<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1998
REGISTRATION NO. 1-14177
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
NEWCO/UWS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
WISCONSIN 39-1931212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
401 WEST MICHIGAN STREET
MILWAUKEE, WISCONSIN 53203-2896
(414) 226-6900
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
------------------------
Securities to be registered pursuant to Section 12(b) of the Act:
<TABLE>
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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<S> <C>
Common Stock, no par value New York Stock Exchange
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act: None
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EXPLANATORY NOTE
This Form 10 Registration Statement has been prepared on a prospective basis
on the assumption that, among other things, the Distribution (as hereinafter
defined) and the related transactions contemplated to occur prior to or
contemporaneously with the Distribution will be consummated as contemplated by
the Information Statement which is a part of this Registration Statement. There
can be no assurance, however, that any or all of such transactions will occur or
will occur as so contemplated. Any significant modifications or variations in
the transactions contemplated will be reflected in an amendment or supplement to
this Registration Statement.
NEWCO/UWS, INC.
INFORMATION INCLUDED IN INFORMATION STATEMENT
AND INCORPORATED BY REFERENCE INTO FORM 10
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
Certain information required to be included herein is incorporated by
reference to specifically identified portions of the body of the Information
Statement filed herewith as Exhibit 99 (the "INFORMATION STATEMENT"). None of
the information contained in the Information Statement shall be incorporated by
reference herein or deemed to be part hereof unless such information is
specifically incorporated by reference.
ITEM 1. BUSINESS
The information required by this Item is contained in the body of the
Information Statement under the captions "Summary," "The Distribution," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business of Newco," and such information is
incorporated herein by reference.
ITEM 2. FINANCIAL INFORMATION
The information required by this Item is contained in the body of the
Information Statement under the captions "Summary Combined Financial Data for
Newco," "Pro Forma Combined Condensed Financial Information of Newco," "Selected
Combined Financial Information of Newco," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and "Newco/UWS, Inc. Index to
Combined Financial Statements" and the Combined Financial Statements appearing
on pages F-1 to F-20, and such information is incorporated herein by reference.
ITEM 3. PROPERTIES
The information required by this Item is contained in the body of the
Information Statement under the caption "Business of Newco--Properties," and
such information is incorporated herein by reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is contained in the body of the
Information Statement under the captions "Management of Newco" and "Security
Ownership of Certain Beneficial Owners and Management," and such information is
incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item is contained in the body of the
Information Statement under the caption "Management of Newco," and such
information is incorporated herein by reference.
1
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ITEM 6. EXECUTIVE COMPENSATION
The information required by this Item is contained in the body of the
Information Statement under the captions "Management of Newco," "Executive
Compensation" and "Newco Benefit Plans Following the Distribution," and such
information is incorporated herein by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is contained in the body of the
Information Statement under the captions "Agreements Between AMSG and Newco,"
"Certain Relationships and Related Transactions" and in Note 6 of the Notes to
Combined Financial Statements, and such information is incorporated herein by
reference.
ITEM 8. LEGAL PROCEEDINGS
The information required by this Item is contained in the body of the
Information Statement under the caption "Business of Newco--Legal Proceedings,"
and such information is incorporated herein by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
The information required by this Item is contained in the body of the
Information Statement under the captions "Summary," "The Distribution," "Risk
Factors" and "Dividend Policy," and such information is incorporated herein by
reference.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On May 28, 1998, as part of its original incorporation, the Registrant
issued 100 shares of its Common Stock to UWS for $100 in a transaction exempt
from the registration requirements of the Securities Act of 1933, as amended, by
reason of the provisions of Section 4(2) thereof relating to sales by an issuer
not involving any public offering.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this Item is contained in the body of the
Information Statement under the caption "Description of Capital Stock of Newco,"
and such information is incorporated herein by reference. Reference also is made
to the Articles of Incorporation and By-Laws of Newco which are set forth as
Exhibits 3.1 and 3.2 hereto.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information required by this Item is contained in the body of the
Information Statement under the caption "Liability and Indemnification of
Directors and Officers of Newco," and such information is incorporated herein by
reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in the body of the
Information Statement under the captions "Summary Combined Financial Data for
Newco," "Pro Forma Combined Condensed Financial Information of Newco," "Selected
Combined Financial Information of Newco," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Newco/UWS, Inc. Index to
Combined Financial Statements" and the Combined Financial Statements appearing
on pages F-1 to F-20, and such information is incorporated herein by reference.
2
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ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) The information required by this Item is contained in "Newco/UWS, Inc.
Index to Combined Financial Statements" on page F-1 of the Information Statement
and the Combined Financial Statements appearing on pages F-1 to F-20, and such
information is incorporated herein by reference.
(b) Exhibits:
The following documents are filed as Exhibits hereto:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<C> <S>
2.1 Form of Distribution and Indemnity Agreement (as amended).(2)
3.1 Articles of Incorporation of Registrant.(2)
3.2 By-Laws of Registrant.(2)
4.1 Specimen Common Stock Certificate.(2)
4.2 Registrant's Dividend Reinvestment and Direct Stock Purchase Plan. (1)
10.1 Form of Employee Benefits Agreement (as amended).(2)
10.2 Form of Tax Allocation Agreement (as amended).(2)
10.3 Settlement Agreement by and between United Wisconsin Services, Inc. ("UWS"), on behalf of itself and on
behalf of Registrant, Wallace J. Hilliard and Ronald A. Weyers, dated April 1, 1998.(2)
10.4 Consolidated Federal Income Tax Allocation Agreement among Blue Cross & Blue Shield United of Wisconsin
("BCBSUW"), United Wisconsin Insurance Company ("UWIC"), UWS, United Wisconsin Proservices, Inc.
("UWPS"), Leasing Unlimited, Inc., United Wisconsin Life Insurance Company ("UWLIC"), Compcare Health
Services Insurance Corporation ("COMPCARE"), ProHealth, Inc. and Take Control, Inc., as amended by
Amendments dated August 6, 1993 and May 9, 1994, respectively.(2)
10.5 Comprehensive Tax Allocation Agreement dated July 1, 1994 among BCBSUW, UWS and various subsidiaries
thereof.(2)
10.6 Federal Income Tax Allocation Agreement among BCBSUW, UWS, UWIC, UWLIC, UWPS, Compcare, Take Control,
Inc., Meridian Resource Corporation ("MRC"), Valley Health Plan, Inc. ("VALLEY") and United Wisconsin
Capital Corporation ("UWCC") for the period commencing January 1, 1993, as amended.(2)
10.7 Consolidated Federal Income Tax Allocation Agreement among UWS, UWIC, Compcare, Meridian Managed Care,
Inc. ("MMC"), MRC, Valley, UWCC, Your Health Plan, Inc. ("YHP"), HMO of Wisconsin Insurance
Corporation ("HMOW"), HMO-W, Inc. and Hometown Insurance Services, Inc. ("HTWN") commencing October 1,
1994.(2)
10.8 Consolidated Federal Income Tax Allocation Agreement among UWS, UWIC, UWPS, Compcare, MMC, MRC, Valley,
UWCC, YHP, HMOW, HMO-W, Inc., HTWN, United Heartland, Inc. ("UHI") and Meridian Marketing Services,
Inc. ("MMS") commencing January 1, 1995.(2)
</TABLE>
3
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<C> <S>
10.9 Consolidated Federal Income Tax Allocation Agreement among UWS, UWIC, UWPS, Compcare, MMC, MRC, Valley,
AMS HMO Holdings, Inc. (f/k/a UWCC), Unity Health Plans Insurance Corporation ("UNITY") (f/k/a HMOW),
HMO-W, Inc., HTWN, UHI and MMS for the period commencing January 1, 1996, and American Medical
Security Holdings, Inc., American Medical Security, Inc., American Medical Insurance Company,
Continental Plan Services, Inc., Nurse Healthline, Inc., Accountable Health Plans, Inc., AMS Provider
Partnerships, Inc., Unity HMO of Illinois, Inc., American Medical Security Insurance Company of Ohio
and American Medical Security Insurance Company of Georgia for the period commencing December 3,
1996.(2)
10.10 Amended and Restated Joint Venture Agreement by and among BCBSUW, UWS (to be assigned to the
Registrant), Valley and Midelfort Clinic, Ltd., effective January 1, 1997.(2)
10.11 Intercompany Service Agreement between BCBSUW, UWS (to be assigned to the Registrant) and UWIC,
effective January 1, 1998.(2)
10.12 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and UWIC, effective
January 1, 1998.(2)
10.13 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and UHI, effective
January 1, 1998.(2)
10.14 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and MMC, effective
January 1, 1998.(2)
10.15 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant), MMC and Compcare on
behalf of its Pharmacy Services department, effective January 1, 1998.(2)
10.16 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant), MMC and Compcare on
behalf of its RxCel department, effective January 1, 1998.(2)
10.17 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant), MMC and Compcare,
effective January 1, 1998.(2)
10.18 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and MRC on behalf of
its Investigation and Recovery Services department, effective January 1, 1998.(2)
10.19 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and MRC on behalf of
its Consulting Services department, effective January 1, 1998.(2)
10.20 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and MRC on behalf of
its Audit Services department, effective January 1, 1998.(2)
10.21 Intercompany Service Agreement among BCBSUW, UWS (subsequently assigned to the Registrant) and UWPS,
effective January 1, 1998.(2)
10.22 Service Agreement between BCBSUW and Valley, effective January 1, 1993.(2)
10.23 Service Agreement between UWS (to be assigned to the Registrant) and Community Health Systems, LLC,
dated November 1, 1994.(2)
10.24 Form of Service Agreement between United Wisconsin Services, Inc. (f/k/a Newco/UWS, Inc.) and American
Medical Security Group, Inc. (f/k/a United Wisconsin Services, Inc.).(2)
10.25 Amended and Restated Joint Venture Agreement among BCBSUW, UWS (to be assigned to the Registrant),
University Health Care, Inc. ("UHC" ), U-Care HMO, Inc. ("U-CARE") and Health Professionals, Inc.
("HPI") dated October 31, 1994.(2)
</TABLE>
4
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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10.26 Agreement of Merger and Joint Venture by and among UWS (to be assigned to the Registrant), UWS
Acquisition Corporation, BCBSUW, HMO-W, Inc. and HMOW dated October 11, 1994.(2)
10.27 Service Agreement between UWS (to be assigned to the Registrant) and HPI dated November 1, 1994.(2)
10.28 License Agreement between UWS (to be assigned to the Registrant) and U-Care dated November 1, 1994.(2)
10.29 Joint Venture Agreement among UWS (to be assigned to the Registrant), BCBSUW, Compcare and Northwoods
Health Care, LLC dated July 1, 1996, as amended October 24, 1996.(2)
10.30 Information System Service Agreement among Blue Cross Blue Shield of South Carolina and Blue Cross &
Blue Shield United of Wisconsin dated August 23, 1996, as amended January 1, 1997.(2)
10.31 Form of Trademark Assignment Agreement by and among UWS, the Registrant and UWLIC.(2)
10.32 Registrant's Equity Incentive Plan.(2)
10.33 1998 Management Incentive Plan.(2)
10.34 Registrant's Deferred Compensation Plan for Directors.(2)
10.35 Registrant/BCBSUW 401(k) Plan.(2)
10.36 Registrant/BCBSUW Union Employees 401(k) Plan.(2)
10.37 Unity Health Plans Insurance Corp. 1998 Profit Sharing Plan.(2)
10.38 Registrant's and BCBSUW's 1998 Profit Sharing Plan.(2)
10.39 Registrant Voluntary Deferred Compensation Plan.(2)
10.40 Registrant Deferred Compensation Trust.(2)
10.41 Registrant/BCBSUW Hourly Pension Plan.(2)
10.42 Registrant/BCBSUW Salaried Pension Plan.(2)
10.43 Registrant/BCBSUW Supplemental Executive Retirement Plan.(2)
10.44 Registrant Stock Appreciation Rights Plan.(2)
10.45 Note and Pledge Agreement dated October 30, 1996, between BCBSUW and United Wisconsin Services, Inc.
(subsequently to be assumed by and assigned to the Registrant).(2)
10.46 Administrative Services Agreement between UWSI and HMO of Wisconsin Insurance Corporation, effective
November 1, 1994.(1)
11 Statement regarding computation of per share earnings. (See Note 2 of Notes to Combined Financial
Statements).(2)
21 Subsidiaries of the Registrant.(2)
27 Financial Data Schedule.(2)
99 Information Statement of the Registrant dated September 11, 1998, as amended.(1)
</TABLE>
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(1) Filed herewith.
(2) Previously filed.
(3) To be filed by amendment.
5
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
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NEWCO/UWS, INC.
Date: September 9, 1998 By: /s/ THOMAS R. HEFTY
-----------------------------------------
Thomas R. Hefty, CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<C> <S>
2.1 Form of Distribution and Indemnity Agreement (as amended).(2)
3.1 Articles of Incorporation of Registrant.(2)
3.2 By-Laws of Registrant.(2)
4.1 Specimen Common Stock Certificate.(2)
4.2 Registrant's Dividend Reinvestment and Direct Stock Purchase Plan. (1)
10.1 Form of Employee Benefits Agreement (as amended).(2)
10.2 Form of Tax Allocation Agreement (as amended).(2)
10.3 Settlement Agreement by and between United Wisconsin Services, Inc. ("UWS"), on behalf of itself and on
behalf of Registrant, Wallace J. Hilliard and Ronald A. Weyers, dated April 1, 1998.(2)
10.4 Consolidated Federal Income Tax Allocation Agreement among Blue Cross & Blue Shield United of Wisconsin
("BCBSUW"), United Wisconsin Insurance Company ("UWIC"), UWS, United Wisconsin Proservices, Inc.
("UWPS"), Leasing Unlimited, Inc., United Wisconsin Life Insurance Company ("UWLIC"), Compcare Health
Services Insurance Corporation ("COMPCARE"), ProHealth, Inc. and Take Control, Inc., as amended by
Amendments dated August 6, 1993 and May 9, 1994, respectively.(2)
10.5 Comprehensive Tax Allocation Agreement dated July 1, 1994 among BCBSUW, UWS and various subsidiaries
thereof.(2)
10.6 Federal Income Tax Allocation Agreement among BCBSUW, UWS, UWIC, UWLIC, UWPS, Compcare, Take Control,
Inc., Meridian Resource Corporation ("MRC"), Valley Health Plan, Inc. ("VALLEY") and United Wisconsin
Capital Corporation ("UWCC") for the period commencing January 1, 1993, as amended.(2)
10.7 Consolidated Federal Income Tax Allocation Agreement among UWS, UWIC, Compcare, Meridian Managed Care,
Inc. ("MMC"), MRC, Valley, UWCC, Your Health Plan, Inc. ("YHP"), HMO of Wisconsin Insurance
Corporation ("HMOW"), HMO-W, Inc. and Hometown Insurance Services, Inc. ("HTWN") commencing October 1,
1994.(2)
10.8 Consolidated Federal Income Tax Allocation Agreement among UWS, UWIC, UWPS, Compcare, MMC, MRC, Valley,
UWCC, YHP, HMOW, HMO-W, Inc., HTWN, United Heartland, Inc. ("UHI") and Meridian Marketing Services,
Inc. ("MMS") commencing January 1, 1995.(2)
10.9 Consolidated Federal Income Tax Allocation Agreement among UWS, UWIC, UWPS, Compcare, MMC, MRC, Valley,
AMS HMO Holdings, Inc. (f/k/a UWCC), Unity Health Plans Insurance Corporation ("UNITY") (f/k/a HMOW),
HMO-W, Inc., HTWN, UHI and MMS for the period commencing January 1, 1996, and American Medical
Security Holdings, Inc., American Medical Security, Inc., American Medical Insurance Company,
Continental Plan Services, Inc., Nurse Healthline, Inc., Accountable Health Plans, Inc., AMS Provider
Partnerships, Inc., Unity HMO of Illinois, Inc., American Medical Security Insurance Company of Ohio
and American Medical Security Insurance Company of Georgia for the period commencing December 3,
1996.(2)
10.10 Amended and Restated Joint Venture Agreement by and among BCBSUW, UWS (to be assigned to the
Registrant), Valley and Midelfort Clinic, Ltd., effective January 1, 1997.(2)
10.11 Intercompany Service Agreement between BCBSUW, UWS (to be assigned to the Registrant) and UWIC,
effective January 1, 1998.(2)
10.12 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and UWIC, effective
January 1, 1998.(2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<C> <S>
10.13 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and UHI, effective
January 1, 1998.(2)
10.14 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and MMC, effective
January 1, 1998.(2)
10.15 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant), MMC and Compcare on
behalf of its Pharmacy Services department, effective January 1, 1998.(2)
10.16 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant), MMC and Compcare on
behalf of its RxCel department, effective January 1, 1998.(2)
10.17 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant), MMC and Compcare,
effective January 1, 1998.(2)
10.18 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and MRC on behalf of
its Investigation and Recovery Services department, effective January 1, 1998.(2)
10.19 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and MRC on behalf of
its Consulting Services department, effective January 1, 1998.(2)
10.20 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and MRC on behalf of
its Audit Services department, effective January 1, 1998.(2)
10.21 Intercompany Service Agreement among BCBSUW, UWS (subsequently assigned to the Registrant) and UWPS,
effective January 1, 1998.(2)
10.22 Service Agreement between BCBSUW and Valley, effective January 1, 1993.(2)
10.23 Service Agreement between UWS (to be assigned to the Registrant) and Community Health Systems, LLC,
dated November 1, 1994.(2)
10.24 Form of Service Agreement between United Wisconsin Services, Inc. (f/k/a Newco/UWS, Inc.) and American
Medical Security Group, Inc. (f/k/a United Wisconsin Services, Inc.).(2)
10.25 Amended and Restated Joint Venture Agreement among BCBSUW, UWS (to be assigned to the Registrant),
University Health Care, Inc. ("UHC" ), U-Care HMO, Inc. ("U-CARE") and Health Professionals, Inc.
("HPI") dated October 31, 1994.(2)
10.26 Agreement of Merger and Joint Venture by and among UWS (to be assigned to the Registrant), UWS
Acquisition Corporation, BCBSUW, HMO-W, Inc. and HMOW dated October 11, 1994.(2)
10.27 Service Agreement between UWS (to be assigned to the Registrant) and HPI dated November 1, 1994.(2)
10.28 License Agreement between UWS (to be assigned to the Registrant) and U-Care dated November 1, 1994.(2)
10.29 Joint Venture Agreement among UWS (to be assigned to the Registrant), BCBSUW, Compcare and Northwoods
Health Care, LLC dated July 1, 1996, as amended October 24, 1996.(2)
10.30 Information System Service Agreement among Blue Cross Blue Shield of South Carolina and Blue Cross &
Blue Shield United of Wisconsin dated August 23, 1996, as amended January 1, 1997.(2)
10.31 Form of Trademark Assignment Agreement by and among UWS, the Registrant and UWLIC.(2)
10.32 Registrant's Equity Incentive Plan.(2)
10.33 1998 Management Incentive Plan.(2)
10.34 Registrant's Deferred Compensation Plan for Directors.(2)
10.35 Registrant/BCBSUW 401(k) Plan.(2)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<C> <S>
10.36 Registrant/BCBSUW Union Employees 401(k) Plan.(2)
10.37 Unity Health Plans Insurance Corp. 1998 Profit Sharing Plan.(2)
10.38 Registrant's and BCBSUW's 1998 Profit Sharing Plan.(2)
10.39 Registrant Voluntary Deferred Compensation Plan.(2)
10.40 Registrant Deferred Compensation Trust.(2)
10.41 Registrant/BCBSUW Hourly Pension Plan.(2)
10.42 Registrant/BCBSUW Salaried Pension Plan.(2)
10.43 Registrant/BCBSUW Supplemental Executive Retirement Plan.(2)
10.44 Registrant Stock Appreciation Rights Plan.(2)
10.45 Note and Pledge Agreement dated October 30, 1996, between BCBSUW and United Wisconsin Services, Inc.
(subsequently to be assumed by and assigned to the Registrant).(2)
10.46 Administrative Services Agreement between UWSI and HMO of Wisconsin Insurance Corporation, effective
November 1, 1994.(1)
11 Statement regarding computation of per share earnings. (See Note 2 of Notes to Combined Financial
Statements).(2)
21 Subsidiaries of the Registrant.(2)
27 Financial Data Schedule.(2)
99 Information Statement of the Registrant dated September 11, 1998, as amended.(1)
</TABLE>
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(1) Filed herewith.
(2) Previously filed.
(3) To be filed by amendment.
<PAGE>
Exhibit 4.2
UNITED WISCONSIN SERVICES, INC.
TERMS AND CONDITIONS
OF THE
DIVIDEND REINVESTMENT AND DIRECT STOCK PURCHASE PLAN
The Dividend Reinvestment and Direct Stock Purchase Plan (the "Plan") of
United Wisconsin Services, Inc., (the "Company") provides each holder or record
of shares ("Record Owner") and Beneficial Owner (as defined below) of shares of
the Company's common stock, no par value per share (the "Common Stock"), with a
convenient and economical way of purchasing additional shares of Common Stock
through the automatic reinvestment of cash dividends of Common Stock and/or
through optional cash payments. An individual who is not a Record Owner or
Beneficial Owner may become a full participant in the Plan through the Plan's
direct stock purchase component by making cash payments for shares in the Plan
An investor who participates in any feature of the Plan is hereafter referred to
as a "Participant."
PURPOSE
1. PURPOSE OF THE PLAN
The purpose of the Plan is to provide interested investors, Record Owners
and Beneficial Owners with a convenient means of investing in the Company
through new investments in Common Stock and through the regular reinvestment of
cash dividends paid on Common Stock. Shares of the Common Stock for the Plan
may be purchased, in the discretion of the Company, either directly from the
Company through the reinvestment agent (the "Reinvestment Agent") and/or in the
open market.
If shares are purchased from the Company, the proceeds from such purchases
will be received by the Company and will be used from time to time for general
corporate purposes.
ADVANTAGES
2. ADVANTAGES OF THE PLAN
Participants in the Plan may elect to have all or a designated portion of
cash dividends on their shares of Common Stock automatically reinvested and/or
build their ownership in the Company through additional cash investment of not
less than $100 per calendar quarter and not more than $100,000 in any calendar
year. (See Section 4 for information on who is eligible to participate.)
<PAGE>
Participants in the Plan will pay the Market Price (as defined in Section
15) for shares whether reinvesting all or a designated portion of their cash
dividends or purchasing additional shares through the cash investment option
available under the Plan.
All service charges and brokerage commissions, if any, in connection with
purchases under the Plan will be paid by the Company.
Full investment under the Plan is possible because the Plan permits
fractions of shares, as well as full shares, to be purchased for Participants.
In addition, dividends with respect to such fractions, as well as with respect
to full shares, will be used to purchase additional shares for Participants.
Regular statements will provide Participants with a record of each transaction.
(See Section 21 for information regarding frequency of reports.) All share
purchases, by reinvestment of dividends or by optional cash payments, will be
credited to the Participant's account established for the Plan (a
"Noncertificated Share Account").
ADMINISTRATION
3. PLAN ADMINISTRATOR
The Reinvestment Agent administers the Plan for Participants. The present
Reinvestment Agent is Firstar Trust Company ("Firstar").
The Reinvestment Agent maintains a continuing record of all Participants'
Noncertificated Share Accounts, sends statements of account to each Participant,
and performs other duties relating to the Plan. The Reinvestment Agent will
hold for safekeeping the certificates for shares purchased for each Participant
under the Plan until termination of the shareholder's participation in the Plan,
or until a written request is received from the Participant for withdrawal of
the shares.
Should Firstar cease to act as the Reinvestment Agent under the Plan, the
Company may perform these administrative duties itself or may designate another
agent. In such event, all references herein to Firstar or the Registration
Agent shall be deemed to be references to the Company or such other agent as the
Company may designate.
Participants can contact the Reinvestment Agent either by telephone at
(414) 276-3737 or by mail addressed to:
Firstar Trust Company
615 E. Michigan Street, 4th Floor
Milwaukee, Wisconsin 53202
2
<PAGE>
PARTICIPATION
4. ELIGIBILITY FOR PARTICIPATION IN THE PLAN
All Record Owners and Beneficial Owners of the Common Stock are eligible to
participate in all features of the Plan. A Beneficial Owner is a shareholder
who beneficially owns shares of Common Stock that are registered in a name other
than his or her own name (e.g., the shares are held in the name of a broker,
bank or other nominee). Record Owners and Beneficial Owners may make optional
cash payments whether or not they also have elected to reinvest dividends on
Common Stock registered in their names.
You must be a Record Owner or Beneficial Owner to participate in the
dividend reinvestment feature of the Plan and only shares of Common Stock of
which you are the Record Owner or Beneficial Owner may have their dividends
reinvested pursuant to the Plan.
The Company may refuse participation in the Plan in its entirety, or
participation through any particular option under the Plan, to shareholders
residing in states whose securities laws do not exempt from registration shares
offered pursuant to the Plan, or pursuant to any particular participation option
under the Plan.
5. HOW TO PARTICIPATE
In order to participate in the Plan, a Record Owner must properly complete
an authorization card furnished by the Reinvestment Agent (the "Authorization
Card") and return it to the Reinvestment Agent. An Authorization Card and
postage-paid envelope are enclosed with this Prospectus and additional cards may
be obtained at any time by shareholders by written or oral request to the
Reinvestment Agent (see Section 3). Telephone requests or general inquiries may
also be made by calling the Reinvestment Agent at (414) 276-3737 (see Section
3).
Beneficial Owners who wish to participate in the Plan must instruct their
broker, bank or other nominee to complete and sign the Authorization Card and
return it to the Plan Administrator. See Section 7 for a discussion of the
Broker and Nominee Form (the "B&N Form") which is required to be used for
optional cash payments of a Beneficial Owner whose broker, bank or other nominee
holds the Beneficial Owner's shares in the name of a securities depository. See
also Section 12.
An Authorization Card will be mailed to all new holders of record of Common
Stock by the Reinvestment Agent. Authorization Cards may also be obtained at
any time by written request to the Reinvestment Agent.
Shareholders who do not wish to participate in the Plan will receive cash
dividends, as declared, in the usual manner.
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If a shareholder returns a properly executed Authorization Card to the
Reinvestment Agent without electing an investment option, such Authorization
Card will be deemed to indicate the intention of such shareholder to apply all
cash dividends, together with any optional cash payments, toward the purchase of
additional shares of Common Stock.
If a Participant's shares are registered in more than one name or in a
representative capacity (i.e., join tenants, trustees, etc.), all registered
holders must sign the Authorization Card exactly as their names appear on the
Company's stock transfer records.
6. THE AUTHORIZATION CARD
The Authorization Card provides for the purchase by any entity, whether or
not a record holder of the Company's Common Stock, of additional shares of
Common Stock through the following investment options offered under the Plan:
- - Full Dividend Reinvestment -- Record Owners may reinvest cash dividends on
all shares owned by the Participant. Optional cash payments of not less
than $100 may also be made quarterly.
- - Partial Dividend Reinvestment -- Record Owners may reinvest cash
distributions on less than all of the shares owned by the Participant and
continue to receive cash dividends on the other shares. Optional cash
payments of not less than $100 may also be made quarterly.
- - Optional Payments Only -- Record Owners may invest by making optional cash
payments of not less than $100 per calendar quarter.
- - Initial Direct Purchase -- Investors who are not currently Record Owners
may participate in the Plan by making a cash payment of not less than $100
to the Plan.
Cash dividends on shares credited to the Participant's Noncertificated
Share Account under the Plan are automatically reinvested to purchase additional
shares.
7. WHAT DOES THE BROKER AND NOMINEE FORM PROVIDE
The B&N Form must be submitted for optional cash payments of a Beneficial
Owner whose broker, bank or other nominee holds the Beneficial Owner's shares
in the name of a registered security depository. A B&N Form must be delivered
to the Plan Administrator each time that such broker, bank or other nominee
transmits optional cash payments on behalf of a Beneficial Owner. B&N Forms
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will be furnished at any time upon request to the Reinvestment Agent (see
Section 3).
Prior to submitting the B&N Form, the broker, bank or other nominee for a
Beneficial Owner must have established participation in the Plan by means of a
duly completed and executed Authorization card on behalf of the Beneficial Owner
(see Sections 5 and 6).
The Reinvestment Agent will make purchases for the Plan once a month on the
first business day of each month (the "Investment Date"). Accordingly, the B&N
Form and appropriate instructions must be received by the Reinvestment Agent no
later than the 25th day of the preceding month or the optional cash payment will
not be invested until the following Investment Date.
8. PARTIAL PARTICIPATION UNDER THE PLAN
A shareholder who desires the dividends on only some full shares to be
reinvested under the Plan may indicate such number of shares on the
Authorization Card. Cash dividends will continue to be made on the remaining
shares.
9. CHANGING THE METHOD OF PARTICIPATION IN THE PLAN AFTER ENROLLMENT
A Participant may change his/her method of participation in the Plan after
enrollment by submitting a revised Authorization Card or sending a written
request signed by all registered owners to the Reinvestment Agent at the address
specified in Section 3. A change in dividend reinvestment will be effective
with the next Dividend Payment Date (as defined in Section 10), if the request
for change is received at least two weeks before that Date.
10. WHEN A SHAREHOLDER OR INVESTOR MAY JOIN THE PLAN
If an Authorization Card specifying a dividend reinvestment feature is
properly completed and received by the Reinvestment Agent at least two weeks
before the record date established for the payment of a particular dividend,
reinvestment of dividends will commence with that dividend payment.
If an Authorization Card is received from a shareholder after the record
date established for a particular dividend, the reinvestment of such dividends
will begin on the dividend payment date following the next record date if such
shareholder is still a holder of record.
Dividend payment dates are anticipated to be in March, June, September and
December each year ("Dividend Payment Date").
Record Owners and Beneficial Owners wishing to make additional optional
cash payments through the Plan or investors not owning
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shares but wishing to make an initial direct purchase through the Plan may do so
at any time.
INITIAL DIRECT PURCHASE AND OPTIONAL CASH PAYMENTS
11. SHAREHOLDERS ELIGIBLE TO MAKE OPTIONAL CASH PAYMENTS
Record Owners who have executed an Authorization Card, and Beneficial
Owners who have executed an Authorization Card and a B&N Form, are eligible to
make optional cash payments of not less than $100 in the aggregate for any
quarter (noncumulative from quarter to quarter). The maximum aggregate amount
of optional cash payments under the Plan may not exceed $100,000 in any calendar
year.
12. HOW TO MAKE AN INITIAL DIRECT PURCHASE OR OPTIONAL CASH PAYMENTS
A new Participant may make an initial cash payment when enrolling in the
Plan by sending the Reinvestment Agent a check or money order, payable to
Firstar Trust Company, for not less than $100, with a completed Authorization
Card.
Once a Participant has enrolled in the Plan and the initial investment is
made, whether of dividends or through an initial direct purchase through the
Plan, a Participant will have the ability to make optional cash payments. Any
check or money order for an optional cash payment must be made to Firstar Trust
Company and should be accompanied by a properly completed Authorization Card.
Checks and forms should be mailed to Firstar Trust Company (see Section 3 for
address), Attention: Dividend Reinvestment. Beneficial Owners whose broker,
bank or other nominee holds the shares of the Beneficial Owner in a registered
securities depository must make their optional cash payments through the use of
the B&N Form rather than through the use of an Authorization Card.
Initial direct purchases and subsequent optional cash payments must be in
United States dollars, payable at a United States bank, and may not be less than
$100 for initial direct purchases or $100 in the aggregate for any quarterly
period between Dividend Payment Dates for optional cash payments (noncumulative
from quarter to quarter). The same amount need not be sent each time, and there
is no obligation to make an optional cash payment in any quarter. Do not send
cash.
Optional cash payments of Participants can be refunded if a written request
is received by the Reinvestment Agent at the above address at least two business
days prior to the Investment Date (see Section 16).
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Optional cash payments received on or prior to each Investment Date will be
invested on that Investment Date. No interest will be paid on funds held
between receipt and investment. You are therefore strongly encouraged to send
your optional cash payments so that they are received by the Reinvestment Agent
close to, but not later than the Investment Date (see Section 16)
13. EXPENSES TO PARTICIPANTS IN CONNECTION WITH PURCHASES UNDER THE PLAN
Participants will incur no brokerage commissions, service or other charges
for purchases made under the Plan. Any costs of administration of the Plan will
be borne by the Company. However, charges will be incurred by a Participant
upon the sale of his or her shares (see Sections 25, 27 and 28), and certain
fees may be charged to Participants by brokers when shares are held by brokers.
The benefit of any reduced brokerage commission charges will be passed on, pro
rata, to Participants.
PURCHASES
14. NUMBER OF SHARES WILL BE PURCHASED FOR PARTICIPANTS
The number of shares to be purchased will be determined by the amount of
the Participant's dividends and/or optional cash payments or initial direct
purchase payments, being reinvested or paid and the Market Price (as defined in
Section 15) of the shares. Each Participant's Noncertificated Share Account in
the Plan will be credited with the number of shares, including fractional shares
computed to three decimal places, equal to the amount of the dividends and/or
optional cash to be reinvested or paid divided by the applicable purchase price
of the shares.
15. DETERMINATION OF THE PURCHASE PRICE OF SHARES
Shares may be purchased from the Company through the Reinvestment Agent or
may be purchased, in the discretion of the Company, in the open market by the
Reinvestment Agent. For shares purchased from the Company through the
Reinvestment Agent, the price per share will be the average of the high and low
sale prices of the shares (the "Market Price") on the Reinvestment Date (defined
as the date on which dividends are paid and can first be reinvested in the
Company by the Reinvestment Agent) on the NYSE as reported by THE WALL STREET
JOURNAL. If no shares were traded on the Reinvestment Date, the Market Price
will be based on the most recent date immediately prior to the Reinvestment
Date that the shares were traded. For shares purchased on the open market, the
price per share will be the average price of all shares purchased for the Plan
in respect of any Reinvestment Date.
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16. TIMING OF INVESTMENT OF DIVIDENDS, AND/OR INITIAL DIRECT PURCHASES OR
OPTIONAL CASH PAYMENTS
Dividend reinvestment payments will be invested in additional shares and
credited to a Participant's Noncertificated Share Account within thirty days of
each Reinvestment Date. If any dividend reinvestment payments are not
reinvested by the Reinvestment Agent within thirty days after a Reinvestment
Date, such dividend payments will be returned to the Participant without any
interest thereon.
Record Owners and Beneficial Owners wishing to make additional optional
cash payments through the Plan may do so at any time. The Reinvestment Agent
will make purchases for the Plan once a month on the first business day of each
month (the "Investment Date") to satisfy these investment requests. Accordingly,
Participants and interested investors should send cash investments so as to
reach the Reinvestment Agent by the 25th day of the preceding month.
17. REINVESTMENT OF ALL DIVIDENDS ON SHARES CREDITED TO A PARTICIPANT'S
NONCERTIFICATED SHARE ACCOUNT UNDER THE PLAN
Regardless of the investment option chosen, all cash dividends on shares
held in the Plan for all Participants are automatically reinvested in additional
shares of Common Stock.
SHARE CERTIFICATES
18. ISSUANCE OF CERTIFICATES TO PARTICIPANTS FOR SHARES PURCHASED UNDER THE
PLAN
Although the Company reserves the right at any time to issue certificates
for any number of shares in a Participant's Noncertificated Share Account,
certificates for shares will not be issued except as described in Section 19.
