SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) March 23, 2001
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COBALT CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
WISCONSIN
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(State of Incorporation)
1-14177 39-1931212
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(Commission File Number) (IRS Employer Identification No.)
401 W. MICHIGAN STREET, MILWAUKEE, WI 53202
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(Address of Principal Executive Offices) (Zip Code)
(414) 226-6900
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(Registrant's Telephone Number, Including Area Code)
UNITED WISCONSIN SERVICES, INC.
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(Former Name or Former Address, if Changed Since Last Report)
ITEM 1: CHANGE IN CONTROL. On March 23, 2001, Wisconsin United for Health
Foundation, Inc. (the Foundation") became the owner of 31,313,390 shares of
Common stock of Cobalt Corporation ("Cobalt" or the "Registrant"), which
represents 77.5% of the outstanding common stock of the Registrant. The
Foundation acquired those shares of common stock pursuant to the Exchange
Agreement ("Exchange Agreement"), dated December 21, 2000 by and between the
Registrant, Wisconsin BC Holding LLC and Blue Cross & Blue Shield United of
Wisconsin, a copy of which was filed with Registrant's Current Report on 8-K
dated December 22, 2000. The transaction contemplated by the Exchange
Agreement closed on March 23, 2001.
Pursuant to the Exchange Agreement: On March 23, 2001, the Company
completed a restructuring (the "Combination") whereby:
1. Blue Cross & Blue Shield United of Wisconsin ("BCBSUW")
converted its form of ownership to a stock insurance
corporation;
2. BCBSUW issued all of its outstanding stock to Wisconsin BC
Holdings LLC ("BC Holdings"), a subsidiary of Wisconsin United
for Health Foundation, Inc. (the "Foundation");
3. BC Holdings exchanged all of the outstanding stock of BCBSUW
with the Company for 31,313,390 shares of newly issued common
stock, no par value, of the Registrant ("Common Stock");
4. BC Holdings contributed the 31,313,390 shares of Common Stock
to the Foundation; and
5. The Registrant changed its name to "Cobalt Corporation."
As a result, BCBSUW is now a wholly owned subsidiary of the Company,
and the Foundation now owns 31,313,390 shares of Common Stock, representing
approximately 77.5% of the outstanding Common Stock.
In connection with the Combination, Blue Cross Blue Shield Association
("Association") rules required the Foundation to deposit all of its shares of
Common Stock into a voting trust and to sell its shares within prescribed time
periods. Accordingly, Cobalt, the Foundation and Marshall & Isley Trust Company
have entered into a voting trust and divestiture agreement, which is summarized
below.
VOTING TRUST AND DIVESTITURE AGREEMENT
DEPOSIT OF SHARES. Pursuant to the agreement, the Foundation deposited
into a voting trust all of the shares of Cobalt it received in the Combination.
The terms of the voting trust significantly limit the Foundation's voting
rights, and the trustee of the voting trust will vote those shares in the
manner described below. In addition, the Foundation may dispose of those
shares only in a manner that would not violate the ownership requirements
contained in the Company's Amended and Restated Articles of Incorporation.
WITHDRAWAL OF SHARES. As described below, the Foundation must sell its
shares of Common Stock within prescribed periods of time. In order to sell these
shares, the Foundation will need to withdraw shares from the voting trust from
time to time. In order to ensure that the Foundation is selling shares in a
permitted manner, the Foundation may withdraw shares from the voting trust only
in order to sell such shares and then only if:
o the Company registers the shares in the name of the purchaser
before the Foundation withdraws them from the voting trust, so
that the Foundation may not keep ownership of those shares;
o the Foundation does not sell the shares to an affiliate of the
Foundation, so that the Foundation may not keep indirect
ownership of those shares;
2
o the Foundation does not sell the shares to a person or entity
that already owns shares of Common Stock in excess of the
ownership limits contained in Cobalt's Amended and Restated
Articles of Incorporation, so that the ownership limits are
not violated;
o the sale would not result in a person or entity owning shares of Cobalt in
excess of the ownership limits contained in Cobalt's Amended and Restated
Articles of Incorporation, so that the ownership limits are not violated;
and
o the voting trust and divestiture agreement, the registration rights
agreement and Cobalt's Amended and Restated Articles of Incorporation and
bylaws permit the sale.
VOTING OF SHARES HELD IN VOTING TRUST. In general, in order to maintain
Cobalt's independence from the Foundation, the trustee of the voting trust will
vote the shares of Common Stock owned by the Foundation as directed by the
directors of Cobalt, except that the Foundation will decide how to vote these
shares on a merger or similar business combination proposal which would result
in the then existing shareholders of Cobalt owning less than 50.1% of the
resulting company, or which would result in any person or entity who owned 50.1%
or less of Common Stock owning more than 50.1% of the voting securities of the
resulting entity. Specifically, the trustee of the voting trust will vote all of
the Foundation's shares of Cobalt in the voting trust in the following manner:
o If the matter is the election of directors of Cobalt, the trustee will vote
the shares in favor of each nominee whose nomination has been approved by
(i) a majority of the members of the Cobalt board of directors who were not
nominated at the initiative of the Foundation or of a person or entity
owning shares of Cobalt in excess of the ownership limits contained in
Cobalt's Amended and Restated Articles of Incorporation (such directors
being called "Independent Directors"), and (ii) a majority of the entire
Cobalt board of directors.
o The trustee will vote against the removal of any director of Cobalt, and
against any change to Cobalt's Amended and Restated Articles of
Incorporation or bylaws, unless (i) a majority of the Independent
Directors, and (ii) a majority of the entire Cobalt board of directors,
initiates or consents to such removal or amendment action.
o In the event that any candidates are eligible for election to the board of
directors who, if elected, would not qualify as Independent Directors, the
trustee will vote the Foundation's shares in the same proportion and for
the same candidates as voted for by the Cobalt shareholders; PROVIDED,
HOWEVER, that if director seats are eligible for public shareholder
representation, the trustee will be directed to vote its shares in the same
proportion and for the same candidates voted for by the other Cobalt
shareholders. This provision will expire at such time as the Foundation
owns less than 20% of the outstanding shares of Common Stock.
o The trustee will vote as directed by the board of directors of the
Foundation on any proposed business combination transaction that if
consummated would result in (1) the then existing Cobalt shareholders,
including the Foundation, owning less than 50.1% of the outstanding voting
securities of the resulting entity, or (2) any person or entity who, prior
to the proposed transaction, owned less than 50.1% of the outstanding
common stock of Cobalt owning 50.1% or more of the outstanding voting
securities of the resulting entity.
o The trustee will vote in accordance with the recommendation of the Cobalt
board of directors on any action requiring prior approval of the Cobalt
board of directors as a prerequisite to becoming effective.
In addition, unless a majority of the Independent Directors and a
majority of the entire Cobalt board of directors initiates or consents to such
action, neither the Foundation nor the trustee of the voting trust may:
o nominate any candidate to fill any vacancy on the Cobalt board of
directors;
3
o call any special meeting of Cobalt shareholders; or
o take any action that would be inconsistent with the voting requirements
contained in the voting trust and divestiture agreement.
STANDSTILL. As the largest shareholder of Cobalt, the Foundation would
ordinarily enjoy the benefits of control typically held by majority
shareholders. However, in order to maintain Cobalt's independence from the
Foundation, as required by the Association, the Foundation has agreed not to
take actions that a shareholder of a corporation ordinarily could take in its
capacity as a shareholder. Specifically, the voting trust and divestiture
agreement provides that the Foundation may not:
o individually, or as part of a group, acquire the right to vote or dispose
of any shares of Common Stock or options to purchase shares of Cobalt stock
other than those shares issued to it in the Combination, unless it receives
the shares in a stock split or other similar transaction;
o enter into any agreement with any person or entity to sell shares of
Cobalt, except in accordance with the voting trust and divestiture
agreement and the registration rights agreement;
o sell any of its shares of Common Stock to a person or entity if the person
or entity already owns, or would own as a result of the sale transaction
and any transactions related to the sale, Common Stock in excess of the
ownership limit for the person or entity included in Cobalt's Amended and
Restated Articles of Incorporation;
o make any shareholder proposal for submission at an annual meeting of
shareholders of Cobalt;
o nominate any candidate to the Cobalt board of directors; or
o appoint any individual to fill a vacancy on the Cobalt board of directors.
OBSERVATION RIGHTS. For so long as the Foundation beneficially owns at
least 20% of the outstanding shares of Common Stock, the Foundation, through an
authorized representative, will have a limited right to attend and observe all
meetings and executive sessions of the Cobalt board of directors. However, the
authorized representative of the Foundation will not observe any portion of a
meeting during which the board of directors addresses an item of business that
would pose a conflict of interest for the Foundation.
DIVESTITURE REQUIREMENTS. The Association requires its for-profit
licensees to have limitations on the ownership of their stock in order to
maintain independence from the control of any single shareholder or group of
shareholders. The Foundation's ownership of approximately 77.5% of the
outstanding shares of Common Stock entitled to vote would ordinarily exceed the
ownership limitations established by the Association. The Association has agreed
to waive the ownership limitations for the Foundation provided that the
Foundation satisfies a number of conditions, including selling the shares of
Common Stock that it owns in the manner and within the time periods described
below.
ONE-YEAR DIVESTITURE DEADLINE
The Foundation must sell shares of Cobalt so that it beneficially owns
less than 80% of the outstanding Common Stock within one year of the
Combination. Because the Foundation owns approximately 77.5% of Cobalt's
outstanding shares entitled to vote, it should not be necessary for any sales to
be effected during this period.
4
THREE-YEAR DIVESTITURE DEADLINE
In addition to meeting the one-year divestiture deadline, the
Foundation must sell shares of Common Stock so that it beneficially owns less
than 50% of the outstanding shares of Common Stock within three years of the
Combination. This three-year period is extended day for day, up to a maximum of
365 days, for each day that the Foundation does not require Cobalt to register
the Foundation's shares of Common Stock under a demand registration because
Cobalt had recently effected a registration of Common Stock.
FIVE-YEAR DIVESTITURE DEADLINE
In addition to meeting the one-year divestiture deadline and the
three-year divestiture deadline, the Foundation must sell shares of Common Stock
so that it beneficially owns less than 20% of the outstanding shares of Cobalt
within five years of the Combination. This five-year period is extended
day-by-day, up to a maximum of 730 days, for each day that the Foundation does
not require Cobalt to register the Foundation's shares of Common Stock under a
demand registration because Cobalt had recently effected a registration of
Common Stock.
EXTENSION OF DIVESTITURE DEADLINES
EXTENSION SOUGHT BY THE FOUNDATION. In the event that the Foundation
cannot meet the divestiture deadlines, it may be able to obtain an extension if
it receives Association approval. Specifically, Cobalt must extend the
divestiture deadlines if:
o the Foundation makes a good faith and reasonable determination that
compliance with the divestiture deadlines would have a material adverse
effect on the Foundation;
o the Foundation advises Cobalt of its determination and the reasons for the
determination and makes a reasonable request for an extension of the
pending divestiture deadline; and
o Cobalt receives written confirmation from the Association that the
Foundation's request for an extension of the divestiture deadline would not
cause a violation of the license agreement between Cobalt and the
Association.
EXTENSION SOUGHT BY COBALT. Similarly, Cobalt can extend the
divestiture deadline for the Foundation without a prior request by the
Foundation. Any such extension is subject to prior approval of the Association.
Specifically, Cobalt may extend the divestiture deadlines if Cobalt makes a good
faith determination that compliance with the divestiture deadlines would have a
material adverse effect on Cobalt or any of its shareholders, other than the
Foundation, and if Cobalt receives written confirmation from the Association
that the extension of the divestiture deadline requested by Cobalt would not
cause a violation of the license agreement between Cobalt and the Association.
