UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998
Commission File Number 0-19506
UNITED WISCONSIN SERVICES, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1431799
(State of Incorporation) (I.R.S. Employer
Identification No.)
401 WEST MICHIGAN STREET, MILWAUKEE, WISCONSIN 53203-2896
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 226-6900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES _X_ NO ___
Number of shares of Common Stock outstanding as of April 30, 1998 was
16,544,121.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 1998 1997
--------- ------------
(In thousands)
Current assets:
Cash and cash equivalents $ 47,081 $ 62,324
Investments - available for sale 442,360 419,417
Due from affiliates 1,205 5,510
Other receivables 65,860 66,306
Prepaid and other current assets 18,111 19,441
--------- ---------
Total current assets 574,617 572,998
Investments - held to maturity 11,768 11,697
Property and equipment, net 44,231 44,147
Goodwill and other intangibles, net 142,092 142,801
Other noncurrent assets 26,450 24,019
--------- ---------
Total assets $ 799,158 $ 795,662
--------- ---------
--------- ---------
See Notes to Interim Consolidated Financial Statements
2
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
--------- ------------
(In thousands)
Current liabilities:
Medical and other benefits payable $175,297 $187,053
Advance premiums 51,102 44,045
Due to affiliates 4,797 3,345
Payables and accrued expenses 43,440 49,856
Other current liabilities 32,052 23,862
-------- --------
Total current liabilities 306,688 308,161
Long-term debt:
Affiliates 70,000 70,000
Other 53,078 53,378
Other noncurrent liabilities 37,593 37,746
-------- --------
Total liabilities 467,359 469,285
Redeemable preferred stock -
Series A adjustable rate nonconvertible, $1,000
stated value, 25,000 shares authorized - -
Shareholder's equity:
Preferred stock (no par value, 475,000 shares authorized) - -
Common stock (no par value, $1 stated value,
50,000,000 shares authorized, 16,544,047 and
16,509,578 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively) 16,544 16,510
Paid-in capital 187,627 186,768
Retained earnings 121,740 117,331
Unrealized gains on investments 5,888 5,768
-------- --------
Total shareholders' equity 331,799 326,377
-------- --------
Total liabilities and shareholders' equity $799,158 $795,662
-------- --------
-------- --------
See Notes to Interim Consolidated Financial Statements
3
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
March 31,
1998 1997
--------- ---------
(In thousands, except per share data)
Revenues:
Health services revenues:
Premium revenue $383,011 $388,608
Other revenue 11,920 13,945
Investment results 9,971 9,845
-------- --------
Total revenues 404,902 412,398
Expenses:
Medical and other benefits 305,423 310,170
Selling, general and administrative expenses 83,064 90,695
Profit sharing on joint ventures 1,124 845
Interest expense 2,303 2,217
Amortization of goodwill and other intangibles 2,347 2,441
-------- --------
Total expenses 394,261 406,368
-------- --------
Income before income tax expense 10,641 6,030
Income tax expense 4,250 2,660
-------- --------
Net income $ 6,391 $ 3,370
-------- --------
-------- --------
Earnings per common share:
Basic $ 0.39 $ 0.21
Diluted 0.38 0.21
See Notes to Interim Consolidated Financial Statements
4
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
1998 1997
--------- ---------
(In thousands)
Operating activities:
Net income $ 6,391 $ 3,370
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,780 5,764
Realized investment gains (2,271) (2,409)
Deferred income tax benefit (132) (1,032)
Changes in other operating accounts:
Other receivables 222 (5,348)
Medical and other benefits payable (11,336) (13,761)
Advance premiums 7,057 1,245
Due to/from affiliates 5,757 3,828
Other - net (3,868) (5,290)
--------- ---------
Net cash provided by (used in) operating activities 6,600 (13,633)
Investing activities:
Purchases of available for sale investments (133,357) (145,873)
Proceeds from sale of available for sale investments 112,156 149,443
Proceeds from maturity of available for sale investments 900 2,035
Purchases of held to maturity investments (348) (1,139)
Proceeds from maturity of held to maturity investments 195 1,005
--------- ---------
Net cash provided by (used in) investing activities (20,454) 5,471
Financing activities:
Cash dividends paid (1,982) (1,969)
Issuance of common stock 893 (236)
Repayment of debt (300) (300)
Net borrowings under line of credit agreement - (1,200)
--------- ---------
Net cash used in financing activities (1,389) (3,705)
Cash and cash equivalents:
Decrease during period (15,243) (11,867)
Balance at beginning of year 62,324 51,146
--------- ---------
Balance at end of period $ 47,081 $ 39,279
--------- ---------
--------- ---------
See Notes to Interim Consolidated Financial Statements
5
UNITED WISCONSIN SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying consolidated financial statements
for United Wisconsin Services, Inc. (the Company) have been prepared in
accordance with generally accepted accounting principles. The financial
information included herein has been prepared by management without audit
by independent certified public accountants.