Shares purchased under the Plan will be credited to a Participant's
Noncertificated Share Account and will be shown on a Participant's statement of
account. Certificates for the shares purchased pursuant to the Plan will be
issued to Participants upon their written request, except that no certificates
will be issued for fractional shares. A Participant requesting a certificate
for all the shares in Participant's Noncertificated Share Account will receive
cash for a fractional share only if participation in the Plan is terminated.
(See Section 19 for how a Participant may obtain certificates.) Cash dividends
on all shares held in the Participant's Noncertificated Share Account under the
Plan will be automatically reinvested to purchase additional shares which will
be reflected in the Participant's Noncertificated Share Account. If a
Participant is a Beneficial Owner, such request should be placed through such
Participant's broker, banker or other nominee.
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19. HOW A PARTICIPANT MAY OBTAIN CERTIFICATES FOR SHARES PURCHASED UNDER THE
PLAN
A Participant who has purchased shares under the Plan may obtain
certificates for those shares in the Participant's Noncertificated Share Account
at any time by sending a written request to that effect to the Reinvestment
Agent. If a Participant is a Beneficial Owner,such request should be placed
through such Participant's broker, bank or other nominee. No certificates will
be issued for fractional shares, but a Participant requesting termination of
participation in the Plan will receive, in cash, the Market Price of any
fractional share as well as one certificate, unless otherwise requested by the
Participant, for all whole shares held for such terminating Participant in the
Noncertificated Share Account. This notice should be mailed to the Reinvestment
Agent (see Section 3 for address). The Company, however, reserves the right at
any time to issue certificates to Participants for any shares in their
Noncertificated Share Accounts. (See Sections 24-27 for information on
termination of participation.)
20. DEPOSITING COMMON STOCK HELD IN CERTIFICATE FORM IN A PARTICIPANT'S
NONCERTIFICATED SHARE ACCOUNT
Common Stock certificates registered in a Participant's name may be
surrendered to the Reinvestment Agent for deposit to the Participant's
Noncertificated Share Account. This procedure enables Participants to avoid
the necessity of safekeeping certificates. The Participant should contact the
Reinvestment Agent (see Section 3) for the proper procedure to deposit
certificates.
Common Stock certificates may be deposited in a Participant's
Noncertificated Share Account whether or not the Participant has previously
authorized reinvestment of dividends on Common Stock registered in the
Participant's name. However, as with all other shares held in the Participant's
Noncertificated Share Account, all dividends on any shares deposited will
automatically be reinvested.
PARTICIPANTS' RECORDS AND ACCOUNTS
21. TYPE OF REPORTS SENT TO PARTICIPANTS IN THE PLAN
As soon as practicable after each Reinvestment Date (in the case of
dividend reinvestment) or Investment Date (in the case of initial direct
purchases or optional cash payments) a Participant in the Plan will receive a
statement indicating the Market Price, the number of shares purchased and the
number of shares in the Participant's Noncertificated Share Account. In
addition to the above information, a statement to a Participant in the dividend
reinvestment feature of the Plan will also show the total dividend payment and
the amount of the dividend payment reinvested. Each of
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these statements is a record of the cost of purchases under the Plan and should
be retained for tax purposes.
In addition, each Participant will receive copies of the Company's annual
and quarterly reports to shareholders, notices of annual and special meetings,
proxy statements and income tax information for reporting dividends. Beneficial
owners whose shares are registered in names other than their own (for instance,
in the name of a broker, bank nominee or other record holder) must arrange to
obtain their copies of such reports from the record holder.
22. NAME UNDER WHICH ACCOUNTS WILL BE MAINTAINED AND CERTIFICATES REGISTERED
WHEN ISSUED
A Participant's Noncertificated Share Account will be maintained in the
name or names which appear on the Company's shareholder records.
A certificate for shares, when delivered to a Participant, will be
registered in the name or names in which the Noncertificated Share Account is
maintained. Upon written request, certificates can be registered and issued in
names other than the account name, provided that the request bears the signature
of the Participant or Participants and the signature(s) are guaranteed by a
commercial bank or a member of the NYSE.
MODIFICATION OR TERMINATION BY A PARTICIPANT
23. MODIFYING THE MANNER OF PARTICIPATION IN THE PLAN
A Participant may change participation from partial to total dividend
reinvestment, from total to partial dividend reinvestment, or may simply change
the number of shares that are enrolled in the Plan by executing and delivering
a new Authorization Card to the Reinvestment Agent (see Section 3 for address).
Beneficial Owners must use the B&N Form to change their Participation. Notices
to change dividend reinvestment must be received by the Reinvestment Agent at
least two weeks before any Dividend Payment Date to be effective as of that
date.
24. TERMINATING PARTICIPATION IN THE PLAN
A Participant may terminate participation in the Plan by notifying the
Reinvestment Agent in writing to that effect. Notices will be effective only
upon receipt by the Reinvestment Agent. Notices to discontinue dividend
reinvestment received by the Reinvestment Agent at least two weeks before any
Dividend Payment Date will be effective as of that date. After termination,
dividends will be paid to the shareholder in cash unless and until the
shareholder rejoins the Plan. In order to re-enter the Plan after termination,
a shareholder must complete a new Authorization Card.
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25. SELLING SHARES HELD IN THE PLAN THROUGH THE REINVESTMENT AGENT
A Participant can instruct the Reinvestment Agent to sell any or all of
the whole shares held in the Plan. The written notification to the
Reinvestment Agent should include the number of shares that are to be sold. The
Reinvestment Agent will make the sale as soon as practicable after receipt of a
Participant's request and will then issue to the Participant a check for the
proceeds less brokerage commission and transfer taxes (if any). In its
discretion, the Reinvestment Agent also may effect a net share exchange between
a selling Participant and another Participant's optional cash purchase or
reinvestment of dividends.
No Participant shall have the authority or power to direct the date or
sales price at which shares may be sold. The request must indicate the number
of shares which may be sold and not the dollar amount to be obtained. Any such
request that does not clearly indicate the number of shares which may be sold
will be returned to the Participant with no action taken. A
withdrawal/termination form will be provided on the stub of the account
statement for this purpose. This notice should be addressed to the
Reinvestment Agent (see Section 3 for address).
26. STATUS OF SHARES HELD IN THE NONCERTIFICATED SHARE ACCOUNT WHEN A
PARTICIPANT TERMINATES PARTICIPATION IN THE PLAN
A certificate for the shares held in the Noncertificated Share Account will
be issued to the Participant upon the Participant's written request or upon a
Participant's termination of participation in the Plan. No fractional shares
will be issued. (See Section 18 for information on share certificates and
Section 19 for information on the cash payment for fractional shares in the
Noncertificated Share Account.)
27. RECEIVING CASH IN LIEU OF FULL SHARE CERTIFICATES UPON TERMINATION OF
PARTICIPATION
The Participant may request, in his or her written notification of
termination, that the Reinvestment Agent sell all full and fractional shares
held in the account under the Plan in which case the Reinvestment Agent will
sell the shares and deliver the Market Price of any fractional share and the
proceeds from the sale of full shares, less brokerage commissions and any taxes
payable in connection with the sale, to the Participant.
28. SELLING RECORD SHARES AND REMAINING IN THE PLAN
If a Participant should sell or transfer all of his or her record shares of
Common Stock, the Reinvestment Agent, at its discretion, may continue to
reinvest the dividends on the shares credited to his or her Noncertificated
Share Account under the Plan until notified in writing by the Participant to
withdraw from the
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Plan, or may terminate the Participant's participation and sell all of the
shares credited to the Participant's Noncertificated Share Account. Upon
termination, the Reinvestment Agent will remit to the former Participant the
proceeds from any sale, less any related brokerage commission and applicable
taxes, and payment for any fractional shares.
29. SELLING OR TRANSFERRING SOME BUT NOT ALL OF THE COMMON STOCK CREDITED TO
THE PARTICIPANT'S NONCERTIFICATED SHARE ACCOUNT
If a Participant is reinvesting dividends on only a portion of his or her
record shares, the Common Stock sold or transferred will be considered to be the
shares receiving cash dividends to the extent possible. Dividend reinvestment
will only be reduced when the number of shares of Common Stock sold or
transferred exceeds the number of shares receiving cash dividends. For example,
if a Participant owns 1,000 shares of Common Stock and has authorized dividends
on 600 of those shares to be reinvested under the Plan, such Participant could
sell up to 400 of his or her record shares without reducing the number of shares
which participate in the dividend reinvestment option of the Plan.
30. STOPPING THE REINVESTMENT OF DIVIDENDS FROM THE PARTICIPANT'S RECORD SHARES
AND RECEIVING THEM IN CASH AND STILL REMAINING IN THE PLAN
A Participant who terminates the reinvestment of dividends paid on his or
her record shares, may leave shares acquired through the Plan in the
Participant's Plan Noncertificated Share Account. Dividends paid on shares left
in the Plan will continue to be automatically reinvested.
31. RE-ENROLLING IN THE PLAN
Generally, a shareholder may again become a Participant at any time.
However, the Company reserves the right to reject any Authorization Form from a
previous Participant on grounds of excessive enrolling and termination. This
reservation is intended to minimize administrative expenses and to encourage use
of the Plan as a long-term investment service.
OTHER INFORMATION
32. DIVIDEND PAYMENT DATES
Dividend Payment Dates are anticipated to be in March, June, September and
December each year.
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33. VOTING OF PARTICIPANT'S SHARES AT ANNUAL MEETINGS OF SHAREHOLDERS
The Reinvestment Agent will obtain voting instructions from the Participant
for all full and fractional shares which are held by the Reinvestment Agent for
the Participant's Noncertificated Share Account on the record date established
by the Company for determining shareholders entitled to vote. In the absence of
voting instructions from the Participant, shares accumulated under the Plan will
not be voted.
34. COMPANY ISSUANCE OF A STOCK DIVIDEND, DECLARATION OF A STOCK SPLIT OR
MAKING A RIGHTS OFFERING
Any stock dividends or split shares distributed by the Company on shares
held by the Reinvestment Agent for the Participant will be credited to the
Participant's Noncertificated Share Account on a pro rata basis. In the event
that the Company makes available to its common shareholders rights to purchase
additional shares, debentures or other securities, the Reinvestment Agent will
sell such rights accruing on shares held by the Reinvestment Agent for
Participants and invest the proceeds in Common Stock of the Company prior to or
with the next regular cash dividend. A Participant who wishes to exercise
purchase rights must request that a stock certificate be sent to him or her by
the Reinvestment Agent prior to the record date for the rights offering.
35. PLEDGING SHARES CREDITED TO A PARTICIPANT'S ACCOUNT
Shares in a Participant's Noncertificated Share Account in the Plan may not
be pledged, assigned or otherwise encumbered unless withdrawn from the
Noncertificated Share Account.
36. RESPONSIBILITY OF THE COMPANY OR THE REINVESTMENT AGENT UNDER THE PLAN
In administering the Plan, neither the Company nor the Reinvestment Agent
nor any agent of either of them will be liable for any act done in good faith,
without negligence, or for any omission to act including, without limitation,
any claims for liability arising out of failure to terminate the Participant's
Noncertificated Share Account upon his or her death prior to receipt of notice
in writing of such death and with respect to the prices at which shares are
purchased or sold for the Participant's Noncertificated Share Account and the
times such purchases or sales are made.
All notices from the Reinvestment Agent to a Participant will be addressed
to the Participant's last known address. Beneficial Owners will receive all
notices and other mailings through their broker, bank or other nominee.
Participant's should notify the Reinvestment Agent promptly in writing of any
change in address.
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The risk to Participants is the same as with any other investment in shares
of Common Stock of the Company. It should be recognized that a Participant
loses any advantage otherwise available from being able to select the timing of
his or her investment. It should also be recognized that, like any investment,
the Company cannot assure the Participant of a profit or protect the Participant
against a loss on the shares purchased by the Participant under the Plan, nor
can the Company control purchases by the Reinvestment Agent. The Company also
cannot guarantee that dividends on shares of its common stock might not be
reduced or eliminated.
37. MODIFICATION, SUSPENSION OR TERMINATION OF THE PLAN
While the Company hopes to continue the Plan indefinitely, the Company
reserves the right to suspend or terminate the Plan at any time. It also
reserves the right to make modifications or amendments to the Plan and in
particular reserves the right to refuse optional cash payments from any
shareholder who, in the sole discretion of the Company, is attempting to
circumvent the interest of the Plan by making excessive optional cash payments
through multiple Noncertificated Share Accounts. To the extent practicable,
notice of any such suspension, termination, modification or amendment will be
sent to all Participants at least 30 days prior to the effective date. Any
modification will be deemed to be accepted by Participants who do not withdraw
prior to the effectiveness of the modification.
If the Plan is terminated, each Participant will receive (1) a certificate
for all whole shares of Common Stock held in the Participant's Noncertificated
Share Account and (2) a check representing the value of any fractional share
held in the Participant's Noncertificated Share Account and any uninvested
optional cash payment held in the account.
FEDERAL INCOME TAX CONSEQUENCES
Participants should consult their personal tax advisors with specific
reference to their own tax situations and potential changes in the applicable
laws as to all federal, state, local, foreign and other tax matters in
connection with the reinvestment of dividends and purchases of Common Stock
under the Plan, the Participant's tax basis and holding period for Common Stock
acquired under the Plan and the character, amount and tax treatment of any gain
or loss realized on the disposition of Common Stock. The following is only a
brief summary of some of the principal federal income tax considerations
applicable to the Plan.
38. TAX TREATMENT OF DIVIDENDS RECEIVED BY A PARTICIPANT
Participants in the Plan who are reinvesting dividends will be treated for
federal income tax purposes as having received with
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respect to each Reinvestment Date a dividend equal to the purchase price of the
shares purchased by dividend reinvestment on that date (i.e., the amount that
would have been received as a cash dividend) plus the cash dividend actually
received (if any). Dividends will be taxed in the following manner: (i) if the
dividend is paid by the Company out of its current or accumulated earnings and
profits, it will be taxed as ordinary income; (ii) if the Company has no
current or accumulated earnings and profits, the dividend will be treated as a
return of capital, which results in a reallocation of basis between shares
previously owned and shares acquired by dividend reinvestment; and (iii) if all
capital has been returned under (ii), the dividend will be treated as capital
gain income.
Participants who acquire shares under the Plan, except those shares
acquired as a return of capital, will have a tax basis in the shares so acquired
equal to the amount being paid for those shares increased by any brokerage fees
treated as a dividend to the Participant. Except for those dividends treated as
a return of capital, the holding period for tax purposes for all Participants
will begin on the day following the Reinvestment Date on or for which the shares
are acquired. A Participant will not realize any taxable income when the
Participant receives certificates for whole shares previously credited to the
Participant's Noncertificated Share Account, either upon the Participant's
request for those shares or upon withdrawal from the Plan.
A Participant will realize gain or loss when shares are sold or exchanged,
or when the Participant receives a cash adjustment for a fraction of a share
credited to the Participant's Noncertificated Share Account upon withdrawal from
the Plan. The amount of such gain or loss will be the difference between the
amount which the Participant receives for the shares, or fraction of a share,
and the Participant's tax basis.
39. TAX TREATMENT OF SERVICE CHARGES, BROKERAGE COMMISSIONS, AND OTHER
ADMINISTRATIVE EXPENSES OF THE PLAN PAID BY THE COMPANY
In connection with purchases of shares on the open market, service charges
and brokerage commissions paid by the Company on the behalf of Participants will
likely be treated as distributions subject to income tax in the same manner as
dividends. With respect to administrative expenses, such expenses paid by the
Company are not likely to be treated as constructive distributions to
Participants and, as a result, not subject to income tax.
40. PROVISIONS FOR PARTICIPANTS WHOSE DIVIDENDS ARE SUBJECT TO INCOME TAX
BACKUP WITHHOLDING
In the case of those Participants whose dividends are subject to United
States income tax backup withholding, the Reinvestment Agent will apply the net
amount of their dividends, after the
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deduction for taxes, to the purchase of shares of Common Stock. As a general
matter, the Company is currently required to withhold for United States income
tax purposes 31% of all dividend payments to a shareholder if (i) the
Participant fails to furnish its taxpayer identification number (the "TIN") to
the Company as required, (ii) the Internal Revenue Service (the "IRS") notifies
the Company that the TIN furnished by the Participant is incorrect, (iii) the
IRS notifies the Company that the Participant has failed properly to report
certain payments as required or (iv) the Participant fails to certify, when and
as required to do so, under penalties of perjury, that it is not subject to
backup withholding. Shareholders may be requested by the Company or their broker
to submit all information and certifications required in order to exempt them
from back-up withholding if such exemption is available to them.
41. TAX TREATMENT OF CASH RECEIVED BY A PARTICIPANT UPON THE SALE OF SHARES
PURCHASED BY THE PARTICIPANT PURSUANT TO THE PLAN
Assuming that the shares are held as capital assets, a Participant who
receives a cash payment for any full or fractional shares then held in his or
her Plan account will recognize either short-term or long-term capital gain or
loss, depending on his or her particular circumstances, the tax basis of his or
her shares, and the period of time he or she has held his or her shares.
Federal law requires the Company to notify the IRS of all sales of stock made
under the Plan during the year. If a Participant sells any shares from the
Plan, he or she will be sent a Form 1099B for each sale pursuant to federal
income tax regulations.
42. FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATION IN THE PLAN BY AN IRA,
KEOGH PLAN, 401(K) PLAN, SIMPLIFIED PENSION ACCOUNT OR ANY CORPORATE
EMPLOYER-SPONSORED RETIREMENT PLAN
The tax consequences of participation in the Plan by retirement plans
differ from those outlined above for individuals. Since the law and regulations
regarding the federal income tax consequences of retirement plan participation
are complex and subject to change, those considering such participation should
consult with their own retirement plan trustees, custodians or tax advisors for
specific information.
16
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
BETWEEN
UNITED WISCONSIN SERVICES, INC.
AND
HMO OF WISCONSIN INSURANCE CORPORATION
This Agreement, effective November 1, 1994, is by and between United
Wisconsin Services, Inc. ("UWSI") and HMO of Wisconsin Insurance Corporation
("HMOW").
WHEREAS, HMOW is the underwriter of HMO Products and POS Products pursuant
to joint venture agreements that UWSI has entered into with HMOW, HMO-W,
Incorporated, Blue Cross & Blue Shield United of Wisconsin, U-Care HMO, Inc.,
University Health Care, Inc. and other affiliated entities (the "Joint Venture
Agreements");
WHEREAS, HMOW desires to obtain certain administrative services from UWSI
in relation to these products; and
WHEREAS, UWSI desires to provide certain administrative services to HMOW in
relation to these products.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and conditions set forth in this Agreement, the parties agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms shall apply:
A. "HMO PRODUCTS" shall mean the health maintenance organization plans
underwritten and/or administered by HMOW pursuant to the Joint Venture
Agreements.
B. "POS PRODUCTS" shall mean point of service plans, the HMO portion of
which is underwritten by HMOW and the indemnity portion of which is underwritten
by Blue Cross or an affiliate of Blue Cross that is licensed to underwrite
indemnity insurance business pursuant to the Joint Venture Agreements.
-1-
<PAGE>
ARTICLE II
OBLIGATIONS OF UWSI
UWSI shall provide administrative services to HMOW which may include the
following:
A. Actuarial Services
B. Accounting Services
C. Financial Reporting Services
D. Management Information Services
E. Legal Services
F. Investment Management Services
G. Financial Audit Services
H. Information Systems Support Services
I. Corporate Communications Services
J. Medical Director Services
K. Medical Consultant Services
L. Health Policy/Pricing Services
M. Utilization Management Services
ARTICLE III
COMPENSATION
As consideration for providing administrative services to HMOW, UWSI shall
be compensated by HMOW on a cost basis, such that all administrative profit
remains with the HMO Products and POS Products. In addition, UWSI may incur
certain expenses for the benefit of HMOW, including, but not limited to,
advertising, external auditors, outside management fees, insurance and payments
due under service contracts and royalty agreements related to the Joint Venture
Agreements. At such time as payment is made by UWSI for said expenses, the
expenses will be charged to HMOW.
ARTICLE IV
RECORDKEEPING
UWSI shall maintain at its principal office, for the duration of this
Agreement and for six years thereafter, this Agreement and the books and records
of all transactions between itself and HMOW. Such books and records shall be
maintained according to the generally accepted standards of insurance business
recordkeeping.
HMOW, its employees, or authorized representatives may inspect all such
books and records to the extent necessary to assure compliance with this
Agreement and to fulfill its obligations under applicable state law. UWSI shall
make such books and records available to
-2-
<PAGE>
HMOW at UWSI's principal office during regular business hours and upon
reasonable advance notice.
UWSI shall make its books and records available for examination, audit or
inspection by agents or representatives of state insurance regulators, as
required by applicable state law.
UWSI shall furnish to HMOW such reports relating to the business which is
the subject of this Agreement as and when HMOW may reasonably require.
ARTICLE V
TERM AND TERMINATION
This Agreement shall be effective November 1, 1994, and shall continue in
effect through October 31, 1999. Thereafter, it shall renew for additional five
(5) year terms unless either party terminates upon thirty (30) days prior
written notice. Notwithstanding the foregoing, this Agreement shall terminate
at such time as the Service Agreement by and between UWSI and Community Health
Systems, L.L.C., terminates.
Termination of this Agreement shall not limit the obligation or liabilities
of either party incurred but not discharged prior to termination.
ARTICLE VI
GENERAL PROVISIONS
A. Each party shall comply with all applicable state laws and
regulations.
B. In the event that either HMOW or UWSI receives from a state insurance
regulator any complaint or inquiry related to business subject to this
Agreement, the party receiving such complaint or inquiry shall promptly forward
to the other a copy of such complaint or inquiry and shall provide, at the
other's request, access to or copies of all information in its possession
pertaining to such complaint or inquiry.
C. UWSI's relationship with HMOW shall be that of an independent
contractor. It is not the intent of the parties to create, nor should this
Agreement be construed to create, a partnership, or an employment relationship
between HMOW, its officers, employees, agents, or representatives and UWSI, its
officers, employees, agents, or representatives.
D. UWSI agrees to indemnify and hold harmless HMOW, its officers,
directors, employees, agents or representatives for any and all claims, demands,
liabilities, fines, assessments, damages and costs, including reasonable
attorneys' fees, arising out of or caused by any negligent act, error or
omission of UWSI, its officers, directors, employees, agents or representatives.
This indemnification by UWSI does not apply to any act, error or omission of
HMOW, its officers,
-3-
<PAGE>
directors, employees, agents or representatives.
E. HMOW agrees to indemnify and hold harmless UWSI, its officers,
directors, employees, agents or representatives for any and all claims, demands,
liabilities, fines, assessments, damages and costs, including reasonable
attorneys' fees, arising out of or caused by any negligent act, error or
omission of HMOW, its officers, directors, employees, agents or representatives.
This indemnification by HMOW does not apply to any act, error or omission of the
UWSI, its officers, directors, employees, agents or representatives.
F. Written notice required under this Agreement shall be given by U. S.
mail and addressed as follows:
To HMOW:
Devon W. Barrix, President
HMO of Wisconsin Insurance Corporation
840 Carolina Street
Sauk City, WI 53583
To UWSI:
Thomas R. Hefty, Chairman, President and Chief Executive Officer
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, WI 53203
G. No party may assign its rights or delegate its duties under this
Agreement without the prior written consent of the other party. Such approved
assignment or delegation shall inure to the benefit of the parties, their
successors and their permitted assigns or delegates.
H. The rights of any party to enforce any provision of this Agreement
shall not be affected by its prior failure to require the other party's
performance under such provision or any other provision. No right under this
Agreement shall be deemed to have been waived unless such waiver is in writing
and signed by the party making the waiver.
I. This Agreement constitutes the entire agreement between the parties
and creates no rights or duties other than as expressly provided herein. Unless
otherwise provided in this Agreement, any amendment to this Agreement must be in
writing, executed by, and delivered to, each of the parties.
J. In the event that a court, regulator, or administrative judge of
competent jurisdiction declares any provision of this Agreement to be invalid or
unenforceable, such declaration shall have no effect on the validity or
enforceability of the remainder of this Agreement.
K. This Agreement shall be construed according to the laws of the State
of Wisconsin.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and effective as of the above stated date.
UNITED WISCONSIN SERVICES, INC. HMO OF WISCONSIN INSURANCE
CORPORATION
By: By:
-------------------------------- ---------------------------
Title: Title:
----------------------------- ------------------------
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<PAGE>
EXHIBIT 99
[UWS NAME AND LOGO]
September 11, 1998
Dear Future Shareholder:
I am pleased to inform you that the Board of Directors of United Wisconsin
Services, Inc. ("UWS") has approved the distribution ("DISTRIBUTION") to UWS
shareholders of all of the outstanding shares of common stock of Newco/UWS, Inc.
("NEWCO"), a newly formed corporation of which you will soon become a
shareholder. Upon completion of the Distribution, Newco will be known as "United
Wisconsin Services, Inc.," and will be an independent public company owning and
operating the managed care and specialty products businesses and management
business currently owned and operated by UWS. The shares of Newco's common stock
have been approved for listing on the New York Stock Exchange under the symbol
"UWZ." After the Distribution, UWS will continue to own and operate its small
group business, and will be known as "American Medical Security Group, Inc."
The enclosed Information Statement explains the Distribution in detail and
provides important financial and other information regarding Newco. The
Distribution will give you a direct investment and ownership interest in two
separate companies. We believe that as separate companies, each one will have
additional and increased marketing, joint venture and acquisition opportunities.
The Distribution and certain intended related transactions will allow Newco,
which will operate under the name "United Wisconsin Services, Inc." following
the Distribution, to fully develop our managed care and specialty products
business, and utilize the Blue Cross and Blue Shield trademarks and tradenames
with our products. For UWS, which will operate under the name "American Medical
Security Group, Inc." after the Distribution, this move will allow them to
concentrate their efforts on continuing to develop, market and administer small
group insurance products, small group specialty group insurance products and
administrative services for small groups.
We are excited about Newco's prospects as an independent company. Newco,
through our wholly owned subsidiaries and provider arrangements, will be a
leading managed care company with the oldest and, in terms of membership,
largest health maintenance organization in Wisconsin and substantial operations
in specialty managed care and other products, including a large dental HMO, as
well as life, workers' compensation, mental health and other businesses. Newco
will possess a strong and highly motivated management team, outstanding
employees and a leading managed care and employee benefits business offering a
broad range of group medical and related benefit products. Operating as an
independent company, we believe Newco will be well positioned to serve its
customers, capitalize on exciting growth opportunities, utilize the Blue Cross
and Blue Shield trademarks and tradenames with our products and provide new
opportunities for our employees. We look forward to your participation in our
future.
Sincerely yours,
Thomas R. Hefty
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
[AMSG NAME AND LOGO]
September 11, 1998
Dear Shareholder:
As you know, the Board of Directors of United Wisconsin Services, Inc.
("UWS") has approved the distribution ("DISTRIBUTION") to UWS shareholders of
all of the outstanding shares of common stock of Newco/UWS, Inc. ("NEWCO"), a
newly formed corporation. Newco will own and operate the managed care companies
and the management business of UWS and, after the Distribution, will be known as
"United Wisconsin Services, Inc.". UWS will continue to own and operate its
small group business, and after the Distribution, will be known as "American
Medical Security Group, Inc." ("AMSG"). In the Distribution, you will receive
one share of Newco common stock for every share of UWS common stock held as of
the close of business on September 11, 1998. The Distribution will not change
the number of shares of UWS common stock you hold. UWS has received a private
letter ruling from the Internal Revenue Service as to the tax-free status of the
Distribution.
THE ENCLOSED INFORMATION STATEMENT EXPLAINS THE DISTRIBUTION IN DETAIL AND
PROVIDES IMPORTANT FINANCIAL AND OTHER INFORMATION REGARDING NEWCO. A
SHAREHOLDER VOTE IS NOT REQUIRED TO APPROVE THE DISTRIBUTION, AND, ACCORDINGLY,
YOUR PROXY IS NOT BEING SOUGHT. HOLDERS OF SHARES OF UWS COMMON STOCK ARE NOT
REQUIRED TO TAKE ANY ACTION TO PARTICIPATE IN THE DISTRIBUTION; HOWEVER, YOU
WILL BE ASKED TO DELIVER YOUR EXISTING STOCK CERTIFICATES REPRESENTING SHARES OF
UWS COMMON STOCK TO AMSG'S TRANSFER AGENT SO THAT YOU CAN BE RE-ISSUED STOCK
CERTIFICATES IN THE NAME OF AMSG. INSTRUCTIONS ON EXCHANGING YOUR STOCK
CERTIFICATES WILL BE SENT TO YOU SHORTLY BEFORE THE DISTRIBUTION.
After the Distribution, UWS will operate under the name "American Medical
Security Group, Inc." and will trade on the New York Stock Exchange under the
symbol "AMZ." We intend to concentrate our efforts on continuing to develop,
market and administer small group medical and specialty insurance products and
administrative services for small groups. We look forward to continuing AMSG's
growth and achieving the full potential of our small group products business.
Sincerely yours,
Samuel V. Miller
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
[NOTE: INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT ON FORM 10 RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS INFORMATION
STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY THESE SECURITIES.]
INFORMATION STATEMENT
NEWCO/UWS, INC.
(TO BE RENAMED "UNITED WISCONSIN SERVICES, INC.")
COMMON STOCK
This Information Statement is being furnished in connection with the
distribution (the "DISTRIBUTION") by United Wisconsin Services, Inc. ("UWS"), a
Wisconsin corporation, of shares of common stock, no par value per share (the
"DISTRIBUTED SHARES" or the "NEWCO COMMON STOCK"), of its wholly owned
subsidiary, Newco/ UWS, Inc. ("NEWCO"), a Wisconsin corporation, to UWS
shareholders. The distribution ratio will be one share of Newco Common Stock for
every one share of common stock of UWS ("UWS COMMON STOCK") owned at the close
of business on September 11, 1998 (the "RECORD DATE"). The Distribution will
result in all of the issued and outstanding shares of Newco Common Stock being
distributed to holders of shares of UWS Common Stock on a pro rata basis. The
Distribution is expected to occur at the close of business on September 25, 1998
(the "DISTRIBUTION DATE"). Certificates evidencing shares of Newco Common Stock
will be mailed to holders of shares of UWS Common Stock on or about the
Distribution Date. UWS has received a ruling from the Internal Revenue Service
("IRS") to the effect that the Distribution will qualify as a tax-free
distribution to UWS, Newco and the UWS shareholders for federal income tax
purposes. No consideration will be required of holders of shares of UWS Common
Stock in return for the shares of Newco Common Stock issued pursuant to the
Distribution.
On the effective date of the Distribution, UWS will be renamed "American
Medical Security Group, Inc." ("AMSG"), and Newco will be renamed "United
Wisconsin Services, Inc." Newco is a newly formed corporation which, as a result
of the transactions entered into in connection with the Distribution, will own
the businesses and assets of, and be responsible for the liabilities associated
with, UWS's managed care and specialty products businesses and management
business. AMSG will continue to own the businesses and assets of, and be
responsible for the liabilities associated with, its small group business.
Following the Distribution, AMSG will not own any shares of Newco Common
Stock, nor will Newco own any shares of AMSG Common Stock. There is currently no
public market for the shares of Newco Common Stock, although a "when-issued"
trading market is expected to develop prior to the Distribution Date. The shares
of Newco Common Stock have been approved for listing, subject to official notice
of issuance, on the New York Stock Exchange ("NYSE") under the symbol "UWZ." The
shares of UWS Common Stock will continue to be listed on the NYSE but on and
after the Distribution Date, will be listed under the symbol "AMZ."
NO VOTE OF SHAREHOLDERS IS REQUIRED TO APPROVE THE DISTRIBUTION.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO
SEND
US A PROXY. IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE
CAPTION "RISK FACTORS" ON PAGE 20.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS INFORMATION STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES.
The date of this Information Statement is September 11, 1998.
<PAGE>
Graphic chart illustrating VWS's subsidiaries and joint ventures grouped
according to products and services offered.
1. HMO and POS Products
- Compcare Health Services Insurance Corporation--Wisconsin's most
experienced HMO having Southeastern Wisconsin's largest provider network
with HMO and POS plans. --bullet>Valley Health Plan, Inc.]A joint venture
with Midelfort Clinic, Ltd, a Mayo Regional Health System, providing HMO
and POS plans and consistently achieves high marks for service.
- Northwoods Health Plans--A joint venture with Howard Young Health Care,
Inc., offering an integrated health care system serving HMO and POS plans.
- Unity Health Plans Insurance Corporation--One of the nation's first
rural-based HMOs providing HMO and POS plans with services through
community physicians and the University of Wisconsin Hospital and Clinics.
- Compcare Northwest--A provider association with local physicians and
clinics providing HMO and POS plans.
2. Specialty Managed Care Products and Services
- Meridian Resource Corporation--Provides managed care consulting, cost
containment subrogation and EAP.
- United Wisconsin Proservices, Inc.--Provides electronic claims processing
and software.
- CNR Health, Inc.--Provides managed mental health care.
- United Wisconsin Group (comprised of United Wisconsin Insurance Company
and United Heartland Life Insurance Company)--Provides life, disability
and dental products.
- RxCel--Provides prescription drug and pharmacy management.
- Heartland Dental Plan, Inc.--Wisconsin's largest dental HMO.
- United Heartland, Inc.--Provides managed care workers' compensation.
3. Small Group Managed Care Products
- American Medical Security (comprised of American Medical Security
Holdings, Inc. and subsidiaries including United Wisconsin Insurance
Company)--Managed care products marketed nationally. Has experienced
management team and creative product design with sophisticated
underwriting.
ii
<PAGE>
ADDITIONAL INFORMATION
UWS is (and following the Distribution, Newco will be) subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
("EXCHANGE ACT"), and in accordance therewith files (and Newco will file)
reports, proxy statements and other information with the Securities and Exchange
Commission ("SEC"). The reports, proxy statements and other information filed by
UWS (and to be filed by Newco) with the SEC may be inspected and copied at the
public reference facilities maintained by the SEC at Judiciary Plaza, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, as well as the Regional Offices
of the SEC at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such information can be obtained by mail from the Public Reference
Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The SEC also maintains an Internet site on the World Wide Web
at http://www.sec.gov that contains reports, proxy statements and other
information regarding public companies. Shares of UWS Common Stock are listed,
and shares of Newco Common Stock have been approved for listing upon official
notice of issuance, on the NYSE and reports, proxy statements and other
information regarding UWS and Newco also can be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005.
Newco has filed with the SEC a Registration Statement on Form 10 (the
"REGISTRATION STATEMENT") under the Exchange Act with respect to the shares of
Newco Common Stock received by UWS shareholders in the Distribution. This
Information Statement does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Statements made in this Information Statement as to
the contents of any contract, agreement or other document referred to herein are
not necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
such exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the related exhibits filed by Newco may be inspected
at the public reference facilities of the SEC listed above.
Questions concerning the Distribution should be directed to Thomas L.
Luljak, Director of Corporate Communications, United Wisconsin Services, Inc.,
401 West Michigan Street, Milwaukee, Wisconsin 53203, (414) 226-6900. After the
Distribution, holders of shares of Newco Common Stock having inquiries related
to their investment in Newco should contact Thomas L. Luljak, Director of
Corporate Communications, 401 West Michigan Street, Milwaukee, Wisconsin 53203,
(414) 226-6900, and holders of shares of AMSG Common Stock having inquiries
related to their investment in AMSG should contact Cliff A. Bowers, Vice
President of Corporate Communications, 3100 AMS Boulevard, Green Bay, Wisconsin
54313, (920) 661-2440.
