<PAGE>
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 PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 1-14177
UNITED WISCONSIN SERVICES, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1931212
(State of incorporation) (I.R.S. Employer
Identification No.)
401 WEST MICHIGAN STREET, MILWAUKEE, WISCONSIN 53203-2896
(Address of principal executive offices) (Zip Code)
(414) 226-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all documents and
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock outstanding as of October 31, 1998 was 16,573,202.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(000's omitted, except share data)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 27,679 $ 17,033
Investments--available for sale 147,879 151,653
Due from affiliates 5,470 313
Other receivables 59,608 53,753
Prepaid and other current assets 10,608 7,304
-------- --------
Total Current Assets 251,244 230,056
Investments--held to maturity 7,783 7,893
Property and equipment, net 8,658 6,978
Goodwill and other intangible assets, net 5,301 5,005
Other noncurrent assets 16,728 16,324
-------- --------
Total Assets $289,714 $266,256
-------- --------
-------- --------
</TABLE>
See Notes to Interim Consolidated Financial Statements.
2
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(000's omitted, except share data)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Medical and other benefits payable $ 69,327 $ 60,724
Advance premiums 31,021 24,060
Due to affiliates 4,933 3,867
Payables and accrued expenses 19,333 20,926
Other current liabilities 10,133 7,745
--------- ---------
Total Current Liabilities 134,747 117,322
Long-Term Debt - Affiliates 70,000 -
Other noncurrent liabilities 26,279 25,318
--------- ---------
Total Liabilities 231,026 142,640
Shareholders' Equity:
Preferred stock (no par value, 1,000,000 shares authorized) - -
Common stock (no par value, no stated value,
50,000,000 shares authorized, 16,573,202 and
16,509,578 issued and outstanding at September 30,
1998 and December 31, 1997, respectively) - -
Investments by and advances from AMSG - 120,405
Paid-in capital 11,423 -
Retained earnings 47,355 -
Unrealized gain (loss) on investments available for sale (90) 3,211
--------- ---------
Total Shareholders' Equity 58,688 123,616
--------- ---------
Total Liabilities and Shareholders' Equity $ 289,714 $ 266,256
--------- ---------
--------- ---------
</TABLE>
See Notes to Interim Consolidated Financial Statements.
3
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(000's omitted)
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums $153,738 $141,127 $452,340 $414,887
Net investment results 3,580 6,659 13,540 17,331
Other revenue 7,775 6,693 22,153 20,044
-------- -------- -------- --------
Total Revenues 165,093 154,479 488,033 452,262
Expenses:
Medical and other benefits 132,194 123,776 385,902 359,539
Selling, general and administrative expenses 25,255 23,453 75,929 70,656
Profit sharing on provider arrangements 674 1,073 2,087 2,261
Interest expense 254 - 254 -
Amortization of goodwill and intangibles 112 86 327 967
-------- -------- -------- --------
Total Expenses 158,489 148,388 464,499 433,423
-------- -------- -------- --------
Income before Income Taxes 6,604 6,091 23,534 18,839
Income Tax Expense 2,513 2,232 9,028 7,093
-------- -------- -------- --------
Net Income $ 4,091 $ 3,859 $ 14,506 $ 11,746
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See Notes to Interim Consolidated Financial Statements.
4
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1998 1997
--------- ----------
(000's omitted)
<S> <C> <C>
Cash Flows - Operating Activities:
Net Income from operations $ 14,506 $ 11,746
Adjustments to reconcile net income from operations
to net cash provided by operating activities:
Depreciation and amortization 1,848 2,183
Realized investment gains (6,340) (10,134)
Deferred income tax expense (benefit) 149 (899)
Changes in operating accounts:
Other receivables (5,358) 4,016
Medical and other benefits payable 7,174 517
Advance premiums 6,961 2,766
Due to/from affiliates (4,091) 10,707
Other, net (3,487) (10,960)
--------- ----------
Net Cash Provided by Operating Activities 11,362 9,942
Cash Flows - Investing Activities:
Purchases of available for sale investments (164,753) (153,126)
Proceeds from sale of available for sale investments 164,573 151,982
Proceeds from maturity of available for sale investments 5,575 7,535
Purchases of held to maturity investments (313) (417)
Proceeds from maturity of held to maturity investments 335 513
--------- ----------
Net Cash Provided By Investing Activities 5,417 6,487
Cash Flows - Financing Activities:
Decrease in investments by and advances from AMSG (6,133) (10,405)
--------- ----------
Net Cash Used in Financing Activities (6,133) (10,405)
Cash and Cash Equivalents:
Increase during period 10,646 6,024
Balance at beginning of year 17,033 19,147
--------- ----------
Balance at End of Period $ 27,679 $ 25,171
--------- ----------
--------- ----------
</TABLE>
See Notes to Interim Consolidated Financial Statements.
5
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
Note A. Creation and Basis of Presentation
On May 27, 1998, the Board of Directors of American Medical Security Group, Inc.
("AMSG") (formerly United Wisconsin Services, Inc.) approved a formal plan to
spin off its managed care companies and specialty business to its shareholders.
The spin off involved the creation of a new corporation originally named
Newco/UWS, Inc. and subsequently renamed United Wisconsin Services, Inc. ("UWS")
and the distribution of one share of common stock of UWS on September 25, 1998
(Distribution Date) for each share of AMSG common stock held as of September 11,
1998 (Record Date). AMSG has received a private letter ruling from the Internal
Revenue Service that the spin off is tax free to AMSG, UWS and their
shareholders.
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three-and nine-month
periods ended September 30, 1998 and 1997 are not necessarily indicative of the
results that may be expected for the years ending December 31, 1998 and 1997.
These interim consolidated financial statements should be read in conjunction
with the audited combined financial statements for the year ended December 31,
1997 and footnotes thereto included in the Newco/UWS, Inc. Form 10 Registration
Statement, as amended.
Certain estimates, assumptions and allocations were made in preparing the
interim consolidated financial statements in order to provide the results of
operations, financial positions or cash flows that would have existed had UWS
been a separate, independent company.
Note B. Net Income Per Share
Historical earnings per share ("EPS") have been omitted since UWS was not an
independent, publicly owned company with a capital structure of its own for any
of the fiscal periods presented in the accompanying Consolidated Statement of
Income.
6
<PAGE>
Note C. Pro Forma Financial Information (Unaudited)
UWS became an independent, publicly owned company on September 25, 1998 as a
result of the spin off from AMSG. In conjunction with the Distribution of assets
pursuant to the spin off, UWS assumed a $70 million note obligation to Blue
Cross & Blue Shield United of Wisconsin ("BCBSUW"). The assumption of debt was
effective September 11, 1998. The following unaudited pro froma information
presents a summary of the effect on net income as if the spin off had occurred
at the beginning of the respective periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Net income as reported $ 4,091 $ 3,859 $ 14,506 $ 11,746
Pro forma adjustment - interest expense, net 634 773 2,215 2,290
----------- ----------- ----------- -----------
Pro forma net income $ 3,457 $ 3,086 $ 12,291 $ 9,456
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Pro forma basic weighted average
common shares (1) 16,571,502 16,448,225 16,544,721 16,403,129
Pro forma dilutive weighted average
common shares (2) 16,571,502 16,448,225 16,544,721 16,403,129
EPS as reported - basic and diluted (3) $ 0.25 $ 0.23 $ 0.88 $ 0.72
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Pro forma EPS - basic and diluted (4) $ 0.21 $ 0.19 $ 0.74 $ 0.58
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(1) Pro forma EPS, are based on the pro forma weighted average number of shares
of outstanding UWS common stock and dilutive common equivalent share from
stock options, giving effect to the planned distribution of one share of
UWS stock for each share of AMSG common stock. Pro forma dilutive common
equivalent shares from stock options are stated at the historical UWS
dilutive common equivalent share level.
(2) Pro forma calculations for dilutive securities assume that the price of the
stock and the strike price of the options is the same for all periods as
the values on the date of the spin off (September 25, 1998).
(3) Basic EPS, as reported, are computed by dividing net income as reported, by
the pro forma weighted average number of common shares outstanding; as
noted above, there is no dilutive effect on securities (2).
(4) Pro forma diluted EPS are computed by dividing pro forma net income by the
pro forma weighted average number of common shares outstanding; as noted
above, there is no dilutive effect on securities (2).
Options to purchase 2,232,356 shares as of September 30, 1998, were not included
in the computation of earnings per diluted common share since the options'
exercise prices were greater than the average market price of the outstanding
common shares.
These unaudited pro forma results have been prepared for informational purposes
only and include the adjustment to historical results, based on additional
interest expense for the period from January 1, 1998 through September 11, 1998
and the nine months ended September 30, 1997, net of related income tax.
7
<PAGE>
The unaudited pro forma financial information presented above does not purport
to be indicative of the results of operations which actually would have resulted
had the transactions occurred at the beginning of the periods presented or of
the future results of operations.
Note D. Recent Accounting Pronouncements
Effective January 1, 1998, UWS adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), issued by
the Financial Accounting Standards Board (FASB) in June 1997. Comprehensive
income is defined therein as all changes in equity during the period except
those resulting from shareholder equity contributions and distributions.
Comprehensive income from operations is stated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(000's omitted)
<S> <C> <C> <C> <C>
Net income per Statement of Income $ 4,091 $ 3,859 $ 14,506 $ 11,746
Unrealized gain (loss) on investments (1,337) 557 (3,301) 80
-------- -------- -------- --------
Comprehensive income $ 2,754 $ 4,416 $ 11,205 $ 11,826
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Accumulated effect of comprehensive income was $(0.1) million and $3.2
million on 9/30/98 and 12/31/97, respectively.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the reporting of operating segment information in both annual
financial reports and interim financial reports issued to shareholders.
Operating segments are components of an entity for which separate financial
information is available and is evaluated regularly by the entity's chief
operating management. SFAS 131 is effective for fiscal years beginning after
December 15, 1997 and is not required to be adopted in interim financial
reports during the first year of adoption. Adoption of this statement is not
expected to have a material impact on UWS.
Note E. Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 1997 to conform with the 1998 presentation.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UNITED WISCONSIN SERVICES, INC.
OVERVIEW
United Wisconsin Services, Inc. ("UWS") is a leading provider of managed
health care services and employee benefit products, primarily in Wisconsin.
UWS has two primary product lines: (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, and (ii)
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.
