPAA are ongoing. Compliance with HIPAA could require the Company to make significant changes to its operations and failure to comply could subject the Company to civil and criminal penalties. The costs of complying with HIPAA are likely to be substantial.
The Foundation is required to decrease its percentage ownership of Cobalt to 50% by March 23, 2004 and 20% by March 23, 2006. The Company is responsible for all legal and accounting fees, printing, and other out-of-pocket costs associated with the offerings to facilitate these sales. During 2002, the Company filed a shelf registration statement with the Securities and Exchange Commission ("SEC") covering the potential sale of up to 0.5 million shares of Cobalt common stock by the Company and up to 6.5 million shares of outstanding Cobalt common stock held by the Foundation. During February of 2003, the Foundation sold 6.3 million shares of Cobalt common stock realizing proceeds of approximately $71.9 million. The Company did not sell any shares of common stock in conjunction with this transaction. As a result, the Company expensed offering costs of approximately $1.2 million during the fourth quarter of 2002.
Wisconsin insurance regulations also require the maintenance of a minimum compulsory surplus based on a percentage of premiums written. As of December 31, 2002, all of the Company's insurance subsidiaries exceeded the regulatory minimum compulsory and security surplus, calculated as prescribed by the OCI. In addition, the Company's insurance subsidiaries are subject to RBC requirements promulgated by the National Association of Insurance Commissioners. The RBC requirements establish minimum levels of capital and surplus based upon the insurer's operations and investment risk. At December 31, 2002, the Company was in compliance with these capital surplus requirements. The Company is also required to maintain certain capital and liquidity levels in conjunction with the licensing of certain products by the Association. As of December 31, 2002, Cobalt, BCBSUW and CompcareBlue exceeded the minimum standards to maintain its license.
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. The aggregate amount available for dividends in 2003 without regulatory approval is $18,928,000.
The Company has substantially completed all aspects of the capital plan, significant provisions of which included the following:
The carrying amount of cash and cash equivalents approximate fair value because of their short-term nature. The carrying values of long-term debt are considered to be carried on the financial statements at their estimated fair value because they were entered into recently and/or they are at variable interest rates, which generally fluctuate with interest rate trends. The fair values of investment securities (see Note 4) are estimated based on quoted market prices.
The Company and certain of its subsidiaries participate in two defined benefit pension plans, the Cobalt Corporation Pension Plan (the "Plan") and the UGS Pension Plan (the "UGS Plan"). Prior to the Combination, the Plan had been named the UWSI/BCBSUW Pension Plan, a multiple employer plan sponsored by BCBSUW and the former UWS. Coincident with the Combination and the aforementioned Plan name change, the Company assumed the assets and liabilities of the Plan and became the sole sponsor. The Plan and the UGS Plan utilize a measurement date of September 30 and December 31, respectively.
The Plan and the UGS Plan provide retirement benefits to covered employees based primarily on compensation and years of service. The Company contributed $6,392,000 and $3,514,000 to the UGS Plan in 2002 and 2001, respectively. No contributions were made to any of the plans in 2000.
The Company also has postretirement benefit plans to provide medical, dental, and vision benefits, and life insurance for certain groups of retired employees. Such plans were amended in 1997 to limit the Company's financial contribution in future periods. No benefits will be provided for individuals hired after the effective dates of these amendments.
The financial information below includes both the Plan and the UGS Plan.
The following table summarizes the change in the pension and postretirement benefit obligations:
The following table summarizes the change in the pension and postretirement plan assets:
The following table provides a reconciliation of the funded status of the plans to the prepaid pension and postretirement costs:
The unrecognized net asset was amortized over the remaining estimated service lives of participating employees at January 1, 1986: 15.4 years for salaried employees and 16.9 years for hourly employees. As of December 31, 2002, the asset has been fully amortized.
The Company sponsors defined contribution plans whereby the Company contributes a percentage of participants' qualifying compensation up to certain limits, as defined by the plans. The Company match is made in Cobalt Corporation common stock and cash. Participant directed contributions in Cobalt Corporation common stock are limited to 30% of the participants' contributions exclusive of the Company match. The Company also provides benefits under various other profit-sharing and bonus programs. Expenses related to such plans and programs totaled $17,937,000, $10,612,000, and $2,337,000 in 2002, 2001, and 2000, respectively.
Other information regarding nonqualified stock options outstanding and exercisable as of December 31, 2002 is as follows:
At December 31, 2001, 1,955,261 outstanding options were exercisable with a weighted average exercise price of $8.71 per share.
Selected quarterly financial data in 2002 and 2001 are as follows:
The purchase price consisted of a cash payment of $15,281,000 and 149,098 shares of common stock of AMSG, plus a possible earn-out of up to $3,000,000 based on CMSI's earnings over the next three years. Any payments made under the earn-out provision will be recorded as additional purchase price.