No person is authorized by UWS, AMSG or Newco to give any information or to
make any representations other than those contained in this Information
Statement, and if given or made, such information or representations must not be
relied upon as having been authorized.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION............................................................... 1
SUMMARY.................................................................................................... 6
SUMMARY COMBINED FINANCIAL DATA FOR NEWCO.................................................................. 12
FORWARD-LOOKING STATEMENTS................................................................................. 13
INTRODUCTION............................................................................................... 13
THE DISTRIBUTION........................................................................................... 13
Background and Reasons for the Distribution.............................................................. 13
Restructuring Prior to the Distribution.................................................................. 14
Manner of Effecting the Distribution..................................................................... 15
Results of the Distribution.............................................................................. 15
Certain Federal Income Tax Consequences of the Distribution.............................................. 16
Future Management of Newco............................................................................... 17
Listing and Trading of Shares of UWS Common Stock........................................................ 17
Listing and Trading of Shares of Newco Common Stock...................................................... 17
Accounting Treatment..................................................................................... 18
Financial Advisor........................................................................................ 18
Dividend Reinvestment Plans.............................................................................. 19
UWS and Newco Benefit Plans.............................................................................. 19
Treatment of Options in the Distribution................................................................. 19
Interests of Certain Persons in the Distribution......................................................... 20
Bank Credit Facilities and Assumption of Certain Indebtedness............................................ 20
Conditions; Termination.................................................................................. 20
Reasons for Furnishing the Information Statement......................................................... 20
RISK FACTORS............................................................................................... 21
Operating History and Future Prospects................................................................... 21
Limited Relevance of Historical Combined Financial Information of Newco.................................. 21
Health Care Costs and Health Care Industry............................................................... 21
Dependence Upon Health Care Providers and Employer Groups................................................ 22
Provider Arrangements.................................................................................... 22
Pharmaceutical Costs..................................................................................... 23
Government Programs and Regulation....................................................................... 23
Health Care Reform Laws.................................................................................. 24
Competition.............................................................................................. 24
Administration and Management............................................................................ 25
Control by Shareholders; Effects of BCBSUW Intended Purchases;
Defensive Measures; Potential Conflicts of Interest.................................................... 25
Newco Conflicts with AMSG After the Distribution......................................................... 26
Certain Federal Income Tax Considerations................................................................ 27
No Prior Trading Market for Newco Common Stock;
Likely Volatile Newco Common Stock Price............................................................... 27
The Year 2000 Issue...................................................................................... 28
REGULATORY APPROVALS....................................................................................... 28
Tax Matters.............................................................................................. 28
Insurance Regulatory Matters............................................................................. 28
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
PRO FORMA CAPITALIZATION................................................................................... 30
DIVIDEND POLICY............................................................................................ 30
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION OF NEWCO................................................ 31
SELECTED COMBINED FINANCIAL INFORMATION OF NEWCO........................................................... 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 36
BUSINESS OF NEWCO.......................................................................................... 45
General.................................................................................................. 45
Newco's Strategy......................................................................................... 46
HMO Products............................................................................................. 46
Specialty Managed Care Products and Services............................................................. 50
Competition.............................................................................................. 53
Reinsurance.............................................................................................. 53
Service Agreements....................................................................................... 53
Investments.............................................................................................. 54
Regulation............................................................................................... 55
Employees................................................................................................ 58
Trademarks............................................................................................... 58
Properties............................................................................................... 58
Legal Proceedings........................................................................................ 58
MANAGEMENT OF NEWCO........................................................................................ 59
Directors of Newco....................................................................................... 59
Executive Officers of Newco.............................................................................. 62
EXECUTIVE COMPENSATION..................................................................................... 64
Historical Compensation.................................................................................. 64
Summary Compensation Table............................................................................... 64
Option/SAR Grants in Last Fiscal Year.................................................................... 65
Aggregated Option/SAR Exercises in the Last Fiscal Year and FY-End Option/SAR Values..................... 65
Long-Term Incentive Plan Awards in Last Fiscal Year...................................................... 66
Pension Plan Table....................................................................................... 67
Chief Executive Officer Supplemental Compensation Agreement.............................................. 67
Treatment of UWS Options and SARs as a Result of the Distribution........................................ 67
NEWCO BENEFIT PLANS FOLLOWING THE DISTRIBUTION............................................................. 68
Newco Equity Incentive Plan.............................................................................. 68
Nonqualified Compensation Plans.......................................................................... 71
Retirement Plans......................................................................................... 72
Supplemental Retirement Plan............................................................................. 72
Deferred Compensation Plans.............................................................................. 73
Other Benefit Plans...................................................................................... 73
AGREEMENTS BETWEEN AMSG AND NEWCO.......................................................................... 73
Distribution Agreement................................................................................... 73
Employee Benefits Agreement.............................................................................. 75
Tax Allocation Agreement................................................................................. 76
AMSG Service Agreement................................................................................... 77
Reinsurance Agreements................................................................................... 77
Intellectual Property Agreement.......................................................................... 77
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS....................................................... 78
Service Agreements with BCBSUW........................................................................... 78
AMSG Service Agreement................................................................................... 78
Supplemental Compensation Agreement...................................................................... 78
BCBSUW Loan.............................................................................................. 78
BCBSUW Intended Purchase of Additional Shares of Newco Common Stock...................................... 79
Settlement Agreement; Certain Registration Rights and Voting Agreements Relating to Newco Common Stock... 79
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 81
DESCRIPTION OF CAPITAL STOCK OF NEWCO...................................................................... 82
Common Stock............................................................................................. 82
Preferred Stock.......................................................................................... 82
Certain Articles of Incorporation and By-Laws Provisions of Newco........................................ 82
Certain WBCL Provisions.................................................................................. 83
Transfer Agent and Registrar............................................................................. 84
Number of Directors; Filling Vacancies; Removal.......................................................... 84
Shareholder Action by Written Consent.................................................................... 84
Special Meetings......................................................................................... 84
Advance Notice Provisions For Shareholder Nominations and Shareholder Proposals.......................... 84
No Preemptive Rights..................................................................................... 86
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF NEWCO........................................... 86
SHAREHOLDER PROPOSALS...................................................................................... 87
INDEPENDENT AUDITORS....................................................................................... 87
NEWCO/UWS, INC. INDEX TO COMBINED FINANCIAL STATEMENTS..................................................... F-1
</TABLE>
vi
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION
<TABLE>
<S> <C>
Q. What is the Distribution and when will it occur?
A. The Distribution is the series of transactions whereby UWS will transfer the stock,
assets and liabilities relating to its managed care companies and management business
to its wholly owned subsidiary, Newco, in exchange for 16,573,102 shares of Newco
Common Stock. UWS then will distribute all of the shares of Newco Common Stock to its
Record Date shareholders who continue to hold their shares of UWS Common Stock through
the Distribution Date. The Record Date is September 11, 1998, and the Distribution will
occur at the close of business on September 25, 1998.
Q. What will I receive in the Distribution?
A. For every share of UWS Common Stock owned by you on the Distribution Date, you will
receive one share of Newco Common Stock.
Q. What do I have to do to participate in the Distribution?
A. Nothing. No proxy or vote is necessary to approve the Distribution. However, UWS
shareholders did approve an amendment to its Articles of Incorporation to change its
name to "American Medical Security Group, Inc.," in July 1998, with the name change to
be effective on the Effective Date of the Distribution. The UWS entity after the
Distribution will be referred to herein as "AMSG."
If you own shares of UWS Common Stock on the Record Date, and you continue to hold such
shares of UWS Common Stock on the Distribution Date, shares of Newco Common Stock will
be credited to your brokerage account or certificates representing shares of Newco
Common Stock will be mailed to you. You do not need to mail in UWS Common Stock
certificates to receive Newco Common Stock certificates, and the Distribution will not
change the number of shares of UWS Common Stock that you own. However, you will be
asked to deliver your stock certificates representing shares of UWS Common Stock after
the Distribution to Firstar Trust Company, AMSG's transfer agent, so that you can be
re-issued stock certificates in the name of "American Medical Security Group, Inc.,"
the new name of UWS after the Distribution. Shortly before the Distribution Date,
Firstar Trust Company will mail to all AMSG shareholders a notice to this effect, along
with letters of instruction to effectuate this exchange.
Q. How will I benefit from the Distribution?
A. The Distribution will give you a direct investment and ownership interest in two
separate companies. The Distribution will allow each company to be managed and operated
more effectively as independent publicly owned companies. UWS believes that as separate
companies, each one will have additional and increased marketing, joint venture and
acquisition opportunities. The Distribution and certain intended related transactions
should allow Newco to concentrate on developing its managed care and specialty products
business and management business and utilize the Blue Cross and Blue Shield trademarks
and tradenames with its products. Furthermore, separate incentive compensation plans
for key employees will provide incentives more directly related to the performance of
the individual companies. The Distribution also will give each company direct access to
capital markets and the ability to issue stock to finance expansion and growth
opportunities. At the present time, two of the licensing requirements of the Blue Cross
and Blue Shield Association, the owners of the Blue Cross and Blue Shield trademarks
and tradenames, are not met, because a Blue Cross and Blue Shield Plan must "control"
the company licensing the trademark and tradename, and at least 80% of the total
licensable combined dollar volume of health insurance sold by a Blue Plan and its
controlled affiliates actually is licensed.
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Because many of the small group products that are sold by UWS's American Medical
Security operations (which are not being transferred to Newco) compete with products
using the Blue Cross and Blue Shield trademarks and tradenames, it would be impractical
to license the small group products with the Blue Cross and Blue Shield trademarks and
tradenames which would be required under the 80% requirement referred to above.
Accordingly, the Distribution will remove that barrier and the managed care and
specialty operations which will be conducted by Newco following the Distribution will
be eligible to use the Blue Cross and Blue Shield trademarks and tradenames because
Newco will be able to meet the 80% test. Regarding the "control" test, Blue Cross &
Blue Shield United of Wisconsin ("BCBSUW") has committed to increase its ownership of
Newco following the Distribution to over 50% so it will meet the control test.
Q. Will shares of Newco Common Stock be listed on any exchange?
A. Yes. The shares of Newco Common Stock have been approved for listing on the NYSE and
will trade under the symbol "UWZ." The shares of UWS Common Stock will continue to be
listed on the NYSE, but on and after the Distribution Date, will be listed under the
symbol "AMZ."
Q. What will happen to the trading of shares of Newco Common Stock and UWS Common Stock?
A. A regular public market for the shares of Newco Common Stock will not exist prior to
the Distribution Date. We expect, however, that "when-issued" trading for shares of
Newco Common Stock will develop prior to the Distribution Date. "When-issued" trading
means that shares can be traded prior to the time certificates are actually available
or issued and reflects the assumed value of a security as if it had already been
issued. When-issued trading would occur to develop an orderly market and trading price
for the shares of Newco Common Stock after the Distribution.
If when-issued trading develops, you may buy and sell shares of Newco Common Stock
before the Distribution Date. None of these trades, however, would settle until after
the Distribution Date, after regular trading in shares of Newco Common Stock has begun.
If the Distribution does not occur, all when-issued trading would be null and void. If
and as long as when-issued trading in shares of Newco Common Stock occurs, the symbol
on the NYSE will be "UWZwi."
We expect that the shares of UWS Common Stock will continue to trade on a regular basis
through the Distribution Date, but beginning on or about September 14, 1998, and
continuing through September 25, 1998, your shares of UWS Common Stock will have a due
bill attached for shares of Newco Common Stock. This means that you will give up your
right to receive shares of Newco Common Stock if you sell your shares of UWS Common
Stock during this time. In addition, shares of UWS Common Stock may trade on an
ex-distribution when-issued basis before the Distribution Date, reflecting an assumed
value for the shares of UWS Common Stock as if the Distribution had already occurred.
If and as long as when-issued trading in the shares of UWS Common Stock occurs, the
symbol on the NYSE will be "AMZwi."
You should consult your broker if you intend to sell your shares of UWS Common Stock
before you receive shares of Newco Common Stock in the Distribution and make sure that
your broker understands your intentions with respect to such sales.
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Q. How will the Distribution affect the trading price of the shares of UWS Common Stock?
A. Prior to the Distribution, the trading price of the shares of UWS Common Stock will
reflect the operations and performance of both Newco and AMSG as a combined entity.
After the Distribution, the trading price of the shares of AMSG Common Stock will
likely be lower than the trading price of UWS Common Stock prior to the Distribution,
because it will only reflect the operations and performance of AMSG, without the
operations and performance of Newco. Furthermore, the combined trading prices of the
shares of AMSG Common Stock and Newco Common Stock after the Distribution may not equal
the trading price of the shares of UWS Common Stock prior to the Distribution.
Q. What will happen to existing options to purchase shares of UWS Common Stock?
A. In general, outstanding options to purchase shares of UWS Common Stock will be
converted as follows: (a) options held by individuals who will be executive officers,
directors or employees of Newco following the Distribution will be converted into
options to purchase shares of Newco Common Stock; (b) options held by individuals who
will be executive officers, directors or employees of AMSG following the Distribution
will be converted into options to purchase shares of AMSG Common Stock; and (c) options
held by Messrs. Wallace J. Hilliard, Ronald A. Weyers, Thomas R. Hefty and C. Edward
Mordy and Ms. Gail L. Hanson and certain options held by Mr. Samuel V. Miller will be
converted into options to purchase an equal number of shares of Newco Common Stock and
AMSG Common Stock. The UWS Board of Directors determined that Messrs. Hefty, Mordy and
Miller and Ms. Hanson will receive options relating to Newco and AMSG due to such
individuals' significant contributions relating to the acquisition of American Medical
Security Group, Inc. by UWS in 1996 and the structuring and implementation of the
Distribution. Messrs. Hilliard and Weyers will receive options relating to Newco and
AMSG as a result of a settlement agreement entered into with UWS and Newco in April
1998.
Based on the market value of shares of Newco Common Stock and AMSG Common Stock at the
close of business on the day immediately following the Distribution Date and on the
market value of shares of UWS Common Stock at the close of business on the Distribution
Date, the options will be adjusted to provide equivalent value to each option holder by
increasing the number of shares of Newco Common Stock or AMSG Common Stock, as the case
may be, subject to each option and decreasing the exercise price per share for each
option; however, options converted into options to purchase an equal number of shares
of Newco Common Stock and AMSG Common Stock will be adjusted to provide equivalent
value by only decreasing the exercise price per share for each option.
Q. What will happen to shares of UWS Common Stock owned through the UWS Dividend Reinvest-
ment and Direct Stock Purchase Plan?
A. They will be treated the same as all other shares of UWS Common Stock. You will
continue to own the shares of UWS Common Stock that you owned through the UWS Dividend
Reinvestment and Direct Stock Purchase Plan prior to the Distribution. In the
Distribution, you will receive one share of Newco Common Stock for every share of UWS
Common Stock that you owned on the Distribution Date through the UWS Dividend
Reinvestment and Direct Stock Purchase Plan. A comparable service will be established
for Newco which will provide for reinvestment of dividends on the shares of Newco
Common Stock and the direct purchase of shares of Newco Common Stock, under which
accounts will be established for participants in the UWS Dividend Reinvestment and
Direct Stock Purchase Plan. Shares of Newco Common Stock credited as a result of the
Distribution to participants in the UWS Dividend Reinvestment and Direct Stock Purchase
Plan will be transferred to the participants' accounts in the new service.
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Q. Is the Distribution taxable for federal income tax purposes?
A. No. UWS has received a private letter ruling from the IRS that the Distribution will be
tax-free to UWS, Newco and UWS shareholders for federal income tax purposes. Shortly
after the Distribution, AMSG will send a letter to its Record Date shareholders that
will explain how they should allocate tax basis between the shares of AMSG Common Stock
and Newco Common Stock.
Q. Will AMSG and Newco be related in any way after the Distribution?
A. AMSG will no longer own any shares of Newco Common Stock after the Distribution.
However, AMSG and Newco will have four common Board members, and each will have Blue
Cross & Blue Shield United of Wisconsin as a significant shareholder. AMSG and Newco
also have entered into various agreements to define their continuing business
relationship, consisting principally of certain reinsurance arrangements between the
companies, and certain investment management and other ancillary services to be
provided by Newco to AMSG after the Distribution.
Q. Will Newco pay dividends?
A. The Board of Directors of Newco expects initially to pay an annual cash dividend of
$0.05 per share on the Newco Common Stock following the Distribution.
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Q. Who can assist me if I have questions?
A. Before the Distribution, UWS shareholders with inquiries relating to the Distribution
may contact:
Thomas L. Luljak, Director of Corporate Communications
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53203
(414) 226-6900
After the Distribution, shareholders of Newco with inquiries relating to Newco or their
investment in shares of Newco Common Stock may contact:
Thomas L. Luljak, Director of Corporate Communications
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53203
(414) 226-6900
The Distribution Agent responsible for the distribution of shares of Newco Common Stock
in the Distribution and acting as transfer agent and registrar for the shares of Newco
Common Stock after the Distribution is:
Firstar Trust Company
Corporate Trust Department
1555 North RiverCenter Drive, Suite 301
Milwaukee, Wisconsin 53212
(414) 905-5000
After the Distribution, shareholders of AMSG with inquiries relating to AMSG or their
investment in shares of AMSG Common Stock may contact:
Cliff A. Bowers, Vice President of Corporate Communications
American Medical Security Group, Inc.
3100 AMS Boulevard
Green Bay, Wisconsin 54313
(920) 661-2440
</TABLE>
5
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT. IT MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO BETTER UNDERSTAND
THE DISTRIBUTION AND FOR A MORE COMPLETE DESCRIPTION OF THE TERMS OF THE
DISTRIBUTION, YOU SHOULD READ CAREFULLY THIS ENTIRE INFORMATION STATEMENT AND
THE OTHER DOCUMENTS REFERRED TO IN THIS INFORMATION STATEMENT. EXCEPT AS THE
CONTEXT OTHERWISE REQUIRES, THE TERM "NEWCO" MEANS NEWCO/UWS, INC. AND ITS
WHOLLY OWNED SUBSIDIARIES, THE TERM "UWS" MEANS UNITED WISCONSIN SERVICES, INC.
AND ITS WHOLLY OWNED SUBSIDIARIES PRIOR TO THE EFFECTIVE DATE OF THE
DISTRIBUTION, THE TERM "AMSG" MEANS UWS AFTER THE EFFECTIVE DATE OF THE
DISTRIBUTION AND THE TERM "AMSG COMMON STOCK" MEANS THE UWS COMMON STOCK AFTER
THE EFFECTIVE DATE OF THE DISTRIBUTION.
THE DISTRIBUTION
<TABLE>
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Distributing Corporation..... United Wisconsin Services, Inc. On and after the Effective
Date, UWS will be renamed, and will be known as American
Medical Security Group, Inc. ("AMSG").
Distributed Corporation...... Newco/UWS, Inc. On and after the Effective Date, Newco will
be renamed, and will be known as United Wisconsin Services,
Inc.
Shares to Be Distributed..... UWS will distribute 16,573,202 shares of Newco Common Stock,
representing 100% of the issued and outstanding shares of
Newco Common Stock.
Distribution Ratio........... One share of Newco Common Stock for each share of UWS Common
Stock.
Record Date.................. The Record Date is September 11, 1998 (close of business).
Effective Date............... The Effective Date is September 11, 1998.
Distribution Date............ The Distribution Date is expected to be on the close of
business on September 25, 1998.
Mailing Date................. On the Distribution Date, the Distribution Agent will
commence mailing certificates representing shares of Newco
Common Stock to holders of shares of UWS Common Stock.
Eligibility for Receipt of
Distributed Shares......... UWS shareholders of record on the Record Date who continue
to own shares of UWS Common Stock on the Distribution Date
will receive Distributed Shares. UWS shareholders of record
on the Record Date who sell their shares of UWS Common Stock
after the Record Date but before the close of business on
the Distribution Date will receive Distributed Shares, but
will be required to forward such Distributed Shares to the
due bill holder relating to their shares of UWS Common
Stock. Persons who purchase shares of UWS Common Stock
between two business days before the Record Date and the
Distribution Date and who continue to hold the shares of UWS
Common Stock on the Distribution Date will receive
Distributed Shares.
Distribution Agent........... Firstar Trust Company.
Trading Market............... There is currently no public market for the shares of Newco
Common Stock, although a "when-issued" trading market is
expected to develop prior to the Distribution Date. The
shares of Newco Common Stock have been approved for listing,
subject to official notice of
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<S> <C>
issuance, on the NYSE under the symbol "UWZ." On and after
the Distribution Date, AMSG will continue to be listed on
the NYSE, but under the symbol "AMZ."
Transfer Agent and
Registrar.................. Firstar Trust Company will be the transfer agent and
registrar for both Newco and AMSG after the Distribution
Date.
Distribution-Related
Inquiries.................. If you have questions about UWS before the Distribution
Date, please contact Thomas L. Luljak, Director of Corporate
Communications, at (414) 226-6900. If you have questions
about Newco, also contact Thomas L. Luljak, Director of
Corporate Communications, at (414) 226-6900.
If you have questions about UWS, to be renamed "American
Medical Security Group, Inc." and to be known as AMSG after
the Distribution Date, please contact Cliff A. Bowers, Vice
President of Corporate Communications, at (920) 661-2440.
Principal Business
of Newco................... After the Effective Date, Newco, through its wholly owned
subsidiaries and provider arrangements, will be a leading
managed care company, primarily in Wisconsin, with the
largest health maintenance organization ("HMO") membership
in Wisconsin and substantial operations in specialty managed
care and other products, including a large dental HMO, as
well as life, workers' compensation, mental health and other
businesses (collectively, the "MANAGED CARE COMPANIES"), and
will perform management and operational services for
companies engaged in managed care and related services (the
"MANAGEMENT BUSINESS"). The principal corporate offices of
Newco after the Distribution will be 401 West Michigan
Street, Milwaukee, Wisconsin 53203, and its telephone number
will be (414) 226-6900.
Management of Newco.......... After the Effective Date, all of the executive officers of
Newco are expected to be persons who currently serve as
executive officers or other key employees of UWS. All such
persons will resign from their positions as executives of
UWS, so that Newco and AMSG will have no executive officers
in common and none of the executive officers of Newco will
be employees of AMSG. The Board of Directors of Newco will
consist of nine individuals, all of whom currently serve on
the Board of Directors of UWS. Four persons who will be
directors of Newco will continue as directors of AMSG.
Principal Business to be
Retained by AMSG........... After the Effective Date, AMSG's principal business will be
to continue to develop, market and administer small group
insurance products, small group specialty insurance products
and administrative services for small groups ("SMALL GROUP
BUSINESS"). The principal corporate offices of AMSG after
the Distribution will be 3100 AMS Boulevard, Green Bay,
Wisconsin 54313, and its telephone number will be (920)
661-2440.
Management of AMSG........... After the Effective Date, AMSG will be managed by
substantially the same senior management that currently
manages American Medical Security Holdings, Inc., a wholly
owned subsidiary of UWS. After the Distribution Date, the
AMSG Board of Directors will consist of four
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individuals who currently serve on the Board of Directors of
UWS and five additional individuals.
Reasons For the
Distribution............... The Board of Directors of UWS believes that the distribution
of shares of Newco Common Stock will allow Newco's business
and AMSG's business each to be managed and operated more
effectively as independent publicly owned companies. After
the Distribution, the Managed Care Companies should be able
to license Blue Cross and Blue Shield trademarks and
tradenames (after Blue Cross & Blue Shield United of
Wisconsin ("BCBSUW") purchases additional shares of Newco
Common Stock to bring its direct or indirect ownership level
of Newco to approximately 51%), and the Managed Care Com-
panies will be better able to participate in potentially
significant joint ventures and acquisitions. In addition,
each of Newco and AMSG will be able to compensate its
management with Newco-based awards, or AMSG-based awards, as
the case may be, the value of which will depend upon the
operating results of Newco alone, or AMSG alone, as the case
may be. The Board of Directors and management of UWS also
believe that the separation into two public companies will
provide each company with better access to the equity
capital markets and improve each company's capital-raising
efficiency since investors will be better able to assess the
different risk profiles and operating characteristics of
both companies.
Federal Income Tax
Consequences............... UWS has received a private letter ruling from the IRS ("TAX
RULING") to the effect that, for federal income tax
purposes, no gain or loss will be recognized by (i) UWS upon
distribution of the Distributed Shares, and (ii) holders of
shares of UWS Common Stock upon receipt of Distributed
Shares in the Distribution. Nevertheless, if UWS engages in
the Distribution and the Distribution is held to be taxable,
both UWS and UWS shareholders could recognize income or gain
and thus become liable for the payment of a material amount
of income tax.
Conditions to the
Distribution............... The Distribution is subject to the satisfaction or waiver of
certain conditions, including receipt of all necessary
regulatory approvals and all material consents required to
consummate the Distribution. Regardless of whether the
conditions are satisfied, the Distribution may be abandoned
by the Board of Directors of UWS, in its sole discretion,
without the approval of the UWS shareholders, at any time
prior to the Distribution Date.
Restructuring Prior to
the Distribution........... On the Effective Date, UWS will contribute to Newco all of
the stock of the Managed Care Companies, the Management
Business and working capital to support the Management
Business, in exchange for 16,573,102 shares of Newco Common
Stock and the assumption by Newco of approximately $3.1
million of unfunded employee post-retirement health benefit
liabilities, certain accrued expenses, a $70.0 million loan
from BCBSUW and all other liabilities relating to the
Managed Care Companies and the Management Business. Imme-
diately thereafter, UWS will own 100% of the issued and
outstanding shares of Newco Common Stock. UWS then will
distribute all of the
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issued and outstanding shares of Newco Common Stock to its
shareholders on a one-for-one basis.
Relationship with AMSG after
the Distribution........... AMSG will not own any shares of Newco Common Stock after the
Distribution, nor will Newco own any shares of AMSG Common
Stock after the Distribution. Newco and UWS have entered
into a Distribution and Indemnity Agreement dated September
11, 1998 (the "DISTRIBUTION AGREEMENT"), a Tax Allocation
Agreement dated September 11, 1998 (the "TAX ALLOCATION
AGREEMENT") and an Employee Benefits Agreement dated
September 11, 1998 (the "EMPLOYEE BENEFITS AGREEMENT"), and
various other agreements with respect to employee benefits,
management and corporate and administrative services,
reinsurance arrangements and intellectual property
transfers, for the purpose of giving effect to the
Distribution and related matters. The Distribution Agreement
provides for, among other things, (i) the separation of
Newco's business from UWS's other business; (ii) the terms
of mutual non-solicitation covenants between Newco and AMSG;
(iii) indemnification, subject to certain exceptions, by UWS
of Newco against liabilities arising out of all UWS opera-
tions, other than the operations of Newco; and (iv)
indemnification, subject to certain exceptions, by Newco of
UWS against liabilities arising out of the operations of
Newco. The Tax Allocation Agreement reflects each of Newco's
and UWS's rights and obligations with respect to
deficiencies and refunds of taxes (including Federal, state
or other income taxes) relating to the business of UWS that
are attributable to periods ending prior to or on the
Distribution Date, and provides for indemnification of each
other with respect to any tax liability resulting from their
respective failure to comply with any provisions in the Tax
Allocation Agreement. The Employee Benefits Agreement
provides that, among other things, (i) Newco will offer
employment to each employee of UWS (parent company only),
and all employees of UWS's subsidiaries will remain employed
by such subsidiaries; (ii) Newco will assume liability for
all employment-related claims applicable to its employees
after the Effective Date; (iii) Newco will assume
sponsorship of, and all liabilities under, the UWS benefit
plans and all benefit plans at the UWS subsidiary level will
remain at that subsidiary; and (iv) depending on the status
of each option holder, outstanding options to purchase
shares of UWS Common Stock will be converted into options to
purchase (a) shares of Newco Common Stock adjusted to
provide equivalent value, (b) an equal number of shares of
Newco Common Stock and AMSG Common Stock adjusted to provide
equivalent value, or (c) shares of AMSG Common Stock
adjusted to provide equivalent value. In addition, Newco and
AMSG will enter into various agreements to define their
continuing business relationship, consisting principally of
certain reinsurance arrangements between the companies and
certain investment management and other ancillary services
to be provided by Newco to AMSG after the Distribution.
Certain Relationships and
Related Transactions....... Upon completion of the Distribution, BCBSUW will own 38.1%
of
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<S> <C>
the issued and outstanding shares of UWS Common Stock and
38.1% of the issued and outstanding shares of Newco Common
Stock. BCBSUW intends to purchase additional shares of Newco
Common Stock to bring its overall direct and indirect
ownership of Newco to approximately 51% within one year
after the Distribution Date. The purchase price for the
shares of Newco Common Stock which are purchased directly
from Newco will be based on the market price of the shares
of Newco Common Stock and an independent third party
appraisal, and may be paid through the cancellation of a
portion or all of the $70.0 million Newco indebtedness to
BCBSUW or in cash. The independent third party appraisal is
required by Wisconsin insurance regulatory authorities.
Newco expects that any private sale of Newco common stock to
BCBSUW would be at market prices. To the extent BCBSUW
purchases shares of Newco Common Stock from Newco, these
purchases may have an adverse effect on Newco's
shareholders, including potential dilution of earnings per
share.
BCBSUW and Newco have entered into Service Agreements
covering sales and marketing services, rental of office
space, and computerized data processing, claims processing,
legal, investment, actuarial and other management services.
The company receiving a service is obligated to pay the
provider an amount which varies depending upon the
particular service rendered, determined on either an
allocated cost basis or based upon direct costs.
Furthermore, Newco and AMSG will enter into various
agreements to define their continuing business relationship,
consisting principally of certain reinsurance arrangements
between the companies and certain investment management and
other ancillary services to be provided by Newco to AMSG
after the Distribution.
Newco has agreed to grant registration rights with respect
to shares of Newco Common Stock to Messrs. Hilliard and
Weyers. These rights are identical to registration rights
they have with respect to their shares of UWS Common Stock
which were granted pursuant to UWS's acquisition of American
Medical Security Group, Inc. in 1996. Messrs. Hilliard and
Weyers also have agreed to voting and standstill provisions
with respect to shares of Newco Common Stock identical to
their existing provisions with respect to shares of UWS
Common Stock.
Post-Distribution
Dividend Policy............ The Board of Directors of Newco expects initially to pay an
annual cash dividend of $0.05 per share on the Newco Common
Stock following the Distribution. However, the payment and
level of cash dividends by Newco after the Distribution will
be subject to the discretion of its Board of Directors.
Dividend decisions will be based upon a number of factors,
including the operating results and financial requirements
of Newco.
Anti-Takeover Effects........ Certain provisions of Newco's Articles of Incorporation and
By-Laws, as well as certain provisions of the Wisconsin
Business Corporation Law ("WBCL"), may have the effect of
making more difficult an acquisition of control of Newco in
a transaction not approved by
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Newco's Board of Directors. Furthermore, within one year
after the Distribution Date, BCBSUW intends to purchase
additional shares of Newco Common Stock to bring its overall
direct and indirect ownership of Newco to approximately 51%,
and therefore an acquisition of control of Newco in a
transaction not approved by BCBSUW would be difficult.
Risk Factors................. Newco shareholders should carefully consider the matters
discussed under the section entitled "Risk Factors" in this
Information Statement.
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SUMMARY COMBINED FINANCIAL DATA FOR NEWCO
The following summary combined pro forma and historical financial data of
Newco highlights certain pro forma and historical combined financial data which
should be read in conjunction with the Combined Financial Statements and the pro
forma financial statements included elsewhere in this document. The historical
combined financial information presents information for Newco for the periods in
which it would have operated the Managed Care Companies and the Management
Business of UWS. The historical and pro forma combined financial information
presented below is not necessarily indicative of the results of operations or
financial position that Newco would have reported if it had operated as an
independent company during the periods presented, nor is it indicative of
Newco's future performance as an independent company.
<TABLE>
<CAPTION>
AS OF AND FOR THE
PRO FORMA SIX MONTHS ENDED
AS OF AND FOR THE YEARS ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
----------------------------------------------------- ------------- --------------------
1993 1994(5) 1995(5) 1996 1997 1997 1997 1998
--------- --------- --------- --------- --------- ------------- --------- ---------
(IN THOUSANDS, EXCEPT OPERATING STATISTICS)
STATEMENT OF INCOME DATA: (UNAUDITED) (UNAUDITED)
-------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Premium revenue............ $ 310,503 $ 355,025 $ 466,929 $ 493,092 $ 560,825 $ 560,825 $ 273,760 $ 298,602
Other revenue.............. 7,515 15,997 24,222 27,632 26,046 26,046 13,351 14,378
Investment results......... 10,697 12,050 9,665 19,040 22,238 22,238 10,672 9,960
--------- --------- --------- --------- --------- ------------- --------- ---------
Total revenues......... 328,715 383,072 500,816 539,764 609,109 609,109 297,783 322,940
--------- --------- --------- --------- --------- ------------- --------- ---------
Expenses:
Medical and other
benefits................. 265,446 306,056 416,167 425,258 485,735 485,735 235,763 253,708
Selling, general and
administrative
expenses................. 43,578 58,026 72,576 83,839 93,959 93,959 47,203 50,674
Interest expense........... -- -- -- -- -- 4,892(2) -- --
Other expenses............. 1,040 1,711 3,412 3,709 4,198 4,198 2,069 1,628
--------- --------- --------- --------- --------- ------------- --------- ---------
Total expenses......... 310,064 365,793 492,155 512,806 583,892 588,784 285,035 306,010
--------- --------- --------- --------- --------- ------------- --------- ---------
Income tax expense......... 5,900 5,072 3,277 10,617 9,433 7,603(3) 4,861 6,515
--------- --------- --------- --------- --------- ------------- --------- ---------
Net income................... $ 12,751 $ 12,207 $ 5,384 $ 16,341 $ 15,784 $ 12,722 $ 7,887 $ 10,415
--------- --------- --------- --------- --------- ------------- --------- ---------
--------- --------- --------- --------- --------- ------------- --------- ---------
BALANCE SHEET DATA:
Cash and investments....... $ 162,421 $ 154,201 $ 178,926 $ 182,431 $ 176,579 $ 190,435 $ 176,971
Total assets............... 197,294 216,954 261,523 269,478 266,256 275,430 267,514
Long-term debt............. -- -- -- -- -- -- --
Total shareholders'
equity................... 124,536 101,465 120,277 123,882 123,616 125,791 126,194
OPERATING STATISTICS:
Medical loss ratio(1)...... 85.8% 86.2% 89.1% 86.2% 86.6% 86.6% 86.1% 85.0%
Selling, general and
administrative expense
ratio(1)................. 10.9% 11.8% 11.0% 11.1% 11.2% 11.2% 11.6% 12.2%
<CAPTION>
PRO FORMA
JUNE 30,
-----------
1998
-----------
STATEMENT OF INCOME DATA:
<S> <C>
Revenues:
Premium revenue............ $ 298,602
Other revenue.............. 14,378
Investment results......... 9,960
-----------
Total revenues......... 322,940
-----------
Expenses:
Medical and other
benefits................. 253,708
Selling, general and
administrative
expenses................. 50,674
Interest expense........... 2,433(2)
Other expenses............. 1,628
-----------
Total expenses......... 308,443
-----------
Income tax expense......... 6,107(3)
-----------
Net income................... $ 8,390
-----------
-----------
BALANCE SHEET DATA:
Cash and investments....... $ 176,971
Total assets............... 267,514
Long-term debt............. 70,000(4)
Total shareholders'
equity................... 56,194(4)
OPERATING STATISTICS:
Medical loss ratio(1)...... 85.0%
Selling, general and
administrative expense
ratio(1)................. 12.2%
</TABLE>
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(1) Ratios are based on premium revenues and premium revenue-related selling,
general and administrative expenses of $33,996,000, $42,022,000 $51,133,000,
$54,861,000, $62,808,000, $31,874,000 and $36,332,000 for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 and the six months ended June
30, 1997 and 1998, respectively.