FAILURE TO MEET DIVESTITURE DEADLINES
It is possible that the Foundation will not be able to meet the
divestiture deadlines. If the Foundation fails to meet a divestiture deadline,
Cobalt will arrange for the sale of those shares of Common Stock that the
agreement required the Foundation to sell and will pay the proceeds received in
the sale to the Foundation, after deducting the expenses incurred by Cobalt. The
sale of these shares would likely require registration with the Securities and
Exchange Commission. Registration is an expensive and time consuming process.
Thus, the sale of these shares may take considerable time to complete. The
Foundation will pay the expenses of the sale. Until sold, the trustee of the
voting trust will vote those shares of Cobalt as described in this document.
If the Foundation is the sole shareholder of Cobalt at a time when the
Foundation has failed to meet any divestiture deadline and when a change of
control has been proposed, then the shares which the Foundation should have sold
will be voted in favor of the proposed change of control.
5
DIVIDENDS. In the future, Cobalt may declare and pay dividends on the
outstanding shares of Common Stock. The Foundation will be entitled to receive
all cash dividends paid on the shares of Common Stock held in the voting trust,
after the trustee deducts its fees and expenses. Any stock dividends paid on the
shares of Common Stock held in the voting trust will be subject to the voting
trust as if originally deposited in the voting trust.
TRUSTEE COMPENSATION AND QUALIFICATIONS. Cobalt and the Foundation will
each pay one-half of the trustee's annual fee which the parties will agree upon
prior to the closing of the Combination.
At all times, the trustee must:
o be authorized to act as a trustee under Wisconsin law;
o not own more than 1% of Cobalt's outstanding stock other than the stock
held for the Foundation; and
o not have any director or officer that serves as a director or officer of
Cobalt.
TERMINATION OF VOTING TRUST AND DIVESTITURE AGREEMENT. The voting trust
and divestiture agreement will terminate once the trustee receives notice from
Cobalt and the Foundation that the Foundation beneficially owns less than 5% of
the outstanding shares of Common Stock. At that point, the restrictions and
deadlines in the voting trust and divestiture agreement will no longer apply,
and the Foundation will have satisfied the divestiture deadlines.
LITIGATION. In order to further ensure that Cobalt will remain
independent from the Foundation, the Foundation may not participate in
litigation against Cobalt that challenges the ownership limitations and other
provisions required by the Association for its for-profit licensees.
Specifically, the Foundation may not join as a party in any litigation that
alleges that:
o a party may not enforce any provisions of the voting trust and divestiture
agreement or Cobalt's Amended and Restated Articles of Incorporation or
bylaws in accordance with their terms;
o the Cobalt board of directors should not enforce any of the provisions of
Cobalt's Amended and Restated Articles of Incorporation or bylaws in any
particular case or circumstances; or
o the Cobalt board of directors should approve or abandon any proposal
concerning an extraordinary business combination involving Cobalt.
The Foundation may, however, participate in any litigation that alleges
that the Cobalt board of directors should solicit proposals from third parties
or initiate a bidding process for the acquisition of Cobalt.
ACQUISITION PROPOSALS. The voting trust and divestiture agreement
provides that the Foundation may not solicit or encourage inquiries or proposals
with respect to, or provide any confidential information to or have any
discussions, meetings, or communications with, a person relating to a merger,
tender offer, or other business combination, involving Cobalt. However, the
Foundation may:
o have discussions with the counter-party to a business combination
transaction after the Cobalt board of directors submits the transaction to
the Cobalt shareholders for approval; and
o have discussions with any person or entity concerning the sale of Common
Stock as permitted by the voting trust and divestiture agreement and the
registration rights agreement.
6
In addition, under the voting trust and divestiture agreement, for so
long as the Foundation beneficially owns at least 20% of the outstanding shares
of Common Stock, Cobalt must consult with the Foundation before soliciting, or
upon receiving, a business combination proposal in which the then existing
Cobalt shareholders including the Foundation will own less than a majority of
the outstanding shares of the resulting entity.
ITEM 2: ACQUISITION OF ASSETS. Pursuant to the Combination, the Registrant
became the owner of 100 percent of the issued and outstanding stock of BCBSUW.
The business, assets and operations of BCBSUW are detailed in the Registrant's
Registration Statement on Form S-4 dated January 31, 2001, Registration No.
333-52674, which is incorporated herein by reference.
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS.
---------------------------------
a. Financial Statements of Business Acquired
(i) Financial Statements of Blue Cross & Blue Shield
United of Wisconsin.
o Schedule IV - Reinsurance
o Schedule V - Valuation and Qualifying Accounts
(ii) Selected Financial Data for Blue Cross & Blue
Shield United of Wisconsin.
(iii) Management's Discussion and Analysis of Financial
Condition and results of Operations for Blue Cross
& Blue Shield United of Wisconsin.
b. Pro Forma Financial Information
(i) Unaudited Pro Forma Balance Sheet
(ii) Unaudited Pro Forma Statement of Operations.
c. Exhibits
2. Exchange Agreement dated December 21, 2001 by and
between Registrant Blue Cross & Blue Shield United
of Wisconsin and Wisconsin BC Holdings, Inc.,
(incorporated by reference from Registrant's
Current Report on Form 8-K dated December 22, 2000).
3.1 Amended and Restated Articles of Incorporation of
Cobalt Corporation.
3.2 Amended and Restated Bylaws of Cobalt Corporation.
99.1 Voting Trust and Divestiture Agreement dated
March 23, 2001 by and between Registrant, Wisconsin
United for Health Foundation, Inc., Wisconsin BC
Holding LLC and Marshall & Ilsley Trust Company.
99.2 Registration Rights Agreement dated March 23, 2001
by and between the Registrant and Wisconsin United
for Health Foundation, Inc.
7
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized
April 9, 2001 Cobalt Corporation
By: /s/ Gail L. Hanson
--------------------------------
Gail L. Hanson
Senior Vice President, Treasurer and
Chief Financial Officer
7a(i)
CONSOLIDATED FINANCIAL STATEMENTS
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
YEAR ENDED DECEMBER 31,
2000, 1999 AND 1998
Blue Cross & Blue Shield United of Wisconsin
Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
CONTENTS
Report of Independent Auditors ........................... 1
Consolidated Financial Statements
Consolidated Balance Sheets............................... 2
Consolidated Statements of Operations .................... 3
Consolidated Statements of Changes in Surplus
and Comprehensive Income (Loss) ..................... 4
Consolidated Statements of Cash Flows .................... 5
Notes to Consolidated Financial Statements ............... 6
Report of Independent Auditors
Board of Directors
Blue Cross & Blue Shield United of Wisconsin
We have audited the accompanying consolidated balance sheets of Blue
Cross & Blue Shield United of Wisconsin (the "Company") as of December 31, 2000
and 1999, and the related consolidated statements of operations, changes in
surplus 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 7. 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.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
Milwaukee, Wisconsin ERNST & YOUNG, LLP
February 23, 2001
1
Blue Cross & Blue Shield United of Wisconsin
Consolidated Balance Sheets
DECEMBER 31,
2000 1999
----------------------
(IN THOUSANDS)
Assets
Current assets:
Cash and cash equivalents (overdraft) $ 1,305 $ (5,054)
Investments--available-for-sale, at fair value 44,373 61,782
Due from affiliates 12,896 11,034
Premium receivables 3,325 2,817
Due from clinics and providers 7,063 6,453
Other receivables 15,930 12,766
Prepaid expenses and other current assets 18,385 17,784
----------------------
Total current assets 103,277 107,582
Investments--held-to-maturity, at amortized cost -- 655
Investments in affiliates 105,609 103,847
Property and equipment, net 25,139 23,597
Goodwill, net 8,020 7,629
Note receivable from affiliate 70,000 70,000
Prepaid pension 36,471 31,610
Deferred income taxes 19,067 20,122
Other noncurrent assets 14,425 16,358
----------------------
Total assets $ 382,008 $ 381,400
======================
Liabilities and surplus
Current liabilities:
Medical and other benefits payable $ 92,218 $ 65,772
Due to affiliates 910 660
Advance premiums 40,745 31,147
Payable and accrued expenses 29,597 24,529
Short-term debt -- 11,175
Other current liabilities 5,162 3,948
----------------------
Total current liabilities 168,632 137,231
Deferred income taxes 20,699 21,169
Post-retirement benefits other than pension 12,722 11,915
Other noncurrent liabilities 11,012 10,976
----------------------
Total liabilities 213,065 181,291
Surplus:
Unassigned surplus 170,907 206,315
Accumulated other comprehensive loss (1,964) (6,206)
----------------------
Total surplus 168,943 200,109
----------------------
Total liabilities and surplus $ 382,008 $ 381,400
======================
SEE ACCOMPANYING NOTES. 2
Blue Cross & Blue Shield United of Wisconsin
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31,
2000 1999 1998
-----------------------------------
(IN THOUSANDS)
Revenues:
Premium $ 538,080 $ 418,949 $ 361,965
Government contract fees 70,305 52,259 31,667
Investment results 9,583 18,510 13,501
Other 24,715 25,970 25,302
-----------------------------------
Total revenues 642,683 515,688 432,435
Expenses:
Medical and other benefits 497,822 376,814 297,885
Selling, general and administrative 176,878 158,187 133,153
Interest 300 553 115
Amortization of goodwill 622 191 --
-----------------------------------
Total expenses 675,622 535,745 431,153
-----------------------------------
Operating income (loss) (32,939) (20,057) 1,282
Equity in net income (loss) of affiliates, net of tax (6,526) (22,690) 3,991
-----------------------------------
Income (loss) before income taxes (39,465) (42,747) 5,273
Income tax expense (benefit) 548 -- (78)
-----------------------------------
Net income (loss) $ (40,013) $ (42,747) $ 5,351
===================================
SEE ACCOMPANYING NOTES. 3
Blue Cross & Blue Shield United of Wisconsin
Consolidated Statements of Changes in Surplus and Comprehensive Income (Loss)
Accumulated Other
Unassigned Comprehensive
Surplus Income (Loss) Total Surplus
--------------------------------------------
(IN THOUSANDS)
Balance at December 31, 1997 $ 240,631 $ 5,226 $ 245,857
Comprehensive income:
Net income 5,351 -- 5,351
Change in unrealized gains/losses on investments -- (318) (318)
-----------
Comprehensive income 5,033
Change in ownership of affiliates 101 -- 101
--------------------------------------------
Balance at December 31, 1998 246,083 4,908 250,991
Comprehensive loss:
Net loss (42,747) -- (42,747)
Change in unrealized gains/losses on investments -- (11,114) (11,114)
-----------
Comprehensive loss (53,861)
Change in ownership of affiliates 2,979 -- 2,979
--------------------------------------------
Balance at December 31, 1999 206,315 (6,206) 200,109
Comprehensive loss:
Net loss (40,013) -- (40,013)
Change in unrealized gains/losses on investments -- 4,242 4,242
-----------
Comprehensive loss (35,771)
Change in ownership of affiliates 4,605 -- 4,605
--------------------------------------------
Balance at December 31, 2000 $ 170,907 $ (1,964) $ 168,943
============================================
SEE ACCOMPANYING NOTES. 4
Blue Cross & Blue Shield United of Wisconsin
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31,
2000 1999 1998
---------------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) $(40,013) $ (42,747) $ 5,351
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 8,669 8,709 6,329
Premium deficiency reserve-Medicare Risk 3,617 - -
Write-off of deferred acquisition costs-Medicare Risk 2,434 - -
Impairment of data warehouse software asset - 2,398 -
Equity in (income) loss of affiliates 6,526 22,690 (3,991)
Realized investment (gains) losses 509 (8,014) (1,615)
Deferred income taxes 548 - -
Changes in other operating accounts:
Other receivables (4,729) (495) (16,504)
Medical and other benefits payable 22,829 (7,804) 18,845
Advance premiums 9,598 5,244 2,339
Due to/from affiliates, net (1,612) (5,643) (3,698)
Other, net (76) (8,686) (2,056)
---------------------------------------------
Net cash provided by (used in) operating activities 8,300 (34,348) 5,000
INVESTING ACTIVITIES
Acquisition of business (1,013) - -
Acquisition of shares of affiliate - (12,214) -
Purchases of available-for-sale investments (8,553) (73,537) (95,540)
Proceeds from sale and maturity of available-for-sale
investments 26,261 125,624 90,897
Proceeds from maturity of held-to-maturity investments 655 5 5
Dividend from affiliate - - 757
Additions to property and equipment, net (8,116) (3,488) (5,967)
---------------------------------------------
Net cash provided by (used in) investing activities 9,234 36,390 (9,848)
FINANCING ACTIVITIES
Net (repayment) borrowings on short-term debt (11,175) (2,440) 2,515
---------------------------------------------
Net cash provided by (used in) financing activities (11,175) (2,440) 2,515
---------------------------------------------
Cash and cash equivalents (overdraft):
Increase (decrease) during year 6,359 (398) (2,333)
Balance at beginning of year (5,054) (4,656) (2,323)
---------------------------------------------
Balance at end of year $ 1,305 $ (5,054) $ (4,656)
=============================================
SEE ACCOMPANYING NOTES. 5
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") offers
traditional indemnity and other managed health care products and services to
groups and individuals in Wisconsin and administers health insurance programs
for numerous organizations on an uninsured basis. United Government Services,
LLC ("UGS"), which processes Medicare claims from providers in all 50 states and
Medicaid for the State of Wisconsin, is a wholly-owned subsidiary of BCBSUW.