The unaudited financial statements include all adjustments and accruals
consisting only of normal recurring accrual adjustments which are, in the
opinion of management, necessary for a fair presentation of the
consolidated financial position and results of operations for the interim
periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. The unaudited interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended
December 31, 1997, incorporated by reference or included in the Company's
Form 10-K, as filed with the Securities and Exchange Commission.
EARNINGS PER COMMON SHARE - Basic earnings per common share are computed by
dividing net income by the weighted average number of common shares
outstanding. Diluted earnings per common share are computed by dividing
net income by the weighted average number of common shares outstanding,
adjusted for the effect of dilutive securities for employee stock options.
Weighted average common shares outstanding were 16,515,874 and 16,337,616
and the effect of dilutive securities were 245,946 and 87,617 for the three
months ended March 31, 1998 and 1997, respectively.
COMPREHENSIVE INCOME - As of January 1 1998, the Company adopted Statement
130, REPORTING COMPREHENSIVE INCOME. Statement 130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the Company's net
income or shareholders' equity. Statement 130 requires unrealized gains or
losses on the Company's available-for-sale securities and foreign currency
transactions adjustments, which prior to adoption were reported separately
in shareholders' equity to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of Statement 130. During the first quarter of 1998 and 1997,
total comprehensive income(loss) amounted to $6,511,000 and $(3,208,000),
respectively.
RECLASSIFICATIONS - Certain reclassifications have been made to the
consolidated financial statements for 1997 to conform with the 1998
presentation.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
United Wisconsin Services, Inc. (the Company) is a leading provider of
managed health care services and employee benefit products. The Company's three
primary product lines are (i) Health Maintenance Organization (HMO) products,
including Compcare Health Services Insurance Corporation (Compcare), Valley
Health Plan, Inc. (Valley), Unity Health Plans Insurance Corporation (Unity) and
certain point-of-service (POS) and other related products managed by Compcare,
Valley and Unity; (ii) small group managed care and life products sold through
American Medical Security Group, Inc. (AMSG), and American Medical Security
Holdings, Inc. (AMS), which owns United Wisconsin Life Insurance Company
(UWLIC), and (iii) specialty managed care products and services, including
dental, life, disability and workers' compensation products, managed care
consulting, electronic claim submission, pharmaceutical management and managed
behavioral health services. Operating results and statistics for these product
groups are presented below for the periods noted.
SUMMARY OF OPERATING RESULTS AND STATISTICS
March 31,
---------
Membership at end of period: 1998 1997
--------- ---------
HMO products 294,145 279,096
AMS medical products 580,928 741,530
---------- ---------
Total medical products 875,073 1,020,626
AMS life products 238,824 354,894
Specialty managed care products and services 1,365,072 1,229,600
Three months ended
March 31,
---------
1998 1997
--------- ---------
Health services revenues (as a percentage of the total):
HMO products 32.1% 28.8%
AMS products 60.7 64.7
Specialty managed care products and 8.2 7.6
services
Intercompany eliminations (1.0) (1.1)
----- -----
Total 100.0% 100.0%
----- -----
----- -----
7
Three months ended
March 31,
---------
1998 1997
--------- ---------
Operating statistics:
HMO products:
Medical loss ratio (1) 88.4% 88.2%
Selling, general and administrative expense ratio (2) 9.0 9.7
AMS products
Medical:
Medical loss ratio (1) 79.0 79.0
Selling, general and administrative expense ratio (2) 21.5 22.6
Life:
Loss ratio (1) 32.8 31.1
Selling, general and administrative expense ratio (2) 29.3 29.7
Specialty managed care products and services:
Loss ratio (1) 71.1 73.1
Consolidated:
Loss ratio (1) 79.7 79.8
Net income margin (3) 1.6 0.8
(1) Medical and other benefits as a percentage of premium revenue.