(2) Reflects pro forma adjustments for interest expense on assumed debt. See
"Pro Forma Combined Condensed Financial Information of Newco."
(3) Reflects pro forma adjustments for the tax effect of the adjustments
described in (2), above. See "Pro Forma Combined Condensed Financial
Information of Newco."
(4) Reflects pro forma adjustments for assumed debt. See "Pro Forma Combined
Condensed Financial Information of Newco."
(5) Commencing October 1, 1994, Newco's results of operations include the
results of operations of Unity. For the years ended December 31, 1994 and
1995, Unity accounted for $23,994,000 and $100,342,000 of Newco's total
premium revenue and $112,000 and $1,062,000 of Newco's net income,
respectively.
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FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this Information
Statement are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The forward-looking statements may be
significantly impacted by risks and uncertainties and are made pursuant to the
safe harbor provisions of such Act; provided, however, the safe harbor for
forward-looking statements does not apply to statements made in an initial
public offering. There can be no assurance that either UWS or Newco can
duplicate each of its respective past performance or that expected future
results will be achieved. Readers are cautioned that a number of factors could
adversely affect Newco's and/or AMSG's ability to achieve results, including the
effects of health care reform, the continuation and renewal of provider
arrangements and the effects of other general business conditions, including
competition, medical cost trends, changes in reserve estimates, terms of
provider contracts, premium rate changes, government regulation, capital
requirements, administrative costs, general economic conditions and the
retention of key employees.
INTRODUCTION
In August 1998, the Board of Directors of UWS declared a dividend, payable
to holders of record of UWS Common Stock at the close of business on September
11, 1998 (the "RECORD DATE"), of one share of Newco Common Stock for each share
of UWS Common Stock. The Distribution will occur at the close of business on
September 25, 1998 (the "DISTRIBUTION DATE"). It is expected that certificates
representing shares of Newco Common Stock will be mailed to holders of shares of
UWS Common Stock on or about the Distribution Date. As a result of the
Distribution, all of the shares of Newco Common Stock owned by UWS will be
distributed by UWS to holders of shares of UWS Common Stock. UWS will be renamed
"American Medical Security Group, Inc.," on the Effective Date, and will be
traded on the NYSE under the symbol "AMZ" after the Distribution Date, and Newco
will be renamed "United Wisconsin Services, Inc." on the Effective Date and will
be traded on the NYSE under the symbol "UWZ" after the Distribution Date.
THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
The Board of Directors of UWS has determined that it is in the best interest
of UWS, Newco and the holders of UWS Common Stock to undertake the Distribution,
thereby separating Newco's business from UWS's other businesses. The
Distribution and certain intended subsequent transactions should allow the
Managed Care Companies to license the Blue Cross and Blue Shield trademarks and
tradenames ("BLUE SERVICE MARKS"), which are owned by BlueCross and BlueShield
Association. None of the Managed Care Companies currently are eligible to
license the Blue Service Marks, because two of the licensing requirements are
not met under the current UWS structure. The applicable BlueCross and BlueShield
Association rules provide that a company can license the Blue Service Marks only
if (i) a Blue Cross and Blue Shield Plan ("BLUE PLAN") "controls" the company
(meaning that a Blue Plan must directly or indirectly own more than 50% of the
stock of the company and must have operational control over the company), and
(ii) 80% of the total licensable combined dollar volume of health insurance sold
by a Blue Plan and its controlled affiliates in a defined geographic area
actually is licensed. Under the current ownership structure, the 50% control
requirement is not met because BCBSUW only owns 38.1% of the shares of UWS
Common Stock (and thus, indirectly, 38.1% of the Managed Care Companies). After
the Distribution, the 50% test will be met because BCBSUW intends to purchase
additional shares of Newco Common Stock so that BCBSUW directly or indirectly
owns approximately 51% of Newco. Furthermore, since BCBSUW will continue to own
less than 50% of AMSG, the Small Group Business will not have to be considered
in applying the 80% test. Accordingly, the 80% test will be met after the
Distribution and after the Compcare Health Services Insurance Corporation
("COMPCARE") products are licensed because the combined licensed products of
BCBSUW and the Managed Care Companies will exceed 80% of the total volume of
medical business of BCBSUW and all of its controlled affiliates.
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The Distribution also should enhance the ability of the Managed Care
Companies to participate in joint ventures and acquisitions currently
unavailable to them. The presence of the Small Group Business within the UWS
group has had a material adverse effect on the ability of the Managed Care
Companies to pursue joint ventures with third parties, primarily due to
competitive concerns of the proposed joint venture partners and acquisition
targets. The Distribution, by separating the Managed Care Companies from the
Small Group Business, would eliminate many of these concerns.
UWS also believes the Distribution will achieve a more favorable valuation
of the businesses of AMSG and Newco for the current holders of shares of UWS
Common Stock and the future holders of shares of Newco Common Stock. The
Distribution will permit the financial community to evaluate better the separate
strengths of each company and to compare the performance of each company with
comparable companies in similar lines of business, which is expected to increase
each company's access to equity and debt markets. In addition, the Distribution
will allow current holders of shares of UWS Common Stock and potential investors
to direct their investment decisions to each of the two separate lines of
business.
The Board of Directors of UWS also believes that Newco's growth and AMSG's
growth will be better facilitated in several ways as separate public companies.
Among the anticipated benefits is the expectation that, as separate public
companies, each of Newco and AMSG will be able to obtain needed financing on
more favorable terms than its businesses now together. In addition, UWS believes
that it will be better able to attract and motivate existing and new key
employees by providing stock-based incentive compensation tied directly to the
results of their efforts as reflected in the market price of the shares of Newco
Common
Stock or the AMSG Common Stock, as the case may be. The establishment of the
shares of Newco Common Stock as a separate, publicly traded equity security
should provide both Newco and AMSG enhanced acquisition opportunities by using
shares of Newco Common Stock or AMSG Common Stock, as the case may be, as
consideration. Finally, the Board of Directors of UWS expects that the
Distribution will enable capital markets to better recognize and evaluate the
merits of each of Newco and AMSG as separate public companies, enhancing the
likelihood that each will achieve appropriate market recognition of its
performance and prospects.
In October 1988, UWS entered into a joint venture agreement ("JOINT VENTURE
AGREEMENT") with American Medical Security Group, Inc. ("AMS") for the purpose
of offering small group products primarily to employers with 100 or fewer
employees. Pursuant to the Joint Venture Agreement, UWS obtained a 10.3% equity
interest in AMS and subsequent purchases eventually increased this percentage
ownership to 12%. The Joint Venture Agreement was to terminate on December 31,
1996, subject to one-year extensions agreed to by both parties, and included a
buyout provision exercisable on December 31, 1996, whereby UWS could acquire the
remaining 88% of the equity interest in AMS that it did not already own.
Throughout the term of the Joint Venture Agreement, AMS's operations had a
significant impact on UWS's overall operations. After exploring other ways to
enhance shareholder value with respect to AMS, and not being able to work out
any of these other arrangements with respect to AMS, in July 1996 (and
consummated in December 1996) UWS negotiated an early exercise of its buyout
option for the remaining equity interest in the AMS. In making this decision,
UWS believed that the possibility of losing all of AMS-related business
outweighed the potentially negative factors associated with exercising the
buyout option, including the respective businesses' strategic direction and
future opportunities. Throughout 1997 and 1998 to date, UWS has become
increasingly aware of the drawbacks associated with keeping its Managed Care
Companies and Small Group Business together in the same company, as outlined
above. For these reasons and the reasons stated above, the UWS Board of
Directors believes that the Distribution is in the best interests of UWS and its
shareholders.
RESTRUCTURING PRIOR TO THE DISTRIBUTION
In order to effect the Distribution, pursuant to the Distribution Agreement
and subject to the terms and conditions thereof, on the Effective Date (i) UWS
will contribute all of the outstanding capital stock of the Managed Care
Companies to Newco; (ii) UWS will contribute certain other assets utilized by
UWS
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and its subsidiaries in the Management Business to Newco; (iii) UWS will
contribute working capital to Newco to support the Management Business; (iv)
Newco will issue 16,573,102 shares of Newco Common Stock to UWS; (v) Newco will
assume certain employee benefit plan liabilities associated with the operation
of such contributed businesses; (vi) Newco will assume a $70.0 million note
obligation of UWS to BCBSUW; and (vii) Newco will assume certain accrued
liabilities of UWS. The "MANAGED CARE COMPANIES" means the following companies
and their subsidiaries: Compcare; Valley Health Plan, Inc. ("VALLEY"); HMO-W,
Inc.; Hometown Insurance Services, Inc.; United Wisconsin Insurance Company;
United Heartland Life Insurance Company; Meridian Resource Corporation; Meridian
Managed Care, Inc.; Meridian Marketing Services, Inc.; United Wisconsin
Proservices, Inc.; United Heartland, Inc.; CNR Health, Inc.; Unity Health Plans
Insurance Corporation ("UNITY"); and Heartland Dental Plan, Inc. The "MANAGEMENT
BUSINESS" means the management and operational services performed by UWS for
companies engaged in managed care and related services, including product
development, actuarial, legal, marketing, finance, accounting, tax, public
relations, executive management and human resources services.
MANNER OF EFFECTING THE DISTRIBUTION
UWS will effect the Distribution by delivering all of the shares of Newco
Common Stock it owns (approximately 16,573,000 shares) to the Distribution
Agent, Firstar Trust Company, on the Distribution Date for distribution to the
holders of UWS Common Stock as of the close of business on the Record Date. The
Distribution will be made on the basis of one share of Newco Common Stock for
each share of UWS Common Stock held as of the close of business on the Record
Date. The shares of Newco Common Stock will be fully paid and nonassessable
(except for certain statutory liabilities which may be imposed by Section
180.0622 of the WBCL for unpaid employee wages) and the holders thereof will not
be entitled to preemptive rights. Upon completion of the Distribution, there
will be approximately 16,573,202 shares of Newco Common Stock outstanding. No
portion of the shares that will be issued and outstanding upon completion of the
Distribution is being, or has been proposed to be, publicly offered by Newco.
All of the shares of Newco Common Stock will be immediately eligible for sale in
the public market without restriction under the Securities Act, except that any
shares owned by affiliates of Newco generally may only be sold in compliance
with the applicable provisions of Rule 144 promulgated under the Securities Act
of 1933, as amended ("SECURITIES ACT").
It is expected that certificates representing shares of Newco Common Stock
will be mailed to holders of shares of UWS Common Stock beginning on or about
September 28, 1998, or if appropriate, the Distribution Agent will credit the
brokerage accounts of UWS shareholders on or about the close of business on
September 25, 1998. UWS shareholders will not be required to pay for shares of
Newco Common Stock received in the Distribution or to surrender shares of UWS
Common Stock to receive shares of Newco Common Stock. However, UWS shareholders
will be asked to deliver their stock certificates representing shares of AMSG
Common Stock after the Distribution to Firstar Trust Company, so that the AMSG
shareholders can be re-issued stock certificates in the name of "American
Medical Security Group, Inc.," the new name of AMSG after the Distribution.
Shortly before the Distribution Date, Firstar Trust Company will mail to all
AMSG shareholders a notice to this effect, along with letters of instruction to
effectuate this exchange. No vote of UWS shareholders is required to approve the
Distribution, and UWS shareholders have no dissenters' rights in connection with
the Distribution; however, the UWS shareholders did approve an amendment to its
Articles of Incorporation to change its name to "American Medical Security
Group, Inc.," effective on the Effective Date.
RESULTS OF THE DISTRIBUTION
After the Distribution, Newco and AMSG will be separate public companies.
Immediately after the Distribution, shareholders of UWS will own all of the
outstanding shares of Newco Common Stock, and Newco expects to have
approximately 260 holders of record of shares of Newco Common Stock and
16,573,000 shares of Newco Common Stock outstanding. The Distribution will not
affect the number of outstanding shares of AMSG Common Stock or any rights of
holders of shares of AMSG Common Stock.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The Distribution is intended to qualify as a tax-free distribution under
Section 355 of the Internal Revenue Code of 1986, as amended (the "CODE"). UWS
has received the Tax Ruling generally to the effect that, among other things:
1. No gain or loss will be recognized by (and no amount will otherwise be
included in the income of) UWS, Newco or UWS shareholders on their
receipt of Distributed Shares.
2. The holding period of the Distributed Shares received by UWS
shareholders will include the holding period of the shares of UWS Common
Stock with respect to which the Distribution will be made, provided that
such shares of UWS Common Stock are held as a capital asset on the
Distribution Date.
3. The basis of the shares of AMSG Common Stock and the Distributed Shares
in the hands of AMSG shareholders after the Distribution will be the same
as the aggregate basis of the shares of UWS Common Stock in the hands of
UWS shareholders immediately before the Distribution. Such basis will be
allocated among the shares of AMSG Common Stock and the Distributed
Shares in proportion to the fair market value of each on the day after
the Distribution Date.
Treasury regulations under Section 355 of the Code require that each UWS
shareholder who receives Distributed Shares pursuant to the Distribution attach
a statement to such shareholder's federal income tax return for the taxable year
in which such stock is received, which statement shows the applicability of
Section 355 of the Code to the Distribution. UWS will provide its shareholders
with the information necessary to comply with this requirement.
The Tax Ruling is based on certain factual representations and assumptions
by UWS and Newco, and the continued validity of the Tax Ruling is subject to the
continued validity of these representations and assumptions. Neither UWS nor
Newco is aware of any present facts or circumstances which should cause such
representations and assumptions to be untrue. Furthermore, certain extraordinary
purchases of shares of AMSG Common Stock and/or shares of Newco Common Stock
(events which are not within the control of UWS or Newco) could cause the
Distribution not to qualify as tax-free. Under the Tax Allocation Agreement, if
as a result of the acquisition of all or a portion of the capital stock or
assets of either company the Distribution fails to qualify as a tax-free
distribution under Section 355 of the Code, then UWS or Newco, as the case may
be, will be liable for any and all increases in Tax (as defined in the Tax
Allocation Agreement) attributable thereto. See "Agreements Between UWS and
Newco." The Tax Ruling also is based on the accuracy of two covenants agreed to
by Newco: within one year after the Distribution, (i) licenses for use of the
Blue Service Marks shall be obtained by Compcare, and (ii) the Managed Care
Companies shall have entered into a joint venture with an unrelated third party.
If the Distribution fails to qualify as a tax-free distribution for federal
income tax purposes, a holder of shares of AMSG Common Stock who receives shares
of Newco Common Stock pursuant to the Distribution would be treated as having
received a distribution equal to the fair market value of the shares of Newco
Common Stock received on the Distribution Date. Such distribution would be
taxable to such shareholder as a dividend to the extent of UWS's current and
accumulated earnings and profits. Any excess first would be treated as a
non-taxable reduction in the tax basis in the shares of UWS Common Stock held by
the shareholder and thereafter as capital gain from the sale or exchange of such
shares of UWS Common Stock (assuming that the shares of UWS Common Stock are
held as a capital asset). The determination of a corporation's earnings and
profits requires complex factual and legal analyses; moreover, the amount of a
corporation's current earnings and profits cannot be determined until the close
of its taxable year. UWS believes, based upon present estimates of its current
and accumulated earnings and profits, that the entire distribution would be
treated as a dividend. In addition, a holder's tax basis in the shares of Newco
Common Stock received pursuant to such a taxable distribution would equal its
fair market value on the Distribution Date, and the holding period of such stock
would begin the day after the
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Distribution Date. A holder's tax basis and holding period of shares of UWS
Common Stock would be unaffected by the Distribution. UWS would recognize a gain
upon the Distribution equal to the excess of the fair market value of the
Distributed Shares over UWS's tax basis in the Distributed Shares.
THE FOREGOING SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE
DISTRIBUTION IS FOR GENERAL INFORMATION ONLY AND MAY NOT APPLY TO UWS
SHAREHOLDERS WHO ACQUIRED THEIR SHARES IN CONNECTION WITH THE GRANT OF
RESTRICTED STOCK OR OTHERWISE AS COMPENSATION, WHO ARE NOT CITIZENS OR RESIDENTS
OF THE UNITED STATES, OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER
THE CODE. ALL UWS SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE
APPLICATION OF LOCAL, STATE AND FOREIGN TAX LAWS.
FUTURE MANAGEMENT OF NEWCO
Following the Effective Date, Newco intends to operate its businesses
substantially in the manner in which it has been operated by UWS in the past.
All of the executive officers of Newco are expected to be persons who currently
serve as officers or other key employees of UWS. See "Management of Newco."
LISTING AND TRADING OF SHARES OF UWS COMMON STOCK
Between the Effective Date and the Distribution Date, shares of UWS Common
Stock will continue to trade on a regular basis and shares of AMSG Common Stock
may trade on a when-issued basis before the Distribution Date, reflecting an
assumed value for the shares of AMSG Common Stock as if the Distribution had
already occurred. When-issued trading in the shares of AMSG Common Stock, if
available, could last from approximately the Effective Date through the
Distribution Date. If a shareholder trades in the when-issued market, he or she
will have no obligation to transfer to a purchaser of shares of UWS Common Stock
the shares of Newco Common Stock such shareholder receives in the Distribution.
If a shareholder trades in the regular market, the shares of UWS Common Stock
traded will be accompanied by due bills representing the shares of Newco Common
Stock to be distributed in the Distribution.
If a when-issued market for shares of AMSG Common Stock develops, an
additional listing for shares of AMSG Common Stock, identifiable by the trading
symbol "AMZwi," will appear on the NYSE. Differences may exist between the
combined value of when-issued shares of Newco Common Stock plus when-issued
shares of AMSG Common Stock and the price of the shares of UWS Common Stock
during this period. Until the market has fully analyzed the operations of UWS
without the operations of Newco, the prices at which the shares of UWS Common
Stock trade before the Distribution Date and the prices at which the shares of
AMSG Common Stock trade after the Distribution Date may fluctuate significantly.
LISTING AND TRADING OF SHARES OF NEWCO COMMON STOCK
There is not currently a public market for the shares of Newco Common Stock.
However, the shares of Newco Common Stock have been approved for listing on the
NYSE, upon official notice of issuance, under the symbol "UWZ." A when-issued
trading market for the shares of Newco Common Stock is expected to develop on or
about the Effective Date. In "when-issued" trading, contracts for the purchase
and sale of shares of stock are made prior to the issuance of such shares in the
same manner as currently issued shares, except that when-issued contracts are
settled by delivery of and payment for the shares on a date chosen by the
particular exchange on which such shares are to be listed. Ordinarily, in
connection with a distribution of stock such as described in this Information
Statement, the date fixed for settlement of when-issued contracts relating to
such stock is the third business day after distribution of such stock.
Shareholders who may wish to effect a when-issued trade in shares of Newco
Common Stock should consult their brokers for additional details. Prices at
which shares of Newco Common Stock may trade prior to the Distribution Date on a
"when-issued" basis or after the Distribution Date cannot be predicted. Until
shares of Newco Common Stock are fully distributed and an orderly market
develops, the prices at
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which trading in such stock occurs may fluctuate significantly. The prices at
which shares of Newco Common Stock trade will be determined by the marketplace
and may be influenced by many factors, including, among others, the depth and
liquidity of the market for shares of Newco Common Stock, investor perception of
Newco and of the industries in which Newco operates, Newco's dividend policy and
general economic and market conditions. During the period when the shares of
Newco Common Stock is subject to when-issued trading, its symbol on the NYSE
will be "UWZwi." Even though when-issued trading may develop, none of these
trades would settle prior to the Distribution Date, and if the Distribution does
not occur, all when-issued trading will be null and void.
Newco initially will have approximately 260 shareholders of record and an
additional 2,700 beneficial holders, based on the number of record holders and
the estimated number of beneficial holders of shares of UWS Common Stock at
September 11, 1998, and approximately 16,573,000 shares of Newco Common Stock
will be outstanding. See "Management of Newco" and "Newco Benefit Plans
Following the Distribution."
It is anticipated that certain investment banking firms will make a market
in shares of Newco Common Stock following the Distribution. Any such market
making activity may be discontinued at any time, without notice. There can be no
assurance that an active trading market in shares of Newco Common Stock will
develop, or, if a market does develop, at what prices shares of Newco Common
Stock will trade.
Except for securities received by persons who may be deemed to be
"affiliates" of Newco under the Securities Act, the shares of Newco Common Stock
distributed to holders of shares of UWS Common Stock in the Distribution will be
freely transferable. Persons who may be deemed to be affiliates of Newco after
the Distribution generally include individuals or entities that control, are
controlled by, or are under common control with Newco and may include certain
officers and directors of Newco as well as principal shareholders of Newco.
Persons who are affiliates of Newco will be permitted to sell their shares of
Newco Common Stock only pursuant to an effective registration statement under
the Securities Act or an exemption from the registration requirements of the
Securities Act, such as the exemption afforded by Rule 144 promulgated under the
Securities Act. See also "Certain Relationships and Related Party Transactions"
for a description of certain registration rights which have been granted
relating to the shares of Newco Common Stock.
The Transfer Agent and Registrar for the shares of Newco Common Stock will
be Firstar Trust Company, Milwaukee, Wisconsin.
ACCOUNTING TREATMENT
Newco will account for the assets and liabilities contributed by UWS at the
historical values at which they were carried by UWS prior to the Distribution.
FINANCIAL ADVISOR
UWS has retained Smith Barney Inc. and Salomon Brothers Inc. (together,
"SALOMON SMITH BARNEY"), to act as its financial advisor in connection with the
Distribution. Pursuant to an engagement letter dated February 9, 1998, Salomon
Smith Barney will be paid a retainer fee of $100,000, and a fee of $2.0 million
upon consummation of the Distribution. UWS has agreed to reimburse Salomon Smith
Barney for its out-of-pocket expenses (including legal fees) incurred in
connection with its engagement, up to $75,000. UWS also has agreed to indemnify
Salomon Smith Barney, their affiliates and their directors, officers, employees,
agents and controlling persons against certain liabilities relating to or
arising out of its engagement, including liabilities under the federal
securities laws. Finally, UWS has agreed that Salomon Smith Barney shall have a
right of first refusal until February 9, 1999, to act as lead underwriter or
exclusive agent in connection with any underwritten public offering, private
placement or other financing after the Distribution involving AMSG.
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DIVIDEND REINVESTMENT PLANS
UWS has a dividend reinvestment and direct stock purchase plan ("UWS
DIVIDEND REINVESTMENT PLAN") pursuant to which shareholders may invest in shares
of UWS Common Stock by reinvesting quarterly cash dividends or by direct cash
investments. Shareholder accounts in the UWS Dividend Reinvestment Plan also
include fractional interests in shares of UWS Common Stock. Shares of Newco
Common Stock will be distributed to participants in the UWS Dividend
Reinvestment Plan on the same basis as other beneficial owners. Fractional
interests in Distributed Shares will be issued in respect of fractional
interests in shares of UWS Common Stock held under the UWS Dividend Reinvestment
Plan. A comparable service will be established for Newco which will provide for
reinvestment of dividends on the shares of Newco Common Stock and the direct
purchase of shares of Newco Common Stock, under which accounts will be
established for participants in the UWS Dividend Reinvestment Plan. Shares of
Newco Common Stock credited as a result of the Distribution to participants in
the UWS Dividend Reinvestment Plan will be transferred to the participants'
accounts in the new service.
UWS AND NEWCO BENEFIT PLANS
On the Effective Date, Newco generally will assume sponsorship of, and all
liabilities under, all nonqualified compensation plans, retirement plans,
supplemental retirement plans, deferred compensation plans (except for
liabilities relating to Mr. Samuel V. Miller), welfare plans, benefit plans and
all other plans, programs, policies and arrangements sponsored by UWS (or
jointly sponsored by UWS and BCBSUW) and in effect prior to the Effective Date,
and UWS will cease to have any liability or obligation to individuals who are or
become employees of Newco or one of its subsidiaries under any UWS benefit
plans, programs or practices. All benefit plans sponsored by UWS subsidiaries
before the Effective Date will remain sponsored by such subsidiaries after the
Effective Date. Outstanding options to purchase shares of UWS Common Stock will
be converted as set forth under "--Treatment of Options in the Distribution,"
below. Converted options to purchase shares of Newco Common Stock held by
persons who will be executive officers, directors or employees of Newco will be
assumed by Newco under a newly established equity incentive plan which will be
similar to UWS's Equity Incentive Plan. See "Executive Compensation," "Newco
Benefit Plans Following the Distribution" and "Agreements Between AMSG and
Newco."
TREATMENT OF OPTIONS IN THE DISTRIBUTION
Holders of vested stock options to purchase UWS Common Stock ("VESTED
OPTIONS") will be entitled to exercise such Vested Options prior to the Record
Date and thereafter to receive shares of Newco Common Stock as part of the
Distribution. Holders of Vested Options who do not exercise such options prior
to the Record Date, together with holders of unvested stock options to purchase
shares of UWS Common Stock ("UNVESTED OPTIONS"), and who will be executive
officers, directors or employees of Newco following the Distribution, generally
will have such unexercised Vested Options and such Unvested Options converted to
equivalent vested and unvested stock options to purchase shares of Newco Common
Stock issued under the Newco/UWS, Inc. Equity Incentive Plan. As a result of the
conversion to vested and unvested stock options to purchase shares of Newco
Common Stock, the Vested Options and Unvested Options to purchase shares of UWS
Common Stock will be cancelled. The Newco stock options will have the same ratio
of exercise price per option to the market value per share, the same aggregate
difference between market value and exercise price and the same vesting
provisions, option periods and other terms and conditions as the UWS options
they replace. Only the number of options and the exercise price will be
adjusted. Holders of Vested and Unvested Options held by persons who will be
employees of AMSG following the Distribution will have such options converted to
equivalent vested and unvested stock options to purchase shares of AMSG Common
Stock.
Vested Options and Unvested Options held by certain individuals will be
treated differently than set forth above. Each option held by Messrs. Hilliard,
Weyers, Hefty and Mordy and Ms. Hanson to purchase
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one share of UWS Common Stock will be converted into an option to purchase one
share of AMSG Common Stock and an option to purchase one share of Newco Common
Stock, with adjustments to the exercise prices of each to provide equivalent
value. Options held by Mr. Miller granted in December 1995 will be converted
into options to purchase shares of AMSG Common Stock and Newco Common Stock,
with the exercise prices for the converted options adjusted in the same manner
as noted above to provide equivalent value. All remaining options held by Mr.
Miller will be converted into equivalent options to purchase shares of AMSG
Common Stock and adjusted by increasing the number of shares of AMSG Common
Stock subject to the option and decreasing the exercise price per share of the
option to provide equivalent value. See "Executive Compensation--Treatment of
UWS Options and SARs as a Result of the Distribution."
INTERESTS OF CERTAIN PERSONS IN THE DISTRIBUTION
Individuals who are directors or executive officers of UWS, directors or
executive officers of AMSG after the Distribution and directors or executive
officers of Newco who currently own shares of UWS Common Stock will receive
shares of Newco Common Stock in connection with the Distribution on the same
terms and conditions as all of the other shareholders of UWS. In addition, such
individuals who hold options to purchase shares of UWS Common Stock will receive
options to purchase shares of Newco Common Stock, shares of AMSG Common Stock,
or shares of Newco Common Stock and AMSG Common Stock, as the case may be. For
certain information concerning the management and executive compensation
arrangements of Newco after the Distribution, see "Management of Newco" and
"Newco Benefit Plans Following the Distribution."
BANK CREDIT FACILITIES AND ASSUMPTION OF CERTAIN INDEBTEDNESS
After the Distribution, Newco and several of its subsidiaries will
participate with BCBSUW in a bank line of credit which permits aggregate
borrowings of up to $30.0 million. Interest on borrowings under the line of
credit will be based upon the London Interbank Offered Rate ("LIBOR") of M&I
Marshall & Ilsley Bank.
In connection with the Distribution, Newco will assume a debt obligation of
UWS to BCBSUW in the principal amount of $70.0 million. On October 30, 1996, UWS
borrowed $70.0 million from BCBSUW to fund the cash portion of the merger
consideration in connection with the merger of American Medical Security Group,
Inc. into UWS. UWS pledged the common stock of certain of its subsidiaries as
collateral for the loan. Interest is payable quarterly at a rate equal to LIBOR
plus 125 basis points, adjusted quarterly. The entire principal balance is due
October 30, 1999.
CONDITIONS; TERMINATION
The Distribution is subject to the satisfaction or waiver of certain
conditions as set forth in the Distribution Agreement. Regardless of whether the
conditions are satisfied, the UWS Board of Directors, in its sole discretion,
without approval of the UWS shareholders, may abandon the Distribution at any
time prior to the Effective Date of the Distribution. See "Agreements Between
UWS and Newco."
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by UWS solely to provide
information to holders of shares of UWS Common Stock who will receive shares of
Newco Common Stock in the Distribution. It is not, and is not to be construed
as, an inducement or encouragement to buy or sell any securities of UWS or
Newco. The information contained in this Information Statement is believed by
UWS to be accurate as of the date set forth on its cover. Changes may occur
after that date, and neither UWS nor Newco will update the information except in
the normal course of its respective public disclosure practices.
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RISK FACTORS
Shareholders should carefully consider and evaluate all of the information
set forth in this Information Statement, including the risk factors listed below
relating to Newco and its operations. This section does not discuss risk factors
which may be applicable to AMSG or its business or operations after the
Distribution, or to an investment in shares of AMSG Common Stock.
OPERATING HISTORY AND FUTURE PROSPECTS
Newco was formed for the purpose of effecting the Distribution. Newco does
not have an operating history as an independent public company, but will own and
conduct the operations of the Managed Care Companies and the Management Business
of UWS. On an historical basis, in each of the three years ended December 31,
1997, Newco's businesses were profitable. There can be no assurance, however,
that Newco's operations will be profitable in 1998 or future years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LIMITED RELEVANCE OF HISTORICAL COMBINED FINANCIAL INFORMATION OF NEWCO
The historical combined financial information may not necessarily reflect
the results of operations, financial position and cash flows of Newco in the
future or the results of operations, financial position and cash flows had Newco
operated as an independent company during the periods presented. The combined
financial information included herein does not reflect any changes that may
occur in the operations of Newco as a result of the Distribution.
HEALTH CARE COSTS AND HEALTH CARE INDUSTRY
Newco's profitability will depend in part on accurately predicting health
care costs and controlling future health care costs through underwriting
criteria, utilization management, product design and negotiation of favorable
provider and hospital contracts. Changes in utilization rates, demographic
characteristics, health care practices, inflation, new technologies, clusters of
high-cost cases, continued consolidation of physician, hospital and other
provider groups, the regulatory environment and numerous other factors affecting
health care costs may adversely affect Newco's ability to predict and control
health care costs as well as Newco's financial condition and/or results of
operations. Periodic renegotiation of hospital contracts and continued
consolidation of physician, hospital and other provider groups may result in
increased health care costs or limit Newco's ability to control such costs.
A large portion of the revenue received by Newco is, in turn, expended by
Newco to pay the costs of health care services delivered to its members. The
total health care costs incurred by Newco are affected by the number and scope
of individual services rendered and the cost of each service. Much of Newco's
premium revenue is set in advance of the actual delivery of services and the
related incurring of the cost, usually on a prospective annual basis. While
Newco attempts to base the premiums it charges at least in part on its estimate
of expected health care costs over the fixed premium period, competition,
regulation and other circumstances may limit Newco's ability to fully base
premiums on estimated costs. In addition, many factors may and often do cause
actual health care costs to exceed those costs estimated and reflected in
premiums. These factors may include increased utilization of services, increased
cost of individual services, catastrophes, epidemics, seasonality, new mandated
benefits or other regulatory changes and insured population characteristics.
In addition to the challenge of controlling health care costs, Newco faces
competitive pressure to contain premium prices. While managed health care plans
compete on the basis of many factors, including service and the quality and
depth of provider networks, Newco expects that price will continue to be a
significant basis of competition. Fiscal concerns regarding the continued
viability of programs such as Medicare and Medicaid may cause decreasing
reimbursement rates for government-sponsored programs. Newco's financial
condition and/or results of operations would be adversely affected by
significant
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premium decreases by any of its major competitors or by any limitation on
Newco's ability to increase or maintain its premium levels.
Newco, like HMOs and health insurers generally, excludes certain health care
services from coverage under its managed care benefit plans. In the ordinary
course of business, Newco is subject to the claims of its members from decisions
to restrict reimbursement for certain treatments. The loss of even one such
claim, if it were to result in a significant punitive damage award, could have a
material adverse effect on Newco's financial condition or results of operations.
In addition, the risk of potential liability under punitive damage theories may
significantly increase the difficulty of obtaining reasonable settlements of
coverage claims. The financial and operational impact that such evolving
theories of recovery may have on the managed care industry generally, or Newco
in particular, is presently unknown.
The managed care industry is labor intensive and its profit margin is low.
Hence, it is particularly sensitive to inflation. Health care industry costs
have been rising annually at rates higher than the Consumer Price Index.
Increases in medical expenses without corresponding increases in premiums could
have a material adverse effect on Newco's financial condition and/or results of
operations.
Competitive price pressures in the group health insurance industry, which
generally result from the entry and exit of health care companies in the
marketplace, historically have resulted in pricing and profitability cycles. The
extent to which recent structural changes in the managed health care and health
insurance industry have altered cyclical patterns is uncertain. There can be no
assurance that cyclical patterns will not adversely affect Newco in the future.
DEPENDENCE UPON HEALTH CARE PROVIDERS AND EMPLOYER GROUPS
One of the significant techniques Newco uses to manage health care costs and
utilization and monitor the quality of care being delivered to its customers and
members is contracting with physicians, hospitals and other providers. In any
particular market, providers could refuse to contract with Newco, demand higher
payments or take other actions which could result in higher health care costs or
less desirable products for customers and members.
In some markets, certain providers, particularly hospitals,
physician/hospital organizations or multi-specialty physician groups, may have
significant market positions or even monopolies. Many of these providers may
compete directly with Newco. If such providers refuse to contract with Newco or
utilize their market position to negotiate favorable contracts or place Newco at
a competitive disadvantage, Newco's ability to market its products and services
or to be profitable in those markets could be adversely affected.
The Managed Care Companies' contracts with its health care providers and
employer groups are renewable periodically. There can be no assurance Newco will
be able to continue to renew these contracts on acceptable terms, nor can there
be any assurance Newco will not experience a decline in enrollment within its
employer groups. The Managed Care Companies' profitability and its ability to
expand will be dependent upon its ability to attract and retain qualified
physicians, hospitals and other health care providers at competitive rates. For
the year ended December 31, 1997, four medical groups and hospitals accounted
for 23.9% of Newco's claims and capitation expense.
The Managed Care Companies' business is dependent upon its ability to obtain
and maintain group benefit agreements with employer groups. As of December 31,
1997, the Managed Care Companies had contractual relationships with 3,574 groups
for medical coverage, seven of which accounted for approximately 40.6% of the
Managed Care Companies' total earned premiums.