Effective January 1, 1999, the United Government Services division was
reorganized as a wholly-owned licensed affiliate of the Company named UGS. The
reorganization had no impact on BCBSUW operations or surplus.
PENDING TRANSACTION
BCBSUW's Board of Directors announced in June of 1999 its intention to
convert the Company from a service insurance corporation to a stockholder owned
corporation. On March 28, 2000 the Office of the Commissioner of Insurance of
the State of Wisconsin ("OCI") issued an order that allows BCBSUW to convert to
a stock form of ownership by completing a combination with United Wisconsin
Services, Inc. ("UWS").
In the fourth quarter of 2000, UWS announced that it had executed a
definitive agreement to combine with BCBSUW. Under the agreement, BCBSUW will
become a wholly-owned subsidiary of UWS, 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.
On February 23, 2001, the shareholders of UWS approved the combination
with the Company. The combination is also subject to approval by the OCI and
other regulatory approvals.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of BCBSUW
and its wholly-owned subsidiary, UGS (collectively, the "Company"). All
intercompany balances have been eliminated in consolidation.
Investments in affiliates in which the Company does not have control,
but has the ability to exercise significant influence over operating and
financial policies (generally 20-50% ownership), are accounted for by the equity
method. Investments in UWS and American Medical Security Group, Inc. ("AMSG")
are accounted for on the equity method.
Benefits paid and the liability for incurred but not reported claims on
uninsured business are not included in these financial statements.
CASH AND CASH EQUIVALENTS (OVERDRAFT)
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.
6
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
Investments are classified as either held-to-maturity or
available-for-sale. Investments that 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
Premium receivables are stated at net realizable value, net of
allowances for uncollectible amounts of $227,000 and $147,000 at December 31,
2000 and 1999, respectively, based upon historical collection trends and
management's best estimate of the ultimate collectibility.
DUE FROM CLINICS AND PROVIDERS
Amounts due from clinics and providers are stated at net realizable
value, net of allowances for uncollectible amounts of $846,000 and $1,220,000 at
December 31, 2000 and 1999, respectively, based upon management's best estimate
of the ultimate collectibility.
OTHER RECEIVABLES
Other receivables are stated at net realizable value, net of allowances
for uncollectible amounts of $4,061,000 and $4,248,000 at December 31, 2000 and
1999, respectively, based upon management's best estimate of the ultimate
collectibility.
PROPERTY AND EQUIPMENT
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
Goodwill represents the excess of cost over the fair value for
additional shares of UWS stock purchased during 1999 and business acquired in
2000. Goodwill is being amortized on a straight-line basis over a weighted
average period of approximately 14 years. Accumulated amortization was $813,000
and $191,000 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.
7
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED ACQUISITION COSTS
Certain costs of acquiring new insured insurance policies have been
deferred. Deferred acquisition costs of $6,930,000 and $8,929,000 at December
31, 2000 and 1999, respectively, are included in other noncurrent assets and are
being amortized over the estimated premium-paying periods of the related
policies. Acquisition costs of $2,661,000, $2,946,000 and $2,892,000 were
capitalized in 2000, 1999 and 1998, respectively. Deferred acquisition costs of
$2,289,000, $2,092,000, and $1,619,000 were amortized during 2000, 1999 and
1998, respectively.
In addition to the amortization above, the Company wrote-off $2,371,000
of deferred acquisition costs associated with the Medicare Risk line-of-business
during 2000.
MEDICAL AND OTHER BENEFITS
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. In addition to actual benefits paid, medical and
other benefits expense includes the change in estimates of reported and
unreported claims, which are unpaid as of the balance sheet date. The estimates
of reported and unreported claims, which are unpaid as of the balance sheet
date, are based on historical payment patterns using standard actuarial
techniques. Processing costs are accrued as operating expenses based on an
estimate of the costs necessary to process these claims.
The Company's year-end claim liabilities are substantially satisfied
through claim payments in the subsequent year. Any adjustments to prior period
estimates are reflected in the current period.
PREMIUM DEFICIENCY RESERVES
Premium deficiency reserves 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. The Company calculates expected
premium deficiency reserves based on budgeted revenues and expenses excluding
investment income. Premium deficiency reserves are evaluated quarterly for
adequacy.
As a result of management's assessment of the profitability of its
Medicare Risk line of business, the Company recorded a provision for probable
future losses (premium deficiency) during 2000. At December 31, 2000, $3,617,000
is included in medical and other benefits payable as a premium deficiency
reserve. The provision for probable future losses was calculated based on a
comparison of anticipated premiums to health care related costs, including
estimated payments for providers, commissions and the cost of collecting
premiums and processing claims. Inadequate compensation from the Health Care
Financing Administration and increased medical benefits contributed to the
requirement for a provision for future losses.
REVENUE RECOGNITION
Health services premiums and managed behavioral health fees are
recognized as revenue in the period in which enrollees are entitled to care.
8
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As a fiscal intermediary for Medicare, the Company is reimbursed for
administrative costs incurred in providing this service. In addition, the
Company also administers various uninsured programs sponsored by the federal and
state government (including State of Wisconsin Medicaid as a subcontractor) and
private corporations, for which the Company receives administrative fees. These
revenues are recognized as the services performed are completed.
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. The amount of premium that was subject
to retrospective premium adjustments in 2000, 1999 and 1998, was $16,441,000,
$35,179,000 and $29,076,000, respectively.
REINSURANCE
The Company has certain reinsurance agreements that provide increased
capacity to write larger risks and maintain its exposure to loss within its
capital resources. The Company is contingently liable on reinsurance ceded in
the event that the reinsurers do not meet their contractual obligations.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
statement purposes and the amounts used for income tax purposes. A valuation
allowance is recorded on deferred tax assets that management believes, more
likely than not, will not be realized.
UNINSURED BUSINESS
Administrative expenses include costs associated with maintenance of
membership records, claim processing and payment, coordination of benefits,
billing/cash collection and other services. The Company is reimbursed for claims
paid and a fee is received for the administrative costs associated with
providing these services. Benefits paid on uninsured programs (excluding
Medicare) were $522,566,000, $527,987,000 and $450,616,000 in 2000, 1999 and
1998, respectively. Administrative fees received related to these programs
totaled $32,307,000, $32,739,000 and $30,067,000 in 2000, 1999 and 1998,
respectively, and are included in government contract fees and other revenue in
the accompanying consolidated statements of operations.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for 1999 and 1998 to conform with the 2000 presentation.
9
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
2. MEDICARE CONTRACTS
The Company, through UGS, serves as a fiscal intermediary for Medicare.
Claims processed and administrative fees received related to these services were
as follows:
YEAR ENDED DECEMBER 31
2000 1999 1998
---------------------------------------------
(IN THOUSANDS)
Number of claims processed 19,340 14,890 8,740
Amount of claims paid $10,409,112 $7,432,701 $3,657,457
Administrative fees received $62,713 $45,490 $26,902
As a fiscal intermediary for various government programs, the Company
is subject to regulations covering allowable cost reimbursements and operating
procedures. The laws and regulations governing fiscal intermediaries are complex
and subject to interpretation. The Company believes that it is in compliance
with all applicable laws and regulations and is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing. While
no such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation, as
well as significant regulatory actions including fines, penalties and exclusion
from being a government contractor for these programs.
3. INVESTMENTS
Investment results comprise the following:
YEAR ENDED DECEMBER 31,
2000 1999 1998
-------------------------------------
(IN THOUSANDS)
Interest on fixed maturities $ 2,729 $ 4,171 $ 5,318
Dividends on equity securities 775 697 721
Realized gains 638 10,393 5,874
Realized losses (1,147) (2,379) (4,259)
-------------------------------------
Gross investment results 2,995 12,882 7,654
Investment expenses (229) (245) (525)
Interest income from affiliates 5,494 4,804 1,411
Other investment income 1,323 1,069 4,961
-------------------------------------
$ 9,583 $18,510 $13,501
=====================================
Proceeds from sales of equity securities during 2000, 1999 and 1998
were $6,134,000, $43,096,000 and $41,990,000, respectively. Proceeds from sales
of fixed maturities classified as available-for-sale during 2000, 1999 and 1998,
excluding maturities, were $19,652,000, $82,529,000 and $48,907,000,
respectively.
10
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
3. INVESTMENTS (CONTINUED)
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:
YEAR ENDED DECEMBER 31,
2000 1999 1998
------------------------------------------
(IN THOUSANDS)
Fixed maturities $1,577 $ (3,392) $ (127)
Equity securities (716) (3,990) 1,806
Provision for deferred income (tax) benefit (302) 2,878 (658)
Unrealized gain (losses) of affiliates, net of tax 3,683 (6,610) (1,339)
------------------------------------------
$4,242 $(11,114) $ (318)
==========================================
The amortized cost and estimated fair values of investments are as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------------------------------------------
(IN THOUSANDS)
At December 31, 2000:
Available-for-sale:
U.S. Treasury securities $ 5,188 $ 105 $ -- $ 5,293
Foreign government securities 2,655 9 (25) 2,639
Corporate debt securities 11,321 84 (395) 11,010
Government agency mortgage-backed
securities 10,788 230 (2) 11,016
Equity securities 14,266 179 (30) 14,415
---------------------------------------------
$ 44,218 $ 607 $ (452) $ 44,373
=============================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------------------------------------------
(IN THOUSANDS)
At December 31, 1999:
Available-for-sale:
U.S. Treasury securities $ 3,350 $ -- $ (154) $ 3,196
Foreign government securities 3,278 1 (180) 3,099
Corporate debt securities 22,462 39 (1,155) 21,346
Government agency mortgage-backed
securities 14,398 17 (139) 14,276
Equity securities 19,000 1,150 (285) 19,865
---------------------------------------------
62,488 1,207 (1,913) 61,782
Held-to-maturity:
Corporate securities 655 -- (3) 652
---------------------------------------------
$ 63,143 $ 1,207 $ (1,916) $ 62,434
=============================================
11
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair values of debt securities at
December 31, 2000, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations.