(2) Selling, general and administrative expenses as a percentage of premium
revenue.
(3) Net income as a percentage of total revenues.
The Company's revenues are derived primarily from premiums, while medical
benefits constitute the majority of expenses. Profitability is directly
affected by many factors including, among others, premium rate adequacy,
estimates of medical benefits, health care utilization, effective administration
of benefit payments, operating efficiency, investment returns and federal and
state laws and regulations.
RESULTS OF OPERATIONS
TOTAL REVENUES
Total revenues for the three months ended March 31, 1998 decreased 1.8% to
$404.9 million from $412.4 million for the three months ended March 31, 1997.
These decreases were due primarily to decreased membership as a result of AMS's
effort to improve certain product line's profitability.
HEALTH SERVICES REVENUES -- HMO health services revenues for the three
months ended March 31, 1998 increased 9.4% to $126.6 million from $115.7 million
for the three months ended March 31, 1997. Average HMO medical premium per
member for the three months ended March 31, 1998 increased 3.5% from the same
period in the prior year. The average number of HMO medical members for the
three months ended March 31, 1998 increased 5.8% to 293,149 from 277,066 for the
three months ended March 31, 1997.
Health services revenues for AMS products for the three months ended March
31, 1998 decreased 7.9% to $239.7 million from $260.3 million for the three
months ended March 31, 1997. While average medical premium per member increased
19.6% for the three months ended March 31, 1998 compared to the three months
ended March 31, 1997, the average number of small group medical members
outstanding decreased 23.0% for the three months ended March 31, 1998 to 602,329
from 782,122 for the three months ended March 31, 1997. Much of this membership
decline was the result of AMS's efforts to return this block of business to
profitability. These steps included: (i) exiting certain unprofitable markets
in Texas and Kentucky, (ii) canceling one life dental business, and (iii)
implementing substantial
8
rate increases for certain product lines which resulted in membership losses
but improved profitability on renewed business. AMS continued to pursue
initiatives to reverse this membership decline, including new agency sales
relationships, expansion into new geographic areas, acquisitions of blocks of
business, and introduction of new products.
Health services revenues for specialty managed care products and services
for the three months ended March 31, 1998 increased 6.6% to $32.5 million from
$30.5 million for the three months ended March 31, 1997. This increase was due
primarily to an increase in general membership.
INVESTMENT RESULTS -- Investment results include investment income and
realized gains (losses) on investments. Investment results for the three months
ended March 31, 1998 increased 1.3% to $10.0 million from $9.8 million for the
three months ended March 31, 1997. Average annual investment yields, excluding
net realized gains, remained constant at 5.9% for the three months ended March
31, 1998 and 1997. Investment gains are realized in the normal investment
process in response to market opportunities. Average invested assets for the
three months ended March 31, 1998 decreased 1.8% to $495.8 million from $505.1
million for the three months ended March 31, 1997. The decrease in average
invested assets is due primarily to the decrease in medical and other benefits
payable resulting from the membership decline for AMS products over the past
year.
EXPENSE RATIOS
LOSS RATIO - The consolidated loss ratio represents the ratio of medical
and other benefits to premium revenue for the Company on a consolidated basis,
and is therefore a blended ratio for medical, life, dental, disability and other
product lines. The consolidated loss ratio was 79.7% for the first quarter of
1998 compared with 79.8% for the first quarter of 1997. The consolidated loss
ratio is influenced by the component loss ratio for each of the Company's
primary product lines, as discussed below.