On May 27, 1998, the Board of Directors of American Medical Security Group,
Inc. ("AMSG") (formerly United Wisconsin Services, Inc.) approved a formal
plan to spin off its managed care companies and specialty business to its
shareholders. The spin off involved the creation of a new corporation
originally named Newco/UWS, Inc. subsequently renamed United Wisconsin
Services, Inc. ("UWS") and the distribution of one share of common stock of
UWS on September 25, 1998 for each share of AMSG common stock held as of
September 11, 1998 (Record Date). AMSG has received a private letter ruling
from the Internal Revenue Service that the spin off is tax free to AMSG, UWS
and their shareholders.
RESULTS OF OPERATIONS
TOTAL REVENUES
Total revenues for the three months ended September 30, 1998 increased
6.9% to $165.1 million from $154.5 million for the three months ended
September 30, 1997. On a year-to-date basis, total revenues increased 7.9% to
$488.0 million from $452.3 million for the nine months ended September 30,
1997. These increases were due primarily to increased membership in a
majority of the product lines and general premium increases.
HEALTH SERVICES REVENUES -- HMO health services revenues for the three
months ended September 30, 1998 increased 8.8% to $131.7 million from $121.0
million for the three months ended September 30, 1997. Average HMO medical
premium per member for the three months ended September 30, 1998 increased
5.9% from the same period in the prior year. The average number of HMO
medical members for the three months ended September 30, 1998 increased 2.3%
to 299,130 from 292,343 for the three months ended September 30, 1997.
HMO health services revenues for the nine months ended September 30,
1998 increased 8.6% to $386.4 million from $355.8 million for the same period
in the prior year. Average HMO medical premium per member for the nine months
ended September 30, 1998 increased 4.2% from the same period in the prior
year, primarily due to general premium increases. The average number of HMO
medical members for the nine months ended September 30, 1998 increased 4.0%
to 295,981 from 284,658 for the same period in the prior year.
Health services revenues for specialty managed care products and
services for the three months ended September 30, 1998 increased 13.0% to
$34.9 million from $30.9 million for the three months ended September 30,
1997. Health services revenues for specialty managed care products and
services for the nine months ended September 30, 1998 increased 10.9% to
$101.1 million from $91.1 million for the nine months ended September 30,
1997. This increase was due primarily to an increase in general membership in
both periods.
9
<PAGE>
NET INVESTMENT RESULTS -- Investment results include investment income
and realized gains on investments. Investment results for the three months
ended September 30, 1998 decreased 46.2% to $3.6 million from $6.7 million
for the three months ended September 30, 1997. On a year-to-date basis,
investment results decreased 21.9% to $13.5 million from $17.3 million for
the same period in the prior year. Average annual investment yields,
excluding net realized gains, were 5.3% for the three months ended September
30, 1998 and 6.0% for the three months ended September 30, 1997. On a
year-to-date basis, average investment yields, excluding net realized gains,
were 5.5% and 5.7% for 1998 and 1997, respectively. Average invested assets
for the three months ended September 30, 1998 decreased 3.4% to $181.3
million from $187.7 million for the three months ended September 30, 1997. On
a year-to-date basis, average invested assets decreased 0.1% to $181.4
million compared to $183.2 million for the same period in 1997.
Investment gains are realized in the normal investment process in response to
market opportunities. Realized gains for the three months ended September 30,
1998 were $1.3 million compared to $3.9 million for the three months ended
September 30, 1997. On a year to date basis, realized gains were $6.3 million
in 1998 compared to $10.1 million in 1997.
EXPENSE RATIOS
LOSS RATIO -- The consolidated loss ratio represents the ratio of
medical and other benefits to premium revenue on a consolidated basis, and is
therefore a blended ratio for medical, life, dental, disability and other
product lines. The consolidated loss ratio was 86.0% for the third quarter of
1998 compared with 87.7% for the third quarter of 1997. On a year-to-date
basis, the consolidated loss ratio was 85.3% for the first nine months of
1998, compared with 86.7% for the first nine months of 1997. The consolidated
loss ratio is influenced by the component loss ratio for each of UWS's
primary product lines, as discussed below.
The medical loss ratio for HMO products for the three months ended
September 30, 1998 was 89.4%, compared with 91.3% for the three months ended
September 30, 1997. On a year-to-date basis, the medical loss ratio for HMO
products was 88.7%, compared with 90.1% for the same period in 1997. The
decrease in the medical loss ratio in 1998 for HMO products is due primarily
to provider recontracting with a continuing shift toward capitation in the
southeastern Wisconsin HMO market. For the nine months ended September 30,
1998, approximately 55.7% of the medical benefits were provided under
capitated arrangements compared to 48.6% during the comparable period in 1997.
The loss ratio for the risk products within specialty managed care
products and services for the three months ended September 30, 1998 was
71.3%, which was consistent with the three months ended September 30, 1997.
On a year-to-date basis, the loss ratio for risk products within specialty
managed care products and services was 70.7% compared with 71.3% for the same
period in the prior year. 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 third quarter of 1998 was 9.0%,
compared with 8.8% for the third quarter of 1997. On a year-to-date basis,
the SGA expense ratio for HMO products was slightly higher for 1998 at 9.3%
compared to 9.2% for the same period in 1997.
SGA expense ratio related to the risk products within specialty managed
care products and services for the third quarter of 1998 was 25.0%, compared
with 24.0% for the third quarter of 1997. On a year-to-date basis, SGA
expense ratio for the risk products was 25.4% for 1998 compared with 23.4%
for the same period in 1997. This increase was due to higher investments in
improved system capabilities and enhancements and related system conversion
and training costs, in addition to loss adjustment expenses recorded on the
workers' compensation business which was transferred from the TPA unit.
The operating expense ratio related to the service products within
specialty managed care products and services for the third quarter of 1998
was 91.2%, compared with 97.7% for the third quarter of 1997. On a
10
<PAGE>
year-to-date basis, the operating expense ratio for the service products was
91.5% for the nine months ended September 30, 1998 compared with 98.0% for
the same period in 1997. Those reductions in 1998 are primarily related to
loss adjustment expenses previously recorded by the workers' compensation TPA
unit to the workers' compensation risk products business.
OTHER EXPENSES
Profit sharing on joint ventures was $0.7 million for the three months
ended September 30, 1998 compared with $1.1 million for the three months
ended September 30, 1997. On a year-to-date basis, profit sharing on provider
arrangements was $2.1 million for the nine months ended September 30, 1998
and $2.3 million for the same period in 1997. These balances represent profit
sharing expenses related to the Unity and Valley provider arrangements.
Amortization of goodwill and other intangibles remained consistent at
$0.1 million for the three months ended September 30, 1998 and 1997. On a
year-to-date basis, amortization of goodwill and other intangibles totaled
$0.3 million for 1998 compared with $1.0 million of amortization expense for
the same period in 1997. The reduction is due to full amortization of certain
intangibles.
NET INCOME FROM OPERATIONS
Net income from operations for the three months ended September 30, 1998
increased 6.0% to $4.1 million from $3.9 million for the three months ended
September 30, 1997. Net income from operations for the nine months ended
September 30, 1998 increased 23.5% to $14.5 million from $11.7 million for
the nine months ended September 30, 1997.
UWS's effective tax rate was 38.1% for the three months ended September
30, 1998 compared with 36.6% for the three months ended September 30, 1997.
On a year-to-date basis, UWS's effective tax rate was 38.4% for the nine
months ended September 30, 1998, compared with 37.7% for the nine months
ended September 30, 1997. UWS's effective tax rate fluctuates based upon the
relative profitability of UWS's two product lines and the differing effective
tax rate for each of those product lines.
SUMMARY OF OPERATING RESULTS AND STATISTICS
Operating results and statistics for the two primary product groups are
presented below for the periods indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
Membership at end of period: 1998 1997
---- ----
<S> <C> <C>
HMO products by business unit:
- -----------------------------
Compcare 174,027 172,606
Valley 40,752 37,730
Unity 86,604 83,481
------- -------
Total HMO products membership 301,383 293,817
------- -------
------- -------
Specialty managed care products and services:
- --------------------------------------------
UWG Life/AD&D 150,811 125,501
Dental - HMO 168,528 169,271
UWG Dental 12,160 13,133
Disability 106,727 78,866
Behavioral Health 969,892 857,898
Workers' Compensation 53,365 55,747
------- -------
Total Specialty managed care
products and services membership 1,461,483 1,300,416
--------- ---------
--------- ---------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Health services revenues (as a percentage of the total):
HMO products 81.6% 81.9% 81.4% 81.8%
Specialty managed care products and services
Service Products 7.0% 6.7% 6.8% 6.8%
Risk Products 14.6% 14.1% 14.5% 14.1%
Intercompany eliminations (3.2%) (2.7%) (2.7%) (2.7%)
------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating statistics:
HMO products:
Medical loss ratio (1) 89.4% 91.3% 88.7% 90.1%
Selling, general, & administrative
expense ratio (2) 9.0% 8.8% 9.3% 9.2%
Combined loss and expense ratio 98.4% 100.1% 98.0% 99.3%
Specialty managed care products and services:
Service products:
Operating expense ratio* 91.2% 97.7% 91.5% 98.0%
Risk products:
Loss ratio (1) 71.3% 71.3% 70.7% 71.3%
Selling, general, & administrative
expense ratio (2) 25.0% 24.0% 25.4% 23.4%
Combined loss and expense ratio 96.3% 95.3% 96.1% 94.7%
Consolidated:
Loss ratio (1) 86.0% 87.7% 85.3% 86.7%
Net income margin (3) 2.5% 2.5% 3.0% 2.6%
</TABLE>
(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.
* This business does not have insurance related risk associated with it.
UWS'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.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
UWS'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. UWS's investment policies are designed to maximize yield, preserve
principal and provide liquidity to meet anticipated payment obligations.
On a historical basis, UWS has generated positive cash flow from operations.
For the nine months ended September 30, 1998, net cash provided by operating
activities amounted to $11.4 million, compared with $9.9 million for the nine
months ended September 30, 1997. The increase in cash flows from operations
in 1998 compared to 1997 was due primarily to an increase in earnings,
medical and other benefits payable and premium advances. Due to periodic cash
flow requirements of certain subsidiaries, UWS made borrowings under its bank
line of credit ranging up to $10.0 million during the first nine months of
1998 and $8.5 million during the first nine months of 1997 to meet short-term
cash needs. No balance was outstanding at September 30, 1998 or at December
31, 1997.