PROVIDER ARRANGEMENTS
Approximately 33.4% of Newco's total earned premiums in 1997 and 14.4% of
Newco's 1997 net income were attributable to the business sold through Newco's
wholly owned subsidiaries, Valley and Unity. Newco's provider arrangement
relating to Valley was renewed through January 1, 2000, and can be
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renewed for up to an additional three-year term, and Newco's provider
arrangement relating to Unity terminate on November 1, 2004. The continued
success of Valley and Unity will depend to a significant degree on the mutuality
of interest between Newco and its provider partners. The termination or a
material modification of Newco's current provider relationships or changes in
the business of its provider arrangements could have a material adverse effect
on Newco's profitability.
One of Newco's providers, Midelfort Clinic, Ltd. ("MIDELFORT"), has an
option to purchase Valley on December 31, 1999 for Valley's net equity plus
$400,000. If Midelfort exercises this repurchase option, Newco would thereafter
have no ongoing interest in Valley, and would lose all of the earned premiums
associated therewith. One of Newco's providers, Community Health Systems, LLC
("CHS"), has the right to repurchase a portion of the Unity business and the
Unity legal entity for the book value of such business plus $500,000 on either
November 1, 1999 or November 1, 2004. If CHS exercises this repurchase option,
Newco would need to transfer the remaining Unity business to one of its other
managed care companies. The other major provider partner, University Health
Care, Inc. ("UHC"), has the option to repurchase the remainder of the Unity
business for the book value of such business plus $500,000 on either November 1,
1999 or November 1, 2004. Any exercise of either or both of these repurchase
options relating to Unity would result in Newco losing the premium revenues
attributable to that business. In addition, the exercise of any of these
repurchase options would be deemed a taxable event to Newco.
PHARMACEUTICAL COSTS
The costs of pharmaceutical products and services are increasing faster than
the costs of other medical products and services. Thus, the Managed Care
Companies face ever higher pharmaceutical expenses. Though Newco's managed care
operations endeavor to keep pharmaceutical costs low for the Managed Care
Companies, there can be no assurance that Newco will be able to do so in the
face of rapidly rising prices. Also, statutory and regulatory changes may
significantly alter Newco's ability to manage pharmaceutical costs through
restricted formularies of products available to Newco's health plan members.
GOVERNMENT PROGRAMS AND REGULATION
Newco's business is subject to extensive federal and state laws and
regulations, including financial requirements, licensing requirements,
enrollment requirements and periodic examinations by governmental agencies. The
laws and rules governing Newco's business and interpretations of those laws and
rules are subject to frequent change. Existing or future laws and rules could
force Newco to change how it does business and may restrict Newco's revenue
and/or enrollment growth and/or increase its health care and administrative
costs. In particular, the Managed Care Companies are subject to regulations
relating to cash reserves, minimum net worth, premium rates, approval of policy
language and benefits, restrictions on the amount of dividends and other
distributions that can be paid by certain of Newco's subsidiaries without prior
approval or notification, the granting and revoking of licenses to transact
business, trade practices, premium rate regulation, underwriting standards,
policy forms, claims payment, licensing of agents and brokers, the amount and
type of investments that Newco may hold, minimum reserve and surplus
requirements, risk-based capital requirements and compelled participation in,
and assessments in connection with, risk-sharing pools and guaranty funds. Such
regulation is intended primarily to protect policyholders rather than investors.
Although such regulations have not significantly impeded the growth of Newco's
business to date, there can be no assurance that Newco will be able to continue
to obtain or maintain required governmental approvals or licenses or that
regulatory changes will not have a material adverse effect on Newco's business.
Delays in obtaining or failure to obtain or maintain such approvals could
adversely affect Newco's revenue or the number of its members or could increase
costs.
A portion of Newco's revenues relate to federal, state and local government
health care coverage programs, such as the Medicaid program. Such contracts
carry certain risks such as higher comparative medical costs, government
regulatory and reporting requirements, the possibility of reduced or
insufficient government reimbursement in the future, and higher marketing and
advertising costs per member as the
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result of marketing to individuals as opposed to groups. Such risk contracts
generally are subject to frequent change, including changes which may reduce the
number of persons enrolled or eligible, reduce the revenue received by Newco or
increase Newco's administrative or health care costs under such programs. In the
event government reimbursement were to decline from projected amounts, Newco's
failure to reduce the health care costs associated with such programs could have
a material adverse effect upon Newco's financial condition and/or results of
operations. Changes to such government programs in the future also may affect
Newco's willingness to participate in such programs.
Statutory capital and surplus requirements vary based upon the types of
risks underwritten and the nature of the provider contracts. The premiums
written by HMOs and insurance companies are limited by the amount of their
statutory capital and surplus. Statutory capital and surplus requirements for
workers' compensation coverage are greater than those for Newco's other
businesses. In addition, risk-based capital formulas, which are currently in
effect or may be adopted, affect Newco's statutory capital and surplus
requirements. In order to maintain growth in premium revenue, underwrite
workers' compensation coverage and continue to meet risk-based capital
requirements, Newco may have to obtain additional statutory capital or utilize
reinsurance agreements to cede a greater percentage of premium revenue. Should
additional resources be necessary, Newco may be required to obtain additional
financing. There can be no assurance such financing could be obtained upon terms
acceptable to Newco.
FORWARDING-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this Information
Statement are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The forward-looking statements may be
significantly impacted by risks and uncertainties and are made pursuant to the
safe harbor provisions of such Act; provided, however, the safe harbor for
forward-looking statements does not apply to statements made in an initial
public offering. There can be no assurance that either UWS or Newco can
duplicate each of its respective past performance or that expected future
results will be achieved. Readers are cautioned that a number of factors could
adversely affect Newco's and/or AMSG's ability to achieve results, including the
effects of health care reform, the continuation and renewal of provider
agreements and the effects of other general business conditions, including
competition, medical cost trends, changes in reserve estimates, terms of
provider contracts, premium rate changes, government regulation, capital
requirements, administrative costs, general economic conditions and the
retention of key employees.
HEALTH CARE REFORM LAWS
In 1996, Congress enacted H.R. 3103, the Kennedy-Kassebaum bill, which
provides for guaranteed issue, group-to-individual portability and pre-existing
condition limitations for certain insurance coverages. It also requires states
to evaluate and potentially rewrite their laws to conform to new guidelines.
Legislation adopted during 1996 also included maternity mandates and mental
health parity. Continuing compliance with this legislation could have an adverse
effect on Newco's financial condition and/or results of operations.
Also in recent years, both the Clinton Administration and several members of
Congress and various state legislators and state regulators have proposed
numerous other health care reform measures. Newco is unable to predict when or
whether any federal or state proposals, or some combination thereof, will be
enacted or, if enacted, the likely impact on Newco. It is possible, however,
that enactment of such health care reform legislation could adversely affect
Newco's financial condition and/or results of operations.
COMPETITION
Newco competes with a number of other entities in the geographic and product
markets in which it operates. Some of these other entities may have certain
characteristics or capabilities which give them an
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advantage in competing with Newco. Certain of Newco's customers may decide to
perform for themselves
functions or services formerly provided by Newco, which could result in a
decrease in Newco's revenues. Certain of Newco's providers may decide to market
products and services to Newco's customers in competition with Newco. In
addition, significant merger and acquisition activity has occurred in the
industry in which Newco operates, as well as in industries which act as
suppliers to Newco, such as the hospital, physician, pharmaceutical and medical
device industries. This activity may create stronger competitors and/or result
in higher health care costs. Provider service organizations may be created by
health care providers to offer competing managed care products. To the extent
there is strong competition or competition intensifies in any market, Newco's
ability to retain or increase customers, revenue growth, pricing flexibility,
control over medical cost trends and marketing expenses could be adversely
affected.
Newco faces competition from other regional and national managed health care
companies, including Humana, Inc. and United HealthCare Corp., and Dean Health
Plan, Inc. in the Madison, Wisconsin area, many of which have significantly
greater financial and other resources than Newco. If competition were to further
increase in any of its markets, Newco's financial condition and/or results of
operations could be materially adversely affected.
For the year ended December 31, 1997 and for the six months ended June 30,
1998, approximately 85.7% and 85.3%, respectively, of Newco's premium revenue
were attributable to its HMO products sold in Wisconsin. A concentration of
premium revenue in a defined geographic area presents the risk that any adverse
change in the local economic, market, competitive, or employment-related
conditions may result in a decrease in premium revenue, an increase in the
medical loss ratio or other adverse effects on Newco's profits. This high
concentration of revenues derived from HMO operations in Wisconsin subjects
Newco's operations to a higher degree of risk than a more geographically
diversified source of revenues would represent, primarily because any adverse
change in the health-related economic conditions in Wisconsin could result in a
material adverse effect on Newco's financial condition and/or results of
operations.
ADMINISTRATION AND MANAGEMENT
The level of administrative expenses is a partial determination of Newco's
profitability. While Newco attempts to effectively manage such expenses,
increases in staff-related and other administrative expenses may occur from time
to time due to business or product start-ups or expansions, growth or changes in
business, acquisition regulatory requirements or other reasons. Such expense
increases are not clearly predictable and could adversely affect Newco's
financial condition and/or results of operations.
The future success of Newco is dependent on a number of key management
employees. Competition for highly skilled people with extensive experience in
the health care industry is intense. Newco will be dependent on the continued
services and management experience of its executive officers. If such executive
officers were to leave, the operating results of Newco could be adversely
affected. The future success of Newco also will be dependent on its ability to
continue to attract key managerial and technical personnel. Newco does not have
key man life insurance covering any of its executive officers, nor does Newco
have employment agreements with any of its executive officers.
CONTROL BY CERTAIN SHAREHOLDERS; EFFECTS OF BCBSUW INTENDED PURCHASES;
DEFENSIVE MEASURES; POTENTIAL CONFLICTS OF INTEREST
Immediately following the Distribution, BCBSUW and executive officers and
directors of Newco will beneficially own approximately 39.4% of the outstanding
shares of Newco Common Stock and, thus, will have significant influence over all
matters requiring a shareholder vote. Furthermore, within a year after the
Distribution Date, BCBSUW intends to purchase additional shares of Newco Common
Stock to bring its direct and indirect ownership of Newco to approximately 51%.
At and after this time, BCBSUW will have the power to significantly affect the
outcome of shareholder votes on all corporate actions requiring majority
approval. This will limit the ability of a third party to acquire control of
Newco and could
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adversely affect the market price of the shares of Newco Common Stock. Issuance
of new shares of Newco Common Stock by Newco will require approval by the Newco
Board of Directors and the Office of the Commissioner of Insurance for the State
of Wisconsin ("OCI") and may require approval by Newco's shareholders. To the
extent BCBSUW purchases shares of Newco Common Stock from Newco, these purchases
may have an adverse effect on Newco's shareholders, including potential dilution
of earnings per share.
Newco's Articles of Incorporation ("ARTICLES OF INCORPORATION") and By-Laws
("BY-LAWS") and certain sections of the WBCL may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
the Newco Board of Directors (including takeovers which some shareholders may
deem to be in their best interest). These provisions could delay or frustrate
the removal of incumbent directors or the assumption of control by an acquiror,
even if such removal or assumption of control would be beneficial to
shareholders. These provisions also could discourage or make more difficult a
merger, tender offer or proxy contest, even if such events would be beneficial,
in the short term, to the interest of shareholders. Such provisions include,
among other things, a classified Board of Directors serving staggered three-year
terms and provisions in the WBCL which may discourage certain types of
transactions involving an actual or potential change of control of Newco.
Newco and certain of its subsidiaries and BCBSUW have entered into service
agreements (the "SERVICE AGREEMENTS") with respect to the provision of certain
services, including sales and marketing, computerized data processing, legal,
investment, actuarial and other management services. Under the Service
Agreements, the company receiving a service pays the company providing the
service an amount which Newco and BCBSUW believe approximates cost. Newco and
certain of its subsidiaries also have entered into reinsurance agreements with
BCBSUW in the past, and may do so in the future, on terms that are believed to
be reasonable at the time but that may not in retrospect be beneficial to Newco.
Pursuant to Wisconsin statutory and regulatory requirements, such reinsurance
agreements and the Service Agreements are required to be filed with the OCI for
its review to determine whether the "transaction at the time it is entered into
is reasonable and fair to the interest of the insurer." In addition, BCBSUW's
sales force markets and sells some of Newco's products. Also, certain of Newco's
products may compete with managed health care products offered by BCBSUW in
Wisconsin. If BCBSUW were to discontinue providing or receiving services,
negotiate for material changes to the Service Agreements or stop marketing and
selling certain of Newco's products, Newco's business and operations could be
adversely affected. Several of Newco's executive officers devote portions of
their time to the operations of BCBSUW. Three of the nine directors of Newco
also are directors of BCBSUW.
NEWCO CONFLICTS OF INTEREST WITH AMSG AFTER THE DISTRIBUTION
After the Distribution, the interests of AMSG and Newco may conflict. Such
sources of conflict may include competition for each company's products and the
reinsurance and service agreements between the parties. After the Distribution,
several of AMSG's products may compete with health care insurance products
offered by Newco, particularly in Wisconsin. With respect to the reinsurance and
service agreements, the potential exists for disagreements as to the quality of
the services provided by the parties and contract compliance. However, UWS
believes that each of AMSG and Newco will benefit from a strategic relationship
with the other entity created by the reinsurance and service agreements. Despite
the anticipated mutuality of interest, each of AMSG and Newco will have unique
shareholder groups whose interests may differ from one another.
After the Distribution, AMSG and Newco will have four common directors,
Messrs. Hefty, Menden, Hickman and Johnson. Messrs. Hefty, Menden, Hickman and
Johnson, as well as certain other officers and directors of AMSG and Newco, also
will own shares in both companies following the Distribution. Appropriate
policies and procedures will be followed by the Board of Directors of each
company to limit the involvement of the overlapping directors (and if
appropriate, relevant officers of such companies) in conflict situations,
including requiring them to abstain from voting as directors of either AMSG or
Newco.
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Such procedures will include requiring Messrs. Hefty, Menden, Hickman and
Johnson (or other executive officers or directors having a significant ownership
interest in both companies) to abstain from voting as directors of either
company, with respect to matters that present a significant conflict of interest
between the companies. Whether or not a significant conflict of interest
situation exists will be determined on a case-by-case basis depending on such
factors as the dollar value of the matter, the degree of personal interest of
Messrs. Hefty, Menden, Hickman or Johnson (or other executive officers or
directors having a significant ownership interest in both companies) in the
matter, the respective interests of the shareholders of AMSG and Newco and the
likelihood that resolution of the matter will have significant strategic,
operational or financial implications for the business of the respective
companies.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
UWS has received the Tax Ruling from the IRS to the effect that, among other
things, for federal income tax purposes, the Distribution will qualify as a
tax-free distribution under Section 355 of the Code. The Tax Ruling is based on
certain factual representations and assumptions, and the continued validity of
the Tax Ruling is subject to the continued validity of these representations and
assumptions. Neither UWS nor Newco is aware of any facts or circumstances which
should cause such representations and assumptions to be untrue. However, certain
extraordinary purchases of shares of AMSG Common Stock and/or Newco Common Stock
(events which are not within the control of UWS or Newco) could cause the
Distribution not to qualify as tax-free. Furthermore, the Tax Ruling also is
based on the accuracy of two covenants agreed to by Newco: within one year after
the Distribution, (i) licenses for use of the Blue Service Marks shall be
obtained by Compcare, and (ii) the Managed Care Companies shall have entered
into a joint venture with an unrelated third party. The Tax Allocation Agreement
provides that neither UWS nor Newco is to take any action inconsistent with, or
fail to take any action required by, the request for the Tax Ruling or the Tax
Ruling unless the other party has given its prior written consent. UWS and Newco
have agreed to indemnify each other with respect to any tax liability resulting
from their respective failure to comply with such provisions. See "Agreements
Between AMSG and Newco."
If the Distribution were taxable, then (i) corporate level income taxes
would be payable by the consolidated group of which UWS is the common parent,
based upon the amount by which the fair market value of the shares of Newco
Common Stock distributed in the Distribution exceeds UWS's basis therein, and
(ii) each holder of shares of UWS Common Stock who receives shares of Newco
Common Stock in the Distribution would be treated as if such shareholder
received a taxable distribution, taxed as a dividend to the extent of such
shareholder's pro rata share of UWS's current and accumulated earnings and
profits, and the holding period of such stock would begin the day after the
Distribution Date. Newco has agreed to indemnify AMSG for any losses which it
may incur if its actions or the actions of any of its affiliates result in such
tax liability. AMSG has agreed to indemnify Newco for any losses which it may
incur in the event that AMSG or any of its affiliates take any action which
adversely impacts the tax-free nature of the Distribution.
The potential corporate tax liability which could arise from an acquisition
of Newco for a period of time following the Distribution, together with the
foregoing indemnification arrangements, could have an anti-takeover effect on
the acquisition of control of either Newco or AMSG after the Distribution.
NO PRIOR TRADING MARKET FOR NEWCO COMMON STOCK; LIKELY VOLATILE NEWCO COMMON
STOCK PRICE
There is not currently a public market for the shares of Newco Common Stock,
and while a "when-issued" trading market is expected to develop prior to the
Distribution Date, there can be no assurance as to the prices at which the
shares of Newco Common Stock will trade after the Distribution Date. The shares
of Newco Common Stock have been approved for listing on the NYSE, subject to
official notice of issuance. Until the shares of Newco Common Stock are fully
distributed and an orderly trading market develops, the prices at which the
shares of Newco Common Stock trade may fluctuate significantly. Prices for
shares of Newco Common Stock will be determined in the marketplace and may be
influenced by many
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factors, including, among others, the depth and liquidity of the market for
shares of Newco Common Stock, investor perception of Newco and its industry and
general economic and market conditions.
Shares of Newco Common Stock distributed to shareholders of UWS Common Stock
in the Distribution will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of Newco under the Securities Act.
Persons who may be deemed to be affiliates of Newco after the Distribution
generally include individuals or entities that control, are controlled by, or
are under common control with, Newco, and may include certain officers and
directors of Newco as well as principal shareholders of Newco. Persons who are
affiliates of Newco will be permitted to sell their shares of Newco Common Stock
only pursuant to an effective registration statement under the Securities Act or
an exemption from the registration requirements of the Securities Act, such as
the exemption afforded by Rule 144. Certain UWS shareholders have been granted
registration rights with respect to the shares of Newco Common Stock. See
"Certain Relationships and Related Party Transactions." Any sales of substantial
amounts of shares of Newco Common Stock in the public market, or the perception
that such sales might occur, whether as a result of the Distribution or
otherwise, could materially adversely affect the market price of the shares of
Newco Common Stock.
THE YEAR 2000 ISSUE
Newco has assessed and continues to assess the potential impact of the
situation commonly referred to as the "Year 2000 Issue." The Year 2000 Issue,
which affects most corporations, concerns the inability of information systems,
primarily computer software programs, to properly recognize and process date-
sensitive information relating to the Year 2000 and beyond. 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 Newco's computer programs that have
time-sensitive software 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.
Newco has determined that it will be required to modify or replace portions
of its software so that its computer systems will function properly with respect
to dates in the year 2000 and thereafter. Newco has estimated that it will incur
costs totalling approximately $2.5 million in 1998 and 1999 to make such
modifications or replacements. Based upon ongoing assessments of progress on
system upgrades and conversions, Newco believes that the Year 2000 Issue will
not pose significant operational problems for its computer systems. 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 Newco.
REGULATORY APPROVALS
TAX MATTERS
Consummation of the Distribution is conditioned upon receipt of the Tax
Ruling to the effect that the Distribution is a tax-free distribution under
Section 355 of the Code. UWS has received the Tax Ruling based on certain
factual representations and assumptions by UWS and Newco, and certain covenants
made by Newco. See "The Distribution--Certain Federal Income Tax Consequences of
the Distribution."
INSURANCE REGULATORY MATTERS
The Distribution is subject to the prior approval of OCI. OCI was contacted
concerning the Distribution and indicated that the Distribution constitutes an
acquisition of control within the meaning of Wis. Admin. Code Section INS Ch.
40. Accordingly, prior to effectuating the Distribution, BCBSUW filed a Form A
with OCI and received the approval of the Commissioner pursuant to Wis. Admin.
Code Section 40.02(1)(b)(2) on August 18, 1998.
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In addition to the foregoing, certain transactions contemplated in
conjunction with the Distribution also may be subject to prior reporting to OCI.
Included in this would be amendments to and creation of inter-company agreements
and the transfer of the $70.0 million BCBSUW note from UWS to Newco. These
transactions and similar transactions were reported to OCI on a Form D and OCI
will have 30 days to review said transactions. OCI may disapprove the
transactions if the Commissioner finds that they would violate the law or be
contrary to the interest of insureds, shareholders or the public. OCI notified
Newco on August 18, 1998, that it would not disapprove these transactions.
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PRO FORMA CAPITALIZATION
The following table sets forth the unaudited pro forma capitalization of
Newco at June 30, 1998. The pro forma capitalization table has been derived from
Newco's Combined Financial Statements and reflects certain pro forma adjustments
as if the Distribution had been consummated as of June 30, 1998. This data
should be read in conjunction with the pro forma balance sheet, the introduction
to the pro forma financial statements appearing elsewhere in this Information
Statement, and Newco's Combined Financial Statements appearing elsewhere in this
Information Statement.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt............................................................ -- $ 70,000(1) $ 70,000
Shareholders' equity:
Preferred Stock, no par value per share;
1,000,000 shares authorized;
none issued or outstanding............................................ -- -- --
Common Stock, no par value per share;
50,000,000 shares authorized;
none issued and outstanding
(16,544,047 shares pro forma)......................................... -- 12,970(2) 12,970
Investments by and advances from UWS.................................... $ 124,947 (124,947) --
Unrealized gains on investments......................................... 1,247 -- 1,247
Retained earnings....................................................... -- 41,977(2) 41,977
---------- ----------- ----------
Total shareholders' equity.......................................... 126,194 (70,000) 56,194
---------- ----------- ----------
Total capitalization................................................ $ 126,194 $ 0 $ 126,194
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
- ------------------------
(1) Reflects the assumption of $70.0 million of affiliated debt UWS owed to
BCBSUW. The principal balance is due on October 30, 1999.
(2) Reflects issuances of shares of Newco Common Stock in connection with the
Distribution.
DIVIDEND POLICY
Newco has not paid any cash dividends to date, but plans to pay an annual
dividend beginning in December 1998. The initial annual dividend is expected to
be approximately $0.05 per share. However, the payment of dividends in the
future is subject to the discretion of the Newco Board of Directors and will
depend upon Newco's operating results, financial condition and capital
requirements, general business conditions, legal restrictions on the payment of
dividends and other factors the Newco Board of Directors deems relevant. There
can be no assurance that dividends will be paid in the future. As a holding
company, Newco depends on dividends from its subsidiaries to pay cash dividends
and to meet expenses. Applicable Wisconsin law limits the amount of dividends
that may be paid by certain of Newco's subsidiaries in any year.
30
<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION OF NEWCO
The pro forma combined condensed statements of income for the year ended
December 31, 1997 and the six months ended June 30, 1998 reflect interest
expense of $4.9 million for the year ended December 31, 1997, and $2.4 million
for the six months ended June 30, 1998, associated with the $70.0 million of
affiliated debt UWS borrowed from BCBSUW on October 30, 1996, as if such debt
was recorded on the books of Newco. The pro forma combined condensed balance
sheet at June 30, 1998 gives effect to the $70.0 million of affiliated debt UWS
borrowed from BCBSUW on October 30, 1996, as if such debt was recorded on the
books of Newco. The pro forma combined condensed financial statements should be
read in conjunction with the financial data presented elsewhere in this
Information Statement. The pro forma financial data are presented for
informational purposes only and may not reflect the future results of operations
or financial position of Newco.
NEWCO/UWS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Premium revenue........................................................... $ 560,825 $ 560,825
Other revenue............................................................. 26,046 26,046
Investment results........................................................ 22,238 22,238
---------- -----------
Total revenues........................................................ 609,109 609,109
---------- -----------
EXPENSES:
Medical and other benefits................................................ 485,735 485,735
Selling, general and administrative expenses.............................. 93,959 93,959
Interest expense.......................................................... -- $ 4,892(a) 4,892
Provider profit sharing................................................... 3,380 3,380
Amortization of goodwill and other intangibles............................ 818 818
---------- ----------- -----------
Total expenses........................................................ 583,892 4,892 588,784
---------- ----------- -----------
Income before income tax expense.......................................... 25,217 (4,892) 20,325
Income tax expense........................................................ 9,433 (1,830)(b) 7,603
---------- ----------- -----------
Net income.................................................................. $ 15,784 $ (3,062) $ 12,722
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(a) Reflects interest expense of $4.9 million for the year ended December 31,
1997 associated with the $70.0 million of affiliated debt UWS borrowed from
BCBSUW on October 30, 1996. Interest is payable quarterly at a rate equal to
LIBOR plus 1.25%, adjusted quarterly. The actual interest rates used in the
calculation are 6.75%, 7.02%, 7.06%, and 7.03% for the first, second, third
and fourth quarters of 1997, respectively. A 1/8% variance in the interest
rate would cause an increase/decrease in net income of approximately
$57,000.
(b) Reflects the application of the historical Newco effective tax rate of 37.4%
to the adjustment made pursuant to Note (a).
31
<PAGE>
NEWCO/UWS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Premium revenue........................................................... $ 298,602 -- $ 298,602
Other revenue............................................................. 14,378 -- 14,378
Investment results........................................................ 9,960 -- 9,960
---------- ----------- -----------
Total revenues........................................................ 322,940 -- 322,940
----------- -----------
EXPENSES:
Medical and other benefits................................................ 253,708 253,708
Selling, general and administrative expenses.............................. 50,674 50,674
Interest expense.......................................................... -- $ 2,433(a) 2,433
Provider profit sharing................................................... 1,413 1,413
Amortization of goodwill and other intangibles............................ 215 215
---------- ----------- -----------
Total expenses........................................................ 306,010 2,433 308,443
---------- ----------- -----------
Income before income tax expense.......................................... 16,930 (2,433) 14,497
Income tax expense........................................................ 6,515 (937)(b) 5,578
---------- ----------- -----------
Net income.................................................................. $ 10,415 $ (1,496) $ 8,919
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(a) Reflects interest expense of $2.4 million for the six months ended June 30,
1998, associated with the $70.0 million of affiliated debt UWS borrowed from
BCBSUW on October 30, 1996. Interest is payable quarterly at a rate equal to
LIBOR plus 1.25%, adjusted quarterly. The actual interest rates used in the
calculation of the 1998 adjustment are 7.06% and 6.96% for the first and
second quarters of 1998, respectively. A 1/8% variance in the interest rate
would cause an increase/decrease in net income of approximately $28,500.
(b) Reflects the application of the historical Newco effective tax rate of 38.5%
to the adjustment made pursuant to Note (a).
32
<PAGE>
NEWCO/UWS, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 14,750 $ 14,750
Investments-available for sale............................................ 154,365 154,365
Other current assets...................................................... 60,975 60,975
---------- -----------
Total current assets........................................................ 230,090 230,090
---------- -----------
Other non-current assets.................................................... 37,424 37,424
---------- -----------
Total assets................................................................ $ 267,514 $ 267,514
---------- -----------
---------- -----------
LIABILITIES
Current liabilities:
Medical and other benefits payable........................................ $ 55,537 $ 55,537
Other current liabilities................................................. 59,388 59,388
---------- -----------
Total current liabilities................................................... 114,925 114,925
---------- -----------
Other non-current liabilities............................................... 26,395 26,395
Notes payable............................................................... -- $ 70,000(a) 70,000
---------- ----------- -----------
Total liabilities........................................................... 141,320 70,000 211,320
Shareholder's equity:
Investments by and advances from UWS...................................... 124,947 (70,000)(a) 54,947
Unrealized gains on investments........................................... 1,247 1,247
---------- ----------- -----------
Total shareholder's equity.................................................. 126,194 (70,000) 56,194
---------- ----------- -----------
Total liabilities and shareholder's equity.................................. $ 267,514 $ 0 $ 267,514
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
NOTE TO PRO FORMA COMBINED CONDENSED BALANCE SHEET
(a) Reflects the assumption of $70.0 million of affiliated debt UWS borrowed
from BCBSUW on October 30, 1996. The principal balance is due on October 30,
1999.
33
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION OF NEWCO
The following table presents selected combined financial information with
respect to Newco. The balance sheet data as of December 31, 1997 and 1996 and
the statement of income data for each of the three years in the period ended
December 31, 1997, have been derived from the audited combined financial
statements and notes thereto of Newco. The balance sheet data as of December 31,
1995, 1994 and 1993 and the statement of income data for the years ended
December 31, 1994 and 1993 and for the six months ended June 30, 1998 and 1997
have been derived from unaudited financial statements which, in the opinion of
Newco's management, include all adjustments necessary, consisting only of normal
recurring accruals, for a fair presentation of financial position and results of
operations at and for the periods presented. Operating results for interim
periods are not necessarily indicative of the results that may be expected for
the full fiscal year. The combined financial statements of Newco do not
necessarily reflect the results of operations or financial position that would
have resulted had Newco been a separate, independent company and are not
necessarily indicative of the results to be expected for any other interim
period or any future fiscal year. The information set forth below should be read
in conjunction with Newco's combined financial statements, including the notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are included elsewhere in this Information
Statement.
<TABLE>
<CAPTION>
AS OF AND FOR THE
PRO FORMA SIX MONTHS ENDED
AS OF AND FOR THE YEARS ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
----------------------------------------------------- ------------- --------------------
1993 1994 1995(5) 1996(5) 1997 1997 1997 1998
--------- --------- --------- --------- --------- ------------- --------- ---------
(IN THOUSANDS, EXCEPT OPERATING STATISTICS)
STATEMENT OF INCOME DATA: (UNAUDITED) (UNAUDITED)
-------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Premium revenue............ $ 310,503 $ 355,025 $ 466,929 $ 493,092 $ 560,825 $ 560,825 $ 273,760 $ 298,602
Other revenue.............. 7,515 15,997 24,222 27,632 26,046 26,046 13,351 14,378
Investment results......... 10,697 12,050 9,665 19,040 22,238 22,238 10,672 9,960
--------- --------- --------- --------- --------- ------------- --------- ---------
Total revenues......... 328,715 383,072 500,816 539,764 609,109 609,109 297,783 322,940
--------- --------- --------- --------- --------- ------------- --------- ---------
Expenses:
Medical and other
benefits................. 265,446 306,056 416,167 425,258 485,735 485,735 235,763 253,708
Selling, general and
administrative
expenses................. 43,578 58,026 72,576 83,839 93,959 93,959 47,203 50,674
Interest expense........... -- -- -- -- -- 4,892(2) -- --
Provider profit
sharing................ 960 1,516 2,734 2,868 3,380 3,380 1,188 1,413
Amortization of goodwill
and other
intangibles............ 80 195 678 841 818 818 881 215
--------- --------- --------- --------- --------- ------------- --------- ---------
Total expenses......... 310,064 365,793 492,155 512,806 583,892 588,784 285,035 306,010
--------- --------- --------- --------- --------- ------------- --------- ---------
Income before income tax
expense................ 18,651 17,279 8,661 26,958 25,217 20,325 12,748 16,930
Income tax expense......... 5,900 5,072 3,277 10,617 9,433 7,603(3) 4,861 6,515
--------- --------- --------- --------- --------- ------------- --------- ---------
Net income................... $ 12,751 $ 12,207 $ 5,384 $ 16,341 $ 15,784 $ 12,722 $ 7,887 $ 10,415
--------- --------- --------- --------- --------- ------------- --------- ---------
--------- --------- --------- --------- --------- ------------- --------- ---------
BALANCE SHEET DATA:
Cash and investments....... $ 162,421 $ 154,201 $ 178,926 $ 182,431 $ 176,579 $ 190,435 $ 176,971
Total assets............... 197,294 216,954 261,523 269,478 266,256 275,430 267,514
Long-term debt............. -- -- -- -- -- -- --
Total shareholders'
equity................... 124,536 101,465 120,277 123,882 123,616 125,791 126,194
OPERATING STATISTICS:
Medical loss ratio(1)...... 85.8% 86.2% 89.1% 86.2% 86.6% 86.6% 86.1% 85.0%
Selling, general and
administrative expense
ratio(1)................. 10.9% 11.8% 11.0% 11.1% 11.2% 11.2% 11.6% 12.2%
<CAPTION>
PRO FORMA
JUNE 30,
-----------
1998
-----------
STATEMENT OF INCOME DATA:
<S> <C>
Revenues:
Premium revenue............ $ 298,602
Other revenue.............. 14,378
Investment results......... 9,960
-----------
Total revenues......... 322,940
-----------
Expenses:
Medical and other
benefits................. 253,708
Selling, general and
administrative
expenses................. 50,674
Interest expense........... 2,433(2)
Provider profit
sharing................ 1,413
Amortization of goodwill
and other
intangibles............ 215
-----------
Total expenses......... 308,443
-----------
Income before income tax
expense................ 14,497
Income tax expense......... 6,107(3)
-----------
Net income................... $ 8,390
-----------
-----------
BALANCE SHEET DATA:
Cash and investments....... $ 176,971
Total assets............... 267,514
Long-term debt............. 70,000(4)
Total shareholders'
equity................... 56,194(4)
OPERATING STATISTICS:
Medical loss ratio(1)...... 85.0%
Selling, general and
administrative expense
ratio(1)................. 12.2%
</TABLE>
34
<PAGE>
- ------------------------------
(1) Ratios are based on premium revenues and premium revenue-related selling,
general and administrative expenses of $33,996,000, $42,022,000 $51,133,000,
$54,861,000, $62,808,000, $31,874,000 and $36,332,000 for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 and the six months ended June
30, 1997 and 1998, respectively.
(2) Reflects pro forma adjustments for interest expense on assumed debt. See
"Pro Forma Combined Condensed Financial Information of Newco."
(3) Reflects pro forma adjustments for the tax effect of the adjustments
described in (2), above. See "Pro Forma Combined Condensed Financial
Information of Newco."
(4) Reflects pro forma adjustments for assumed debt. See "Pro Forma Combined
Condensed Financial Information of Newco."
(5) Commencing October 1, 1994, Newco's results of operations include the
results of operations of Unity. For the years ended December 31, 1994 and
1995, Unity accounted for $23,994,000 and $100,342,000 of Newco's total
premium revenue and $112,000 and $1,062,000 of Newco's net income,
respectively.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Newco is a leading provider of managed health care services and employee
benefit products, primarily in Wisconsin. Newco's two primary product lines are
(i) Health Maintenance Organization ("HMO") products, including Compcare Health
Services Insurance Corporation ("COMPCARE"), Valley Health Plan, Inc.
("VALLEY"), Unity Health Plans Insurance Corporation ("UNITY") and certain
point-of-service ("POS") and other related products managed by Compcare, Valley
and Unity; and (ii) specialty managed care products and services, including
dental, life, disability and workers' compensation products, managed care
consulting, electronic claim submission, and managed behavioral health services.