The medical loss ratio for HMO products for the three months ended March
31, 1998 was 88.4%, compared with 88.2% for the three months ended March 31,
1997. The increase in the medical loss ratio in 1998 for HMO products is due
primarily to higher loss experience in the southeastern Wisconsin HMO market,
due in part to certain high-cost claims, an increase in the drug cost component
and an increase in outpatient utilization.
The medical loss ratio for AMS products for the three months ended March
31, 1998 remained constant with the three months ended March 31, 1997 at 79.0%.
AMS continues to reprice its products and eliminate unprofitable business.
The loss ratio for specialty managed care products and services for the
three months ended March 31, 1998 was 71.1%, compared with 73.1% for the three
months ended March 31, 1997. The decrease is primarily attributable to improved
results in the United Heartland worker's compensation block of business.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE RATIO -- The selling, general
and administrative (SGA) expense ratio includes commissions, administrative
expenses, and premium taxes and other assessments. The SGA expense ratio for
HMO products for the first quarter of 1998 was 9.0%, compared with 9.7% for the
first quarter of 1997. The decrease was due to improved management efficiencies
at each of the Company's HMOs, as well as a decline in assessments related to
Wisconsin's Health Insurance Risk Sharing Plan.
The SGA expense ratio for AMS medical products for the three months ended
March 31, 1998 was 21.5%, compared with 22.6% for the three months ended March
31 ,1997. The SGA expense ratio for AMS life products for the first quarter of
1998 was 29.3%, compared with 29.7% for the same period in the prior year. AMS
products are sold exclusively through independent agents who are compensated
through commissions. Over time, renewal business has gradually represented a
larger proportion of the total AMS medical and life business. Since renewal
commissions are typically lower than commissions on new sales, this has
contributed to the decrease in the expense ratios. AMS continues to focus on
efforts to improve operating efficiency through process re-engineering and to
align staff commensurate with gross premium revenue.
9
SGA expenses related to specialty managed care products and services
increased 3.6% for the three months ended March 31, 1998 to $14.9 million from
$14.4 million for the same period in the prior year. Increases in SGA expenses
are tied to health services revenues which increased 6.6% for the three months
ended March 31, 1998 over the same period in 1997.
OTHER EXPENSES
Profit sharing on joint ventures was $1.1 million for the three months
ended March 31, 1998, compared with $0.8 million for the three months ended
March 31, 1997. These balances represent profit sharing expenses related to the
Unity and Valley joint ventures.
Interest expense increased to $2.3 million for the three months ended March
31, 1998 from $2.2 million for the same period in the prior year. Amortization
of goodwill and other intangibles totaled $2.3 million for the first quarter of
1998, compared with $2.4 million of amortization expense for the first quarter
of 1997.
NET INCOME
Consolidated net income for the three months ended March 31, 1998 increased
89.6% to $6.4 million or $0.39 per share from $3.4 million or $0.21 per share
for the three months ended March 31, 1997.
The Company's effective tax rate was 39.9% for the three months ended March
31, 1998 compared with 44.1% for the three months ended March 31, 1997.
Excluding the impact of non-deductible goodwill related to the AMS merger and
other acquisitions, the Company's effective tax rate was 37.6% for the three
months ended March 31, 1998, compared with 39.6% for the three months ended
March 31, 1997. The Company's effective tax rate fluctuates based upon the
relative profitability of the Company's three product lines and the differing
effective tax rates for each of those product lines. The lower effective tax
rate in 1998 was due primarily to a higher proportion of the Company's income
being generated by AMS, which records a lower effective tax rate than the
Company's other subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of health services
revenues and investment income. The primary uses of cash include medical and
other benefits and operating expense payments. Positive cash flows are invested
pending future payments of medical and other benefits and other operating
expenses. The Company's investment policies are designed to maximize yield,
preserve principal and provide liquidity to meet anticipated payment
obligations.
Historically, the Company has generated positive cash flow from operations.
For the three months ended March 31, 1998, net cash provided by or used in
operating activities amounted to a provision of $6.6 million, compared with
$14.8 million used for the three months ended March 31, 1997. The increase in
cash flow from operations in 1998 was due primarily to an increase in earnings
and an increase in Compcare and Unity's advanced premiums. Due to periodic cash
flow requirements of certain subsidiaries, the Company made borrowings under its
bank line of credit ranging up to $10.0 million during the first three months of
1998 and $7.0 million during the first three months of 1997 to meet short-term
cash needs.