UWS's investment portfolio consists primarily of investment grade bonds,
Government securities and has a limited exposure to equity securities. At
September 30, 1998, $126.4 million or 81.0% of UWS's total investment
portfolio was invested in bonds compared with $127.8 million or 80.1% at
December 31, 1997. The bond portfolio had an average quality rating by
Moody's Investor Service of A1 and Aa3 at September 30, 1998 and December 31,
1997, respectively. The majority of the bond portfolio was classified as
available for sale. The market value of the total investment portfolio, which
includes stocks and bonds, exceeded amortized cost by $0.6 million and $4.8
million at September 30, 1998 and December 31, 1997, respectively. UWS 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, capital contributions are made to the 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 UWS'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 dates presented, statutory capital
and surplus for each of these insurance subsidiaries exceeded required levels.
In conjunction with the Distribution of assets pursuant to the spin off, UWS
assumed a $70 million note obligation to Blue Cross & Blue Shield United of
Wisconsin ("BCBSUW"). The assumption of debt was effective September 11,
1998. The obligation and related debt service costs of $0.3 million, for the
period subsequent to September 11, 1998, have been reflected in the
accompanying interim consolidated financial statements.
In addition to internally generated funds and periodic borrowings on its bank
line of credit, UWS believes that additional financing to facilitate
long-term growth could be obtained through equity offerings, debt offerings,
financings from BCBSUW or bank borrowings, as market conditions may permit or
dictate.
13
<PAGE>
YEAR 2000 ISSUES
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
UWS has identified required modifications or replacements of its
software and certain hardware so that those systems will properly utilize
dates beyond December 31, 1999. UWS presently believes that with these
modifications or replacements of existing software and certain hardware, the
Year 2000 Issue can be mitigated and will not pose significant operational
problems. However, if such modifications and conversions are not made or are
not completed timely, the Year 2000 Issue could have a material impact on the
operations of UWS.
UWS's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing, and implementation. To date, UWS
has fully completed its assessment of all systems that could be significantly
affected by the Year 2000 Issue. The completed assessment indicated that most
of UWS's significant information technology systems could be affected,
particularly the general ledger, billing and processing of medical claims.
That assessment also indicated that software and hardware (embedded chips)
used in building operations and office equipment (hereafter also referred to
as non-IT systems) also are at risk. UWS does not believe that the Year 2000
Issue presents a material exposure as it relates to UWS's non-IT systems. In
addition, UWS has inquired and gathered information about the Year 2000
readiness status of its significant suppliers and vendors and continues to
monitor their readiness.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR
COMPLETION OF EACH REMAINING PHASE
As of September 30, 1998, UWS is approximately 70% complete on the
remediation phase for its information technology exposures. UWS also expects
to complete software reprogramming and replacement no later than December 31,
1998. Once software is reprogrammed or replaced for a system, UWS will begin
testing and implementation. These phases are expected to run concurrently for
different systems. For all systems where UWS has completed the remediation
phase, UWS has also completed the testing and implementation phases. For
those systems where remediation is still underway, UWS expects to complete
remediation, testing and implementation by March 1, 1999.
The remediation phase of non-IT systems is nearly complete. Testing of
remediated non-IT systems is approximately 65% complete. Once testing is
complete, the non-IT systems are expected to be ready for immediate use. UWS
expects to complete its remediation efforts, testing and implementation of
affected non-IT systems by March 31, 1999.
14
<PAGE>
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE
YEAR 2000
UWS outsources and relies extensively on third party systems to process
selected payroll, membership and claims processing functions, among others.
UWS is in the process of working with third party vendors to ensure that
their systems are Year 2000 ready. UWS is currently completing a claims
system conversion for one of its units, which is expected to be complete by
December 31, 1998. Upgrades and testing of the membership system for that
same unit is expected by March 1, 1999. Based on discussions with these key
vendors, UWS is of the understanding that the vendor systems utilized by UWS
are or will be year 2000 ready.
UWS has initiated formal communications with its systems processing
vendors, government agencies and all large customers and providers using
electronic interfaces to determine the extent to which UWS's interface
systems are vulnerable to the failure of third parties to remediate Year 2000
Issues. UWS is not aware of any significant interface issues.
UWS has surveyed its significant suppliers and subcontractors (external
agents) that do not share information systems with UWS. To date, UWS is not
aware of any external agent with a Year 2000 issue that would materially
impact UWS's results of operations, liquidity, or capital resources. However,
UWS has no means of ensuring that external agents will be Year 2000 ready.
The inability of external agents to complete their Year 2000 resolution
process in a timely fashion could materially impact UWS. The effect of
non-compliance by external agents is not determinable.
COST OF THE YEAR 2000 PROJECT
UWS has utilized both internal and external resources to reprogram or
replace, test and implement the software and non-IT systems for the Year 2000
modifications. The total cost of the Year 2000 project is estimated at $0.7
million and is being funded through operating cash flows. To date, UWS has
incurred $0.5 million of identifiable costs related to all phases of the Year
2000 project. Remaining costs, to be incurred to complete the Year 2000
project, are estimated to approximate $0.2 million. An additional $6.1
million of costs were incurred to replace systems primarily the result of a
service agreement expiration and to provide additional functionality. These
replacements also included Year 2000 readiness but were not the result of
acceleration due to Year 2000 Issues. In addition, UWS has capitalized $0.9
million and will capitalize an additional $0.2 million related to other
functionality enhancing system upgrades which also provide Year 2000
readiness. A number of other repairs to current systems are covered by
existing maintenance agreements and by normal upgrades and do not present
incremental additional expense.
Costs related to maintenance of existing computer hardware and software
are expensed as incurred. Purchases of new hardware or software in
replacement of non-compliant hardware or software and reprogramming costs are
being capitalized in accordance with UWS's standard accounting practices.
RISKS ASSOCIATED WITH YEAR 2000
UWS Management believes it has an effective program in place to resolve
the Year 2000 issue in a timely manner. As noted above, UWS has not yet
completed all necessary phases of the Year 2000 program. In the event that
UWS is unable to complete the remaining phases, UWS would selectively be
unable to bill and collect premiums, adjudicate medical and other claims,
manage the utilization of medical services or perform actuarial
determinations. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect UWS. UWS could
be subject to litigation on a loss of business in the event it failed to
complete certain of the remaining remediation and implementation steps. The
amount of any potential liability and lost revenue cannot be reasonably
estimated at this time. No provision for any such liability or lost revenue
has been recorded.
15
<PAGE>
CONTINGENCY PLANS
UWS is developing contingency plans for certain critical applications
and is working on such plans with major data center vendors. These
contingency plans are being developed in the event the system conversions and
their functionality or the readiness of Year 2000 are not completed on a
timely basis. These contingency plans involve, among other actions, manual
workarounds, reducing claim inventories prior to December 31, 1999, and
adjusting staffing strategies.
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 or events to differ materially from those
contemplated by such forward looking statements. Forward-looking statements
may include, but are not limited to, projections of revenues, income or
losses, capital expenditures, plans for future operations, financing needs or
plans, compliance with financial covenants in loan agreements, plans relating
to products or services of the Company, assessments of materiality,
predictions of future events, the ability to obtain additional financing, the
Company's ability to meet obligations as they become due, as well as
assumptions relating to the foregoing. In addition, when used in this
discussion, the words "anticipates," "believes," "estimates," "expects,"
"intends," "plans" and similar expressions are intended to identify
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, economic and business
conditions and competition in the managed care industry, development of
claims reserves, developments in health care reform and other regulatory
issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the General Intractions to Rule 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by
Rule 305 of Regulation S-K are inapplicable to UWS at this time.
16
<PAGE>
PART II. OTHER INFORMATION
UNITED WISCONSIN SERVICES, INC.
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
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 United Wisconsin Services, Inc. Equity Incentive Plan,
as revised effective September 11, 1998.
10.2 Amendment to Employee Benefits Agreement between United
Wisconsin Services, Inc. and Newco/UWS, Inc. effective
September 21, 1998.
(b) Reports on Form 8-K
None
17
<PAGE>
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: 11/13/98
----------------------
UNITED WISCONSIN SERVICES, INC.
/s/ C. Edward Mordy
-------------------------------------------
C. Edward Mordy
Vice President and Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
18
<PAGE>
UNITED WISCONSIN SERVICES, INC.
INDEX TO EXHIBITS
Exhibit
Number Document Description
- ------- --------------------
10.1 United Wisconsin Services, Inc. Equity
Incentive Plan, as revised effective
September 11, 1998.
10.2 Amendment to Employee Benefits Agreement
between United Wisconsin Services, Inc. and
Newco/UWS, Inc. effective September 21, 1998.
19
<PAGE>
EQUITY INCENTIVE PLAN
UNITED WISCONSIN SERVICES, INC.
SEPTEMBER 11, 1998
THIS DOCUMENT CONSTITUTES PART
OF A PROSPECTUS COVERING SECURITIES
THAT HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
UNITED WISCONSIN SERVICES, INC.