Operating results and statistics for these product groups are presented below
for the periods indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Membership at end of period:
HMO products:
Compcare..................................... 161,372 149,636 173,241 169,908 172,825
Valley....................................... 27,476 33,434 37,906 37,476 40,203
Unity........................................ 66,623 79,147 85,117 80,471 84,880
---------- ---------- ---------- ---------- ----------
Total HMO products membership.............. 255,471 262,217 296,264 287,855 297,908
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Specialty managed care products and
services:
Life/AD&D.................................... 118,812 116,390 129,406 119,924 154,033
Dental HMO................................... 167,592 169,063 169,823 167,442 168,044
Behavioral health............................ 645,883 826,153 863,538 851,495 913,479
Workers' compensation........................ 55,845 53,574 54,928 55,109 53,509
Disability and other......................... 68,233 81,462 97,727 86,724 111,551
---------- ---------- ---------- ---------- ----------
Total specialty managed care products and
services membership...................... 1,056,315 1,246,642 1,315,422 1,280,694 1,400,616
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Premium revenue
(as a percentage of the total):
HMO products................................................. 86.2% 85.4% 85.7% 85.7% 85.3%
Specialty managed care products and services................. 14.4 15.0 14.7 14.7 15.1
Intercompany eliminations.................................... (0.6) (0.4) (0.4) (0.4) (0.4)
--------- --------- --------- --------- ---------
Total...................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating Statistics:
HMO Products:
Medical loss ratio(1).......................................... 91.1% 89.8% 89.5% 89.5% 88.4%
Selling, general and administrative expense ratio(2)........... 9.2 9.3 9.2 9.4 9.4
Specialty managed care products and services:
Loss ratio(1).................................................. 77.1 69.8 74.1 71.3 70.4
Combined:
Loss ratio(1).................................................. 89.1 86.8 87.3 86.8 85.7
Net income margin(3)........................................... 1.1 3.0 2.6 2.7 3.2
</TABLE>
- ------------------------
(1) Medical and other benefits as a percentage of premium revenue prior to
intercompany eliminations.
(2) Premium revenue related selling, general and administrative expenses as a
percentage of premium revenue prior to intercompany eliminations.
(3) Net income as a percentage of total revenues.
Newco's revenues are derived primarily from premiums, while medical benefits
constitute the majority of expenses. Profitability is directly affected by many
factors including, among others, premium rate adequacy, estimates of medical
benefits, health care utilization, effective administration of benefit payments,
operating efficiency, investment returns and federal and state laws and
regulations.
RESULTS OF OPERATIONS
All financial data in the Results of Operations section are gross numbers
and, therefore, are not net of intercompany eliminations. For this reason, some
of the financial data does not precisely match the data in the financial tables.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
TOTAL REVENUES
Total revenues for the six months ended June 30, 1998 increased 8.4% to
$322.9 million from $297.8 million for the six months ended June 30, 1997. These
increases were due primarily to increases in HMO premium revenue partially
offset by lower investment results.
PREMIUM REVENUE--HMO premium revenue for the six months ended June 30, 1998
increased 8.5% to $254.7 million from $234.8 million for the six months ended
June 30, 1997, as a result of increased average HMO medical premium per member
and increased average number of medical members. Average HMO medical premium per
member for the six months ended June 30, 1998 increased 3.2% from the same
period in the prior year due to premium increases, partially offset by benefit
buy downs. The average number of HMO medical members for the six months ended
June 30, 1998 increased 4.8% to 294,409 from 280,815 for the six months ended
June 30, 1997.
Premium revenue for specialty managed care products and services for the six
months ended June 30, 1998 increased 12.5% to $45.0 million from $40.0 million
for the six months ended June 30, 1997. This increase was due primarily to new
sales in the life and disability lines of business.
OTHER REVENUE--Other revenue for the six months ended June 30, 1998
increased 4.6% to $21.1 million from $20.2 million for the six months ended June
30, 1997.
37
<PAGE>
INVESTMENT RESULTS--Investment results include investment income and
realized gains (losses) on investments. Investment results for the six months
ended June 30, 1998 decreased 6.5% to $10.0 million from $10.7 million for the
six months ended June 30, 1997. Average annual investment yields, excluding net
realized gains, were 5.58% and 5.50% for the six months ended June 30, 1998 and
1997, respectively. Net realized investment gains for the six months ended June
30, 1998 decreased to $5.0 million from $5.5 million for the six months ended
June 30, 1997. Average invested assets for the six months ended June 30, 1998
decreased $9.6 million to $176.8 million from $186.4 million for the six months
ended June 30, 1997. Investment gains are realized in the normal investment
process in response to market opportunities. In addition, during 1997 Newco
reduced its exposure to equity investments resulting in above average realized
gains.
EXPENSE RATIOS
LOSS RATIO--The combined loss ratio represents the ratio of medical and
other benefits to premium revenue for Newco on a combined basis, and is a
blended ratio for medical, life, dental, disability and other product lines. The
combined loss ratio was 85.7% for the first six months of 1998 and 86.8% for the
first six months of 1997. The combined loss ratio is influenced by the component
loss ratio for each of Newco's primary product lines, as discussed below.
The medical loss ratio for HMO products for the six months ended June 30,
1998 was 88.4%, compared with 89.5% for the six months ended June 30, 1997. The
decrease in the medical loss ratio in 1998 for HMO products is due primarily to
provider recontracting with a shift to additional capitation in the Southeastern
Wisconsin HMO market.
The loss ratio for specialty managed care products and services for the six
months ended June 30, 1998 was 70.4% compared with 71.3% for the six months
ended June 30, 1997. The decrease is primarily attributable to improved results
in the United Heartland worker's compensation block of business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO--The selling, general and
administrative ("SGA") expense ratio includes commissions, administrative
expenses, and premium taxes and other assessments. The SGA expense ratio for HMO
products for the first six months of 1998 was 9.4% which remained consistent
with the first six months of 1997.
Included in SGA expenses are assessments related to the Health Insurance
Risk Sharing Plan ("HIRSP"). HIRSP is a fund established by the State of
Wisconsin to provide major medical and Medicare supplemental insurance for
persons unable to obtain this insurance in the private market or who can only
obtain substandard or excessive costly insurance due to their health status.
HIRSP is funded by premiums paid by insureds, assessments to health insurers and
subsidies from the State of Wisconsin. Every insurer (foreign or domestic) doing
business in the State of Wisconsin is required to participate in the funding of
and administration of HIRSP. The assessments paid by Newco during the six months
ended June 30, 1998 were $493,000 compared to $811,000 for the same period in
1997.
SGA expenses related to specialty managed care products and services
increased 25.8% for the six months ended June 30, 1998 to $11.7 million from
$9.3 million for the same period in the prior year. This increase was due to an
increase in premium and other revenue, along with higher investments in improved
system capabilities and enhancements and related system conversion and training
costs, in addition to an increase in loss adjusting expenses recorded on the
workers' compensation TPA unit.
OTHER EXPENSES
Provider profit sharing was $1.4 million for the six months ended June 30,
1998, compared with $1.2 million for the six months ended June 30, 1997. These
balances represent payments to providers for profit sharing expenses related to
the Unity and Valley provider arrangements.
38
<PAGE>
NET INCOME
Combined net income for the six months ended June 30, 1998 increased 23.4%
to $10.4 million from $7.9 million for the six months ended June 30, 1997. The
increase in net income was due primarily to increased premium revenues coupled
with a stable loss ratio and a decrease in the SGA expense ratio.
Newco's effective tax rate was 39.0% for the six months ended June 30, 1998
compared with 38.1% for the six months ended June 30, 1997. Newco's effective
tax rate fluctuates based upon the relative profitability of Newco's product
lines and the differing effective tax rates for each of those product lines.
1997 COMPARED WITH 1996 AND 1996 COMPARED WITH 1995
TOTAL REVENUES
Total revenues in 1997 increased 12.8% to $609.1 million from $539.8 million
in 1996. Total revenues in 1996 increased 7.8% from $500.8 million in 1995.
These increases were due primarily to increased premium and other revenue as a
result of membership increases and increased net investment gains.
PREMIUM REVENUE--HMO premium revenue in 1997 increased 13.8% to $479.2
million from $421.2 million in 1996. HMO premium revenue in 1996 increased 4.7%
from $402.4 million in 1995. The increases in both years are primarily due to
increases in average HMO premium revenue per member and increases in the average
number of HMO medical members. Average HMO medical premium per member in 1997
increased 3.0% from 1996 and 3.1% from 1995, due to premium increases, partially
offset by benefit buy downs. The average number of HMO medical members in 1997
increased 10.8% to 287,534 from 259,507 in 1996. This increase was due in part
to the elimination of a key provider from the network of one of Compcare's
competitors, resulting in a shift of members to Compcare. The average number of
HMO medical members in 1996 increased 1.6% from 255,471 in 1995.
Premium revenue for specialty managed care products and services in 1997
increased 13.8% to $83.9 million from $73.8 million in 1996. Premium revenue in
1996 increased 9.7% from $67.2 million in 1995. The increase was due primarily
to an increase in life and disability premiums in both years and an increase in
workers' compensation premiums in 1997. The increases in life and disability
premiums were driven by membership increases, while the increase in workers'
compensation premiums was due primarily to a change in the reinsurance agreement
related to this business. In 1996, Newco ceded 50% of the workers' compensation
premiums written by United Heartland, Inc. to a third-party reinsurer. In 1997,
the percentage ceded to the outside reinsurer was reduced to 40%.
OTHER REVENUE--Other revenue in 1997 increased 1.3% to $40.0 million from
$39.5 million in 1996. Included in other revenue in 1996 is a $1.5 million gain
on the sale of the vision line of business which is non-recurring. Other revenue
in 1996 increased 32.1% from $29.9 million in 1995. After adjusting for the gain
on the sale of the vision line of business, other revenue increased by 5.2% from
1996 to 1997 and by 27.1% from 1995 to 1996. These increases are primarily
attributable to growth in managed behavioral health, electronic claims and
pharmacy management services.
INVESTMENT RESULTS--Investment results include investment income and
realized gains (losses) on investments. Investment results in 1997 increased
16.8% to $22.2 million from $19.0 million in 1996. Investment results in 1996
increased 97.0% from $9.7 million in 1995. Increases in both 1996 and 1997 were
due primarily to increased net investment gains. Average annual investment
yields, excluding net realized gains, were 5.75%, 5.90% and 5.15% for 1997, 1996
and 1995, respectively. Investment results in 1997 included $1.8 million of
mutual fund distributions which were recorded as investment income in December
1997. Net realized investment gains increased from $1.1 million in 1995 to $8.4
million in 1996 and $11.9 million in 1997. Investment gains are realized in the
normal investment process in response to market opportunities. In addition, a
portion of the gains realized during the second half of 1997 were achieved as
part of a portfolio restructuring to reduce the overall level of equity
investments from 10% to
39
<PAGE>
5%. Average invested assets in 1997 declined 0.1% to $179.5 million from $180.7
million in 1996. Average invested assets in 1996 increased 8.5% from $166.6
million in 1995. Changes in levels of average invested assets relate to ongoing
operations, including collection of receivables and timing of claim payments.
EXPENSE RATIOS
LOSS RATIO--The combined loss ratio represents the ratio of medical and
other benefits to premium revenue for Newco on a combined basis, and is a
blended ratio for medical, life, dental, disability and other product lines. The
combined loss ratio was 87.3% in 1997 compared with 86.8% in 1996 and 89.1% in
1995. The combined loss ratio is influenced by the component loss ratio for each
of Newco's primary product lines, as discussed below.
The medical loss ratio for HMO products in 1997 was 89.5%, compared with
89.8% in 1996 and 91.1% in 1995. The higher loss ratio in 1995 is attributable
to the competitive market conditions in southeastern Wisconsin where pricing
pressures, coupled with increased utilization, had an adverse impact on
Compcare's loss ratio.
The loss ratio for specialty managed care products in 1997 was 74.1%,
compared with 69.8% in 1996 and 77.1% in 1995. The loss ratios principally
consist of losses experienced in the life, disability, workers compensation and
dental product lines of business. These products represent relatively small
blocks of business, and as a result, the loss ratio can exhibit significant
volatility due to varying levels of claim frequency and severity. Generally, the
anticipated aggregate loss ratio for the four products should range between 70%
and 75%. The 1995 loss ratio reflects higher loss experience on the life,
disability and workers compensation products marketed by UHLIC, UWIC and United
Heartland, respectively. The 1997 loss ratio was also impacted by a higher level
of life and disability claims in comparison to a favorable level of life and
disability claims in 1996. The Company expects the 1998 loss ratio to decrease
from the 1997 level towards the middle of the expected range.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO--The SGA expense ratio
includes commissions, administrative expenses, and premium taxes and other
assessments. The SGA expense ratio for HMO products in 1997 was 9.2%, compared
with 9.3% in 1996 and 9.2% in 1995.
SGA expenses related to specialty managed care products and services
increased 11.6% in 1997 to $57.9 million from $51.9 million in 1996. SGA
expenses related to specialty managed care products and services increased 28.3%
in 1996 to $51.9 million from $40.5 million in 1995. Increases in SGA expenses
are tied to premium and other revenues which increased 8.0% in 1997 compared
with 1996 and increased 16.6% in 1996 compared with 1995. In addition, the mix
of business shifted over these yearly periods, as a result of greater growth in
ancillary lines of business that have higher SGA expense ratios.
OTHER EXPENSES
Provider profit sharing was $3.4 million in 1997, compared with $2.9 million
in 1996 and $2.7 million in 1995, net of intercompany eliminations. Included in
this caption is expense related to the Unity and Valley provider arrangements
and income from the workers' compensation agreements. Profit sharing expenses
related to the Unity and Valley provider arrangements were $4.0 million, $3.0
million and $2.7 million in 1997, 1996 and 1995, respectively. Income from the
workers' compensation agreements was $0.6 million and $0.1 million in 1997 and
1996, respectively.
NET INCOME
Combined net income in 1997 decreased 3.1% to $15.8 million from $16.3
million in 1996. Combined net income in 1996 increased 201.9% from $5.4 million
in 1995 due primarily to an increase in investment results.
40
<PAGE>
Newco's effective tax rate was 37.4% in 1997, compared with 37.4% in 1996
and 34.8% in 1995. Newco's effective tax rate fluctuates based upon the relative
profitability of Newco's three product lines and the differing effective tax
rates for each of those product lines.
LIQUIDITY AND CAPITAL RESOURCES
Newco's sources of cash flow consist primarily of premium and other 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. Newco's investment policies are designed to maximize yield, preserve
principal and provide liquidity to meet anticipated payment obligations.
For the six months ended June 30, 1998 and 1997, net cash provided by
operations amounted to $2.1 million and $8.2 million, respectively. Net cash
provided by operating activities amounted to $2.8 million, $6.6 million and
$11.4 million in 1997, 1996 and 1995, respectively. The fluctuations in cash
flow from operations related to net income as well as levels in intercompany
balances, advanced premiums and claims payable. Due to periodic cash flow
requirements of certain subsidiaries, Newco made borrowings under its bank line
of credit ranging up to $8.5 million during 1997 and up to $10.0 million for the
six months ended June 30, 1998 to meet short-term cash needs. No balance was
outstanding at December 31, 1997 or June 30, 1998.
Newco's investment portfolio consists primarily of investment grade
corporate bonds, Government securities and common stock. At June 30, 1998,
$122.0 million or 75.2% of Newco's total investment portfolio was invested in
bonds compared to $127.9 million or 80.1% at December 31, 1997 and $123.8
million or 75.8% at December 31, 1996. The bond portfolio had an average quality
rating of A1 at June 30, 1998 and Aa3 at December 31, 1997, and December 31,
1996 based on Moody's Investor Service ratings, and the majority of the bond
portfolio was classified as available for sale. In accordance with Statement of
Financial Accounting Standards No. 115, bonds classified as available for sale
are recorded on Newco's balance sheet at market value. Newco's Government
securities at June 30, 1998 consisted of $27.9 million in U.S. Treasury
securities, $26.7 million of Government agency mortgage-backed securities, $5.7
million of foreign government securities, and $2.0 million of state and
municipal securities. Government agency mortgage-backed securities are subject
to certain risks. The actual maturity of a mortgage-backed security varies,
depending on when the mortgagors prepay or repay the underlying mortgage loans.
Prepayments on the underlying mortgage loans may shorten the life of the
investment, thereby adversely affecting its yield to maturity and the related
market value of the mortgage-backed security. Therefore, mortgage-backed
securities are particularly subject to reinvestment risk. For example, during
periods of falling interest rates, higher coupon mortgage-backed securities are
more likely to prepay, and Newco may not be able to reinvest the proceeds from
prepayments in securities with yields similar to those of the prepaying
mortgage-backed securities. Furthermore, prepayments on mortgage-backed
securities are influenced significantly by general interest rates, economic
conditions and competition. During the years ended December 31, 1996 and 1997,
the effects of prepayments of mortgage-backed securities on Newco's financial
condition and/or results of operations were not material. Newco's equity
holdings consist of a diversified portfolio of publicly traded domestic common
stocks. The market value of the total investment portfolio, which includes
stocks and bonds, exceeded amortized cost by $3.9 million, $4.8 million and $6.3
million at June 30, 1998, December 31, 1997 and 1996, respectively. Unrealized
holding gains and losses on bonds classified as available for sale are included
as a component of shareholders' equity, net of applicable deferred taxes. Newco
has no investments in mortgage loans, non-publicly traded securities, real
estate held for investment or financial derivatives.
From time to time, Newco makes capital contributions to its subsidiaries to
assist them in maintaining appropriate levels of capital and surplus for
regulatory and rating purposes. Insurance subsidiaries are required to maintain
certain levels of statutory capital and surplus. In Wisconsin, where a large
percentage of Newco's premiums are written, these levels are based upon the
amount and type of premiums written
41
<PAGE>
and are calculated separately for each subsidiary. As of December 31, 1997,
statutory capital and surplus for each of these insurance subsidiaries exceeded
required levels. Should premium growth outpace existing capital, the insurance
subsidiaries may seek additional capital from Newco or may utilize reinsurance
as a means of reducing the capital requirement.
PROVIDER ARRANGEMENTS
The Company is party to certain provider arrangements in conjunction with
Unity Health Plans Insurance Corporation ("Unity") and Valley Health Plan, Inc.
("Valley"), wholly owned HMO subsidiaries included in the Company's combined
financial statements, which include profit-sharing payments to certain providers
and repurchase provisions.
Effective January 1, 1992, the Company acquired all of the outstanding
capital stock of Valley for cash approximating $2,800,000, representing the net
book value of Valley plus $400,000 as negotiated by the Company. Valley, a
health maintenance organization located in Eau Claire, Wisconsin, was purchased
from Midelfort Clinic, Ltd., a Mayo Regional Practice ("Midelfort Clinic"),
which continues to be Valley's primary health care provider. Under the terms of
the purchase and sale agreement, Midelfort Clinic retained an option to
repurchase all of the capital stock of Valley, at a price determined by the
formula used in computing the purchase price paid by the Company, at any time
until December 31, 1996. The option to repurchase was subsequently amended to
permit repurchase at December 31, 1999. The acquisition was accounted for under
the purchase method of accounting. The accompanying combined financial
statements include the results of operations of Valley.
Effective October 1, 1994, the Company acquired all of the outstanding
common stock of HMO-W, Inc. for cash approximating $7,482,000 representing the
net book value of HMO-W, Inc. as negotiated by the Company. HMO-W, Inc. owned
all of the outstanding common stock of HMO of Wisconsin Insurance Corporation
("HMOW").
Effective October 1, 1994, the Company also acquired all of the assets of
U-Care HMO, Inc. ("U-Care") and certain assets from an affiliate of U-Care for
cash approximating $3,772,000, representing net book value plus $500,000 as
negotiated by the Company.
Pursuant to the HMO-W, Inc. and U-Care purchase agreements, options to
repurchase the net assets of HMO-W, Inc. and U-Care were issued to the
respective primary provider groups, at price determined by the formula used in
computing the purchase price paid by the Company, effective on November 1, 1999
or 2004. The U-Care and HMO-W, Inc. acquisitions were accounted for under the
purchase method of accounting. The accompanying combined financial statements
include the results of operations of U-Care and HMOW which have been merged to
form Unity.
Total revenues subject to repurchase options, pursuant to the various
acquisition agreements, totaled $160,003,000, $191,342,000 and $191,688,000 for
1995, 1996 and 1997, respectively. Profit sharing expense related to these
provider arrangements is calculated based on the profitability of the HMO
subsidiary and totaled $2,754,000, $3,002,000 and $3,960,000, in 1995, 1996 and
1997, respectively. Total net income subject to repurchase options, pursuant to
the various acquisition agreements, totaled $2,591,000, $2,629,000 and
$2,395,000 for 1995, 1996 and 1997, respectively. Total assets and total net
assets subject to repurchase options were $56,281,000 and $22,475,000,
respectively, at December 31, 1996 and $49,802,000 and $20,632,000,
respectively, at December 31, 1997.
Should the buy back options be exercised, Newco would receive an amount
equal to the premium over book value but would lose rights to the future profits
on the HMO. The cash received by Newco pursuant to the exercise of the buy back
option could be redeployed to support additional premium writings, acquire other
businesses or be invested to earn a portfolio return. Due to these alternative
uses of capital, the potential buy back arrangements do not represent material
claims against Newco's liquidity and capital resources.
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<PAGE>
Management believes that exercise of the repurchase options is not probable
as exercise would not provide a substantial economic benefit to the options
holders and would require regulatory approval pursuant to change of control
regulations.
The amount of dividends which may be paid to Newco from insurance
subsidiaries are limited by state regulation. In the past, the insurance
subsidiaries have been allowed, with prior notification to the OCI, to pay
dividends in excess of the ordinary dividend levels prescribed by regulation.
In addition to internally generated funds and periodic borrowings on its
bank line of credit, Newco 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. Immediately after the Distribution, Newco recognizes that its debt to
equity ratio will be high, primarily as a result of its assumption of the $70.0
million loan from BCBSUW to UWS. However, Newco believes that this ratio should
improve within a year following the Distribution Date, as a result of BCBSUW's
intended purchases of shares of Newco Common Stock to bring its direct and
indirect ownership of Newco from 38.1% to approximately 51%. The purchase price
for the shares of Newco Common Stock which are purchased directly from Newco
will be paid through either the cancellation of a corresponding portion or all
of the $70.0 million debt obligation or in cash. BCBSUW may purchase some of the
shares of Newco Common Stock in the open market.
INFLATION
Health care costs have been rising and are expected to continue to rise at a
rate that exceeds the consumer price index. Newco's cost control measures,
risk-sharing incentive arrangements with medical care providers, and premium
rate increases are designed to reduce the adverse effect of medical cost
inflation on its operations. In addition, Newco utilizes its ability to apply
appropriate underwriting criteria in selecting groups and individuals and in
controlling the utilization of health care services. However, there can be no
assurance that Newco's efforts will fully offset the impact of inflation or that
premium revenue increases will equal or exceed increasing health care costs.
YEAR 2000 ISSUE
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 Newco's
computer programs that have time-sensitive software 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.
Newco has determined that it will be required to modify or replace portions
of its software so that its computer systems will function properly with respect
to dates in the year 2000 and thereafter. Newco's financial systems were
replaced with software which is Year 2000 compliant effective January 1, 1998.
Newco's operating subsidiaries have reviewed their computer systems and are in
the process of addressing the Year 2000 issue. The operating system for Compcare
is being converted from its current platform to a Year 2000 compliant system
operated by a third party vendor. This conversion is scheduled for completion
during the third quarter of 1998. Valley's operating system has been upgraded
and is Year 2000 compliant. Unity is in the process of testing upgrades to its
claims processing system which is scheduled for implementation by year end 1998.
During the past two years, United Heartland has worked to customize a purchased
operating system which is Year 2000 compliant. This system is fully operational.
Software, that is Year 2000 compliant, has been purchased to administer the
life, disability and dental products sold by UWIC, UHLIC and Heartland Dental.
This software is in the process of being installed with a target effective date
of December 1, 1998. None of Newco subsidiaries sell products which are
characterized as long duration contracts. Newco has estimated that it will have
costs totalling approximately $2.5 million in 1998 and 1999 to make such
modifications or replacements. Based on ongoing assessments of progress on
43
<PAGE>
system upgrades and conversions, Newco believes that the Year 2000 Issue will
not pose significant operational problems for its computer systems. 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 Newco.
Newco has initiated formal communications with its systems processing vendor
and all large customers using electronic interfaces to determine the extent to
which Newco's interface systems are vulnerable to those third parties' failure
to remedy their own Year 2000 Issues.
Newco will utilize both internal and external resources to reprogram, or
replace, and test the software for the Year 2000 modifications. Newco
anticipates completing the Year 2000 projects by December 31, 1998, which is
prior to any anticipated impact on its operating systems. A number of repairs to
current systems are covered by existing maintenance agreements and by normal
operational upgrades and do not present incremental additional expense. Costs
related to modification of existing computer hardware and software are expensed
as incurred. Purchases of new hardware or software in replacement of non-
compliant hardware or software are being capitalized in accordance with Newco's
standard accounting practices.
44
<PAGE>
BUSINESS OF NEWCO
GENERAL
Newco is a Wisconsin corporation organized in May 1998 as a wholly owned
subsidiary of UWS, and will continue to be a wholly owned subsidiary of UWS
until the Effective Date. Newco's principal executive offices are located at 401
West Michigan Street, Milwaukee, Wisconsin 53203.
On the Effective Date, UWS will contribute to Newco all of the stock of the
Managed Care Companies, the Management Business and working capital for the
Management Business, in exchange for 16,573,102 shares of Newco Common Stock and
the assumption by Newco of certain unfunded employee post-retirement health
benefit liabilities, certain accrued expenses, a $70.0 million loan from BCBSUW
and all other liabilities relating to the Managed Care Companies and the
Management Business. Immediately thereafter, UWS will own 100% of the issued and
outstanding shares of Newco Common Stock. On the Distribution Date, UWS then
will distribute all of the outstanding shares of Newco Common Stock to its
shareholders on a one-for-one basis.
On and after the Effective Date, Newco will be a leading managed care and
employee benefits company primarily in Wisconsin, but also will serve markets in
38 other states. The products and services offered by Newco will comprise a
broad range of group medical and related benefit products which provide
employers with cost effective solutions to their employee benefits needs. The
medical products are delivered through health maintenance organizations that
encourage or require use of contracting providers. HMOs help control health care
costs by various means, including utilization controls such as pre-admission
approval for hospital inpatient services, pre-authorization of outpatient
surgical procedures, and capitated or discounted fee arrangements. Newco also
will offer various specialty products and services, including group life,
dental, disability income, workers' compensation and electronic claim
transmission services.
Valley, an HMO in Northwestern Wisconsin, was acquired by Newco in 1992. Its
major provider is the Midelfort Clinic, Ltd., Mayo Regional Health System
("MIDELFORT"). Unity, an HMO serving Southwestern and Central Wisconsin, was
formed by the combination of HMO of Wisconsin Health Insurance Corporation
("HMO-W") and the business of U-Care HMO, Inc., ("U-Care"). HMO-W and U-Care
were purchased by Newco effective October 1, 1994. Community Physicians'
Network, Inc. ("CPN") and the University of Wisconsin-Madison Medical Center,
constitute the provider networks for Unity.
Newco's HMO products are sold primarily by a salaried sales force to
employers and other groups, including Medicaid-eligible individuals, throughout
Wisconsin. Specialty products and services are sold through a variety of
distribution channels to employer groups and providers in Wisconsin and
throughout the United States.
The following table lists earned premiums and other revenue for Newco's
various lines of business for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
HMO products earned premiums and other revenue....... $ 402,354 $ 421,248 $ 479,182 $ 234,750 $ 254,702
Specialty managed care products and services and
other revenue...................................... 97,138 113,277 123,859 60,270 66,191
Eliminations....................................... (8,341) (13,801) (16,170) (7,909) (7,913)
---------- ---------- ---------- ---------- ----------
Total earned premiums and other
revenue........................................ $ 491,151 $ 520,724 $ 586,871 $ 287,111 $ 312,980
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
45
<PAGE>
NEWCO'S STRATEGY
Newco believes current market conditions in health care favor companies that
provide quality health care products and services, while ensuring meaningful
cost containment for the buyer. Newco also believes there are significant niches
offering opportunities for companies that are responsive to consumer demand for
affordable health care. Newco is a managed care leader in Wisconsin due to the
quality and extent of its provider network, the number of members, the breadth
of its managed care product offerings and the pricing of those products. Newco
also believes there are opportunities to develop or enhance specialty managed
care products and services which will leverage Newco's expertise in the health
care market. To take advantage of market opportunities, Newco has developed the
following business strategy:
- EMPHASIZE COST-EFFECTIVE ACCESS TO QUALITY HEALTH CARE OPTIONS. Newco
believes that rising health care costs continue to cause buyers to seek
cost-effective quality health care options for employees. Newco plans to
focus on this demand through its HMO and specialty managed care products
by offering a full range of products coupled with state-of-the-art managed
care techniques and competitive administrative costs. Newco recently began
marketing its "United 24" product in selected Wisconsin counties which
combines health, disability and workers' compensation coverage into a
single lower premium product.
- PURSUE ACQUISITIONS AND DEVELOP STRATEGIC ALLIANCES. Newco intends to
continue to pursue strategic acquisitions and alliances, including
agreements with providers that it believes will complement or enhance its
existing products and/or markets. Since 1996, Newco has expanded its HMO
operations through two new start-up HMO's in the northern half of
Wisconsin in a partnership arrangement with two major providers. Newco
also recently completed the acquisition of the remaining interest in CNR.
Further, Newco believes that additional strategic alliances will enable
Newco to provide additional products and services in its existing markets.
- EXPAND GEOGRAPHICALLY. Newco intends to continue to expand its activities
outside of its traditional areas of operation both inside and outside of
Wisconsin. Compcare has continued to increase its market share in
southeastern Wisconsin by expanding its provider networks in counties
surrounding Milwaukee. Newco has recently initiated a plan to expand
Heartland Dental, its dental HMO product, to selected market territories
in a number of states in the upper Midwest. Newco continues to expand its
life and disability products through a brokerage sales effort in the upper
Midwest. The workers' compensation product is now being actively marketed
in Iowa and Illinois, and Newco seeks additional opportunities to expand
the workers' compensation business through acquisitions or strategic joint
ventures. In addition, Newco may acquire other managed care companies or
related lines of business in order to enter new markets both inside and
outside of Wisconsin.
- LEVERAGE BCBSUW RELATIONSHIP. When BCBSUW increases its direct or
indirect ownership of Newco to approximately 51%, Compcare intends to
license and use the Blue Service Marks with its products. Newco believes
this licensing and use will give Compcare a marketing and sales advantage
over its other managed care competitors in its markets. In addition, as a
result of its affiliation with BCBSUW, including through the Service
Agreements, Newco has access to BCBSUW's extensive database of health care
claims information. Newco believes this database provides it with a
competitive advantage since it is able to utilize the database to design,
underwrite, price and administer its products more effectively.
HMO PRODUCTS
PRODUCTS
Compcare, a wholly owned subsidiary of Newco, offers a variety of HMO and
POS products throughout Wisconsin. POS products have become the coverage of
choice for a number of employers as they provide a complete replacement for
programs which include a PPO plan or both traditional indemnity
46
<PAGE>
and HMO coverages. Compcare offers its members a broad network of providers
which include all three of the major physician hospital organizations in
Southeastern Wisconsin.
Valley offers the following plans: (i) the Group Plan, a comprehensive HMO
plan; (ii) the Partner Plan, a traditional HMO plan which incorporates
co-payments; (iii) POS products, which combines a traditional HMO plan with an
out-of-network benefit with deductible and coinsurance; (iv) a Medicare
Supplement product, which is designed to close the gap between health care costs
incurred and government programs' allowed payments; (v) a small group product,
combining managed care with deductibles and co-payments; and (vi) an HMO
Medicaid plan, which is a comprehensive HMO plan for Medicaid recipients.
Unity offers a comprehensive group plan which incorporates some co-payments
and deductibles and a modified comprehensive group plan which incorporates
co-payments and deductibles as well as coinsurance on certain benefits such as
hospitalization and specialty care. Unity also offers an individual plan,
including an in-area conversion plan, and a Medicare Supplement plan. In
addition, Unity markets POS products with a wide variety of benefit options.
The POS plans provide significant incentives for their members to utilize
the plans' managed care benefits and provide reduced benefits and increased
deductibles and co-payments when services are rendered by providers outside of
the HMO networks. In order to receive the higher level of benefits available
within the network, a member must receive care from a primary care physician or
be referred to a specialist by the primary care physician. These incentives
lower the overall premium for the group, even though the POS premiums tend to be
slightly higher than comparable traditional HMO products. POS plans provide a
greater level of health care cost control than a traditional HMO and an
indemnity plan. POS plans are sold generally as a complete replacement for an
employer's HMO and indemnity offerings.
MARKETING AND CUSTOMERS
Marketing HMO products generally is a two-step process. Presentations are
made first to employers. Once selected by an employer, Newco then directly
solicits members from the employee base. During periodic "open enrollments,"
when employees are permitted to change health care programs, Newco uses
advertising and work site presentations to attract new members. Virtually all of
the HMO employer group contracts are renewable annually.
Significant factors in HMO selection by employers and employees include the
composition of provider networks, quality of services, price, choice and scope
of benefits and market presence. To the extent permitted by OCI and the federal
government, Newco can offer an employer a wide spectrum of benefit options,
including federally qualified and non-federally qualified products. To address
rising health care costs, some employers now consider a variety of health care
options to encourage employees to use the most cost-effective form of health
care services. These options, which include HMO and POS plans, may either be
self-funded or provided by third parties.
As of June 30, 1998, HMO membership consisted of the following (in numbers
of individuals):
<TABLE>
<CAPTION>
COMMERCIAL
--------------------
HMO POS MEDICAID TOTAL
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Compcare........................................... 104,584 36,420 31,821 172,825
Valley............................................. 23,901 12,312 3,990 40,203
Unity.............................................. 62,843 16,819 5,218 84,880
--------- --------- ----------- ---------
191,328 65,551 41,029 297,908
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
Trends in membership over the last several years have shown that there is
strong growth in Newco's POS and Medicaid products, with slower growth in HMO
membership.
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Compcare's operations in the seven counties in Southeastern Wisconsin
account for approximately 90% of its medical membership. The remainder of
Compcare's membership is spread throughout Wisconsin. Valley operates in a 15
county area in Western Wisconsin, and Unity operates in a 31 county area in
Southwestern and Central Wisconsin. During 1996, Newco entered into two
strategic partnerships to offer HMO products in Northern Wisconsin. Compcare
Northwest is a partnership with the Duluth Clinic to bring managed care
operations to the underserved rural market. Northwoods Health Plans, LLC is a
joint venture formed with Howard Young Health Care, Inc., a leading provider of
health care services in North Central Wisconsin. Newco believes that expansion
efforts should contribute to increased enrollment by attracting new employer
groups, by increasing penetration in existing employer groups, and by broadening
its access to the Medicaid population.
The following table identifies the seven group contracts with the largest
HMO earned premium for 1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
EARNED PREMIUMS IN 1997
-------------------------
<S> <C>
Medicaid............................................................ 12.5%
State of Wisconsin.................................................. 11.7
Federal Employee Health Benefits Program............................ 4.5
Briggs & Stratton Corporation....................................... 3.1
City of Milwaukee................................................... 3.0
General Motors Corporation.......................................... 3.0
Milwaukee County.................................................... 2.8
-----
Subtotal........................................................ 40.6
Other employer groups (3,567 in number)............................. 59.4
-----
100.0%
-----
-----
</TABLE>
The HMOs have significant enrollment among federal, state and municipal
government employees, as well as employees represented by collective bargaining
units. Newco believes that health care will continue to be an important
negotiating issue with organized labor groups and the reputation of Newco's HMOs
are advantageous to its future marketing efforts.
Through one of the Service Agreements, Newco utilizes BCBSUW's salaried
sales force that as of December 31, 1997, consisted of 20 account
representatives and customer relations personnel, 36 account executives, one
agency manager, four agency consultants, and five sales directors, to market HMO
products. Newco directly employs a sales staff of seven account executives, one
sales director, one agency manager and two agency consultants who market
products for Unity as well as BCBSUW.