AMORTIZED ESTIMATED
COST FAIR VALUES
--------------------------------
(IN THOUSANDS)
Available-for-sale:
Due in one year or less $ - $ -
Due after one through five years 7,816 7,750
Due after five through ten years 6,086 6,133
Due after ten years 5,262 5,059
--------------------------------
19,164 18,942
Government agency mortgage-backed securities 10,788 11,016
--------------------------------
$29,952 $29,958
================================
The Company participates in securities lending programs whereby blocks
of securities, which are returnable to the Company on short-term notice and
included in investments, are loaned to third parties, primarily major brokerage
firms. The Company requires a minimum of 102% of the fair value of the loaned
securities to be separately maintained as collateral for the loans. Securities
with a cost or amortized cost of $3,782,000 and $3,593,000 and estimated fair
value of $3,866,000 and $3,479,000 were on loan under the program at December
31, 2000 and 1999, respectively.
4. INVESTMENTS IN AFFILIATES
Investments in affiliates for 2000 and 1999 consist of the equity
investment in UWS, a leading provider of managed health care services and
employee benefit products, and AMSG, a leading provider of small group PPO
products and life products.
The Company owned approximately 47% and 46% of total UWS shares
outstanding and 44% and 41% of total AMSG shares outstanding at December 31,
2000 and 1999, respectively. The Company's recorded investment in UWS was
$7,821,000 and $14,364,000 at December 31, 2000 and 1999, respectively. The
Company's recorded investment in AMSG was $97,788,000 and $89,483,000 at
December 31, 2000 and 1999, respectively.
12
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
4. INVESTMENTS IN AFFILIATES (CONTINUED)
Summarized financial information for UWS is as follows:
Condensed Consolidated Balance Sheets
DECEMBER 31,
2000 1999
---------------------------
(IN THOUSANDS)
Current assets $266,955 $237,988
Noncurrent assets 98,871 59,166
---------------------------
Total assets $365,826 $297,154
===========================
Current liabilities $230,720 $160,720
Noncurrent liabilities 118,333 105,402
Shareholders' equity 16,773 31,032
---------------------------
Total liabilities and shareholders' equity $365,826 $297,154
===========================
Condensed Consolidated Statements of Operations
YEAR ENDED DECEMBER 31,
2000 1999 1998
----------------------------------------------
(IN THOUSANDS)
Revenues:
Health services revenues:
Premium revenue $760,624 $651,567 $608,917
Other revenue 45,496 41,586 29,728
Investment results 8,254 11,371 19,029
----------------------------------------------
Total revenues 814,374 704,524 657,674
----------------------------------------------
Expenses:
Medical and other benefits 700,094 621,916 519,636
Selling, general and administrative 133,020 127,404 103,517
Profit (loss) sharing on provider arrangements 460 (4,096) 2,762
Interest 6,500 5,293 1,464
Amortization of goodwill 1,065 796 450
----------------------------------------------
Total expenses 841,139 751,313 627,829
----------------------------------------------
Operating income (loss) (26,765) (46,789) 29,845
Equity in net loss of affiliate (312) - -
----------------------------------------------
Income (loss) before income taxes (27,077) (46,789) 29,845
Income tax expense (benefit) (10,649) (17,785) 11,767
----------------------------------------------
Net income (loss) $(16,428) $(29,004) $ 18,078
==============================================
UWS is a party to certain provider arrangements that include repurchase
provisions related to UWS' ownership of Unity Health Plans Insurance Corporation
and Valley Health Plan, Inc., wholly-owned health maintenance organization
subsidiaries of UWS.
13
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
4. INVESTMENTS IN AFFILIATES (CONTINUED)
Total UWS revenues subject to repurchase options totaled $239,306,000,
$220,235,000 and $207,014,000 in 2000, 1999 and 1998, respectively. Total net
income (loss) subject to repurchase options totaled $(3,156,000), $(1,071,000)
and $2,358,000 in 2000, 1999 and 1998, respectively. Total assets and total net
assets subject to repurchase options were $52,182,000 and $18,068,000,
respectively, at December 31, 2000 and $39,409,000 and $16,970,000,
respectively, at December 31, 1999.
UWS has an agreement with United Wisconsin Life Insurance Company
("UWLIC"), a wholly-owned subsidiary of AMSG, whereby United Wisconsin Insurance
Company ("UWIC"), a wholly-owned subsidiary of UWS, 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. UWIC 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.
UWS has an agreement with UWLIC whereby UWLIC underwrites certain life
and accidental death and dismemberment products on behalf of United Heartland
Life Insurance Company ("UHLIC"), a wholly-owned subsidiary of UWS. UWS also had
agreements with UWLIC, through September 30, 1998, whereby UWLIC underwrote
certain health care and dental products on behalf of Compcare, Heartland Dental
Plan, Inc., and Innovative Resource Group, Inc., all wholly-owned subsidiaries
of UWS. UWS assumes 100% of the premium revenues on these products from UWLIC.
The assumed premium revenue approximated $18,287,000, $18,182,000 and
$23,295,000 in 2000, 1999 and 1998, respectively.
At December 31, 2000, the aggregate fair value quoted on the New York
Stock Exchange ("NYSE") of the Company's shares of UWS stock was $26,831,000.
During 2000, the Company received a $0.05 per share dividend from UWS
totaling $392,000, which was reinvested in UWS' stock resulting in BCBSUW
obtaining 109,088 additional UWS shares. The Company's equity in UWS' net income
(loss) was $(7,604,000), $(12,711,000) and $6,825,000 in 2000, 1999 and 1998,
respectively.
Summarized financial information for AMSG is as follows:
DECEMBER 31,
Condensed Balance Sheets 2000 1999
---------------------------
(IN THOUSANDS)
---------------------------
Total assets $471,923 $503,094
===========================
Total liabilities $250,746 $282,814
Shareholders' equity 221,177 220,280
---------------------------
Total liabilities and shareholders' equity $471,923 $503,094
===========================
14
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
4. INVESTMENTS IN AFFILIATES (CONTINUED)
Condensed Statements of Operations
YEAR ENDED DECEMBER 31,
2000 1999 1998
--------------------------------------------
(IN THOUSANDS)
Health services revenues:
Premium revenue $951,071 $1,056,107 $914,017
Other revenue 20,112 22,361 22,632
Investment results 18,682 18,912 24,220
--------------------------------------------
Total revenues 989,865 1,097,380 960,869
Expenses:
Medical and other benefits 724,613 860,473 691,767
Selling, general and administrative 251,767 268,059 242,073
Interest 3,584 3,564 7,691
Amortization of goodwill 3,785 4,273 8,781
Write-off of intangible assets and related charges - - 15,453
--------------------------------------------
Total expenses 983,749 1,136,369 965,765
Income (loss) from continuing operations before income tax 6,116 (38,989) (4,896)
Income tax expense (benefit) 3,447 (13,043) (1,868)
--------------------------------------------
Income (loss) from continuing operations 2,669 (25,946) (3,028)
Income from discontinued operations, net of tax - - 10,003
--------------------------------------------
Net income (loss) $ 2,669 $ (25,946) $ 6,975
============================================
Income from discontinued operations reflects the operating results
related to AMSG's 1998 spin-off of UWS for the period January 1, 1998 through
September 25, 1998, the distribution date of the spin-off.
AMSG acquired a sales distribution system in 1996 in conjunction with
the purchase of its small group business. Subsequently AMSG has largely
eliminated its commission-based sales distribution system, replacing it with
salaried sales offices. This resulted in an after-tax charge to 1998 operations
of $9,251,000, including $7,683,000 of intangible distribution system assets and
$1,568,000 of related costs.
AMSG repurchased 1,261,870 and 1,121,500 shares of common stock, at
cost, aggregating $8,292,000 and $7,488,000 in 2000 and 1999, respectively. The
impact of this repurchase on the Company's investment in the net assets of
affiliates is reported on the change in ownership of affiliates line of the
Consolidated Statements of Changes in Surplus and Comprehensive Income (Loss).
AMSG's repurchase of common stock shares increased the Company's ownership in
AMSG by approximately 3%.
At December 31, 2000, the aggregate fair value quoted on the NYSE of
the Company's shares of AMSG stock was $37,857,000. The Company's equity in
AMSG's net income (loss) was $1,078,000, $(9,979,000) and $(2,834,000) in 2000,
1999 and 1998, respectively.
The accounting policies of UWS and AMSG are consistent with those of
the Company.
15
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
5. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as
follows:
DECEMBER 31,
2000 1999
-----------------------------
(IN THOUSANDS)
Land and land improvements $ 909 $ 909
Building and building improvements 7,056 6,721
Computer equipment and software 33,552 32,190
Internet development costs 250 -
Furniture and other equipment 19,309 17,488
-----------------------------
61,706 57,308
Less accumulated depreciation (35,937) (33,711)
-----------------------------
$ 25,139 $ 23,597
=============================
Depreciation expense related to property and equipment totaled
$6,278,000, $6,791,000 and $4,820,000 in 2000, 1999 and 1998, respectively.
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. During 1999, the Company recorded a non-cash pre-tax charge of
$2,398,000 to reduce the carrying amount of certain computer software costs.
This charge is included in selling, general and administrative expense in the
accompanying consolidated statements of operations and is allocated between the
insured and self-funded segments. These costs were associated with data
warehouse functions that had been written off by the Company.
6. MEDICAL AND OTHER BENEFITS PAYABLE
A summary of the activity for medical and other benefits payable for
2000 and 1999 is as follows:
2000 1999
---------------------------
(IN THOUSANDS)
Medical and other benefits payable at beginning of year $ 65,772 $73,576
Incurred related to:
Current year 505,597 375,750
Prior years (7,775) 1,064
---------------------------
Total incurred 497,822 376,814
Paid related to:
Current year 414,305 312,196
Prior years 57,071 72,422
---------------------------
Total paid 471,376 384,618
---------------------------
Medical and other benefits payable at end of year $ 92,218 $65,772
===========================
The Company uses paid claims and completion factors based on historical
payment patterns to estimate incurred claims. Changes in payment patterns and
claims trends can result in changes to prior years' claims estimates.
16
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
7. DEBT
The Company has a bank line-of-credit with UWS, which permits aggregate
borrowings to $20,000,000. The line-of-credit is with a commercial bank, and has
an adjustable rate with interest payments due quarterly. The Company pledged
5,000,000 shares of AMSG common stock as collateral for this line-of-credit. The
Company had no outstanding line-of-credit balance as of December 31, 2000. The
outstanding line-of-credit balance as of December 31, 1999 was $11,175,000. The
interest expense on the line-of-credit was $300,000, $553,000 and $115,000 in
2000, 1999 and 1998, respectively. The 2000 weighted average interest rate on
the line-of-credit was 8.1%.
8. RELATED-PARTY TRANSACTIONS
As of September 11, 1998, UWS assumed a $70,000,000 note obligation to
the Company in connection with the spin-off in 1998 of AMSG's managed care
companies and specialty business. The spin-off involved the creation of a new
corporation that subsequently became UWS. UWS pledged the common stock of
certain subsidiaries as collateral for the note obligation. Interest is payable
quarterly at a rate equal to the London Interbank Offered Rate plus 1.25%,
adjusted quarterly; 8.06% as of December 31, 2000. On October 13, 1999, the
maturity date of the principal balance was extended from October 30, 1999 to
April 30, 2001. Management has been authorized by the board of directors to
renegotiate the note. The Company and UWS intend to extend the maturity date
beyond December 31, 2001, pending approval of the OCI. As a result, this note
receivable has been classified as noncurrent in the accompanying December 31,
2000 balance sheet. Interest income received totaled $5,494,000, $4,804,000 and
$1,411,000 in 2000, 1999 and 1998, respectively.