EQUITY INCENTIVE PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Article Section Page
- ------- ------- ----
1 ESTABLISHMENT, PURPOSE, AND DURATION
1.1 Establishment of the Plan 1
1.2 Purpose of the Plan 1
1.3 Duration of the Plan 2
2 DEFINITIONS 2
3 ADMINISTRATION
3.1 The Committee 9
3.2 Authority of the Committee 9
3.3 Decisions Binding 9
4 SHARES SUBJECT TO THE PLAN
4.1 Number of Shares 10
4.2 Lapsed Awards 12
4.3 Adjustments in Authorized Shares 12
5 ELIGIBILITY AND PARTICIPATION
5.1 Eligibility 12
5.2 Actual Participation 12
6 STOCK OPTIONS
6.1 Grant of Options 13
6.2 Option Award Agreement 15
6.3 Option Price 16
6.4 Duration of Options 16
6.5 Exercise of Options 16
6.6 Payment 16
6.7 Restrictions on Share Transferability 17
6.8 Termination of Employment Due to Death, Disability or
Retirement 17
6.9 Termination of Employment for
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Other Reasons 19
6.10 Transferability of Options 19
7 STOCK APPRECIATION RIGHTS
7.1 Grant of SARs 20
7.2 Exercise of Tandem SARs 21
7.3 Exercise of Affiliated SARs 21
7.4 Exercise of Freestanding SARs 21
7.5 SAR Agreement 22
7.6 Term of SARs 22
7.7 Payment of SAR Amount 22
7.8 Rule 16b-3 Requirements 22
7.9 Termination of Employment Due to Death Disability, or
Retirement 23
7.10 Termination of Employment for Other Reasons 24
7.11 Nontransferability of SARs 24
8 RESTRICTED STOCK
8.1 Grant of Restricted Stock 25
8.2 Restricted Stock Agreement 25
8.3 Transferability 25
8.4 Other Restrictions 25
8.5 Certificate Legend 26
8.6 Removal of Restrictions 26
8.7 Voting Rights 26
8.8 Dividends and Other Distributions 26
8.9 Termination of Employment Due to Death, Disability, or
Retirement 27
8.10 Termination of Employment for Other Reasons 27
9 PERFORMANCE UNITS AND PERFORMANCE SHARES
9.1 Grant of Performance Units/Shares 28
9.2 Value of Performance Units/Shares 28
9.3 Earning of Performance Units/Shares 28
9.4 Form and Timing of Payment of Performance Units/Shares 28
9.5 Termination of Employment Due to Death,
Disability, Retirement, or Involuntary Termination
(without Cause) 29
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
9.6 Termination of Employment for Other Reasons 29
9.7 Nontransferability 29
10 BENEFICIARY DESIGNATION 30
11 DEFERRALS 30
12 RIGHTS OF EMPLOYEES
12.1 Employment 30
12.2 Participation 31
13 CHANGE IN CONTROL 31
14 AMENDMENT, MODIFICATION, AND TERMINATION
14.1 Amendment, Modification, and Termination 32
14.2 Awards Previously Granted 32
15 WITHHOLDING
15.1 Tax Withholding 32
15.2 Share Withholding 32
16 INDEMNIFICATION 34
17 SUCCESSORS 34
18 LEGAL CONSTRUCTION
18.1 Gender and Number 35
18.2 Severability 35
18.3 Requirements of Law 35
18.4 Securities Law Compliance 35
18.5 Governing Law 36
</TABLE>
iii
<PAGE>
UNITED WISCONSIN SERVICES, INC.
EQUITY INCENTIVE PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. United Wisconsin Services, Inc. (until
the Effective Date known as Newco/UWS, Inc.), a Wisconsin corporation
(hereinafter referred to as the "Company"), hereby establishes an incentive
compensation plan to be known as the "United Wisconsin Services, Inc. Equity
Incentive Plan" (hereinafter referred to as the "Plan"), as set forth in this
document. The Plan permits the grant of Nonqualified Stock Options,
Incentive Stock Options, SARs, Restricted Stock, Performance Units, and
Performance Shares.
This Plan is being created in connection with the distribution (the
"Distribution"), by the corporation formerly known as United Wisconsin
Services, Inc. of all of the shares in the Company in connection with the
spin-off of the managed care and specialty products business to the Company
and the assumption by the Company of the United Wisconsin Services, Inc.
name. In connection with the Distribution, options ("Substituted Options")
will be issued under this Plan in substitution for options issued under the
equity incentive plan of the corporation formerly known as United Wisconsin
Services, Inc. (the "Prior Plan").
Upon approval by the Board of Directors of the Company, subject to
ratification by an affirmative vote of a majority of Shares of the Company,
the Plan shall become effective as of the Distribution Date (the "Effective
Date"), and shall remain in effect as provided in Section 1.3 herein.
1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the
success, and enhance the value, of the Company by linking the personal
interests of Participants to those of Company shareholders, and by providing
Participants with an incentive for outstanding performance.
<PAGE>
The Plan is further intended to provide flexibility to the Company in
its ability to motivate, attract, and retain the services of Participants
upon whose judgment, interest, and special effort the successful conduct of
its operation is dependent.
1.3 DURATION OF THE PLAN. Subject to approval by the Board of
Directors of the Company and ratification by the shareholders of the Company,
the Plan shall commence on the Effective Date, as described in Section 1.1
herein, and shall remain in effect, subject to the right of the Board of
Directors to terminate the Plan at any time pursuant to Article 14 herein,
until all Shares subject to it shall have been purchased or acquired
according to the Plan's provisions. However, in no event may an Award be
granted under the Plan more than ten years after the Effective Date.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings
set forth below and, when the meaning is intended, the initial letter of the
word is capitalized:
(a) "Affiliate" - A company closely related to UWSI such as Blue
Cross & Blue Shield United of Wisconsin, or such other company as
the Board may designate. For purposes of options received in
connection with the Distribution, American Medical Security
Group, Inc. (and its subsidiaries) will be considered Affiliates.
(b) "Affiliated SAR" means a SAR that is granted in connection with a
related Option, and which will be deemed to automatically be
exercised simultaneous with the exercise of the related Option.
(c) "Award" means, individually or collectively, a grant under this
Plan of Nonqualified Stock Options, Incentive Stock Options,
SARs,
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<PAGE>
Restricted Stock, Performance Units, or Performance Shares.
(d) "Award Agreement" means an agreement entered into by each
Participant and the Company, setting forth the terms and
provisions applicable to Awards granted to Participants under
this Plan.
(e) "Beneficial Owner" shall have the meaning ascribed to such term
in Rule 13d-3 of the General Rules and Regulations under the
Exchange Act.
(f) "Board" or "Board of Directors" means the Board of Directors of
the Company.
(g) "Cause" means: (I) willful and gross misconduct on the part of a
Participant that is materially and demonstrably detrimental to
the Company; or (ii) the commission by a Participant of one or
more acts which constitute an indictable crime under United
States Federal, state, or local law. "Cause" under either (I) or
(ii) shall be determined in good faith by the Committee.
(h) "Change in Control" of the Company shall be deemed to have
occurred as of the first day that any one or more of the
following conditions shall have been satisfied:
(i) Any Person (other than those Persons in control of the
Company as of the Effective Date, or other than a trustee
or other fiduciary holding securities under an employee
benefit plan of the Company, or a corporation owned
directly or indirectly by the stockholders of the Company
in
-3-
<PAGE>
substantially the same proportions as their ownership
of stock of the Company), becomes the Beneficial Owner,
directly or indirectly, of securities of the Company
representing twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding
securities; or
(ii) During any period of two (2) consecutive years (not
including any period prior to the Effective Date),
individuals who at the beginning of such period constitute
the Board (and any new Director, whose election by the
Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the Directors then still in office who
either were Directors at the beginning of the period or
whose election or nomination for election was so
approved), cease for any reason to constitute a majority
thereof; or
(iii) The stockholders of the Company approve: (A) a plan of
complete liquidation of the Company; or (B) an agreement
for the sale or disposition of all or substantially all
the Company's assets; or -C- a merger, consolidation, or
reorganization of the Company with or involving any other
corporation, other than a merger, consolidation, or
reorganization that would result in the voting securities
of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding
or by being converted into voting securities of the
surviving entity), at least fifty percent (50%) of the
combined voting power of the voting securities of the
Company (or such
-4-
<PAGE>
surviving entity) outstanding immediately after such
merger, consolidation, or reorganization.
However, in no event shall a "Change in Control" be deemed
to have occurred, with respect to a Participant, if the
Participant is part of a purchasing group which
consummates the Change-in-Control transaction. A
Participant shall be deemed "part of a purchasing group"
for purposes of the preceding sentence if the Participant
is an equity participant in the purchasing company or
group (except for: (I) passive ownership of less than
three percent (3%) of the stock of the purchasing company;
or (ii) ownership of equity participation in the
purchasing company or group which is otherwise not
significant, as determined prior to the Change in Control
by a majority of the nonemployee continuing Directors).
(i) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(j) "Committee" means the Management Review Committee, as specified
in Article 3, appointed by the Board to administer the Plan with
respect to grants of Awards.
(k) "Company" means United Wisconsin Services, Inc., a Wisconsin
corporation, (until the Effective Date known as Newco/UWS, Inc.)
or any successor thereto as provided in Article 17 herein.
(l) "Director" means any individual who is a Non-Employee member of
-5-
<PAGE>
the Board of Directors of the Company.
(m) "Directors Plan" means the 1995 Directors Stock Option Plan of
United Wisconsin Services, Inc.
(n) "Disability" means a permanent and total disability, within the
meaning of Code Section 22(e)(3), as determined by the Committee
in good faith, upon receipt of sufficient competent medical
advice from one or more individuals, selected by the Committee,
who are qualified to give professional medical advice.
(o) "Distribution Date" means the date the stock of the Company is
distributed by the corporation formerly known as United Wisconsin
Services, Inc.
(p) "Employee" means any full-time employee of the Company or of the
Company's Subsidiaries or Affiliates. Directors who are not
otherwise employed by the Company shall not be considered
Employees under this Plan.
(q) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor Act thereto.
(r) "Fair Market Value" means the closing price for Shares on the
relevant date, or (if there were no sales on such date) the
average of closing prices on the nearest day before and the
nearest day after the relevant date, on a stock exchange or over
the counter, as determined by the Committee.
-6-
<PAGE>
(s) "Freestanding SAR" means a SAR that is granted independently of
any Options.
(t) "Incentive Stock Option" or "ISO" means an option to purchase
Shares, granted under Article 6 herein, which is designated as an
Incentive Stock Option and is intended to meet the requirements
of Section 422 of the Code.
(u) "Insider" shall mean a Participant who is, on the relevant date,
an officer, Director or 10% shareholder of the Company, subject
to Section 16 of the Exchange Act.
(v) "Nonqualified Stock Option" or "NQSO" means an option to purchase
Shares, granted under Article 6 herein, which is not intended to
be an Incentive Stock Option.
(w) "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.
(x) "Option Price" means the price at which a Share may be purchased
by a Participant pursuant to an Option, as determined by the
Committee.
(y) "Participant" means an Employee or a Director who has outstanding
an Award granted under the Plan.
(z) "Performance Unit" means an Award granted to an Employee, as
described in Article 9 herein.
-7-
<PAGE>
(aa) "Performance Share" means an Award granted to an Employee,
as described in Article 9 herein.
(bb) "Period of Restriction" means the period during which the
transfer of Shares of Restricted Stock is limited in some way
(based on the passage of time, the achievement of performance
goals, or upon the occurrence of other events as determined by
the Committee, at its discretion), and the Shares are subject to
a substantial risk of forfeiture, as provided in Article 8
herein.
(cc) "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d).
(dd) "Restricted Stock" means an Award granted to a Participant
pursuant to Article 8 herein.