PROVIDERS
Compcare, Valley and Unity contract with physicians and hospitals to provide
medical services to their members. Members designate one physician in the
network as their primary care provider and are required to seek non-emergency
care from this physician.
Compcare has an extensive provider network in Southeastern Wisconsin, which
included 3,111 physicians as of December 31, 1997. Compcare is the only HMO that
contracts with all eight of the largest multi-specialty clinics in Milwaukee for
the provision of health care services to its members. This network is augmented
by individual physicians, hospitals and IPAs affiliated with Milwaukee's large
hospitals. Providers outside of Milwaukee consist of multi-specialty clinics and
hospitals. Ancillary services are provided under capitated arrangements through
sub-networks including chiropractic, mental health, oral surgery, home care,
durable medical equipment and vision. No single provider represents a material
48
<PAGE>
relationship in Compcare's provider network. Compcare's contracts with providers
renew annually. Compcare considers its relationships with its provider networks
to be good and has been able to renew its provider contracts on acceptable
terms.
Approximately 56.5% of Valley's medical and other benefits are provided
under an arrangement with Midelfort and its affiliate, Luther Hospital, which
Newco believes is the leading medical services provider in Eau Claire,
Wisconsin. Arrangements with three smaller area clinics and five other hospitals
provide a majority of the other Valley medical and other benefits. As of June
30, 1998, Valley's provider network consisted of 324 physicians. Approximately
81% of Valley's physician services are provided under the Midelfort arrangement.
Valley has contracts with six hospitals (one of which is affiliated with
Midelfort) which have provided a majority of Valley's hospital services. The
relationship with Midelfort is generated by the Valley provider arrangement,
which is renewable by the parties through December 31, 2002. Valley's contracts
with its other providers renew annually. Newco considers its relationships with
Midelfort and its other providers for Valley to be good and has been able to
renew provider contracts on acceptable terms.
Unity contracts with CPN, an Independent Physician Association ("IPA"), and
UHC, an affiliate of the University of Wisconsin Hospital and Clinics, which
together provide all of the physician services for Unity's membership throughout
its 31 county service area. The contracts with CPN and UHC are renewable through
October 1, 2004. CPN and UHC collectively contract with approximately 400
primary care providers and 2,100 specialists and ancillary health care
providers. In addition, Unity contracts directly with approximately 50 acute
care and specialty care hospitals. Newco believes its CPN and UHC provider
relationships are good, and CPN and UHC have been able to renew their provider
contracts on acceptable terms.
Compcare, Valley and Unity manage the cost of health care provided to their
members through the method of payment and risk-sharing programs with physician
groups and hospitals and with their utilization management program. The method
of payment consists of a mixture of capitation, fee schedules and discounted
fee-for-service arrangements. Capitation allows the payment of a fixed amount
per member per month to providers, regardless of services provided, which
stabilizes medical and dental costs. Capitation encourages providers to avoid
unnecessary utilization of hospital, physician and ancillary health care
services. For the six months ended June 30, 1998, approximately 43%, 24% and 96%
of Compcare's, Valley's and Unity's medical benefits, respectively, were
provided under capitated arrangements.
For certain medical providers, compensation for services is calculated on a
discounted fee-for-service basis. Under this arrangement, Newco will reimburse
physician groups for services rendered based upon negotiated fee schedules or
usual and customary charges less an agreed upon discount. Hospitals may be
reimbursed at a set per diem rate for each inpatient day, on a flat rate per
procedure basis, or on a discounted charge basis. In fee-for-service
arrangements, risks associated with utilization are retained by Compcare and
Valley. However, such arrangements provide Compcare and Valley with greater
pricing flexibility and opportunities to benefit by application of underwriting
on a group specific or individual basis. Furthermore, fee schedule-based
compensation allows Compcare and Valley to better target improvement in loss
ratios through product development and benefit modification. Such changes are
more difficult in a capitated system since capitation levels must be
renegotiated before any effective changes can be made to benefits or products.
One capitated physician group and two hospital systems in Compcare's
provider network elect to participate in stop-loss arrangements with Newco. For
example, one of the hospital systems elected a stop-loss arrangement in which
the inpatient, outpatient and professional service costs incurred for any
eligible member cannot exceed $75,000 in a given contract year. Any cumulative
costs in excess of $75,000 per year are paid to the provider in addition to the
capitation payments previously paid. These arrangements limit the facility's or
group's claim liability to a fixed amount per member per year. Claim costs in
excess of stop-loss limits are reimbursed by Compcare to the participating
providers and represent approximately 0.2% of the total capitation payments in
1997.
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OPERATIONS OF PROVIDER ARRANGEMENTS
Valley has a provider arrangement with Midelfort. The current term of the
provider arrangement is through January 1, 2000, with an option for an
additional three year renewal term or renewal terms of one year each. During the
initial five year term of the provider arrangement, after-tax profits were
shared equally with Midelfort. Effective January 1, 1997, 50% of pre-tax profits
are shared with Midelfort. Profit sharing with Midelfort equaled $1.3 million,
$0.8 million and $0.9 million during 1997, 1996 and 1995, respectively, and $0.7
million for the six months ended June 30, 1998. Midelfort has an option to
repurchase Valley on December 31, 1999 for Valley's net equity plus $400,000. If
Midelfort exercises its repurchase option, Newco would have no ongoing interest
in Valley.
The agreements with CHS and UHC which provide for profit sharing and the
repurchase of Unity have ten year terms which run through November 1, 2004.
Under these agreements, 50% of the pre-tax profits are shared, with CHS
receiving 30% and UHC receiving 20%. The profit sharing payments by Unity to CHS
and UHC together were $2.3 million, $2.0 million and $1.8 million for 1997, 1996
and 1995, respectively, and $1.0 million for the six months ended June 30, 1998.
CHS and UHC have options to repurchase the businesses originally sold to Newco
and the increased membership related to their respective provider networks on
November 1, 1999 or November 1, 2004. CHS has the right to repurchase the former
HMO-W business related to the rural provider networks and the Unity legal entity
for the book value of Unity related to the business being repurchased plus
$500,000. If CHS exercises this repurchase option, Newco would need to transfer
the remaining Unity business to one of its other Managed Care Companies. UHC has
the option to repurchase the former U-Care business related to the University of
Wisconsin provider network for the value of the net worth of Unity related to
the business being repurchased plus $500,000. Exercise of the repurchase option
ends the agreement with respect to that party. If both repurchase options are
exercised, Newco would have no ongoing interest in Unity.
COST CONTAINMENT
The majority of medical management and cost containment services for
Compcare are provided by Meridian Managed Care, Inc. Services for Valley and
Unity are coordinated by medical directors in conjunction with the medical
staffs of their providers.
MANAGEMENT INFORMATION SERVICES
Each of Newco's HMOs utilizes information systems developed and/or
customized specifically to meet the needs of the HMO. The information systems
support marketing, sales, underwriting, contract administration, billing,
financial and other administrative functions as well as provider capitation and
claims administration, provider management, quality management and utilization
review.
Newco continually evaluates, upgrades and enhances the information systems
which support its operations. Information systems utilized by Compcare and
Valley are outsourced to a third party.
SPECIALTY MANAGED CARE PRODUCTS AND SERVICES
In the last few years, Newco has focused on growing its specialty products
and services it offers. Such products and services include prepaid dental care,
life and disability insurance, workers' compensation and managed behavioral
health benefits, managed care consulting, electronic claims processing and other
medical benefits. Such specialty products are sold through a variety of methods,
including brokers, agents and an in-house sales force.
DENTAL
At year end 1997, a separate corporate entity, Heartland Dental Plan, Inc.
("HEARTLAND DENTAL"), was established to manage Newco's dental HMO operations
(formerly known as Dentacare). Heartland Dental
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was established as a separate entity to facilitate growth of prepaid dental
business outside of Wisconsin. Prepaid dental services were provided to 168,044
members as of June 30, 1998, which makes Heartland Dental the largest dental HMO
in Wisconsin. Premium revenues attributable to Heartland Dental were $27.8
million for the year ended December 31, 1997. Heartland Dental contracts with
group dental practices on a capitated basis throughout Wisconsin and Northern
Illinois. Members receive services through their selected dental center. In
addition, Heartland Dental offers POS and out-of-area products. The Heartland
Dental provider network had 279 dental providers as of June 30, 1998. Newco
considers its relationship with its dental provider network to be good and has
been able to renew its dental provider contracts on acceptable terms. Heartland
Dental competes with other regional and national managed care dental plans,
indemnity dental insurance, self funded dental plans and direct reimbursement
dental programs.
Heartland Dental offers ten different products with varying benefit options,
most of which cover all preventive and diagnostic services. Other services are
offered at various levels of coverage. All products cover pre-existing
conditions and the full range of dental services, including orthodontics.
LIFE AND DISABILITY
Newco offers group term life and AD&D coverages as well as dependent life
and accelerated death benefits. Short and long-term disability products have
been designed to provide income replacement for an employee who becomes disabled
through a non-work related situation. Newco's Rapid Pay plan is a unique
short-term disability product by which claimants receive benefits on a timely
basis with minimal up-front paperwork. As of June 30, 1998, Newco had a total of
253,490 life and disability certificates. Premium revenue related to life and
disability products was $34.0 million for the year ended December 31, 1997. Life
products are underwritten by United Wisconsin Life Insurance Company ("UWLIC"),
a wholly-owned subsidiary of AMSG, and ceded to United Heartland Life Insurance
Company ("UHLIC"), which is licensed in Ohio and Wisconsin. UWLIC is licensed to
do business in 39 states and the District of Columbia. United Wisconsin
Insurance Company ("UWIC"), which sells disability products, is licensed in 35
states and the District of Columbia. Newco competes with national providers of
group life and disability coverage.
An insurance company's rating is an important factor in establishing its
competitive position. In 1997, UWIC, UWLIC and UHLIC were assigned ratings of
"A-" "(Excellent)" by A.M. Best Company, Inc. ("BEST"). The "A-" "(Excellent)"
rating is the fourth highest rating given to insurance companies.
MANAGED CARE WORKERS' COMPENSATION
Through United Heartland, Inc. ("UNITED HEARTLAND"), Newco applies managed
care techniques to the workers' compensation market in Wisconsin. United
Heartland is a managing general agent that until January 1, 1995 was owned
equally by Newco and Aon Corporation ("AON"). On January 1, 1995, Newco
exercised its option to acquire Aon's interest in United Heartland, thereby
making United Heartland a wholly owned subsidiary of Newco. The workers'
compensation coverage sold through United Heartland is underwritten by UWIC in
those states where UWIC is licensed to provide such coverage. A reinsurer
underwrites risk for coverage in those states where UWIC is not licensed to
provide workers' compensation coverage. Premium revenue attributable to United
Heartland approximated $21.0 million during 1997. During 1997 and the first six
months of 1998, Newco retained 60% of the workers' compensation risk and ceded
the other 40% to a reinsurer. The workers' compensation market, both nationally
and in the state of Wisconsin, is extremely competitive. Competition has
primarily come from the large, national multi-line property and casualty
insurance companies.
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Newco believes the key elements to success in the workers' compensation
insurance business are service to employers and control of workers' compensation
costs through comprehensive loss control and claims management procedures. As
part of its underwriting process, United Heartland performs a loss control
review of each prospective insured prior to making a commitment to provide
coverage. It also examines the employer's commitment toward developing or
improving light duty/return to work programs, safety awareness programs,
supervisor training in accident investigation and enforcement of safety in the
workplace. United Heartland also reviews the financial resources of the
employers to verify an ability to follow through on any commitments made that
may require a capital expenditure.
United Heartland utilizes medical management resources to assist in the
adjustment of its claims, which include: (i) access to BCBSUW's usual and
customary charges database; (ii) the PPO network established by Newco for United
Heartland clients; and (iii) access to the hospital bill audit and medical staff
of Newco as needed in claims handling. Newco believes this managed care
capability, combined with a commitment to communicating with employers,
employees and medical providers, assists United Heartland in monitoring the
major cost factors of workers' compensation claims. Cost savings have been
demonstrated as United Heartland's customers over the six year period ended
December 31, 1997 have experienced a 16% drop in the cost of their workers'
compensation claims.
MANAGED CARE CONSULTING
Through Meridian Resource Corporation ("MERIDIAN"), Newco specializes in
providing consulting and technical services to insurance companies, employers,
providers, government agencies, coalitions and other organizations to make
decisions regarding health care benefits and more effective health care
delivery. Consulting services include health care data analysis, hospital cost
indexing and analysis, feasibility studies and economic analysis. Technical
services include hospital bill audit, data analysis and reporting, claims audit
and subrogation recovery services. Meridian also has established a niche in
collecting salvage and subrogation recoveries for self-insured groups and other
health insurers. Newco competes against other stand-alone companies that provide
similar cost reduction strategies and other large insurance companies that have
these functions. Revenues from managed care consulting services totalled $10.7
million for the year ended December 31, 1997.
Newco's combined medical management functions are conducted through Meridian
Managed Care, Inc. ("MMC"). MMC primarily serves the population of Compcare and
BCBSUW but also markets its programs to non-affiliated organizations. MMC
controls costs by promoting quality and efficiency. Central to its effectiveness
is promoting and developing partnerships with providers.
MMC's utilization management program provides comprehensive, custom-designed
strategies which protect its members and control costs by ensuring
cost-effective, quality care. MMC's traditional utilization management program
offers inpatient prior authorization, admission review, continued stay review,
discharge planning, patient education, appropriateness review and outpatient
procedure review.
ELECTRONIC CLAIM SUBMISSION
United Wisconsin Proservices, Inc. ("PROSERVICES") provides software and
claim submission services and has created the largest provider/insurer network
for such services in Wisconsin, extending to 103 hospitals and 75 clinics in
Wisconsin, and 530 home health agencies nationwide. Proservices electronically
transmits more than seven million medical claims annually for such clients as
Medicare, Medicaid, private insurers, third party administrators and re-pricers.
Proservices competes with other hospital software vendors and national suppliers
of electronic claims processing.
MANAGED BEHAVIORAL HEALTH
CNR Health, Inc. ("CNR") is a managed care organization that provides
cost-effective behavioral health care management solutions to a variety of
customers. In December 1997, Newco increased its
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ownership of CNR from 53% to 100%. CNR's primary products include behavioral
health management, provider networks, employee assistance programs, medical
management, 24-hour triage, disability management, claims administration and
Healthy Additions, its prenatal program. In 1997, CNR introduced its Cavion
behavioral health management software product to the market and formed a
partnership with two local organizations to become one of the entities managing
the Wisconsin Works ("W-2") program. W-2 is a new program that replaced Aid to
Families with Dependent Children with programs to prepare individuals for the
job market and help them find and keep those jobs. CNR competes with other
national providers of behavioral health management services.
CNR customers include insurance companies, self-funded employers, third
party administrators, Medicaid and other governmental entities. Through its
managed care programs, CNR managed approximately 913,500 lives as of June 30,
1998, while its revenues for the year ended December 31, 1997 were $18.8
million.
COMPETITION
The managed care industry is highly competitive. During the past few years,
the managed care industry in Wisconsin and the upper Midwest has experienced
consolidation. Newco believes the principal competitive features affecting its
ability to retain and increase its managed care membership include the price of
benefit plans offered, the composition of provider networks, quality of service,
responsiveness to user demands, financial stability, comprehensiveness of
coverage, diversity of product offerings and market presence and reputation.
Although Newco is a leading provider of managed care services in Wisconsin,
Newco may experience increased competition in the future. Newco competes with
national competitors for its HMO products including Humana, Inc. and United
HealthCare Corp. The Unity HMO competes with Dean Health Plan, Inc. in the
Madison area and surrounding counties. Many of Newco's competitors are larger,
have considerably greater financial resources and distribution capabilities and
offer more diversified types of insurance coverage than Newco.
REINSURANCE
Newco manages the risk it retains through the use of reinsurance. Newco
maintains in force both "quota share" and "excess of loss" reinsurance treaties.
Quota share reinsurance is a contractual arrangement whereby the reinsurer
assumes an agreed percentage of certain risks insured by the ceding insurer and
shares premium revenue and losses proportionately. Newco's quota share
reinsurance treaties allocate the total amount of business subject to the
treaties between Newco and the respective parties to the treaties. Through quota
share reinsurance, UHLIC assumes 100% of certain life coverages underwritten by
UWLIC and cedes to BCBSUW 100% of certain medical coverages underwritten by
UWIC. 40% of Newco's workers' compensation business is ceded to an independent
reinsurer. Excess of loss reinsurance is used to cap the amount of loss retained
by Newco on individual claims or a series of claims. Excess of loss reinsurance
is utilized by Newco's HMOs to limit their exposure to inpatient hospital claims
or, in the case of Compcare, to organ transplants. On the life and disability
business, Newco limits its retention per claim to $75,000. For workers'
compensation claims, Newco limits its retention per claim to $75,000, retains
the first $250,000 of a loss, which it shares with its quota share reinsurer,
and cedes losses between $250,000 and $10,000,000 on an excess of loss basis to
third party reinsurers. Except for affiliates of Newco, all reinsurers with
which Newco contracts are rated "A-" "(Excellent)" or better by Best.
SERVICE AGREEMENTS
Newco and various of its subsidiaries purchase services from, or provide
services to, BCBSUW pursuant to written agreements (the "SERVICE AGREEMENTS").
Services covered by these agreements include marketing, information systems,
legal, investment, actuarial, accounting, underwriting and other administrative
and management services. Fees under the Service Agreements are calculated on a
cost basis. Costs directly attributable to a particular company are paid by such
company. Costs that are not specific to any
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particular company are allocated based on utilization and allocation methods
agreed to by the parties to the agreements. If the recipient can obtain any of
the services under more favorable terms by performing the services itself or by
procuring them from a third party, it is not obligated to renew the Service
Agreement for those services if the provider is unwilling to substantially match
such terms. The Service Agreements automatically renew annually unless otherwise
terminated. In addition, under Wisconsin law, the OCI reviews the Service
Agreements to ensure that the agreements are reasonable and fair to the
interests of the insurance companies that are parties to the agreements. For the
year ended December 31, 1997, Newco paid approximately $9.3 million for such
services, and received approximately $14.6 millon from BCBSUW for the provision
of such services.
After the Distribution, Newco may provide certain services to AMSG pursuant
to a written agreement (the "AMSG SERVICE AGREEMENT"). Services that AMSG may
utilize pursuant to the AMSG Service Agreement include investment management,
investment accounting, risk management, accounting and financial audit and
corporate communications. Fees under the AMSG Service Agreement for investment
management and investment accounting will be based on a percentage of the
portfolio plus a flat rate for each company whose investments are being handled
by Newco. Fees for risk management will be based on a percentage of the annual
premiums for risk management insurance. Fees for accounting and financial audit
and corporate communications will be based on an hourly rate. The AMSG Service
Agreement will terminate on December 31, 1999 unless terminated earlier upon
appropriate notice. The AMSG Service Agreement will be submitted to OCI for its
review and lack of disapproval.
INVESTMENTS
Newco attempts to minimize its business risk through conservative investment
policies. Investment guidelines set quality, concentration and return
parameters. Newco's investment guidelines permit investments in various types of
liquid assets, including U.S. Treasury obligations, securities of various
Federal agencies and commercial paper, and other assets including corporate debt
securities, municipal securities, asset-backed securities, mortgage-backed
securities, equity securities and mutual funds. Up to 10% of Newco's fixed
income portfolio (at the time of purchase) may be invested in issues rated BB by
Standard & Poor's Corporation or an equivalent rating from another nationally
recognized securities rating organization. The remainder of the individual fixed
income issues must carry an investment grade rating at the time of purchase, and
the ongoing average portfolio rating must be "A-" or better, based on ratings of
Standard & Poor's Corporation or another nationally recognized securities rating
organization. Newco invests in securities authorized by applicable state laws
and regulations and follows investment policies designed to maximize yield,
preserve principal and provide liquidity. Newco's portfolio contains no
investments in mortgage loans or non-publicly traded securities, except for
investments in affiliates. However, at December 31, 1997, $21.8 million of
Newco's investment portfolio was invested in investment grade government agency
mortgage-backed securities.
With the exception of short-term investments and securities on deposit with
various state regulators, investment responsibilities have been delegated to
external investment managers. Such investment responsibilities, however, must be
carried out within the investment parameters established by Newco, which may be
amended from time to time.
Securities which may be sold prior to maturity to support Newco's investment
strategies, such as in response to changes in interest rates, the yield curve
concentration or sector concentration, are classified as available for sale and
are stated at market value with unrealized gains and losses reported as a
component of shareholders' equity in accordance with Statement of Financial
Accounting Standards No. 115. Securities for which Newco has both the positive
intent and ability to hold to maturity are recorded at amortized cost. Bonds
which are held to meet deposit requirements of the various states are classified
as held to maturity. All other bonds are classified as available for sale.
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The table below reflects investment results for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average invested assets(1)........................... $ 166,564 $ 180,679 $ 179,505 $ 186,433 $ 176,775
Net investment income(2)............................. 8,571 10,659 10,317 5,127 4,937
Average yield........................................ 5.15% 5.90% 5.75% 5.50% 5.58%
Net realized gain (losses)........................... 1,094 8,381 11,921 5,545 5,023
Net unrealized gains (losses) on stocks & bonds...... 3,511 3,959 3,211 3,482 1,247
</TABLE>
- ------------------------
(1) Average of aggregate investment amounts at the beginning and end of each
period.
(2) Amounts are calculated net of investment expenses, but prior to adjustment
for other interest income and expense.
REGULATION
GENERAL. Government regulation of employee benefit plans, including health
care coverage, health plans and Newco's specialty managed care products, is a
changing area of law that varies from jurisdiction to jurisdiction and generally
gives responsible administrative agencies broad discretion. Newco believes that
it is in compliance in all material respects with the various federal and state
regulations applicable to its current operations. To maintain such compliance,
it may be necessary for Newco or a subsidiary to make changes from time to time
in its services, products, structure or operations. Additional government
regulation or future interpretation of existing regulations could increase the
cost of Newco's compliance or otherwise affect Newco's operations, products,
profitability or business prospects.
Newco is unable to predict what additional government regulations, if any,
affecting its business may be enacted in the future or how existing or future
regulations might be interpreted. A number of jurisdictions have enacted small
group insurance and rating reforms which generally limit the ability of insurers
and health plans to use risk selection as a method of controlling costs for
small group business. These laws may generally limit or eliminate use of
pre-existing condition exclusions, experience ratings and industry class
ratings, and limit the amount of rate increases from year to year. Under these
laws, cost control through provider contracting and managing care may become
more important, and Newco believes its experience in these areas will allow it
to compete effectively.
Recently, federal legislation significantly expanded regulation of group
health plans and health care coverage. The new laws place restrictions on the
use of pre-existing conditions and eligibility restrictions based upon health
status and prohibit cancellation of coverage due to claims experience or health
status. Federal regulations also prohibit insurance companies from declining
coverage to small employers. Additional federal laws which take effect in 1998
include prohibitions against separate, lower, dollar maximums for mental health
benefits and requirements relating to minimum coverage for maternity inpatient
hospitalization. Newco does not anticipate that these new laws will affect its
comparable profitability or business prospects because all insurance companies
across the country are subject to the same requirements. Furthermore, many
requirements of the federal legislation are similar to small group reforms that
have been in place for many years. Newco will be able to utilize and expand upon
the cost control measures initiated as a result of small group legislative
reform.
Increasingly, states are considering various health care reform measures and
are adopting laws or regulations, which may limit Newco's health plans' and
insurance operations' ability to control which providers are part of their
networks and may hinder their ability to effectively manage utilization and
cost.
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Newco is unable to predict what reforms, if any, may be enacted or how these
reforms would affect Newco's operations.
HMOS. Wisconsin and the other states in which Newco offers HMO products
have enacted statutes regulating the activities of those health plans. Most
states require periodic financial reports from HMOs licensed to operate in their
states and impose minimum capital or reserve requirements. In addition, certain
of Newco's subsidiaries are required by state regulatory agencies to maintain
restricted cash reserves represented by interest-bearing instruments which are
held by trustees or state regulatory agencies to ensure that adequate financial
resources are maintained or to act as a fund for insolvencies of other HMOs in
the state.
As a federally qualified HMO, Compcare must file periodic reports with, and
is subject to periodic review by, the Department of Health and Human Services,
the Health Care Financing Administration and the Office of Prepaid Health Care.
Newco's other HMOs are only subject to state regulation because they are not
federally qualified HMOs.
Newco's HMOs which have Medicaid contracts are subject to both federal and
state regulation regarding services to be provided to Medicaid enrollees,
payment for those services and other aspects of the Medicaid program. Medicaid
has in force and/or has proposed regulations relating to fraud and abuse,
physician incentive plans and provider referrals which may affect Newco's
operations.
Several of Newco's health plans have contracts with the Federal Employees
Health Benefit Plan ("FEHBP"). These contracts are subject to extensive
regulation, including complex rules relating to the premiums charged. FEHBP has
the authority to retroactively audit the rates charged and may seek premium
refunds and other sanctions against health plans participating in the program.
Newco's health plans which have contracted with FEHBP are subject to such audits
and may be requested to make such refunds.
INSURANCE REGULATION. Newco's insurance subsidiaries are subject to
regulation by the Department of Insurance in each state in which the entity is
licensed. Regulatory authorities exercise extensive supervisory power over
insurance companies relating to the licensing of insurance companies; the amount
of reserves which must be maintained; the approval of forms and insurance
policies used; the nature of, and limitation on, an insurance company's
investments; periodic examination of the operations of insurance companies; the
form and content of annual statements and other reports required to be filed on
the financial condition of insurance companies; and the establishment of capital
requirements for insurance companies. Newco's insurance company subsidiaries are
required to file periodic statutory financial statements in each jurisdiction in
which they are licensed. Additionally, such companies are examined periodically
by the insurance departments of the jurisdiction in which they are licensed to
do business.
The National Association of Insurance Commissioners ("NAIC") adopted the
Risk-Based Capital ("RBC") for Life and/or Health Insurers Model Act ("RBC MODEL
ACT"), effective December 31, 1993, to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks associated
with: (i) asset quality; (ii) mortality and morbidity; (iii) asset and liability
matching; and (iv) other business factors. The RBC Model Act formula is used by
the states to monitor trends in statutory capital and surplus for the purpose of
initiating regulatory action. The NAIC adopted similar RBC requirements for
property and casualty insurance companies effective December 31, 1994, and for
health organizations, including HMOs, effective December 31, 1998. Newco has
calculated the risk-based capital for its life and property and casualty
subsidiaries as of December 31, 1997 using the applicable RBC formula. These
calculations produced risk-based capital levels which exceed the levels at which
the RBC formulas recommend intervention by regulatory authorities. The RBC
requirements for HMOs are not expected to have a significant effect on Newco's
capital requirements.
Under Wisconsin law, insurance companies must provide OCI with advance
notice of any dividend that is more than 15% larger than any dividend for the
corresponding period of the previous year. In
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addition, OCI may disapprove any "extraordinary" dividend, defined as any
dividend which, together with other dividends paid by an insurance company in
the prior twelve months, exceeds the lesser of: (i) 10% of statutory capital and
surplus as of the preceding December 31; (ii) with respect to a life insurer,
net income less realized gains for the calendar year preceding the date of the
dividend; or (iii) with respect to a non-life insurer, the greater of (ii) above
or the aggregate net income less realized gains for the three calendar years
preceding the date of the dividend less distributions made within the first two
of those three years.
Based upon the financial results of Newco's combined insurance entities for
the year ended December 31, 1997, $4.2 million is available for 1998 dividend
payments to their parent without regulatory approval.
INSURANCE HOLDING COMPANY REGULATIONS. Newco is a holding company which
conducts all of its business through combined entities and is subject to
insurance holding company laws and regulations. Under Wisconsin law, acquisition
of control of Newco, and thereby indirect control of its insurance subsidiaries,
requires the prior approval of OCI. "Control" is defined as the direct or
indirect power to direct or cause the direction of the management and policies
of a person. Any purchaser of 10% or more of the outstanding voting stock of a
corporation is presumed to have acquired control of the corporation and its
subsidiaries unless OCI, upon application, determines otherwise.
Each of Newco's combined insurance entities is subject to regulation under
state insurance holding company regulations. Such insurance holding company laws
and regulations generally require registration with that state's department of
insurance and the filing of certain reports describing capital structure,
ownership, financial condition, certain intercompany transactions and general
business operations. Various notice and reporting requirements generally apply
to transactions between companies within an insurance holding company system,
depending on the size and nature of the transactions. Certain state insurance
holding company laws and regulations require prior regulatory approval or, in
certain circumstances, prior notice of, certain material intercompany transfers
of assets as well as certain transactions between the regulated companies, their
parent holding companies and affiliates, and acquisitions.
UTILIZATION REVIEW REGULATIONS. A number of states have enacted laws and/or
adopted regulations governing the provision of utilization review activities.
Generally, these laws and regulations require compliance with specific standards
for the delivery of services, confidentiality, staffing, and policies and
procedures of private review entities, including the credentials required of
personnel. Some of these laws and regulations may affect certain operations of
Newco's business units.
A few jurisdictions have enacted laws which hold managed care organizations
liable for damages resulting from wrongful denial of care or payment for care.
Newco provides utilization review services through CNR in at least one state
that has passed such legislation. The liability law encompasses entities which
do not provide insurance coverage, but merely provide utilization review
services. CNR is developing risk management procedures and believes that it will
be able to minimize potential liability for coverage decisions.
ERISA. The provision of goods and services to or through certain types of
employee health benefit plans is subject to ERISA. ERISA is a complex set of
laws and regulations that are subject to periodic interpretation by the United
States Department of Labor. ERISA places certain controls on how Newco's
business units may do business with employers covered by ERISA, particularly
employers that maintain self-funded plans. The Department of Labor is engaged in
an ongoing ERISA enforcement program which may result in additional constraints
on how ERISA-governed benefit plans conduct their activities. There recently
have been legislative attempts to limit ERISA's preemptive effect on state laws.
If such limitations were to be enacted, they might increase Newco's liability
exposure under state law-based suits relating to employee health benefits
offered by Newco's health plans and specialty businesses and may permit greater
state regulation of other aspects of those businesses' operations.
57
<PAGE>
EMPLOYEES
As of June 30, 1998, Newco had 1,189 full-time and 47 part-time employees,
of whom 200 were managerial and supervisory personnel. Of these employees, 58
were represented by a union. Newco considers its relations with its employees to
be good.
TRADEMARKS
"Compcare" is a federally registered service mark of Newco. Newco has filed
for and maintains various other trademarks and trade names at the federal level
and in the State of Wisconsin. Although Newco considers its registered service
marks, trademarks and trade names important in the operation, of its business,
the business of Newco is not dependent on any individual service mark, trademark
or trade name.
PROPERTIES
Newco occupies common facilities with BCBSUW and is charged a proportionate
share of the cost of such facilities under the Service Agreements. Newco's
corporate headquarters are located in Milwaukee, Wisconsin in a 235,000 square
foot building leased by BCBSUW. Newco also utilizes space in a Milwaukee
regional office leased by BCBSUW, which has approximately 299,000 square feet of
office and warehouse space. In addition, Newco's business is sold and serviced
in four other Wisconsin regional offices leased by BCBSUW and a 40,000 square
foot facility in Sauk City, Wisconsin owned by Unity.
LEGAL PROCEEDINGS
Newco is currently, and is from time to time, subject to claims and suits
arising in the ordinary course of its business. Although the results of
litigation proceedings cannot be predicted with certainty, Newco believes that
the ultimate resolution of these proceedings will not have a material adverse
effect on its financial condition or results of operations.
58
<PAGE>
MANAGEMENT OF NEWCO
DIRECTORS OF NEWCO
Newco's Board of Directors is classified into three classes, designated
Class I, Class II and Class III, each class to be as nearly equal in number of
directors as possible. The term of office of the Class I directors expires at
the 1999 annual meeting of shareholders, the term of office of the Class II
directors expires at the 2000 annual meeting of shareholders, and the term of
office of the Class III directors expires at the 2001 annual meeting of
shareholders. In May 1998, UWS, as the sole shareholder of Newco at that time,
elected the following directors to the Newco Board of Directors: Messrs. Forbes,
Hickman, Hefty, Abdoo, Johnson, Dunham and Menden, Dr. Rupp and Ms. Skornicka.
The Class I directors consist of Messrs. Dunham and Forbes and Dr. Rupp; the
Class II directors consist of Messrs. Abdoo, Johnson and Menden; and the Class
III directors consist of Messrs. Hefty and Hickman and Ms. Skornicka. Directors
elected to succeed those directors whose terms expire will be elected to a
three-year term of office. All directors hold office until the next annual
meeting of shareholders at which their terms expire and until their successors
have been duly elected and qualified. Directors are not eligible to stand for
re-election after the age of 70. Newly created directorships resulting from any
increase in the number of directors and any vacancies on the Board of Directors
resulting from death, resignation, retirement, disqualification, removal or
other cause will be filled solely by the affirmative vote of a majority of the
remaining directors then in office. Increases or decreases in the number of
directors will be apportioned among the classes as nearly equal as possible, and
any additional director of any class elected to fill a vacancy resulting from an
increase in such class will hold office for a term that will coincide with the
remaining term of that class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director.
The name, age (as of the Effective Date), class of directorship and business
background of each of the persons who serve as directors of Newco are set forth
below. Messrs. Forbes, Abdoo and Dunham, Dr. Rupp and Ms. Skornicka will resign
as directors of UWS as of the Distribution Date, while Messrs. Hefty, Hickman,
Johnson and Menden will remain as directors of UWS following the Distribution
Date.
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- --------------------------------------------------------------------------------------
<S> <C>
CLASS I DIRECTORS
Michael D. Dunham Director of UWS from 1997 to 1998; Director of BCBSUW from 1996 to 1997; President and
Age: 53 a director of Effective Management Systems, Inc., a developer of integrated
manufacturing and business management software, since its incorporation in 1978.
James L. Forbes Director of UWS from 1991 to 1998; Director of BCBSUW since 1974; President and Chief
Age: 66 Executive Officer and Director of Badger Meter, Inc., a manufacturer of products using
flow measurement technology, since 1985; Director of Universal Foods Corporation,
Firstar Corporation and Firstar Trust Company, a subsidiary of Firstar Corporation.
William C. Rupp, M.D. Director of UWS from 1997 to 1998; President and Chief Executive Officer of
Age: 52 Luther/Midelfort Mayo Health System since 1994; President of Midelfort Clinic since
1991; practicing physician in oncology since 1982.
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- --------------------------------------------------------------------------------------
<S> <C>
CLASS II DIRECTORS
Richard A. Abdoo Director of UWS from 1991 to 1998; Director of BCBSUW from 1991 to 1997; Chairman of
Age: 54 the Board, President and Chief Executive Officer of Wisconsin Energy Corporation, a
diversified energy services holding company, since 1991; Chairman of the Board and
Chief Executive Officer of Wisconsin Electric Power Company since 1990; Director of
Wisconsin Energy Corporation since 1988; Director of Wisconsin Electric Power Company
since 1989; Chairman of the Board and Chief Executive Officer of Wisconsin Natural Gas
Company from 1990 to 1995; Director of Wisconsin Natural Gas Company from 1989 to
1995; Director of Marshall & Ilsley Corporation, a bank holding company, and
Sundstrand Corporation.