UWS provides marketing, underwriting, actuarial and certain
administrative services to the Company. In addition, the Company provides office
space and certain other administrative services to UWS. These activities are
reimbursed at amounts approximating cost, which resulted in allocations to UWS
of $11,610,000, $11,659,000 and $8,964,000 in 2000, 1999 and 1998, respectively,
and allocations to the Company 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 UWS provide services to the Company, at market
rates, covering hospital bill audits, investigation recovery services,
electronic claims clearing and case management services. The cost of these
services to the Company was $2,761,000, $2,257,000 and $713,000 in 2000, 1999
and 1998, respectively.
The Company provides health insurance to certain of UWS' employees.
Premium revenue received from UWS for these services totaled $3,681,000,
$2,653,000 and $2,005,000 in 2000, 1999 and 1998, respectively. In addition,
certain subsidiaries of UWS provide health, life and other insurance benefits to
the employees of the Company. Premium revenue paid by the Company totaled
$5,435,000, $4,921,000 and $4,547,000 in 2000, 1999 and 1998, respectively.
The Company has an agreement with United Wisconsin Insurance Company
("UWIC"), a wholly-owned subsidiary of UWS, whereby UWIC underwrites certain
insured products. The Company assumes 100% of the premium revenue of these
products from UWIC. The assumed premium revenue was $3,497,000, $1,843,000 and
$6,122,000 in 2000, 1999 and 1998, respectively.
17
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
8. RELATED-PARTY TRANSACTIONS (CONTINUED)
Amounts due from/to affiliates, except the $70,000,000 note obligation
due from UWS, are related primarily to operating expenses and reinsurance
arrangements. Such amounts due from/to affiliates are generally settled on a
monthly basis for operating expenses and are settled in accordance with industry
practice for reinsurance agreements.
Management believes the above stated related-party activities were
entered into on a reasonable basis and include all costs of doing business.
Certain members of the board of directors of the Company are also on
the boards of directors of UWS and AMSG.
9. INCOME TAXES
The Company files separate federal and state income tax returns. The
income tax returns include UGS, which is a disregarded entity for tax purposes.
The Company had net federal income tax receivables of $11,576,000 and
$11,776,000 at December 31, 2000 and 1999, respectively, included in prepaid
expenses and other current assets. The Company has federal net operating loss
("NOL") carryforwards totaling $96,708,000 which expire in the years 2011
through 2020, and alternative minimum tax ("AMT") NOL carryforwards totaling
$78,598,000. The Company has state net business loss carryforwards totaling
$157,691,000 at December 31, 2000, which expire in the years 2001 through 2020.
The Company had federal and state income tax refunds, net of payments of
$194,000, $280,000 in 2000 and 1999, respectively and payments, net of refunds
of $7,809,000 in 1998.
The components of federal income tax expense (benefit) are as follows:
YEAR ENDED DECEMBER 31,
2000 1999 1998
------------------------------
(IN THOUSANDS)
Current $ - $ - $(78)
Deferred 548 - -
------------------------------
Total $548 $ - $(78)
==============================
18
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
9. INCOME TAXES (CONTINUED)
The differences between taxes computed at the federal statutory rate
and recorded income taxes are as follows:
YEAR ENDED DECEMBER 31,
2000 1999 1998
----------------------------------------
(IN THOUSANDS)
Net operating income (loss) before equity of affiliates:
Tax at federal statutory rate $(11,529) $(7,020) $ 449
Valuation allowance 14,877 18,608 (1,752)
State income and franchise taxes, net of federal benefit (2,602) (1,585) 101
Prior period adjustment - (8,600) -
Other, net (198) (1,403) 1,124
----------------------------------------
$ 548 $ - $ (78)
========================================
Significant components of the Company's federal and state deferred tax
liabilities and assets are as follows:
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------------------------------------------------
FEDERAL STATE FEDERAL STATE
----------------------------------------------------------
(IN THOUSANDS)
Deferred tax liabilities:
Depreciation $ - $ - $ (327) $ (74)
Claims-based receivables (700) (158) (529) (119)
Pension accrual (12,937) (2,920) (11,148) (2,516)
Deferred acquisition costs (2,425) (547) (3,091) (698)
Interest expense (1,555) (351) (1,555) (351)
Federal effect of state taxes - - (2,993) -
Other, net (308) (70) - -
----------------------------------------------------------
(17,925) (4,046) (19,643) (3,758)
Deferred tax assets:
Depreciation 264 60 - -
Postretirement benefits other than pensions 4,453 1,005 3,215 726
Deferred gain on sale of building 1,005 227 1,187 268
Deferred compensation 4,213 951 2,849 643
Medical and other benefits payable
Discounting 1,691 382 1,723 389
Net operating loss carryforwards 33,848 12,458 25,314 12,850
Bad debt reserve allowance 1,797 406 1,859 420
Premium deficiency reserve 1,266 285 - -
AMT credit 2,963 - 2,963 -
Other, net 1,108 250 1,330 299
Valuation allowance (34,717) (11,985) (20,036) (11,789)
----------------------------------------------------------
17,891 4,039 20,404 3,806
----------------------------------------------------------
Net deferred tax assets (liabilities) $ (34) $ (7) $ 761 $ 48
==========================================================
The federal deferred benefit arising from the deductibility of state
deferred tax is included as a component of other federal deferred taxes. The net
deferred tax assets and liabilities that are not reported separately in the
balance sheet are included in other current assets or other current and
noncurrent liabilities, as applicable.
19
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
10. COMMITMENTS AND CONTINGENCIES
LONG-TERM CONTRACT
On October 1, 1998, the Company entered into an agreement with a
service bureau to obtain certain electronic data processing services for the
Company and an affiliate. The agreement has a term of five years, with options
to extend for two additional one-year renewal periods. Expenses to this service
bureau were $14,986,000, $13,945,000 and $6,931,000 in 2000, 1999 and 1998,
respectively.
OPERATING LEASES
The Company has operating leases for office space, EDP equipment,
automobiles, software and terminal lines. Future minimum lease payments under
noncancelable operating leases with initial or remaining lease terms in excess
of one year at December 31, 2000 were $34,757,000 in total. Individually, the
lease payments are $7,202,000, $7,004,000, $6,879,000, $6,191,000, $4,434,000
and $3,047,000 in 2001, 2002, 2003, 2004, 2005 and thereafter, respectively.
Rental expense totaled $9,538,000, $13,404,000 and $10,855,000 in 2000, 1999 and
1998, respectively.
EXTENSION OF CREDIT
The Company has an outstanding line-of-credit in the amount of
$15,000,000 available to Health Professionals of Wisconsin, Inc. The outstanding
balance as of December 31, 2000, which originated in 1997, was $4,628,000.
LITIGATION
The Company and its affiliates are involved in various legal actions
occurring in the normal course of business. In the opinion of management,
adequate provision has been made for losses which may result from these actions
and, accordingly, the outcome of these proceedings is not expected to have a
material adverse effect on the consolidated financial statements.
11. STATUTORY FINANCIAL INFORMATION
Insurance companies are subject to regulation by the OCI 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.
Such accounting practices differ from GAAP. The most significant of these
differences is the requirement that the Company's investments in UWS and AMSG be
valued at statutory book value. Total surplus as reported on a statutory basis
at December 31, 2000 and 1999 was $104,356,000 and $142,424,000, respectively.
Results of operations as reported on a statutory basis were net income (loss) of
$(28,223,000), $(22,226,000) and $1,843,000 in 2000, 1999 and 1998,
respectively.
20
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
11. STATUTORY FINANCIAL INFORMATION (CONTINUED)
During 1998, the National Association of Insurance Commissioners
("NAIC") adopted Codification of Statutory Accounting Principles
("Codification") which provide 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 to
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 the Company. Depending on the final resolution of pending amendments
to Codification and collection of provider receivables, the Company 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 and regulatory requirements.
State insurance regulations also require the maintenance of a minimum
compulsory surplus based on a percentage of premiums written. As of December 31,
2000, statutory compulsory excess surplus and regulatory minimum compulsory
surplus, calculated as permitted by the OCI, were $28,616,000 and $55,095,000,
respectively. In addition, the Company's insurance subsidiaries are subject to
risk-based capital ("RBC") requirements promulgated by the NAIC. The RBC
requirements establish minimum levels of capital and surplus based upon the
insurer's operations. At December 31, 2000, the Company was in compliance with
these capital surplus requirements. In addition, the Company is required to
maintain certain capital and liquidity levels in conjunction with the licensing
of certain products by the Blue Cross Association ("BCA"). While exceeding the
minimum standards to maintain its license, the Company is subject to ongoing
monitoring by the BCA.
12. EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFITS
The Company and UWS participate in a multiple employer defined benefit
pension plan (the "BCBSUW Plan"). Coincident with the reorganization of UGS, a
portion of the Plan's assets and liabilities were spun-off to a new UGS Pension
Plan (the "UGS Plan"). Beginning January 1, 1999, the UGS Plan provided
retirement benefits for current UGS employees and past retirees, including
benefits accrued prior to 1999, on the same basis as had been provided under the
BCBSUW Plan. The BCBSUW and UGS Plans provide retirement benefits to covered
employees based primarily on compensation and years of service. No contributions
were made in 2000, 1999 or 1998.
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.
21
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes the change in the pension and
postretirement benefit obligations as of December 31, 2000 and 1999:
PENSION POSTRETIREMENT
----------------------- -----------------------
2000 1999 2000 1999
----------------------- -----------------------
(IN THOUSANDS)
Benefit obligation at beginning of year $76,770 $76,822 $13,176 $10,928
Service cost 2,393 1,988 284 206
Interest cost 5,129 5,175 890 737
Plan amendments - - 1,400 1,003
Actuarial (gains) losses 4,752 (3,508) (509) 1,338
Company transfers (821) 890 - -
Benefits paid (5,872) (4,597) (923) (1,036)
----------------------- -----------------------
Benefit obligation at end of year $82,351 $76,770 $14,318 $13,176
======================= =======================
The pension and postretirement plans' assets are comprised primarily of
debt, equity and other marketable securities, including 700,000 shares of UWS
stock, held by the BCBSUW Plan, with a fair value of $2,363,000 and $2,975,000
at December 31, 2000 and 1999, respectively. The plan received dividends in the
amount of $35,000 during 2000. The following table summarizes the change in the
pension and postretirement plan assets as of December 31, 2000 and 1999:
PENSION POSTRETIREMENT
---------------------------- -----------------------------
2000 1999 2000 1999
---------------------------- -----------------------------
(IN THOUSANDS)
Fair value of plan assets at beginning of year $122,341 $108,256 $3,052 $ 3,611
Employer contributions - - 28 242
Actual return on plan assets 14,281 17,792 223 235
Company transfers (821) 890 - -
Benefits paid (5,872) (4,597) (923) (1,036)
---------------------------- -----------------------------
Fair value of plan assets at end of year $129,929 $122,341 $2,380 $ 3,052
============================ =============================
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:
PENSION POSTRETIREMENT
------------------------------ ---------------------------
2000 1999 2000 1999
------------------------------ ---------------------------
(IN THOUSANDS)
Funded status of plan at end of year $47,578 $45,571 $(11,938) $(10,124)
Unrecognized net transition asset (1,577) (2,664) - -
Unrecognized prior service cost (5,110) (6,123) (920) (1,040)
Unrecognized net (gain) (4,420) (5,174) 136 (662)
------------------------------ ---------------------------
Prepaid (accrued) at end of year $36,471 $31,610 $12,722 $(11,826)
============================== ===========================
The 2000 combined ending prepaid pension balance consists of
$36,964,000 for the BCBSUW Plan and ending accrued pension liability of $493,000
for the UGS Plan.