(ee) "Retirement" shall have the meaning ascribed to it in the
tax-qualified defined benefit retirement plan of the Company.
(ff) "Shares" means the shares of common stock of the Company.
(gg) "Subsidiary" means any corporation in which the Company owns
directly, or indirectly through subsidiaries, at least fifty
percent (50%) of the total combined voting power of all classes
of stock, or any other entity (including, but not limited to,
partnerships and joint ventures) in which the Company owns at
least fifty percent (50%) of the combined equity thereof.
-8-
<PAGE>
(hh) "Substituted Option" means an option issued under this Plan in
substitution for options issued under another stock option plan,
including but not limited to options issued pursuant to the Prior
Plan and the Directors Plan.
(ii) "Stock Appreciation Right" or "SAR" means an Award, granted alone
or in connection with a related Option, designated as a SAR,
pursuant to the terms of Article 7 herein.
(jj) "Tandem SAR" means a SAR that is granted in connection with a
related Option, the exercise of which shall require forfeiture of
the right to purchase a Share under the related Option (and when
a Share is purchased under the Option, a SAR shall similarly be
canceled).
(kk) "Window Period" means the period beginning on the third business
day following the date of public release of the Company's
quarterly sales and earnings information, and ending on the
thirtieth day following such date.
ARTICLE 3. ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Management
Review Committee of the Board, or by any other Committee appointed by the
Board consisting of not less than two (2) Directors who are not Employees.
The members of the Committee shall be appointed from time to time by, and
shall serve at the discretion of, the Board of Directors.
All members of the Committee shall be Non-Employee Directors.
"Non-
-9-
<PAGE>
Employee Directors," as defined in rule 16b-3 promulgated by the Securities
and Exchange Commission ("SEC") under the Exchange Act, means a director who
(I) is not currently an officer or otherwise employed by the Company or any
affiliate (ii) does not receive compensation for consulting service or in any
other capacity from the Company in excess of $60,000 in any one year, (iii)
does not possess an interest in and is not engaged in business relationships
required to be reported under Items 404(a) or 404(b) of Regulation S-K
promulgated under the Exchange Act and (iv) is an Outside Director as defined
in Treas. Reg. 1.162-27.
3.2 AUTHORITY OF THE COMMITTEE. The Committee shall have full power
except as limited by law or by the Articles of Incorporation or Bylaws of the
Company, and subject to the provisions herein, to determine the size and
types of Awards with respect to Employees; to determine the terms and
conditions of such Employee Awards in a manner consistent with the Plan; to
construe and interpret the Plan and any agreement or instrument entered into
under the Plan; to establish, amend, or waive rules and regulations for the
Plan's administration; and (subject to the provisions of Article 14 herein)
to amend the terms and conditions of any outstanding Award to the extent such
terms and conditions are within the discretion of the Committee as provided
in the Plan. Further, the Committee shall make all other determinations which
may be necessary or advisable for the administration of the Plan. As
permitted by law, the Committee may delegate its authority as identified
hereunder.
3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board of Directors shall be final, conclusive, and binding
on all persons, including the Company, its stockholders, Employees,
Directors, Participants, and their estates and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
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<PAGE>
4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3
herein, the total number of Shares available for grant under the Plan may not
exceed 4,500,000. These 4,500,000 Shares may be either authorized but
unissued or reacquired Shares.
The following rules will apply for purposes of the determination of the
number of Shares available for grant under the Plan:
(a) While an Award is outstanding, it shall be counted against the
authorized pool of Shares, regardless of its vested status.
(b) The grant of an Option or Restricted Stock shall reduce the
Shares available for grant under the Plan by the number of Shares
subject to such Award.
(c) The grant of a Tandem SAR shall reduce the number of Shares
available for grant by the number of Shares subject to the
related Option (i.e., there is no double counting of Options and
their related Tandem SARs).
(d) The grant of an Affiliated SAR shall reduce the number of Shares
available for grant by the number of Shares subject to the SAR,
in addition to the number of Shares subject to the related
Option.
(e) The grant of a Freestanding SAR shall reduce the number of Shares
available for grant by the number of Freestanding SARs granted.
-11-
<PAGE>
(f) The Committee shall in each case determine the appropriate number
of Shares to deduct from the authorized pool in connection with
the grant of Performance Units and/or Performance Shares.
(g) To the extent that an Award is settled in cash rather than in
Shares, the authorized Share pool shall be credited with the
appropriate number of Shares represented by the cash settlement
of the Award, as determined at the sole discretion of the
Committee (subject to the limitation set forth in Section 4.2
herein).
4.2 LAPSED AWARDS. If any Award granted under this Plan is canceled,
terminates, expires, or lapses for any reason (with the exception of the
termination of a Tandem SAR upon exercise of the related option, or the
termination of a related Option upon exercise of the corresponding Tandem
SAR), any Shares subject to such Award again shall be available for the grant
of an Award under the Plan.
4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger,
reorganization, consolidation, recapitalization, separation, liquidation,
stock dividend, split-up, Share combination, or other change in the corporate
structure of the Company affecting the Shares, such adjustment shall be made
in the number and class of Shares which may be delivered under the Plan, and
in the number and class of and/or price of Shares subject to outstanding
Options, SARs, and Restricted Stock granted under the Plan, as may be
determined to be appropriate and equitable by the Committee, in its sole
discretion, to prevent dilution or enlargement of rights; and provided that
the number of Shares subject to any Award shall always be a whole number.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 ELIGIBILITY. Persons eligible to participate in this Plan include all
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Employees and Directors.
5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible Employees, those
to whom Awards shall be granted and shall determine the nature and amount of
each Award. Directors shall receive Options as provided in Section 6.1.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
options may be granted to Employees at any time and from time to time as
shall be determined by the Committee. The Committee shall have discretion in
determining the number of Shares subject to Options granted to each Employee
except that no Employee may receive options (other than Substituted Options)
with respect to more than 250,000 Shares in any year. The Committee may
grant ISOs, NQSOs, or a combination thereof to Employees. Directors may
receive only NQSOs. Substituted Options may be issued under the Plan. The
number of Substituted Options shall be the number of options immediately
before the substitution, adjusted to prevent dilution or enlargement of the
Participant's rights. The grant date of such substituted options shall be
the grant date under the plan through which the options were originally
granted. Substituted Options shall be issued to Directors and Employees who
participated in the Prior Plan and in the Directors Plan in accordance with
the terms of the Employee Benefits Agreement executed in connection with the
Distribution, and such substituted Options shall be subject to the same grant
date, exercise price (as adjusted pursuant to Section 6.3), vesting and
exercise period such Options were subject to under the Prior Plan and the
Directors Plan.
To the extent Shares are available for grant under the Plan, each
Director who is first elected as a Director subsequent to the Effective Date (a
"Subsequent
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Director") shall be granted, as of the date on which such Subsequent Director
is qualified and first begins to serve as a Director, an Option to purchase
6,000 shares, subject to adjustment pursuant to Section 4.3 or to purchase
such lesser number of Shares as remain available for grant under the Plan.
In the event that the number of Shares available for grant under the Plan is
insufficient to make all grants hereby specified on the relevant date, then
all Directors who are entitled to a grant on such date shall share ratably in
the number of Shares then available for grant under the Plan. The Option
Price of such Option shall equal the Fair Market Value of a Share on the date
the grant of this Option is effective.
If sufficient Shares are not available under the Plan to fulfill
the grant of Options to any Subsequent Director first elected after the
Effective Date, and thereafter additional Shares become available, such
Subsequent Director receiving an Option for fewer than 6,000 Shares shall
then receive an Option to purchase an amount of Shares, determined by
dividing the number of Shares available pro-rata among each Subsequent
Director receiving an Option for fewer than 6,000 Shares, then available
under the Plan, not to exceed 6,000 Shares, subject to adjustment as to any
one Subsequent Director. The date of grant shall be the date such additional
Shares become available. The Option Price of an Option shall equal the Fair
Market Value of a Share on the date the Option is granted.
If a Subsequent Director receives an Option to purchase fewer than
6,000 Shares, subject to adjustment pursuant to Section 4.3 hereof, and
additional Shares subsequently become available under the Plan, an Option to
purchase such Shares shall first be allocated as of the date of availability
to any Subsequent Director who has not previously been granted an Option.
Such Options shall be granted to purchase a number of Shares no greater than
the number of Shares covered by Options granted to other Subsequent Directors
first elected subsequent to the Effective Date, but who have received Options
to purchase fewer than 6,000 Shares (subject to adjustment pursuant
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to Section 4.3). Thereafter, Options for any remaining Shares shall be
granted pro-rata among all Subsequent Directors granted Options to purchase
fewer than 6,000 Shares. No Director first elected after the Effective Date
shall receive an Option to purchase more than 6,000 Shares (subject to
adjustment under Section 4.3).
The Option Price of the Shares purchasable under each Option granted to
a Director shall be equal to one hundred percent (100%) of the Fair Market
Value per Share on the date of grant of such Option.
Subject to acceleration as provided below, Options granted to Directors
shall vest annually at the rate of thirty-three and one third percent
(33-1/3%) of the aggregate number of Shares granted annually beginning on the
first anniversary of the date of grant and on each subsequent anniversary of
the date of grant thereafter. If a Director's tenure ends during the
applicable three-year period due to Death, Disability or Retirement or
following a Change in Control, however, such Director's Options shall become
immediately exercisable as to one hundred percent (100%) of the Shares
covered thereby as of the Director's last day of service as a Director with
the Company to the extent such Option may be exercised pursuant to Section
6.5 of this Plan. Retirement with respect to a Director shall mean the date
of the Company's annual shareholders' meeting at which he or she would
otherwise, but for said retirement, be a nominee for election to the Board,
or the date on which the Director attains seventy (70) years of age.
Once any portion of an Option issued to a Director becomes exercisable,
it shall remain exercisable for the shortest period of (1) twelve years from
the date of grant; or (2) two (2) years following the date on which the
Director ceases to serve in such capacity for any reason other than removal
for Cause. If a Director is removed for Cause, all outstanding Options held
by the Director shall immediately be forfeited to the Company and no
additional exercise period shall be allowed, regardless of the vested
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status of the Options.
6.2 OPTION AWARD AGREEMENT. Each Option grant shall be evidenced by an
Option Award Agreement that shall specify the Option Price, the duration of
the Option, the number of Shares to which the Option pertains, and such other
provisions as the Committee shall determine. The Option Award Agreement also
shall specify whether the Option is intended to be an ISO within the meaning
of Section 422 of the Code, or a NQSO whose grant is intended not to fall
under the Code provisions of Section 422.