The Company's investment portfolio consists primarily of investment grade
bonds and has a limited exposure to equity securities. At March 31, 1998,
$393.6 million or 86.7% of the Company's total investment portfolio was invested
in bonds. At December 31, 1997, $398.6 million or 92.5% of the Company's total
investment portfolio was invested in bonds. The bond portfolio had an average
quality rating of Aa3 at both March 31, 1998 and December 31, 1997 by Moody's
Investor Service, and the majority of the bond portfolio was classified as
available for sale. In accordance with Statement of Financial Accounting
Standards No. 115, bonds classified as available for sale are recorded on the
Company's balance sheet at market value. The market value of the total
investment portfolio, which includes stocks and bonds, exceeded amortized cost
by $9.4 million and $8.8 million at March 31, 1998 and December 31, 1997,
respectively. Unrealized holding gains and losses on bonds classified as
available for sale are included as a
10
component of shareholders' equity, net of applicable deferred taxes. The
Company has no investments in mortgage loans, non-publicly traded securities
(except for principal only strips of U. S. Government securities), real
estate held for investment or financial derivatives.
From time to time, the Company makes capital contributions to its
subsidiaries to assist them in maintaining appropriate levels of capital and
surplus for regulatory and rating purposes. Insurance subsidiaries are required
to maintain certain levels of statutory capital and surplus. In Wisconsin,
where a large percentage of the Company's premium is written, these levels are
based upon the amount and type of premiums written and are calculated separately
for each subsidiary. As of the balance sheet date presented, statutory capital
and surplus for each of these insurance subsidiaries exceeded required levels.
In addition to internally generated funds and periodic borrowings on its
bank line of credit, the Company believes that additional financing to
facilitate long-term growth could be obtained through equity offerings, debt
offerings, financings from Blue Cross & Blue Shield United of Wisconsin or bank
borrowings, as market conditions may permit or dictate.
FORWARD LOOKING STATEMENTS
This report contains certain forward looking statements with respect to the
financial condition, results of operation and business of the Company. Such
forward looking statements are subject to inherent risks and uncertainties that
may cause actual results to differ materially from those contemplated by such
forward looking statements. Factors that may cause actual results to differ
materially from those contemplated by such forward looking statements include,
among others, rising health care costs, business conditions and competition in
the managed care industry, developments in health care reform and other
regulatory issues.
11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On April 22, 1998, the Company announced its intention to separate its
American Medical Security small group products business from its HMO
and specialty products business through a spin off. The Company has
filed a private letter ruling request with the Internal Revenue
Service seeking a ruling that the distribution will be tax free to
the Company and its shareholders. The Company expects to complete the
spin off during the third quarter of 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3 Restated and Amended Bylaws of United Wisconsin Services,
Inc. dated February 25, 1998.
10.1 Employment and Noncompetition Agreement between United
Wisconsin Services, Inc., American Medical Security
Holdings, Inc., and Samuel V. Miller.
11 Statement regarding computation of per share earnings.
(See Note 1 of Notes to Interim Consolidated Financial
Statements).
(b) Reports on Form 8-K
None
12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: 5/14/98
-----------
UNITED WISCONSIN SERVICES, INC.
/s/ C. Edward Mordy
------------------------------------------
C. Edward Mordy
Vice President and Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
13
UNITED WISCONSIN SERVICES, INC.
INDEX TO EXHIBITS
Sequential
Exhibit Page
Number Document Description Number
- ------- -------------------- ----------
3 Restated and Amended Bylaws of United Wisconsin 15
Services, Inc. dated February 25, 1998.
10.1 Employment and Noncompetition Agreement between 46
United Wisconsin Services, Inc., American Medical
Security Holdings. Inc., and Samuel V. Miller.
11 Statement regarding computation of per share
earnings. (See Note 1 of Notes to Interim
Consolidated Financial Statements).
14