22
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
Weighted-average assumptions used as of September 30, 2000 and 1999,
the measurement date, in developing the projected benefit obligations are as
follows:
PENSION POSTRETIREMENT
---------------------- ----------------------
2000 1999 2000 1999
---------------------- ----------------------
Discount rate 7.00% 7.00% 7.00% 7.00%
Rate of compensation increase 4.75 4.75 N/A N/A
Healthcare cost trend rate N/A N/A 5.00 5.00
Expected rate of return on plan assets 9.25 9.00 N/A N/A
Union N/A N/A 8.00 7.50
Non-union N/A N/A 5.00 4.50
The unrecognized net asset is being 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.
The effect of a 1% increase or decrease in the medical trend rate would
be a $1,336,000 increase or decrease in the benefit obligation at September 30,
2000.
The components of the pension credit and postretirement benefit cost,
which are included in selling, general and administrative expenses in 2000, 1999
and 1998 are as follows:
PENSION POSTRETIREMENT
------------------------------------ ----------------------------------
2000 1999 1998 2000 1999 1998
------------------------------------ ----------------------------------
(IN THOUSANDS)
Service cost $ 2,393 $ 1,988 $ 2,047 $ 284 $ 206 $ 183
Interest cost 5,129 5,175 5,334 890 737 764
Expected return on plan assets (10,283) (9,483) (9,012) (184) (224) (162)
Net amortization of transition
Asset (1,087) (1,137) (1,283) - - -
Amortization of prior service cost (1,013) (1,013) (1,013) (120) (182) (182)
Amortization of unrecognized
(gain) loss - 4 - (2) (42) (107)
Special termination benefits - - 770 - - -
------------------------------------ ----------------------------------
Pension (credit) and
postretirement benefit costs for
the year $ (4,861) $(4,466) $(3,157) $ 868 $ 495 $ 496
==================================== ==================================
DEFINED CONTRIBUTION AND BONUS PLANS
The Company participates in defined contribution plans whereby the
employer contributes a percentage of participants' qualifying compensation up to
certain limits, as defined by the plans. The Company also established various
other profit-sharing and bonus programs. Expenses related to all of these plans
totaled $2,337,000, $2,128,000 and $4,115,000 in 2000, 1999 and 1998,
respectively.
23
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK-BASED COMPENSATION PLANS
Certain employees of the Company participate in a stock appreciation
rights plan ("SAR"), based upon the market value of UWS common stock. As of
December 31, 2000, 533,634 rights were outstanding, of which 157,796 were
exercisable. The expense, which did not have a significant impact on the
consolidated statements of operations in 2000, 1999 and 1998, is included in
selling, general and administrative expenses. The Company measures compensation
expense when the market price of UWS common stock exceeds the exercise price of
vested rights.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial data in 2000 and 1999 are as follows:
QUARTER
------------------------------------------------------------------
First Second Third Fourth Total
------------------------------------------------------------------
(IN THOUSANDS)
2000
Total revenues $146,267 $155,424 $167,492 $173,500 $642,683
Loss before income taxes (7,908) (8,427) (10,434) (12,696) (39,465)
Net loss (7,908) (8,427) (10,982) (12,696) (40,013)
1999
Total revenues $118,810 $128,219 $131,293 $137,366 $515,688
Income (loss) before income taxes 3,023 (4,299) (19,499) (21,972) (42,747)
Net income (loss) 2,973 (4,249) (19,499) (21,972) (42,747)
14. SEGMENT REPORTING
The Company has three reportable business segments: insured products,
self-funded products and government contracts. Insured products include: full
coverage, copayment, preferred provider organization, point of service, Medicare
supplement and interim coverage. The self-funded segment provides administrative
services and access to the Company's extensive provider network for uninsured
contracts. Government contracts include processing services for Medicare
providers throughout the United States and for Medicaid in the State of
Wisconsin.
"Other Operations" includes operations not directly related to the
business segments, unallocated corporate items (i.e. equity in net income (loss)
of affiliates, corporate interest expense on corporate debt, amortization of
goodwill and unallocated overhead expenses) and intercompany eliminations. The
Company evaluates segment performance based on profit or loss from operations
before income taxes. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies.
24
Blue Cross & Blue Shield United of Wisconsin
Notes to Consolidated Financial Statements
Year ended December 31, 2000, 1999 and 1998
14. SEGMENT REPORTING (CONTINUED)
Financial data by segment is as follows:
YEAR ENDED DECEMBER 31,
2000 1999 1998
-----------------------------------------
(IN THOUSANDS)
Health services revenue:
Insured $540,560 $420,357 $361,965
Self-funded 24,716 25,970 25,302
Government contracts 70,305 52,259 31,667
Other operations (2,481) (1,408) --
-----------------------------------------
Total consolidated $633,100 $497,178 $418,934
=========================================
Investment results:
Insured $8,487 $17,083 $12,392
Self-funded 391 1,052 862
Government contracts 705 375 247
-----------------------------------------
Total consolidated $9,583 $18,510 $13,501
=========================================
Income (loss) before income tax expense (benefit):
Insured $(23,475) $ (4,894) $14,756
Self-funded (10,694) (16,365) (15,550)
Government contracts 1,230 1,202 2,076
Other operations (6,526) (22,690) 3,991
-----------------------------------------
Total consolidated $(39,465) $(42,747) $ 5,273
=========================================
DECEMBER 31,
2000 1999
----------------------------
(IN THOUSANDS)
Total assets:
Insured $178,858 $158,772
Self-funded 181,089 209,233
Government contracts 22,061 13,395
----------------------------
Total consolidated $382,008 $381,400
============================
Total assets, including investment in affiliates, are allocated between
insured and self-funded based on the percentage of premium revenue.
YEAR ENDED DECEMBER 31,
2000 1999 1998
------------------------------------
(IN THOUSANDS)
Health services revenue from transaction with other operating segments:
Insured $(2,481) $(1,408) --
25
SCHEDULE IV
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
REINSURANCE
Percentage
Ceded to Assumed of amount
Gross other from other assumed to
amount companies companies Net amount net amount
---------- --------- ----------- ---------- ----------
(IN THOUSANDS)
Year ended December 31, 1998:
Premiums:
Health and disability $355,977 $134 $6,122 $361,965 1.7%
Year ended December 31, 1999:
Premiums:
Health and disability $417,339 $233 $1,843 $418,949 0.4%
Year ended December 31, 2000:
Premiums:
Health and disability $535,012 $429 $3,497 $538,080 0.6%
SCHEDULE V
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
VALUATION AND QUALIFYING ACCOUNTS
Net
charges
Balance (credits) Write-offs Balance
beginning to net against end of
of period income allowance period
---------- ---------- ----------- -------
(IN THOUSANDS)
Year ended December 31, 1998: Allowance for possible losses on:
Premium receivables $ 98 $ (6) $ - $ 92
Due from clinics and providers 418 524 - 942
Other 82 4,097 - 4,179
------ ------- ------ ------
Total allowance $ 598 $4,615 $ - $5,213
====== ======= ====== ======
Year ended December 31, 1999: Allowance for possible losses on:
Premium receivables $ 92 $ 55 $ - $ 147
Due from clinics and providers 942 278 - 1,220
Other 4,179 69 - 4,248
------ ------- ------ ------
Total allowance $5,213 $ 402 $ - $5,615
====== ======= ====== ======
Year ended December 31, 2000: Allowance for possible losses on:
Premium receivables $ 147 $ 80 $ - $ 227
Due from clinics and providers 1,220 (374) - 846
Other 4,248 (187) - 4,061
------ ------- ------ ------
Total allowance $5,615 $ (481) $ - $5,134
====== ======= ====== ======
7a(ii)
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
SELECTED CONSOLIDATED FINANCIAL DATA FOR BCBSUW
The following selected consolidated financial data for the four years
ended December 31, 2000 are derived from the audited consolidated financial
statements of BCBSUW. The selected financial data for the year ended December
31, 1996, and the December 31, 1997 balance sheet are derived from unaudited
financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which BCBSUW considers
necessary for a fair presentation of the financial position and the results of
operations for these periods. The data should be read in conjunction with
BCBSUW's consolidated financial statements, related notes, and other financial
information included herein.
----------------------------------------------------------------
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
2000 1999 1998 1997 1996
-----------------------------------------------------------------
(IN THOUSANDS)
STATEMENT OF INCOME DATA:
Revenues:
Health services revenue:
Premium $ 538,080 $ 418,949 $ 361,965 $ 345,903 $ 351,808
Government contract fees 70,305 52,259 31,667 23,333 18,570
Other 24,715 25,970 25,302 20,606 20,147
Investment results 9,583 18,510 13,501 18,347 19,065
-----------------------------------------------------------------
Total revenues 642,683 515,688 432,435 408,189 409,590
Expenses:
Medical and other benefits 497,822 376,814 297,885 297,979 299,807
Selling, general and administrative 176,878 158,187 133,153 119,036 114,416
Interest 300 553 115 215 139
Amortization of goodwill 622 191 -- -- --
-----------------------------------------------------------------
Total expenses 675,622 535,745 431,153 417,230 414,362
-----------------------------------------------------------------
Operating income (loss) (32,939) (20,057) 1,282 (9,041) (4,772)
Equity in net income (loss) of affiliates, net of
tax (6,526) (22,690) 3,991 6,857 4,731
-----------------------------------------------------------------
Pre-tax income (loss) (39,465) (42,747) 5,273 (2,184) (41)
Income tax expense (benefit) 548 -- (78) (2,785) (1,393)
-----------------------------------------------------------------
Net income (loss) $ (40,013) $ (42,747) $ 5,351 $ 601 $ 1,352
=================================================================
BALANCE SHEET DATA:
Cash and investments $ 45,678 $ 57,383 $ 109,447 $ 104,261 $ 124,821
Investments in and advances to affiliates 175,609 173,847 195,773 193,777 189,484
Total assets 382,008 381,400 443,186 392,699 389,414
Total surplus 168,943 200,109 250,991 245,857 246,521
OPERATING STATISTICS:
Medical loss ratio(1) 92.5% 89.9% 82.3% 86.1% 85.2%
Selling, general and administrative expense
ratio(2) 27.9% 31.9% 31.8% 30.5% 29.3%
Net income (loss) margin(3) (6.2%) (8.3%) 1.2% 0.1% 0.3%
- ---------------------
(1) Represents medical and other benefits as a percentage of premium revenue.
(2) Represents selling, general and administrative expenses as a percentage
of health services revenue.
(3) Represents net income (loss) as a percentage of total revenues.
7a(iii)
BCBSUW MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
BCBSUW is a Wisconsin corporation, which was organized in 1939. BCBSUW
provides health and dental insurance coverage and related services to both the
private and public sectors. BCBSUW offers full coverage, co-payment, preferred
provider organization, Medicare supplement and interim coverage options to
groups and individuals. BCBSUW is the only health insurer in the state operating
full-service regional sales and customer service centers. Through its
wholly-owned subsidiary, United Government Services LLC ("UGS"), BCBSUW is a
government contractor and processes Medicare claims for providers in all 50
states and is currently the largest Part A Medicare processor in the nation.
In the discussion below, the number of "members" is equivalent to the
number of persons covered by contracts in force.