6.3 OPTION PRICE. The Option Price for each grant of an option to an
Employee shall be determined by the Committee; provided that the Option Price
shall not be less than one hundred percent (100%) of the Fair Market Value of
a Share on the date the Option is granted. The Option Price for a
Substituted Option shall be the Option Price immediately before the
substitution, adjusted to prevent dilution or enlargement of the
Participant's rights.
6.4 DURATION OF OPTIONS. Each Option granted shall expire at such time
as the Committee shall determine at the time of grant; provided, however,
that no ISO shall be exercisable later than the tenth (10th) anniversary date
of its grant, and no NQSO shall be exercisable later than the twelfth (12th)
anniversary date of its grant. Substituted Options shall expire on the
earlier of the date provided in this Section 6.4 or the date such options
would have expired under the plan and agreement pursuant to which they were
originally granted.
6.5 EXERCISE OF OPTIONS. Options granted to Employees under the Plan
shall be exercisable at such times and be subject to such restrictions and
conditions as the Committee shall in each instance approve, which need not be
the same for each grant or for each Employee. However, in no event may any
Option granted under this Plan to an Employee or Director become exercisable
prior to six (6) months following the date
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of its grant.
6.6 PAYMENT. Options shall be exercised by the delivery of a written
notice of exercise to the Secretary of the Company, setting forth the number
of Shares with respect to which the Option is to be exercised, accompanied by
full payment for the Shares.
The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time
of exercise equal to the total Option Price (provided that the Shares which
are tendered must have been held by the Participant for at least six (6)
months prior to their tender to satisfy the Option Price), or (c) by a
combination of (a) and (b).
The Committee also may allow cashless exercise as permitted under
Federal Reserve Board's Regulation T, subject to applicable securities law
restrictions, or by any other means which the Committee determines to be
consistent with the Plan's purpose and applicable law.
As soon as practicable after receipt of a written notification of
exercise and full payment, the Company shall deliver to the Participant, in
the Participant's name, Share certificates in an appropriate amount based
upon the number of Shares purchased under the Option(s).
6.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose
such restrictions on any Shares acquired pursuant to the exercise of an
Option under the Plan, as it may deem advisable, including, without
limitation, restrictions under applicable Federal securities laws, under the
requirements of any Stock exchange or market upon which such Shares are then
listed and/or traded, and under any Blue Sky
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or state securities laws applicable to such Shares.
6.8 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY OR RETIREMENT.
(a) TERMINATION BY DEATH. In the event the employment of an Employee
is terminated by reason of death, all outstanding Options granted
to that Employee shall immediately vest one hundred percent
(100%), and shall remain exercisable at any time prior to their
expiration date, or for one (1) year after the date of death,
whichever period is shorter, by such person or persons as shall
have been named as the Employee's beneficiary, or by such persons
that have acquired the Employee's rights under the Option by will
or by the laws of descent and distribution.
(b) TERMINATION BY DISABILITY. In the event the employment of an
Employee is terminated by reason of Disability, all outstanding
Options granted to that Employee shall immediately vest one
hundred percent (100%) as of the date the Committee determines
the definition of Disability to have been satisfied, and shall
remain exercisable at any time prior to their expiration date, or
for one (1) year after the date that the Committee determines the
definition of Disability to have been satisfied, whichever period
is shorter.
(c) TERMINATION BY RETIREMENT. In the event the employment of an
Employee is terminated by reason of Retirement, the Committee
shall retain discretion over the treatment of Options.
(d) EMPLOYMENT TERMINATION FOLLOWED BY DEATH. In the event that an
Employee's employment terminates by reason of Disability or
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Retirement, and within the exercise period allowed by the
Committee following such termination the Employee dies, then the
remaining exercise period under outstanding Options shall equal
the longer of: (I) one (1) year following death; or (ii) the
remaining portion of the exercise period which was triggered by
the employment termination. Such Options shall be exercisable by
such person or persons who shall have been named as the
Employee's beneficiary, or by such persons who have acquired the
Employee's rights under the Option by will or by the laws of
descent and distribution.
(e) EXERCISE LIMITATIONS ON ISOS. In the case of ISOs, the tax
treatment prescribed under Section 422 of the Internal Revenue
Code of 1986, as amended, may not be available if the Options are
not exercised within the Section 422 prescribed time periods
after each of the various types of employment termination.
6.9 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of an
Employee shall terminate for any reason other than the reasons set forth in
Section 6.8 (and other than for Cause), all Options held by the Employee which
are not vested as of the effective date of employment termination immediately
shall be forfeited to the Company (and shall once again become available for
grant under the Plan). However, the Committee, in its sole discretion, shall
have the right to immediately vest all or any portion of such Options, subject
to such terms as the Committee, in its sole discretion, deems appropriate.
Options which are vested as of the effective date of employment
termination may be exercised by the Employee within the period beginning on
the effective date of employment termination, and ending six (6) months after
such date or on such later
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date as is approved by the Committee.
If the employment of an Employee shall be terminated by the Company for
Cause, all outstanding Options held by the Participant immediately shall be
forfeited to the Company and no additional exercise period shall be allowed,
regardless of the vested status of the Options.
For Employees employed by Affiliates, termination shall mean termination
of such Employee's employment with the Affiliate.
6.10 TRANSFERABILITY OF OPTIONS. No ISO granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all
ISOs granted to a Participant under the Plan shall be exercisable during his
or her lifetime only by such Participant.
NQSOs granted hereunder may be exercised only during a Participant's
lifetime by the Participant, the Participant's guardian or legal
representative or by a permissible transferee. NQSOs shall be transferable
by Participants pursuant to the laws of descent and distribution upon a
Participant's death, and during a Participant's lifetime, NQSOs shall be
transferable by Participants to members of their immediate family, trusts for
the benefit of members of their immediate family, and charitable institutions
("permissible transferees") to the extent permitted under Section 16 of the
Exchange Act and subject to federal and state securities laws. The term
"immediate family" shall mean any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, sister-in-law, or brother-in-law and shall
include adoptive relationships.
NQSOs also shall be transferable by Participants other than to permissible
transferees with the prior approval of the Committee which shall have the
authority to
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approve such transfers of NQSOs on a case-by-case basis in its sole
discretion.
The Committee shall have the authority to establish rules and
regulations specifically governing the transfer of NQSOs granted under this
Plan as it deems necessary and advisable.
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1 GRANT OF SARS. Subject to the terms and conditions of the Plan, an
SAR may be granted to an Employee at any time and from time to time as shall
be determined by the Committee. The Committee may grant Affiliated SARs,
Freestanding SARs, Tandem SARs, or any combination of these forms of SAR.
The Committee shall have complete discretion in determining the number
of SARs granted to each Employee (subject to Article 4 herein) and,
consistent with the provisions of the Plan, in determining the terms and
conditions pertaining to such SARs. However, the grant price of a
Freestanding SAR shall be at least equal to one hundred percent (100%) of the
Fair Market Value of a Share on the date of grant of the SAR. The grant
price of Tandem or Affiliated SARs shall equal the Option Price of the
related Option. In no event shall any SAR granted hereunder become
exercisable within the first six (6) months of its grant.
7.2 EXERCISE OF TANDEM SARS. Tandem SARs may be exercised for all or
part of the Shares subject to the related Option upon the surrender of the
right to exercise the equivalent portion of the related Option. A Tandem SAR
may be exercised only with respect to the Shares for which its related Option
is then exercisable.
Notwithstanding any other provision of this Plan to the contrary, with
respect to a Tandem SAR granted in connection with an ISO: (I) the Tandem SAR
will expire no
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later than the expiration of the underlying ISO; (ii) the value of the payout
with respect to the Tandem SAR may be for no more than one hundred percent
(100%) of the difference between the Option Price of the underlying ISO and
the Fair Market Value of the Shares subject to the underlying ISO at the time
the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only
when the Fair Market Value of the Shares subject to the ISO exceeds the
Option Price of the ISO.
7.3 EXERCISE OF AFFILIATED SARS. Affiliated SARs shall be deemed to be
exercised upon the exercise of the related Options. The deemed exercise of
Affiliated SARs shall not necessitate a reduction in the number of related
Options.
7.4 EXERCISE OF FREESTANDING SARS. Freestanding SARs may be exercised
upon whatever terms and conditions the Committee, in its sole discretion,
imposes upon them.
7.5 SAR AGREEMENT. Each SAR grant shall be evidenced by an Award
Agreement that shall specify the grant price, the term of the SAR, and such
other provisions as the Committee shall determine.
7.6 TERM OF SARS. The term of a SAR granted under the Plan shall be
determined by the Committee, in its sole discretion; provided, however, that
such term shall not exceed twelve (12) years.
7.7 PAYMENT OF SAR AMOUNT. Upon exercise of a SAR, an Employee shall
be entitled to receive payment from the Company in an amount determined by
multiplying:
(a) The difference between the Fair Market Value of a Share on the
date of exercise over the grant price; by
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(b) The number of Shares with respect to which the SAR is exercised.
At the discretion of the Committee, the payment upon SAR exercise may be
in cash, in Shares of equivalent value, or in some combination thereof.
7.8 RULE 16B-3 REQUIREMENTS. Notwithstanding any other provision of
the Plan, the Committee may impose such conditions on exercise of a SAR
(including, without limitation, the right of the Committee to limit the time
of exercise to specified periods) as may be required to satisfy the
requirements of Section 16 (or any successor rule) of the Exchange Act.
For example, if the Participant is an Insider, the ability of the
Participant to exercise SARs for cash will be limited to Window Periods.
However, if the Committee determines that the Participant is not an Insider,
or if the securities laws change to permit greater freedom of exercise of
SARs, then the Committee may permit exercise at any point in time, to the
extent the SARs are otherwise exercisable under the Plan.
7.9 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT.
(a) TERMINATION BY DEATH. In the event the employment of an Employee
is terminated by reason of death, all outstanding SARs granted to
that Employee shall immediately vest one hundred percent (100%),
and shall remain exercisable at any time prior to their
expiration date, or for one (1) year after the date of death,
whichever period is shorter, by such person or persons as shall
have been named as the Employee's beneficiary, or by such persons
that have acquired the Employee's rights under the SAR by will or
by the laws of descent and distribution.