SUMMARY OF MEMBERSHIP AND RATIOS
DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Health and dental insurance members at end of period:
Insured 397,074 372,737 347,272
Self-funded 235,604 298,799 334,835
---------------------------
Total health and dental members 632,678 671,536 682,107
===========================
DECEMBER 31,
--------------------------
2000 1999 1998
--------------------------
Health and dental insurance members
(as a percentage of the total):
Insured 62.8% 55.5% 50.9%
Self-funded 37.2 44.5 49.1
--------------------------
Total health and dental members 100.0% 100.0% 100.0%
==========================
SUMMARY OF OPERATING RESULTS AND RATIOS
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
----------------------------------
(IN THOUSANDS)
Revenue:
Insured premium $ 540,560 $ 420,357 $ 361,965
Government contract fees 70,305 52,259 31,667
Self-funded administrative fees 24,716 25,970 25,302
Intercompany eliminations (2,481) (1,408) --
----------------------------------
Total health services revenue 633,100 497,178 418,934
Investment results 9,583 18,510 13,501
----------------------------------
Total revenue $ 642,683 $ 515,688 $ 432,435
==================================
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
-------------------------
Health services revenue (as a percentage of the total):
Insured premium 85.4% 84.5% 86.4%
Government contract fees 11.1 10.5 7.6
Self-funded administrative fees 3.9 5.2 6.0
Intercompany eliminations (0.4) (0.2) --
-------------------------
Total 100.0% 100.0% 100.0%
=========================
SUMMARY OF OPERATING RESULTS AND RATIOS
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
---------------------------
Self-funded admin. fees per member per month $ 8.74 $ 7.24 $ 6.17
Operating ratios:
Insured medical loss ratio(1) 92.5% 89.9% 82.3%
Selling, general, and administrative expense:
Insured SGA ratio(2) 13.3% 15.1% 16.8%
Self-funded SGA per member per month $12.65 $12.10 $10.26
- ---------------
(1) Insured medical and other benefits as a percentage of premium revenue.
(2) Insured selling, general and administrative expenses as a percentage of
premium revenue.
BCBSUW's revenues are derived primarily from premiums, while medical
benefits constitute the majority of expenses. Profitability is directly affected
by many factors including, among others, premium rate adequacy, estimates of
medical benefits, health care utilization, effective administration of benefit
payments, operating efficiency, investment returns and federal and state laws
and regulations.
TOP 10 CUSTOMERS
The following table identifies the top ten group contracts based on
membership counts as of December 31, 2000:
PERCENTAGE OF
TOTAL MEMBERS
--------------------
Federal Employee Health Benefits Program (1) 13.2%
Milwaukee Public Schools 8.9
State of Wisconsin 7.7
Menards, Inc. (1) 5.4
Wisconsin Bankers Association 4.3
Alterra Health Care Corporation (1) 3.2
Wisconsin Dairy Programs (1) 2.5
Milwaukee Electric Tool, Inc. 2.3
Harley-Davidson Motor Company 2.1
Appleton Area School District (1) 1.9
--------------------
Subtotal 51.5
Other employer groups 48.5
--------------------
Total 100.0%
====================
- -----------
(1) Insured programs.
INVESTED ASSETS
The table below reflects investment results for the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Average invested assets (1) $ 47,041 $ 75,665 $103,661
Net investment income (2) 3,275 4,623 5,514
Average yield 6.96% 6.11% 5.32%
Net realized gains (losses) (509) 8,014 1,615
Net unrealized gains (losses) on stocks &
bonds 155 (709) 6,672
- ----------------
(1) Average of aggregate investment amounts at the beginning and end of each
period.
(2) Amounts are calculated net of investment expenses, and exclude investment
income from affiliates.
RESULTS OF OPERATIONS
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 data in the
financial tables.
2000 COMPARED WITH 1999, AND 1999 COMPARED WITH 1998
TOTAL REVENUES
Total revenues in 2000 increased 24.6% to $642.7 million from $515.7
million in 1999. Total revenues in 1999 increased 19.3% from $432.4 million in
1998. These increases were due primarily to increased membership in the insured
product line, premium rate increases on medical insurance business and new
government contracts.
HEALTH SERVICES REVENUE. Insured premium in 2000 increased 28.6% to
$540.6 million from $420.4 million in 1999. Insured premium in 1999 increased
16.1% from $362.0 million in 1998. The increases in both years are due to
increases in average premium revenue per member and increases in the average
number of medical members. Average insured premium per member in 2000 increased
20.7% from 1999 and increased 8.2% in 1999 from 1998 as a result of premium
increases. The number of insured medical and dental members as of December 31,
2000 increased 6.5% to 397,074 from 372,737 as of December 31, 1999. The number
of insured medical and dental members as of December 31, 1999 increased 7.3%
from 347,272 as of December 31, 1998.
Government contract fees in 2000 increased 34.4% to $70.3 million from
$52.3 million in 1999. Government contract fees in 1999 increased 65.0% from
$31.7 million in 1998. The increase from 1999 to 2000 is largely attributed to
becoming the Medicare Part A Intermediary for the states of Virginia and West
Virginia as of September 1, 1999.
Self-funded administrative fees in 2000 decreased 5.0% to $24.7 million
from $26.0 million in 1999. Self-funded administrative fees in 1999 increased
2.8% from $25.3 million in 1998. The average self-funded administrative fee per
member per month in 2000 increased 20.7% to $8.74 from $7.24 in 1999. The
average self-funded administrative fee per member per month increased 17.3% in
1999 from $6.17 in 1998. The number of members as of December 31, 2000 decreased
21.1% to 235,604 from 298,799 as of December 31, 1999. This decrease is due to
aggressive pricing on targeted group contracts and subsequent loss of
unprofitable business. The number of self-funded members as of December 31,
1999, decreased 10.8% from 334,835 as of December 31, 1998.
NET INVESTMENT RESULTS. Net investment results include investment
income and realized gains and losses on the sale of investments. Investment
results in 2000 decreased 48.1% to $9.6 million from $18.5 million in 1999.
Investment results in 1999 increased 37.0% from $13.5 million in 1998. Average
annual investment yields, excluding net realized gains, investment income from
affiliates and other interest income were 6.96%, 6.11% and 5.32% for 2000, 1999
and 1998, respectively.
Average invested assets in 2000 decreased 37.9% to $47.0 million from
$75.7 million in 1999. The decrease in average invested assets during 2000 is a
result of cash requirements necessary to fund operating losses. Average invested
assets in 1999 decreased 27.0% from $103.7 million in 1998. The decrease in 1999
from 1998 is a result of cash requirements necessary to fund operating losses
and increased cash payments relative to medical and other benefits payable.
Investment gains are realized in the normal investment process in
response to market opportunities. Realized losses were $0.5 million in 2000
compared to gains of $8.0 million in 1999. Realized gains were $1.6 million in
1998.
BCBSUW received interest income of $5.5 million, $4.8 million and $1.4
million in 2000, 1999 and 1998, respectively, on a $70.0 million note (discussed
further under "Liquidity and Capital Resources") from United Wisconsin Services
("UWS").
EXPENSE RATIOS
LOSS RATIO. The medical loss ratio for 2000 was 92.5%, compared with
89.9% for 1999 and 82.3% for 1998. The increase in the medical loss ratio in
2000 is primarily the result of greater than anticipated medical utilization and
cost trends.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO. The selling, general
and administrative ("SGA") expense ratio includes commissions, administrative
expenses, premium taxes and other assessments and claim interest expense. The
insured SGA expense ratio in 2000 was 13.3%, compared with 15.1% in 1999 and
16.8% in 1998. The improved SGA expense ratio in 2000 and 1999 are a result of
increased membership. BCBSUW's average self-funded SGA expense per member per
month increased 4.5% in 2000 to $12.65 from $12.10 in 1999. The average
self-funded SGA expense per member per month in 1999 increased 17.9% from $10.26
in 1998. The decrease in the self-funded membership in 2000 and 1999 caused the
SGA expense per member per month to increase.
OTHER EXPENSES
BCBSUW, along with UWS, has a bank line of credit that permits
aggregate borrowings up to $20 million. Interest expense related to the bank
line of credit in 2000, 1999 and 1998 was $0.3 million, $0.6 million and $0.1
million, respectively.
In 1999, BCBSUW purchased 1.4 million additional shares of UWS stock.
The excess of cost over the fair value of net assets acquired has been recorded
as goodwill and is being amortized on a straight-line basis over a period of 15
years. Amortization expense was $0.5 million and $0.2 million for 2000 and 1999,
respectively.
NET INCOME
Consolidated net results improved in 2000 to a loss of $40.0 million
compared to a loss of $42.7 million in 1999. The consolidated net loss in 1999
was a decrease in results compared to net income of $5.4 million in 1998. The
poor results in 2000 was the combination of a $32.9 million operating loss and
$6.5 million equity in net loss of affiliates, net of tax. The $32.9 million
operating loss is due to a $23.5 million loss before income taxes on insured
business, which experienced greater than anticipated medical utilization and
cost trends, combined with a $10.7 million loss before income taxes on
self-insured business. Partially offsetting these losses was $1.2 million in
income before income taxes on government contracts. The 1999 loss was also
attributable to greater than anticipated utilization on the insured business and
losses on the self-insured business.
Because of operating losses, BCBSUW did not have current income tax
expense or benefit in 2000. Current tax benefit in 1999 and 1998 was $0 and $0.1
million, respectively. BCBSUW had deferred tax expense of $0.5 million in 2000
which relates to a valuation allowance from a prior period. There was no
deferred tax benefit in 1999 or 1998.
LIQUIDITY AND CAPITAL RESOURCES
BCBSUW's sources of cash flow consist primarily of health services
revenues and investment income. The primary uses of cash include medical and
other benefits and operating expense payments. Positive cash flows are invested
pending future payments of medical and other benefits and other operating
expenses. BCBSUW's investment policies are designed to maximize yield, preserve
principal and provide liquidity to meet anticipated payment obligations.
BCBSUW's cash flow improved in 2000 compared to 1999. Net cash provided
by operating activities amounted to $8.3 million, compared with net cash used in
operating activities of $34.3 million in 1999. The improvement is primarily due
to the decrease in cash payments relative to medical and other benefits payable.
Due to periodic cash flow requirements, BCBSUW made borrowings under its bank
line of credit. The line of credit is with a commercial bank and has a rate
equal to the London Interbank Offered Rate ("LIBOR") plus 1.5%, adjusted monthly
with interest payments due monthly. BCBSUW had no outstanding line of credit
balances as of December 31, 2000. BCBSUW's outstanding line of credit balance
was $11.2 million as of December 31, 1999. The interest expense on the line of
credit was $0.3 million and $0.6 million in 2000 and 1999, respectively.
As a Primary Licensee of the Association, BCBSUW is required to
maintain a prescribed liquidity ratio of certain liquid assets to average
monthly expenses, as defined, in accordance with licensure requirements of the
BCA.
BCBSUW's investment portfolio consists primarily of investment-grade
bonds and government securities and has a limited exposure to equity
securities. At December 31, 2000, $30.0 million or 67.5% of BCBSUW's total
investment portfolio was invested in bonds compared with $42.6 million or
68.2% at December 31, 1999. The bond portfolio had an average quality rating
by Moody's Investor Service of "Aa3" at December 31, 2000 and December 31,
1999. The entire bond portfolio was classified as available-for-sale as of
December 31, 2000. The market value of the total investment portfolio, which
includes stocks and bonds, was greater than amortized cost by $0.2 million at
December 31, 2000 and less than amortized cost by $0.7 million at December
31, 1999. Unrealized holding gains and losses on bonds classified as
available-for-sale are included as a component of surplus, net of applicable
deferred taxes. BCBSUW has no investments in mortgage loans, no non-publicly
traded securities (except for investments related to UWS and its affiliates),
real estate held for investment or financial derivatives (except for
principal-only strips of U.S. Government securities).
As of September 11, 1998, UWS assumed a $70.0 million note obligation
to BCBSUW in connection with the spin-off in 1998 of AMSG's managed care
companies and specialty business. The spin-off involved the creation of a new
corporation that subsequently became UWS. UWS pledged the common stock of
certain subsidiaries as collateral for the note obligation. Interest is payable
quarterly at a rate equal to LIBOR plus 1.25%, adjusted quarterly. On October
13, 1999, the maturity date of the principal balance was extended from October
30, 1999 to 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 Office of the Commissioner of Insurance.