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(b) TERMINATION BY DISABILITY. In the event the employment of a
Participant is terminated by reason of Disability, all
outstanding SARs granted to that Employee shall immediately vest
one hundred percent (100%) as of the date the Committee
determines the definition of Disability to have been satisfied,
and shall remain exercisable at any time prior to their
expiration date, or for one (1) year after the date that the
Committee determines the definition of Disability to have been
satisfied, whichever period is shorter.
(c) TERMINATION BY RETIREMENT. In the event the employment of an
Employee is terminated by reason of Retirement, the Committee
shall retain discretion over the treatment of SARs.
(d) EMPLOYMENT TERMINATION FOLLOWED BY DEATH. In the event that an
Employee's employment terminates by reason of Disability or
Retirement, and within the exercise period allowed by the
Committee following such termination the Employee dies, then the
remaining exercise period under outstanding SARs shall equal the
longer of: (I) one (1) year following death; or (ii) the
remaining portion of the exercise period which was triggered by
the employment termination. Such SARs shall be exercisable by
such person or persons who shall have been named as the
Employee's beneficiary, or by such persons who have acquired the
Employee's rights under the SAR by will or by the laws of descent
and distribution.
7.10 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of
an Employee shall terminate for any reason other than the reasons set forth
in Section 7.9 (and other than for Cause), all SARs held by the Employee
which are not vested as of
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the effective date of employment termination immediately shall be forfeited
to the Company (and shall once again become available for grant under the
Plan). However, the Committee, in its sole discretion, shall have the right
to immediately vest all or any portion of such SARs, subject to such terms as
the Committee, in its sole discretion, deems appropriate.
SARs which are vested as of the effective date of employment termination
may be exercised by the Employee within the period beginning on the effective
date of employment termination, and ending six (6) months after such date or
on such later date as is approved by the Committee.
If the employment of an Employee shall be terminated by the Company for
Cause, all outstanding SARs held by the Employee immediately shall be
forfeited to the Company and no additional exercise period shall be allowed,
regardless of the vested status of the SARs.
7.11 NONTRANSFERABILITY OF SARS. No SAR granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all
SARs granted to an Employee under the Plan shall be exercisable during his or
her lifetime only by such Employee.
ARTICLE 8. RESTRICTED STOCK
8.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of
the Plan, the Committee, at any time and from time to time, may grant Shares
of Restricted Stock to eligible Employees in such amounts as the Committee
shall determine.
8.2 RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall be
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evidenced by a Restricted Stock Agreement that shall specify the Period of
Restriction, or Periods, the number of Restricted Stock Shares granted, and
such other provisions as the Committee shall determine.
8.3 TRANSFERABILITY. Except as provided in this Article 8, the Shares
of Restricted Stock granted herein may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated until the end of the
applicable Period of Restriction established by the Committee and specified
in the Restricted Stock Agreement, or upon earlier satisfaction of any other
conditions, as specified by the Committee in its sole discretion and set
forth in the Restricted Stock Agreement. However, in no event may any
Restricted Stock granted under the Plan become vested in an Employee prior to
six (6) months following the date of its grant. All rights with respect to
the Restricted Stock granted to an Employee under the Plan shall be available
during his or her lifetime only to such Participant.
8.4 OTHER RESTRICTIONS. The Committee shall impose such other
restrictions on any Shares of Restricted Stock granted pursuant to the Plan
as it may deem advisable including, without limitation, restrictions based
upon the achievement of specific performance goals (Company-wide, divisional,
and/or individual), and/or restrictions under applicable Federal or state
securities laws; and may legend the certificates representing Restricted
Stock to give appropriate notice of such restrictions.
8.5 CERTIFICATE LEGEND. In addition to any legends placed on
certificates pursuant to Section 8.4 herein, each certificate representing
Shares of Restricted Stock granted pursuant to the Plan shall bear the
following legend:
"The sale or other transfer of the Shares of stock
represented by this certificate, whether voluntary,
involuntary, or by operation of law, is subject to certain
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restrictions on transfer as set forth in the United
Wisconsin Services, Inc. Equity Incentive Plan, and in a
Restricted Stock Agreement. A copy of the Plan and such
Restricted Stock Agreement may be obtained from the
Secretary of United Wisconsin Services, Inc."
8.6 REMOVAL OF RESTRICTIONS. Except as otherwise provided in this
Article 8, Shares of Restricted Stock covered by each Restricted Stock grant
made under the Plan shall become freely transferable by the Employee after
the last day of the Period of Restriction. Once the Shares are released from
the restrictions, the Employee shall be entitled to have the legend required
by Section 8.5 removed from his or her Share certificate.
8.7 VOTING RIGHTS. During the Period of Restriction, Employees holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those Shares.
8.8 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of
Restriction, Employees holding Shares of Restricted Stock granted hereunder
shall be entitled to receive all dividends and other distributions paid with
respect to those Shares while they are so held. If any such dividends or
distributions are paid in Shares, the Shares shall be subject to the same
restrictions on transferability and forfeitability as the Shares of
Restricted Stock with respect to which they were paid.
In the event that any dividend constitutes a "derivative security" or an
"equity security" pursuant to Rule 16(a) under the Exchange Act, such
dividend shall be subject to a vesting period equal to the longer of: (I) the
remaining vesting period of the Shares of Restricted Stock with respect to
which the dividend is paid; or (ii) six months. The Committee shall
establish procedures for the application of this provision.
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8.9 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT.
In the event the employment of an Employee is terminated by reason of death
or Disability, all outstanding Shares of Restricted Stock shall immediately
vest one hundred percent (100%) as of the date of employment termination (in
the case of Disability, the date employment terminates shall be deemed to be
the date that the Committee determines the definition of Disability to have
been satisfied). The Committee retains discretion over the treatment of
Restricted Stock upon Retirement. In the event of full vesting, the holder
of the certificates of Restricted Stock shall be entitled to have any
nontransferability legends required under Sections 8.4 and 8.5 of this Plan
removed from the Share certificates.
8.10 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of
an Employee shall terminate for any reason other than those specifically set
forth in Section 8.9 herein, all Shares of Restricted Stock held by the
Employee which are not vested as of the effective date of employment
termination immediately shall be forfeited and returned to the Company (and,
subject to Section 4.2 herein, shall once again become available for grant
under the Plan).
With the exception of a termination of employment for Cause, the
Committee, in its sole discretion, shall have the right to provide for
lapsing of the restrictions on Restricted Stock following employment
termination, upon such terms and provisions as it deems proper.
ARTICLE 9. PERFORMANCE UNITS AND PERFORMANCE SHARES
9.1 GRANT OF PERFORMANCE UNITS/SHARES. Subject to the terms of the
Plan, Performance Units and Performance Shares may be granted to eligible
Employees at any time and from time to time, as shall be determined by the
Committee. The
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Committee shall have complete discretion in determining the number of
Performance Units and Performance Shares granted to each Employee.
9.2 VALUE OF PERFORMANCE UNITS/SHARES. Each Performance Unit shall
have an initial value that is established by the Committee at the time of
grant. Each Performance Share shall have an initial value equal to the Fair
Market Value of a Share on the date of grant. The Committee shall set
performance goals in its discretion which, depending on the extent to which
they are met, will determine the number and/or value of Performance
Units/Shares that will be paid out to the Employee. The time period during
which the performance goals must be met shall be called a "Performance
Period." Performance Periods shall, in all cases, exceed six (6) months in
length.
9.3 EARNING OF PERFORMANCE UNITS/SHARES. After the applicable
Performance Period has ended, the holder of Performance Units/Shares shall be
entitled to receive payout on the number of Performance Units/Shares earned
by the Employee over the Performance Period, to be determined as a function
of the extent to which the corresponding performance goals have been achieved.
9.4 FORM AND TIMING OF PAYMENT OF PERFORMANCE UNITS/ SHARES. Payment
of earned Performance Units/Shares shall be made in a single lump sum, within
forty-five (45) calendar days following the close of the applicable
Performance Period. The Committee, in its sole discretion, may pay earned
Performance Units/Shares in the form of cash or in Shares (or in a
combination thereof), which have an aggregate Fair Market Value equal to the
value of the earned Performance Units/Shares at the close of the applicable
Performance Period.
Prior to the beginning of each Performance Period, Participants may
elect to defer the receipt of Performance Unit/Share payout upon such terms
as the Committee deems appropriate.
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9.5 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, RETIREMENT, OR
INVOLUNTARY TERMINATION (WITHOUT CAUSE). In the event the employment of an
Employee is terminated by reason of death or Disability or involuntary
termination without Cause during a Performance Period, the Employee shall
receive a prorated payout of the Performance Units/Shares. The Committee
retains discretion over the treatment of Performance Units/Shares upon
Retirement. Any prorated payout shall be determined by the Committee, in its
sole discretion, and shall be based upon the length of time that the Employee
held the Performance Units/Shares during the Performance Period, and shall
further be adjusted based on the achievement of the preestablished
performance goals.
Timing of payment of earned Performance Units/Shares shall be determined
by the Committee at its sole discretion.
9.6 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that an
Employee's employment terminates for any reason other than those reasons set
forth in Section 9.5 herein, all Performance Units/Shares shall be forfeited
by the Employee to the Company, and shall once again be available for grant
under the Plan.
9.7 NONTRANSFERABILITY. Performance Units/Shares may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further, an
Employee's rights under the Plan shall be exercisable during the Employee's
lifetime only by the Employee or the Employee's legal representative.
ARTICLE 10. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any
beneficiary or
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<PAGE>
beneficiaries (who may be named contingently or successively) to whom any
benefit under the Plan is to be paid in case of his or her death before he or
she receives any or all of such benefit. Each such designation shall revoke
all prior designations by the same Participant, shall be in a form prescribed
by the Company, and will be effective only when any necessary spousal consent
is obtained and filed by the Participant in writing with the Secretary of the
Company during the Participant's lifetime. In the absence of any such
designation, benefits remaining unpaid at the Participant's death shall be
paid to the Participant's estate.
ARTICLE 11. DEFERRALS
The Committee may permit a Participant to defer such Participant's
receipt of the payment of cash or the delivery of Shares that would otherwise
be due to such Participant by virtue of the exercise of an Option or SAR, the
lapse or waiver of restrictions with respect to Restricted Stock, or the
satisfaction of any requirements or goals with respect to Performance
Units/Shares. If any such deferral election is required or permitted, the
Committee shall, in its sole discretion, establish rules and procedures for
such payment deferrals.