BCBSUW has an outstanding line of credit in the amount of $15.0 million
available to Health Professionals of Wisconsin, Inc. The balance was $4.6
million and $3.0 million as of December 31, 2000 and December 31, 1999,
respectively. Interest on the line of credit is calculated using prime rate.
BCBSUW is required to maintain certain levels of statutory capital and
surplus under the NAIC Health Organization Risk-Based Capital ("HORBC")
requirements. Wisconsin insurers are also subject to compulsory and security
surplus requirements based upon the amount and type of premiums written. In
addition to statutory capital requirements, BCBSUW is required to maintain
certain levels as determined by the Association.
In addition to internally generated funds and periodic borrowings on
its bank line of credit, BCBSUW believes that additional financing to facilitate
long-term growth could be obtained through offerings, debt offerings, or bank
borrowings, as market conditions may permit or dictate.
During the third quarter of 2000, BCBSUW entered into an agreement to
purchase a 25% interest in a Wisconsin-based health plan for $12.5 million. The
purchase is subject to a right-of-first-refusal under an agreement with existing
shareholders of the health plan and has not yet been consummated.
IMPACT OF THE YEAR 2000
In late 1999, BCBSUW completed its remediation and testing of systems.
As a result of those planning and implementation efforts, BCBSUW 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. BCBSUW expensed approximately $1.3 million
during 1999 in connection with remediating its systems. BCBSUW 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.
INFLATION
Health care costs have been rising and are expected to continue to rise
at a rate that exceeds the consumer price index. BCBSUW's cost control measures,
risk-sharing incentive arrangements with medical care providers, and premium
rate increases are designed to reduce the adverse effect of medical cost
inflation on its operations. In addition, BCBSUW utilizes its ability to apply
appropriate underwriting criteria in selecting groups and individuals and in
controlling the utilization of health care services. However, there can be no
assurance that these efforts will fully offset the impact of inflation or that
premium revenue increases will equal or exceed increasing health care costs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Because of BCBSUW's investment policies, the primary market risks
associated with BCBSUW's portfolio are interest rate risk, credit risk and the
risk related to fluctuations in equity prices. With respect to interest rate
risk, a reasonably near-term rise in interest rates could negatively affect the
fair value of BCBSUW's bond portfolio; however, because BCBSUW considers it
unlikely that BCBSUW would need or choose to substantially liquidate its
portfolio, BCBSUW believes that such an increase in interest rates would not
have a material impact on future earnings or cash flows. In addition, BCBSUW is
exposed to the risk of loss related to changes in credit spreads. Credit spread
risk arises from the potential that changes in an issuer's credit rating or
credit perception may affect the value of financial instruments.
The overall goal of the investment portfolio is to support the ongoing
operations of BCBSUW. BCBSUW's philosophy is to manage assets to maximize total
return over a multiple-year time horizon, subject to appropriate levels of risk.
BCBSUW manages these risks by establishing gain and loss tolerances, targeting
asset-class allocations, diversifying among asset classes and segments within
various asset classes, and using performance measurement and reporting.
In 1999, BCBSUW had an external study done of the asset allocation and
restructured their portfolio, moving from actively managed equities to mutual
funds.
BCBSUW uses a sensitivity model to assess the interest rate risk of its
fixed income investments. The model includes all fixed income securities held as
of December 31, 2000 and incorporates assumptions regarding the impact of
changing interest rates on expected cash flows for certain financial assets with
prepayment features, such as callable bonds and mortgage-backed securities. The
reduction in the fair value of BCBSUW's modeled financial assets resulting from
a hypothetical instantaneous 100 basis point increase in the U.S. Treasury yield
curve is estimated at $1.6 million as of December 31, 2000.
7b(i)
UNAUDITED PRO FORMA BALANCE SHEET
(IN THOUSANDS) DECEMBER 31, 2000 BCBSUW UWS ADJUSTMENTS COBALT
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ASSETS
Current assets:
Cash and cash equivalents $ 1,305 $ 49,625 $ (500) (1) $50,430
Investments--available-for-sale, at fair value 44,373 117,893 -- 162,266
Due from affiliates 12,896 5,867 (13,426) (2) 5,337
Premium receivables 3,325 39,091 -- 42,416
Due from clinics and providers and other receivables 22,993 31,849 -- 54,842
Prepaid expenses and other current assets 18,385 22,630 (11,156) (3) 29,859
- ---------------------------------------------------------------------------------------------------------------------------------
Total current assets 103,277 266,955 (25,082) 345,150
Investments--held-to-maturity, at amortized cost -- 9,758 101 (4) 9,859
Investments in affiliates 105,609 -- (7,821) (6) 97,788
Property and equipment, net 25,139 12,969 -- 38,108
Goodwill 8,020 22,178 71,005 (1)(7) 101,203
Note receivable from affiliate 70,000 -- (70,000) (5) --
Prepaid pension 36,471 8,305 -- 44,776
Deferred income taxes 19,067 26,276 (26,276) (3) 19,067
Other noncurrent assets 14,425 19,385 -- 33,810
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Total assets $382,008 $365,826 $(58,073) $689,761
=================================================================================================================================
LIABILITIES AND SURPLUS/SHAREHOLDERS' EQUITY:
Current liabilities:
Medical and other benefits payable $ 92,218 $119,017 $ -- $211,235
Due to affiliates 910 12,701 (13,426) (2) 185
Advance premium 40,745 51,523 -- 92,268
Payables and accrued expenses 29,597 16,238 -- 45,835
Short-term debt and other current liabilities 5,162 31,241 (6,412) (3) 29,991
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 168,632 230,720 (19,838) 379,514
Noncurrent liabilities:
Note payable to affiliate -- 70,000 (70,000) (5) --
Other benefits payable -- 35,369 -- 35,369
Deferred income taxes 20,699 7,422 (7,422) (3) 20,699
Postretirement benefits other than pension 12,722 4,657 -- 17,379
Other noncurrent liabilities 11,012 885 -- 11,897
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 213,065 349,053 (97,260) 464,858
Common stock (no par value, no stated value, 50,000,000 shares
authorized, 17,048,908 issued and outstanding at December 31, 2000) -- 14,445 -- 14,445
Surplus/retained earnings 170,907 3,040 (23,598) (3) 212,417
101 (4)
(8,153) (6)
70,505 (7)
(385) (8)
Accumulated other comprehensive loss (1,964) (712) 332 (6) (1,959)
385 (8)
- ---------------------------------------------------------------------------------------------------------------------------------
Total surplus / shareholders' equity 168,943 16,773 39,187 224,903
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and surplus / shareholders' equity $382,008 $365,826 $(58,073) $689,761
=================================================================================================================================
(1) ADJUSTMENT TO REFLECT $500,000 CONTRIBUTION TO WISCONSIN UNITED FOR
HEALTH FOUNDATION.
(2) ADJUSTMENT TO ELIMINATE INTERCOMPANY ACTIVITY BETWEEN UWS AND BCBSUW.
THE REMAINING RECEIVABLE/PAYABLE BALANCE RELATES TO UNCONSOLIDATED
AFFILIATES.
(3) ADJUSTMENT TO ESTABLISH A FULL VALUATION ALLOWANCE FOR UWS'S NET
DEFERRED TAX ASSET BALANCES.
(4) ADJUSTMENT OF HELD-TO-MATURITY INVESTMENTS TO FAIR VALUE.
(5) ADJUSTMENT TO ELIMINATE $70.0 MILLION INTERCOMPANY NOTE BETWEEN UWS
AND BCBSUW.
(6) ADJUSTMENT TO ELIMINATE THE BCBSUW INVESTMENT IN UWS.
(7) ADJUSTMENT TO RECORD GOODWILL CALCULATED AS A RESULT OF PURCHASE
ACCOUNTING BASED ON THE DECEMBER 31, 2000 BALANCE SHEET AND FAIR
VALUE. THE CLOSING PRICE OF UWS COMMON STOCK ON THE NEW YORK STOCK
EXCHANGE ON MARCH 23, 2001 ($6.15 PER SHARE) WAS UTILIZED IN
DETERMINING GOODWILL.
(8) ADJUSTMENT OF BASIS OF AVAILABLE-FOR-SALE INVESTMENTS TO FAIR VALUE AS
OF THE TRANSACTION DATE.
7b(ii)
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA) BCBSUW UWS ADJUSTMENTS COBALT
- --------------------------------------------------------------------------------------------------------------------
Revenues:
Health services revenue:
Premium $538,080 $760,624 $(9,231)(1) $1,289,473
Government contract fees 70,305 -- -- 70,305
Other 24,715 45,496 (5,351)(1) 64,860
Investment results 9,583 8,254 (5,494)(2) 12,343
- --------------------------------------------------------------------------------------------------------------------
Total revenues 642,683 814,374 (20,076) 1,436,981
Expenses:
Medical and other benefits 497,822 700,094 (8,467)(1) 1,189,449
Selling, general, administrative and other 176,878 133,020 (6,116)(1) 303,782
Profit sharing on provider arrangements -- 460 -- 460
Interest 300 6,500 (5,494)(2) 1,306
Amortization of goodwill 622 1,065 4,734 (3) 6,421
- --------------------------------------------------------------------------------------------------------------------
Total expenses 675,622 841,139 (15,343) 1,501,418
- --------------------------------------------------------------------------------------------------------------------
Operating loss (32,939) (26,765) (4,733) (64,437)
Equity in net income (loss) of affiliates, net of tax (6,526) (312) 7,604 (4) 766
- --------------------------------------------------------------------------------------------------------------------
Pre-tax loss (39,465) (27,077) 2,871 (63,671)
Income tax expense (benefit) 548 (10,649) 10,812 (5) 711
- --------------------------------------------------------------------------------------------------------------------
Net loss $(40,013) $(16,428) $(7,941) $(64,382)
- --------------------------------------------------------------------------------------------------------------------
Loss per share:
Basic $(1.59)
Diluted $(1.59)
Weighted average shares outstanding:
Basic 40,412 (6)(7)
Diluted 40,412 (6)(7)
- --------------------------------------------------------------------------------------------------------------------
(1) ADJUSTMENT TO ELIMINATE INTERCOMPANY ACTIVITY BETWEEN UWS AND BCBSUW.
(2) ADJUSTMENT TO ELIMINATE INTEREST ON THE $70.0 MILLION INTERCOMPANY
NOTE BETWEEN UWS AND BCBSUW.
(3) AMORTIZATION OF GOODWILL OVER A PERIOD OF 15 YEARS, WHICH WAS
CALCULATED AS A RESULT OF PURCHASE ACCOUNTING BASED ON THE DECEMBER
31, 2000 BALANCE SHEET AND FAIR VALUE. THE CLOSING PRICE OF UWS COMMON
STOCK ON THE NEW YORK STOCK EXCHANGE ON MARCH 23, 2001 ($6.15 PER
SHARE) WAS UTILIZED IN DETERMINING GOODWILL.
(4) ADJUSTMENT TO ELIMINATE BCBSUW'S EQUITY IN NET LOSS OF UWS.
(5) ADJUSTMENT TO ESTABLISH A FULL VALUATION ALLOWANCE FOR UWS'S DEFERRED
TAX BENEFIT.
(6) POTENTIALLY DILUTIVE SECURITIES ARE NOT INCLUDED IN THE CALCULATION OF
EARNINGS PER SHARE BECAUSE THEIR INCLUSION WOULD HAVE AN ANTIDILUTIVE
EFFECT.
(7) THE SHARES OF COBALT COMMON STOCK OWNED BY BCBSUW WILL NOT BE TREATED
AS OUTSTANDING FOR PER SHARE CALCULATIONS FOR FINANCIAL REPORTING
PURPOSES.