ARTICLE 12. RIGHTS OF EMPLOYEES
12.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in
any way the right of the Company to terminate any Employee's employment at
any time, nor confer upon any Employee any right to continue in the employ of
the Company.
For purposes of the Plan, transfer of employment of a Participant
between the Company and any one of its Subsidiaries (or between Subsidiaries)
or Blue Cross & Blue Shield United of Wisconsin shall not be deemed a
termination of employment.
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<PAGE>
12.2 PARTICIPATION. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having been so selected, to be selected
to receive a future Award.
ARTICLE 13. CHANGE IN CONTROL
Upon the occurrence of a Change in Control, unless otherwise
specifically prohibited by the terms of Section 18 herein:
(a) Any and all Options and SARs granted hereunder shall become
immediately exercisable;
(b) Any restriction periods and restrictions imposed on Restricted
Shares shall lapse, and within ten (10) business days after the
occurrence of a Change in Control, the stock certificates
representing Shares of Restricted Stock, without any restrictions
or legend thereon, shall be delivered to the applicable
Participants;
(c) The target value attainable under all Performance Units and
Performance Shares shall be deemed to have been fully earned for
the entire Performance Period as of the effective date of the
Change in Control, and shall be paid out in cash to Participants
within thirty (30) days following the effective date of the
Change in Control; provided, however, that there shall not be an
accelerated payout with respect to Performance Units or
Performance Shares which were granted less than six (6) months
prior to the effective date of the Change in Control;
(d) Subject to Article 14 herein, the Committee shall have the
authority
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<PAGE>
to make any modifications to the Awards as determined by the
Committee to be appropriate before the effective date of the
Change in Control.
ARTICLE 14. AMENDMENT, MODIFICATION, AND TERMINATION
14.1 AMENDMENT, MODIFICATION, AND TERMINATION. With the approval of the
Board, at any time and from time to time, the Committee may terminate, amend,
or modify the Plan.
14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant holding such Award.
ARTICLE 15. WITHHOLDING
15.1 TAX WITHHOLDING. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an
amount sufficient to satisfy Federal, state, and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising or as a result of this Plan.
15.2 SHARE WITHHOLDING. With respect to withholding required upon the
exercise of Options or SARs, upon the lapse of restrictions on Restricted
Stock, or upon any other taxable event hereunder, Participants may elect,
subject to the approval of the Committee, to satisfy the withholding
requirement, in whole or in part, by having the Company withhold Shares
having a Fair Market Value on the date the tax is to be determined equal to
the minimum statutory total tax which could be imposed on the transaction.
All elections shall be irrevocable, made in writing, signed by the
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<PAGE>
Participant, and elections by Insiders shall additionally comply with the
applicable requirement set forth in (a) or (b) of this Section 15.2.
(a) AWARDS HAVING EXERCISE TIMING WITHIN INSIDERS' DISCRETION. The
Insider must either:
(i) Deliver written notice of the stock withholding election
to the Committee at least six (6) months prior to the date
specified by the Insider on which the exercise of the
Award is to occur; or
(ii) Make the stock withholding election in connection with an
exercise of an Award which occurs during a Window Period.
(b) AWARDS HAVING A FIXED EXERCISE/PAYOUT SCHEDULE WHICH IS OUTSIDE
INSIDERS' CONTROL. The Insider must either:
(i) Deliver written notice of the stock withholding election
to the Committee at least six (6) months prior to the date
on which the taxable event (e.g., exercise or payout)
relating to the Award is scheduled to occur; or
(ii) Make the stock withholding election during a Window Period
which occurs prior to the scheduled taxable event relating
to the Award (for this purpose, an election may be made
prior to such a Window Period, provided that it becomes
effective during a Window Period occurring prior to the
applicable taxable event).
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<PAGE>
ARTICLE 16. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or of
the Board, shall be indemnified and held harmless by the Company against and
from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, action, suit, or proceeding to which he or she may be a party or in
which he or she may be involved by reason of any action taken or failure to
act under the Plan and against and from any and all amounts paid by him or
her in settlement thereof, with the Company's approval, or paid by him or her
in satisfaction of any judgment in any such action, suit, or proceeding
against him or her, provided he or she shall give the Company an opportunity,
at its own expense, to handle and defend the same before he or she undertakes
to handle and defend it on his or her own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification
to which such persons may be entitled under the Company's Certificate of
Incorporation or Bylaws, as a matter of law, or otherwise, or any power that
the Company may have to indemnify them or hold them harmless.
ARTICLE 17. SUCCESSORS
All obligations, of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether
the existence of such successor is the result of a direct or indirect
purchase, merger, consolidation, or otherwise, of all or substantially all of
the business and/or assets of the Company.
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<PAGE>
ARTICLE 18. LEGAL CONSTRUCTION
18.1 GENDER AND NUMBER. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
18.2 SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
18.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
Notwithstanding any other provision set forth in the Plan, if required
by the then-current Section 16 of the Exchange Act, any "derivative security"
or "equity security" offered pursuant to the Plan to any Insider may not be
sold or transferred for at least six (6) months after the date of grant of
such Award. The terms "equity security" and "derivative security" shall have
the meanings ascribed to them in the then-current Rule 16(a) under the
Exchange Act.
18.4 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions
under this Plan are intended to comply with all applicable conditions or Rule
16b-3 or its successors under the 1934 Act. To the extent any provision of
the plan or action by the Committee fails to so comply, it shall be deemed
null and void, to the extent permitted by law and deemed advisable by the
Committee.
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<PAGE>
18.5 GOVERNING LAW. To the extent not preempted by Federal law, the
Plan, and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the State of Wisconsin.
-37-
<PAGE>
AMENDMENT TO EMPLOYEE BENEFITS AGREEMENT
This Amendment to Employee Benefits Agreement (the "Amendment") is
dated as of September _____, 1998 by and between American Medical Security
Group, Inc., f/k/a United Wisconsin Services, Inc., ("AMSG") a Wisconsin
corporation, and United Wisconsin Services, Inc., f/k/a Newco/UWS, Inc.
("UWS"), a Wisconsin corporation.
WHEREAS, AMSG and UWS previously entered into an Employee Benefits
Agreement (the "Benefits Agreement") dated September 11, 1998; and
WHEREAS, parties believe it is appropriate to modify the provisions
of the Benefits Agreement with respect to the option exercise price of
certain stapled options which will be issued as provided in the Benefits
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in the Benefits Agreement and this
Amendment, AMSG and UWS agree as follows:
Section 5(c) is of the Benefits Agreement is hereby amended to read
as follows:
(c) (i) HILLIARD, WEYERS, HEFTY, MORDY & HANSON As of the
Distribution, Hilliard, Weyers, Hefty, Mordy & Hanson shall receive, for
each option each currently holds with respect to one share of UWS Common
Stock, an option with respect to one share of AMSG Common Stock and an option
with respect to one share of Newco/UWS Common Stock. The Options with
respect to AMSG Common Stock which are issued to Hefty, Mordy & Hanson shall
continue to be issued under the UWS Stock Option Plans. The Options with
respect to AMSG Common Stock which are issued to Hilliard and Weyers shall
continue to be issued by AMSG. The exercise price of each option received
with respect to each share of AMSG Common Stock shall be determined under the
AMSG Stapled Option Exercise Price Formula (attached as Exhibit A). The
Options with respect to Newco/UWS Common Stock which are issued to Hefty,
Mordy & Hanson shall be issued under the newly established Newco/UWS Stock
Option Plans. The Options with respect to Newco/UWS Common Stock which are
issued to Hilliard and Weyers shall be issued by Newco/UWS. The exercise
price of each option received with respect to Newco/UWS Common Stock shall be
determined under the Newco/UWS Stapled Option Exercise Price Formula
(attached as Exhibit B). (ii) MILLER As of the Distribution, Miller shall
receive, for each option granted to him with respect to one share of UWS
Common Stock on December 6, 1995 an option with respect to one share of AMSG
Common Stock and an option with respect to one share of Newco/UWS Common
Stock. The options with respect to AMSG Common Stock shall continue to be
issued under the UWS Stock Option Plans. The options with respect to
Newco/UWS Common Stock shall be issued under the newly established Newco/UWS
Stock Option Plans. The exercise price of each option received with respect
to each share of AMSG Common Stock shall be determined under the AMSG Staple
Option Exercise Price Formula (attached as
<PAGE>
Exhibit A). The exercise price of each option received with respect to
Newco/UWS Common Stock shall be determined under the Newco/UWS Stapled Option
Exercise Price Formula (attached as Exhibit B). All other options Miller has
received with respect to UWS Stock shall be adjusted effective as of the
Effective Date by multiplying the number of shares of UWS Common Stock
subject to the option by the AMSG Adjustment Factor and dividing the exercise
price by the AMSG Adjustment Factor. Such Options which are issued pursuant
to the UWS Stock Option Plans shall continue to be issued pursuant to such
plans and such options which are not issued pursuant to the UWS Stock Option
Plans shall continue to be issued outside of the UWS Stock Option Plans.
(iii) The termination of employment provisions contained in the UWS Stock
Option Plans or the newly established Newco/UWS Stock Option Plans shall be
applied to any option received pursuant to this subsection which is not
granted by the individual's actual employer (or a member of such employer's
Group) based on the individual's termination of employment with his actual
employer.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to Employees Benefit Agreement to be duly executed as of the date first above
written.
AMERICAN MEDICAL SECURITY GROUP, INC,
(f/k/a United Wisconsin Services Inc.)
By:____________________________
UNITED WISCONSIN SERVICES, INC.
(f/k/a Newco/UWS, Inc.)
By:____________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT 9/30/98 (UNAUDITED) AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE NINE MONTHS ENDED 9/30/98 (UNAUDITED) AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 147,879
<DEBT-CARRYING-VALUE> 7,783
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 155,662
<CASH> 27,679
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 289,714
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 31,021
<POLICY-OTHER> 69,327
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 70,000
0
0
<COMMON> 0
<OTHER-SE> 58,688
<TOTAL-LIABILITY-AND-EQUITY> 289,714
452,340
<INVESTMENT-INCOME> 13,540
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 22,153
<BENEFITS> 385,902
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 75,929
<INCOME-PRETAX> 23,534
<INCOME-TAX> 9,028
<INCOME-CONTINUING> 14,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,506
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.88
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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</TABLE>