William R. Johnson Director of UWS since 1993; Chairman of Johansen Capital Investment and Financial
Age: 71 Consulting since 1986; President of Johansen Capital Associates, Inc., a financial and
investment consultant to corporations and individuals, since 1984; Chairman, President
and Chief Executive Officer of National Investment Services of America, Inc., an
investment manager of pension, profit sharing and other funds, from 1968 to 1984.
Eugene A. Menden Director of UWS since 1991; Director of BCBSUW from 1987 to 1992. Prior to his
Age: 67 retirement, Director of International Finance for Marquette Medical Systems, Inc.
(f/k/a Marquette Electronics, Inc.), a manufacturer of medical electronic products.
Served as Vice President of Finance for Marquette Electronics, Inc. from 1970 to 1991,
Treasurer from 1970 to 1989, and director from 1972 until 1996.
CLASS III DIRECTORS
Thomas R. Hefty Director of UWS since 1983; President of UWS from 1986 to 1998 and Chairman of the
Age: 51 Board and Chief Executive Officer of UWS from 1991 to 1998; Chairman of the Board and
Director of BCBSUW since 1988; President of BCBSUW since 1986; Executive Vice
President of BCBSUW from 1982 to 1986; Deputy Insurance Commissioner for OCI from 1979
to 1982; Director of Artisan Funds, Inc., an investment company registered under the
Investment Company Act of 1940, as amended.
James C. Hickman Director of UWS since 1991; Director of BCBSUW since 1986; Director of Century
Age: 71 Investment Management Company; Emeritus Professor and Emeritus Dean of the School of
Business of the University of Wisconsin-Madison since 1993; Professor in the UW School
of Business from 1990 to 1993; Dean of the University of Wisconsin-Madison School of
Business from 1985 to 1990.
Carol N. Skornicka Director of UWS from 1997 to 1998; Senior Vice President - Corporate Development,
Age: 56 Secretary and General Counsel of Midwest Express Holdings, Inc. and Midwest Express
Airlines, Inc. since March 1998; Vice President, Secretary and General Counsel of
Midwest Express Holdings, Inc. and Midwest Express Airlines, Inc. since 1996;
Secretary of the Wisconsin Department of Industry, Labor and Human Relations from 1991
to 1996; Director of Astral Aviation, Inc. since 1996.
</TABLE>
60
<PAGE>
DIRECTORS' MEETINGS AND COMMITTEES
The Newco Board of Directors expects to have four regularly scheduled
meetings per year and will hold such special meetings as it deems advisable to
review significant matters affecting Newco and to act upon matters requiring
Board approval. The Newco Board of Directors will have standing Executive,
Finance, Management Review and Audit Committees.
The Executive Committee will discharge certain of the responsibilities of
the Board of Directors when so instructed by the Board and will study proposals
and make recommendations to the Board. Specifically, the Executive Committee
will have the authority to approve long range corporate and strategic plans,
advise and consult with management on corporate policies, approve Newco's annual
operating plan and approve major changes in policy affecting new services and
programs. It is anticipated that the Executive Committee will not meet regularly
but instead will meet only when the entire Board of Directors is unable to do
so. The members of the Executive Committee will be Messrs. Forbes (Chairman),
Abdoo and Hickman.
The Finance Committee will approve investment policies and plans and approve
the investment of funds of Newco, consult with management regarding real estate,
accounts receivable and other assets, determine the amounts and types of
insurance carried by Newco, advise and consult with management regarding
selection of insurance carriers and corporate tax policies and discharge certain
other responsibilities of the Board of Directors when so instructed by the
Board. The members of the Finance Committee will be Messrs. Hefty, Rupp and
Johnson and Ms. Skornicka.
The Management Review Committee will evaluate the performance of Newco's
executive officers, approve executive officer development programs, determine
the compensation of the executive officers and review management's
recommendations as to the compensation of other key personnel, act as the
nominating committee for officers and directors and make recommendations to the
Board of Directors regarding the types, methods and levels of director
compensation, administer the compensation plans for the officers, directors and
key employees, and discharge certain other responsibilities of the Board of
Directors when so instructed by the Board. The Management Review Committee will
consider a nominee for election to the Board of Directors recommended by a
shareholder if the shareholder submits the nomination in compliance with the
requirements of Newco's By-Laws relating to nominations by shareholders. The
members of the Management Review Committee will be Messrs. Forbes, Abdoo, Dunham
and Hickman.
The Audit Committee will review the scope and timing of the audit of Newco's
financial statements by Newco's independent public accountants and review with
these accountants Newco's management policies and procedures with respect to
auditing and accounting controls. The Audit Committee also will review with the
independent accountants the financial statements for Newco and the auditors'
reports and management letter. The Audit Committee will select and engage
Newco's accountants and review and approve all related party transactions. In
addition, it will review and evaluate conflict of interest statements and
discharge certain other responsibilities of the Board of Directors when so
instructed by the Board. The members of the Audit Committee will be Messrs.
Menden, Abdoo, Dunham and Hickman.
COMPENSATION OF DIRECTORS
Directors who are officers or employees of Newco will receive no
compensation as such for service as members of the Board of Directors or
Committees of the Board. A director who is not an officer or employee of Newco
will receive a fee of $1,100 for each Board or Committee meeting attended, and a
monthly retainer of $750. In addition, each Committee Chairman will receive a
monthly fee of $250.
Newco also will maintain a Deferred Compensation Plan for Directors under
which members of the Newco Board of Directors may elect to defer receipt of all
or a portion of their directors' fees. Under such plan, Newco will be obligated
to repay the deferred fees, in either a lump sum or installments as elected by
61
<PAGE>
the participating director, together with any earnings on such deferred fees.
The repayments generally will commence upon the participating director's
resignation or termination from the Newco Board of Directors.
EXECUTIVE OFFICERS OF NEWCO
The name, age, title as of the Effective Date of the Distribution and
business background of each of the persons who will become on the Effective Date
the executive officers of Newco are set forth below. The individuals named below
are currently officers of UWS and various of its subsidiaries, but will resign
from all positions held at UWS or its remaining subsidiaries as of the Effective
Date of the Distribution. The business address of each of the executive officers
is 401 West Michigan Street, Milwaukee, Wisconsin 53203.
<TABLE>
<CAPTION>
NAME AGE TITLE
- -------------------------------------------------- --- -------------------------------------------------------
<S> <C> <C>
Thomas R Hefty.................................... 51 Chairman of the Board, President, Chief Executive
Officer and Director
Stephen E. Bablitch............................... 44 Vice President, General Counsel and Secretary
Devon W. Barrix................................... 56 Vice President
Roger A. Formisano................................ 49 Executive Vice President and Chief Operating Officer
and President of Compcare and Meridian
Mark H. Granoff................................... 52 Vice President and President of UWIC
Gail L. Hanson.................................... 42 Vice President and Treasurer
C. Edward Mordy................................... 55 Vice President and Chief Financial Officer
Emil E. Pfenninger................................ 47 Vice President and President of United Heartland
Penny J. Siewert.................................. 41 Vice President
Mary Traver....................................... 47 Vice President
</TABLE>
Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are appointed. There are no family
relationships among any of the directors and/or executive officers of Newco.
THOMAS R. HEFTY is the Chairman of the Board, President and Chief Executive
Officer of Newco. Mr. Hefty was elected President of UWS in 1986 and Chairman of
the Board and Chief Executive Officer of UWS in 1991. Since 1987, he has served
in various capacities with UWS's subsidiaries. Mr. Hefty has been Chairman of
the Board and a director of BCBSUW since 1988, having joined BCBSUW in 1982 and
later serving as President. From 1979 to 1982, Mr. Hefty was Deputy Insurance
Commissioner for OCI.
STEPHEN E. BABLITCH will be Vice President, General Counsel and Secretary of
Newco. Mr. Bablitch joined UWS in 1996 as General Counsel, Vice President and
Secretary. He has been General Counsel, Vice President and Secretary of BCBSUW
since 1996 as well. Prior to joining UWS and BCBSUW, Mr. Bablitch was an
attorney with Dewitt, Ross and Stevens, Madison, Wisconsin from 1991 to 1996.
DEVON W. BARRIX will be Vice President of Newco. He was elected a Vice
President of UWS in 1994 following UWS's acquisition of Unity and its parent,
HMO-W. Mr. Barrix was the Chief Executive Officer of Unity (f/k/a HMO of
Wisconsin Insurance Corporation) from 1985 to 1994 and was the President of
Unity from 1994 to 1996.
ROGER A. FORMISANO will be Executive Vice President and Chief Operating
Officer of Newco. Mr. Formisano was elected Executive Vice President and Chief
Operating Officer of UWS in 1995. He had been a Vice President of UWS since
1992. He serves as President of Compcare and Meridian. Mr. Formisano was a
Professor in the School of Business of the University of Wisconsin-Madison from
1978 to 1993. He also serves in various capacities with UWS's subsidiaries, and
is a director of Integrity Mutual Insurance Company and Wisconsin Sports
Authority, Inc., both privately held companies.
62
<PAGE>
MARK H. GRANOFF will be Vice President of Newco. Mr. Granoff was elected a
Vice President of UWS in 1991 and was elected President of UWIC in 1991 and
UHLIC in 1997. He has served in various capacities with some of UWS's other
subsidiaries since 1991. Mr. Granoff has been a Vice President of BCBSUW since
1990. Prior to joining BCBSUW, from 1988 to 1990, Mr. Granoff served as Employee
Benefits Marketing Vice President for Business Men's Assurance Company of
America, an insurance company.
GAIL L. HANSON will be Vice President and Treasurer of Newco. Ms. Hanson has
been Treasurer of UWS since 1987 and was elected a Vice President in 1996. She
has served in various capacities with UWS's subsidiaries since 1984. Ms. Hanson
was elected Vice President and Treasurer of BCBSUW in 1996 and had been
Assistant Vice President and Treasurer since 1987, having joined BCBSUW in 1984
as the Controller of UWIC.
C. EDWARD MORDY will be Chief Financial Officer of Newco. Mr. Mordy has been
a Vice President and the Chief Financial Officer of UWS since 1987. He has
served in various capacities with UWS's subsidiaries since 1987. Mr. Mordy has
been a Vice President and Corporate Controller of BCBSUW since 1986.
EMIL E. PFENNINGER will be Vice President of Newco. Mr. Pfenninger was
elected a Vice President of UWS in 1995 and President of United Heartland in
1990. Mr. Pfenninger was the Underwriting Manager with CNA Insurance Companies
from 1987 to 1990.
PENNY J. SIEWERT will be Vice President of Regional Services of Newco. Ms.
Siewert was elected Vice President of Regional Services of UWS in 1995. Ms.
Siewert joined BCBSUW in 1977 and has served in various capacities. Ms. Siewert
was elected Vice President of Operations for BCBSUW in 1990, Vice President of
Special Markets for BCBSUW in 1992, and Vice President of Regional Services for
BCBSUW in 1995.
MARY TRAVER will be Vice President of Newco. Ms. Traver has been a Vice
President of UWS since 1988. Ms. Traver was Vice President and General Counsel
of UWS from 1988 to 1996 and Secretary from 1992 to 1996. She has served in
various capacities with some of UWS's subsidiaries since 1987. Ms. Traver was
General Counsel of BCBSUW from 1987 to 1996, Secretary of BCBSUW from 1992 to
1996, and a Vice President of BCBSUW since 1988. She assumed the position of
Regional Vice President for the Southeastern region of BCBSUW in 1997.
63
<PAGE>
EXECUTIVE COMPENSATION
HISTORICAL COMPENSATION
The following table summarizes the total compensation paid by UWS or its
subsidiaries to Newco's Chief Executive Officer and each of the other four
individuals expected to be the most highly compensated executive officers of
Newco during 1998 for services rendered to UWS and BCBSUW for the years ended
December 31, 1997, 1996 and 1995. Pursuant to the Service Agreements, certain
executive officers of Newco provide services to BCBSUW. Costs and expenses
associated therewith are shared in accordance with the terms of the Service
Agreements. See "Certain Relationships and Related Party Transactions."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------------------------- ----------------------------------
AWARDS PAYOUTS
------------------- -------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING LTIP
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1,2) COMPENSATION($)(3) OPTIONS/SARS(#) PAYOUTS($)(1)
- ---------------------------- --------- ----------- -------------- --------------------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas R. Hefty ............ 1997 $ 475,008 $ 97,377 $ 7,885 35,000 $ 5,294
CHAIRMAN OF THE BOARD, 1996 410,028 177,542 9,355 30,000 --
PRESIDENT & CHIEF EXECUTIVE 1995 390,024 91,265 6,693 -- 10,832
OFFICER
Roger A. Formisano ......... 1997 244,536 22,008 904 25,000 2,894
EXECUTIVE VICE PRESIDENT & 1996 235,128 61,604 3,424 15,000 --
CHIEF OPERATING OFFICER; 1995 179,840 41,004 4,999 -- 4,406
PRESIDENT OF COMPCARE AND
MERIDIAN
Mark H. Granoff ............ 1997 154,260 53,837 2,839 7,000 1,571
PRESIDENT, UNITED WISCONSIN 1996 147,612 49,243 4,380 4,000 --
GROUP 1995 139,512 34,161 2,898 -- 3,955
C. Edward Mordy ............ 1997 184,848 20,333 3,385 18,000 2,370
VICE PRESIDENT & CHIEF 1996 176,040 55,805 3,106 10,000 --
FINANCIAL OFFICER 1995 161,496 18,734 2,567 -- 5,502
Penny J. Siewert(5) ........ 1997 174,576 18,180 -- 15,000 2,061
VICE PRESIDENT OF REGIONAL 1996 163,152 53,677 1,737 7,000 --
SERVICES 1995 117,388 33,808 -- 7,500 --
<CAPTION>
NAME AND ALL OTHER
PRINCIPAL POSITION COMPENSATION($)(4)
- ---------------------------- ---------------------
<S> <C>
Thomas R. Hefty ............ $ 4,000
CHAIRMAN OF THE BOARD, 3,750
PRESIDENT & CHIEF EXECUTIVE 3,750
OFFICER
Roger A. Formisano ......... 4,000
EXECUTIVE VICE PRESIDENT & 3,750
CHIEF OPERATING OFFICER; 3,750
PRESIDENT OF COMPCARE AND
MERIDIAN
Mark H. Granoff ............ 3,857
PRESIDENT, UNITED WISCONSIN 3,690
GROUP 3,488
C. Edward Mordy ............ 4,000
VICE PRESIDENT & CHIEF 3,750
FINANCIAL OFFICER 3,750
Penny J. Siewert(5) ........ 4,000
VICE PRESIDENT OF REGIONAL 3,017
SERVICES 2,935
</TABLE>
- ------------------------------
(1) Amounts include compensation earned and deferred at the election of the
named executive officer during the fiscal years indicated and paid
subsequent to the end of each fiscal year.
(2) Amounts represent bonuses earned under each of UWS's Profit Sharing Plan and
Management Incentive Plan.
(3) Amounts represent reimbursement for the payment of taxes and the payout for
unused personal days. The amounts indicated do not include perquisites and
other personal benefits to the named executive officers which for each such
officer did not exceed the lesser of $50,000 or 10% of the officer's total
annual salary and bonus.
(4) Amounts represent UWS's matching contributions to the UWSI/BCBSUW 401(k)
Plan.
(5) Ms. Siewert was promoted to an executive officer of UWS on September 1,
1995.
64
<PAGE>
The following table indicates all grants by UWS of options to purchase
shares of UWS Common Stock to the executive officers listed in the Summary
Compensation Table during 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
------------------------------------------------------------------ STOCK PRICE
# OF SECURITIES % OF TOTAL OPTIONS/ APPRECIATION FOR
UNDERLYING SARS GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/ EMPLOYEES IN FISCAL BASE PRICE EXPIRATION --------------------
EXECUTIVE SARS GRANTED(1) YEAR ($/SHARE) DATE 5% 10%
- ----------------------------- ----------------- --------------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Thomas R. Hefty.............. 35,000 19.60% $ 25.625 01/01/09 $ 713,784 $1,917,903
Roger A. Formisano........... 25,000 14.00 25.625 01/01/09 509,845 1,369,931
Mark H. Granoff.............. 7,000 3.90 37.125 06/12/09 206,823 555,724
C. Edward Mordy.............. 18,000 10.10 25.625 01/01/09 367,089 986,350
Penny J. Siewert............. 15,000 8.40 25.625 01/01/09 305,907 821,958
</TABLE>
- ------------------------------
(1) All options granted vest at the rate of 25% each year on the anniversary of
the grant date. All options listed for Messrs. Hefty, Formisano, Mordy and
Ms. Siewert were granted on 1/2/97. The options listed for Mr. Granoff were
granted on 6/12/97.
As set forth in the Employee Benefits Agreement, options to purchase shares
of UWS Common Stock held by individuals who will be executive officers,
directors or employees of Newco will be converted into options to purchase
shares of Newco Common Stock and the number and exercise price of the options
will be adjusted to provide equivalent value to each option holder; provided,
however, that options held by Messrs. Hefty and Mordy will be converted into
options to purchase shares of AMSG Common Stock and Newco Common Stock and the
exercise price of the options will be adjusted to provide equivalent value. See
"--Treatment of UWS Options and SARs as a Result of the Distribution" and
"Agreements Between AMSG and Newco."
No Stock Appreciation Rights ("SARS") or options to purchase shares of UWS
Common Stock were exercised by any of the executive officers listed in the
Summary Compensation Table during 1997. The number of unexercised SARs and
options and the total value of unexercised in-the-money SARs and options to
purchase shares of UWS Common Stock at December 31, 1997 are shown in the table
below. See "--Treatment of UWS Options and SARs as a Result of the Distribution"
and "Agreements Between AMSG and Newco."
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END (#) AT FY-END ($)
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
- -------------------------------------------------------- -------------------------- ----------------------------
<S> <C> <C>
Thomas R. Hefty......................................... 66,657 / 83,886 $262,763 / $310,263
Roger A. Formisano...................................... 24,018 / 44,256 71,081 / 95,769
Mark H. Granoff......................................... 21,268 / 18,006 64,300 / 72,300
C. Edward Mordy......................................... 32,112 / 38,704 127,788 / 144,412
Penny J. Siewert........................................ 5,500 / 24,000 17,688 / 29,625
</TABLE>
- ------------------------
(1) Options become immediately exercisable upon a change in control of UWS. A
change in control includes the acquisition by certain persons or groups of
25% or more of the outstanding shares of Common Stock; a change in the
membership of a majority of the Board of Directors, if not approved by the
incumbent Directors; or the approval by UWS's shareholders of a plan of
liquidation, an agreement to sell substantially all of UWS's assets, or
certain mergers, consolidations or reorganizations. Newco does not believe
that the Distribution constitutes a change in control of UWS.
65
<PAGE>
LONG-TERM INCENTIVE PLAN
UWS adopted a Long-Term Incentive Plan ("LTIP") for, among others, the
executive officers of UWS. The LTIP is administered by UWS's Management Review
Committee. Awards are based on the achievement of certain growth objectives
established at the beginning of each three-year plan cycle by the Management
Review Committee. Goals are set at minimum, target and maximum levels for each
objective. Payout awards are determined at the end of each three-year plan cycle
and are prorated when actual results for any objective lie between the minimum
and maximum goal levels. Payout awards are based on a percentage of each
participant's average base salary range midpoint during the applicable
three-year cycle. The components and maximum payout potential for the 1997-1999
Plan for Messrs. Hefty, Formisano, Granoff and Mordy and Ms. Siewert are:
Average Annual Increase in Combined Surplus of BCBSUW and Newco calculated in
accordance with generally accepted accounting principles, 10.00%; Average Annual
Increase in Government Programs Reimbursement, 2.50%; Increase in Combined
Revenue for BCBSUW and Newco, 4.16%. The potential value of payouts under the
1997-1999 LTIP to the listed executive officers is shown in the following table:
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE OR NON-STOCK PRICE-BASED PLANS(2)
OTHER PERIOD UNTIL ----------------------------------
NAME MATURATION OR PAYOUT(1) THRESHOLD TARGET MAXIMUM
- ------------------------------------------------------ ----------------------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Thomas R. Hefty....................................... 3 Years $ 42,944 $ 64,383 $ 107,263
Roger A. Formisano.................................... 3 Years 23,038 24,540 57,544
Mark H. Granoff....................................... 3 Years 9,070 13,598 22,654
C. Edward Mordy....................................... 3 Years 18,643 27,950 56,565
Penny J. Siewert...................................... 3 Years 17,809 26,700 44,482
</TABLE>
- ------------------------
(1) The 1997-1999 LTIP has been discontinued and a pro rata payout was made in
June 1998 as follows: Mr. Hefty--$32,192; Mr. Formisano--$17,270; Mr.
Mordy--$13,975; Ms. Siewert--$13,350; and Mr. Granoff--$6,799.
(2) The average midpoint of the named executive's annual base salary range for
the three-year term is calculated using the actual 1996 and 1997 base salary
range midpoint and the estimated 1998 base salary range midpoint. The
estimated 1998 midpoint is 4% higher than the 1997 actual base salary range
midpoint.
DEFINED BENEFIT PENSION PLANS
UWS has provided a non-contributory defined benefit plan to its salaried
employees pursuant to the UWSI/BCBSUW Salaried Pension Plan (the "SALARIED
PLAN"). The Salaried Plan utilizes a cash balance formula which provides annual
pay credits of 4% plus transition credits of 4% for the number of years of
service on December 31, 1996 (up to 15 years). Interest is credited on the cash
balance account based on the yield on ten-year Treasury securities for the month
of October of the previous year. Newco will assume sponsorship (with BCBSUW) of
the Salaried Plan and the related trust and will continue to provide benefits
for all individuals who, immediately prior to the Effective Date of the
Distribution, were participants in the Salaried Plan.
In addition, UWS provides to executive officers defined benefits from the
UWSI/BCBSUW Supplemental Executive Retirement Plan (the "SERP"). The SERP
provides a total benefit (taking into account Salaried Plan benefits and Social
Security benefits) of 2% of final five-year average pay per year of service (up
to 30 years). Newco will assume sponsorship of the SERP and all liabilities with
respect thereto. The
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approximate annual benefits for the following pay classifications and years of
service are expected to be as follows:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-----------------------------------------------
REMUNERATION 15 20 25 30 OR MORE
- --------------------------------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
$125,000..................................... $ 37,500 $ 50,000 $ 62,500 $ 75,000
$150,000..................................... $ 45,000 $ 60,000 $ 75,000 $ 90,000
$175,000..................................... $ 52,500 $ 70,000 $ 87,500 $ 105,000
$200,000..................................... $ 60,000 $ 80,000 $ 100,000 $ 120,000
$225,000..................................... $ 67,500 $ 90,000 $ 112,500 $ 135,000
$250,000..................................... $ 75,000 $ 100,000 $ 125,000 $ 150,000
$275,000..................................... $ 82,500 $ 110,000 $ 137,500 $ 165,000
$300,000..................................... $ 90,000 $ 120,000 $ 150,000 $ 180,000
$400,000..................................... $ 120,000 $ 160,000 $ 200,000 $ 240,000
$500,000..................................... $ 150,000 $ 200,000 $ 250,000 $ 300,000
$600,000..................................... $ 180,000 $ 240,000 $ 300,000 $ 360,000
</TABLE>
The persons named in the Summary Compensation Table have the following years
of credited service: Mr. Hefty--15 years; Mr. Formisano--6 years; Mr. Granoff--7
years; Mr. Mordy--12 years; Ms. Siewert-- 21 years.
CHIEF EXECUTIVE OFFICER SUPPLEMENTAL COMPENSATION AGREEMENT
In September 1997, UWS entered into a Supplemental Compensation Agreement
with Mr. Hefty, President, Chairman and Chief Executive Officer, as incentive
for continued employment, and to reward Mr. Hefty for activities that result in
an increase in the shareholder value of UWS as a result of ownership of AMS.
Under the terms of the agreement, Mr. Hefty will be awarded phantom shares of
UWS Common Stock upon the occurrence of specific triggering events. The
Distribution is not a specific triggering event under the Supplemental
Compensation Agreement, and the parties to such Agreement have agreed that the
Supplemental Compensation Agreement shall terminate upon completion of the
Distribution.
TREATMENT OF UWS OPTIONS AND SARS AS A RESULT OF THE DISTRIBUTION
UWS has granted options ("UWS OPTIONS") to purchase shares of UWS Common
Stock under the United Wisconsin Services, Inc. Equity Incentive Plan and the
1995 Director Stock Option Plan (collectively, the "UWS EQUITY INCENTIVE PLANS")
to persons who are or will be executive officers, non-employee directors and
employees of Newco. On the Effective Date, each UWS Option held by the executive
officers, directors and employees of Newco, other than Messrs. Hefty and Mordy
and Ms. Hanson, will be converted into options to purchase shares of Newco
Common Stock and adjusted to provide equivalent value by (i) multiplying the
number of shares of UWS Common Stock subject to the option by the Newco
Adjustment Factor, and (ii) dividing the exercise price per share of the option
by the Newco Adjustment Factor. The "NEWCO ADJUSTMENT FACTOR" is defined as the
quotient obtained by dividing (x) the closing market price of the shares of UWS
Common Stock on the Distribution Date by (y) the closing market price of the
shares of Newco Common Stock on the trading day immediately following the
Distribution Date. The converted options will be assumed by Newco under the
Newco/UWS, Inc. Equity Incentive Plan. In addition, the converted options will
provide that (i) for purposes of the vesting, exercisability and duration of
these options, service with UWS as an executive officer, director or employee
shall be deemed to be service with Newco, and (ii) upon the occurrence of
certain events resulting in a change of control of Newco, these options will
become immediately vested and exercisable to the extent not previously vested
and exercisable.
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UWS Options held by persons who will be employees and directors of AMSG
after the Distribution, other than certain UWS options held by Mr. Miller, will
be adjusted to provide equivalent value by (i) multiplying the number of shares
of UWS Common Stock subject to the option by the AMSG Adjustment Factor, and
(ii) dividing the exercise price per share of the option by the AMSG Adjustment
Factor. The "AMSG ADJUSTMENT FACTOR" is defined as the quotient obtained by
dividing (x) the closing market price of the shares of UWS Common Stock on the
Distribution Date by (y) the closing market price of the shares of AMSG Common
Stock on the trading day immediately following the Distribution Date.
UWS Options held by certain other individuals will be treated differently
than set forth above. Each option to purchase one share of UWS Common Stock held
by Messrs. Hilliard, Weyers, Hefty and Mordy and Ms. Hanson, and UWS options
held by Mr. Miller which were granted in December 1995, will be converted into
an option to purchase one share of AMSG Common Stock and an option to purchase
one share of Newco Common Stock. In order to provide equivalent value to each
option holder, the exercise price of each option to purchase shares of AMSG
Common Stock will be adjusted to equal the exercise price of the option prior to
the Distribution divided by the AMSG Adjustment Factor, and the exercise price
of each option to purchase shares of Newco Common Stock will be adjusted to
equal the exercise price of the option prior to the Distribution divided by the
Newco Adjustment Factor. All remaining options held by Mr. Miller will be
adjusted to provide equivalent value by (i) multiplying the number of shares of
UWS Common Stock subject to the option by the AMSG Adjustment Factor, and (ii)
dividing the exercise price per share of the option by the AMSG Adjustment
Factor.
UWS has awarded SARs ("UWS SARS") under the United Wisconsin Services, Inc.
1992 Stock Appreciation Rights Plan (the "UWS SAR PLAN") to executive officers
and employees of Newco. Upon the Distribution, each UWS SAR awarded to these
executive officers and employees will be assumed by Newco under a newly
established Newco SAR Plan, which will be substantially similar to the UWS SAR
Plan, and converted into SARs with respect to shares of Newco Common Stock. UWS
SARs awarded to executive officers and employees of Newco will be converted by
multiplying the number of SARs by the Newco Adjustment Factor and dividing the
grant price of the SARs by the Newco Adjustment Factor.
NEWCO BENEFIT PLANS FOLLOWING THE DISTRIBUTION
NEWCO EQUITY INCENTIVE PLAN
Prior to the Distribution, the Newco Board of Directors and UWS, as sole
shareholder of Newco, approved the Newco/UWS, Inc. Equity Incentive Plan (the
"NEWCO EQUITY INCENTIVE PLAN"). The Newco Equity Incentive Plan provides for the
granting of stock options, restricted stock awards and other awards of shares of
Newco Common Stock or Newco Common Stock equivalents payable to Newco employees,
including executive officers, and to Newco Directors. All outstanding awards
granted under the UWS Equity Incentive Plans and the UWS SAR Plan to expected
executive officers, directors and employees of Newco will be assumed by Newco
under the Newco Equity Incentive Plan.
PURPOSE. The primary purpose of the Newco Equity Incentive Plan is to
promote the success and enhance the value of Newco by linking the personal
interests of the participants with an incentive for outstanding performance. The
Newco Equity Incentive Plan also is intended to provide flexibility to Newco 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.
ADMINISTRATION. The Newco Equity Incentive Plan will be administered by the
Management Review Committee of the Newco Board of Directors. The Management
Review Committee is authorized to determine the size and types of employee
awards under the Newco Equity Incentive Plan, the employees to whom they will be
granted, the terms and conditions of such awards, including the date or dates on
which awards become exercisable either in whole or in part, their expiration
date and other matters in their discretion.
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ELIGIBILITY AND SHARES SUBJECT TO PLAN. Any key employee of Newco or any
key employee of its subsidiaries is eligible for an award under the Newco Equity
Incentive Plan if selected by the Management Review Committee. Subject to the
provisions of the Newco Equity Incentive Plan, the Management Review Committee
will have full authority and discretion to determine the employees to whom
awards will be granted and the amount and form of such awards. Currently there
are approximately 22 persons who will be employed by Newco and its subsidiaries
who would be eligible for selection for participation by the Management Review
Committee. Newly elected directors also will receive awards under the Newco
Equity Incentive Plan.
Under the Newco Equity Incentive Plan, the maximum number of shares of Newco
Common Stock granted or subject to awards will be 4.5 million (approximately
27.2% of the issued and outstanding shares of Newco Common Stock as of the
Effective Date). The Newco Equity Incentive Plan will assume the outstanding
awards granted under the UWS Equity Incentive Plans and approximately 2,159,000
shares of Newco Common Stock will be subject to such awards. Upon the
cancellation or expiration of an award, the unissued shares of Newco Common
Stock subject to such awards will again be available for additional awards under
the Newco Equity Incentive Plan.
TYPE OF AWARDS. Under the Newco Equity Incentive Plan, the Management
Review Committee is authorized to grant to employees: (i) stock options that
qualify as incentive stock options under Section 422 of the Code ("INCENTIVE
STOCK OPTIONS"); (ii) stock options that do not so qualify ("NONQUALIFIED STOCK
OPTIONS"); (iii) shares of Newco Common Stock, subject to such restrictions as
determined under the Newco Equity Incentive Plan ("RESTRICTED STOCK"); (iv)
SARs; and (v) Performance Units or Performance Shares. The Management Review
Committee is entitled to set the option price of stock options issued to
employees at any price it determines is equal to or in excess of the fair market
value of the shares of Newco Common Stock on the date of grant. Stock options
entitle the recipient to purchase a specific number of shares of Newco Common
Stock after a specified period of time at an option price set by the Management
Review Committee. No stock option can be exercised more than twelve years after
the date such option is granted. In the case of Incentive Stock Options, the
aggregate fair market value of the shares of stock with respect to which options
are exercisable for the first time by any recipient during any calendar year
cannot, under present tax rules, exceed $100,000. Newly elected directors will
receive Nonqualified Stock Options.
TERMS AND CONDITIONS. The term of any Incentive Stock Option or
Nonqualified Stock Option granted to an employee pursuant to the Newco Equity
Incentive Plan shall not exceed ten or twelve years, respectively (five years in
the case of a 10% or greater shareholder who is granted Incentive Stock
Options), and the option price per share shall not be less than the fair market
value of the shares of Newco Common Stock on the date the option is granted
(110% of the fair market value in the case of a 10% or greater shareholder who
is granted Incentive Stock Options). Options are not exercisable in any event
prior to six months following the date of grant. Newly elected directors shall
receive, as of their date of election, Nonqualified Stock Options with respect
to 6,000 shares of Newco Common Stock, exercisable at 100% of fair market value
on the date of grant.
SARs shall have a grant price at least equal to 100% of the fair market
value of the shares of Newco Common Stock if granted independently of any stock
option, or equal to the option price of the related stock option if granted in
connection with a stock option. The term of an SAR granted pursuant to the Newco
Equity Incentive Plan shall not exceed twelve years. SARs are not exercisable in
any event prior to six months following the date of grant.
Restricted Stock may be granted to employees in such amounts as the
Management Review Committee shall determine subject to the terms and provisions
of the Newco Equity Incentive Plan. Restricted Stock generally may not be sold
or otherwise transferred for a certain period (based on the passage of time, the
achievement of performance goals or the occurrence of other events as determined
by the Management Review Committee). During that period, however, participants
may exercise full voting rights and shall be entitled to receive all dividends
and other distributions with respect to shares of Restricted
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Stock. The grant of shares of Restricted Stock shall not vest in any event prior
to six months following the date of grant.
The number and/or value of Performance Units or Performance Shares that may
be granted to participants will be based on the extent to which performance
goals, as determined by the Management Review Committee, have been met. The
performance goals will be determined over a period of at least six months. At
the time of grant, each Performance Unit must have an initial value established
by the Management Review Committee and each Performance Share shall have an
initial value equal to the fair market value of the shares of Newco Common Stock
on the date of grant.
Awards under the Newco Equity Incentive Plan shall immediately vest and/or
be exercisable upon the occurrence of the participant's death, disability or
retirement, or a Change in Control (as defined in the Newco Equity Incentive
Plan). Subject to the terms of the Newco Equity Incentive Plan, awards may be
exercised within three months after termination of employment for any reason
except death, disability or retirement (but any awards held by a participant
dismissed for cause will immediately expire), within one year after the date of
the participant's death (by the participant's personal representative, legatees
or heirs) if the participant was employed by Newco at such date, within one year
after a participant's employment with Newco is terminated by reason of
disability, and within three years after a participant retires (as defined in
Newco's "tax qualified pension plan"). The Management Review Committee may
permit a participant to defer such participant's receipt of the payment of cash
or the delivery of shares of Newco Common Stock that would otherwise be due.
FEDERAL INCOME TAX CONSEQUENCES OF ISSUANCES AND EXERCISES OF OPTIONS. An
optionee will not be deemed to have received taxable income upon the grant or
exercise of any Incentive Stock Option, provided that such shares of Newco
Common Stock are held for at least one year after the date of exercise and two
years after the date of grant. No gain or loss will be recognized by Newco as a
result of the grant or exercise of Incentive Stock Options. An optionee will be
deemed to receive ordinary income upon exercise of Nonqualified Stock Options in
an amount equal to the amount by which the fair market value of the shares of
Newco Common Stock on the exercise date exceeds the exercise price. The amount
of any ordinary income deemed to be received by an optionee due to a premature
disposition of the shares of Newco Common Stock acquired upon the exercise of an
Incentive Stock Option or upon the exercise of a Nonqualified Stock Option will
be a deductible expense for tax purposes for Newco.
In general, a recipient of other stock awards, including Newco Common Stock
equivalents, but excluding restricted stock awards (see below), will have
ordinary income equal to the cash or fair market value of the shares of Newco
Common Stock on the date received in the year in which the award is actually
paid. Newco will have a corresponding deductible expense in the same year in an
amount equal to that reported by the recipient as ordinary income. The
recipient's basis in the shares of Newco Common Stock received will be equal to
the fair market value of the stock when received and the recipient's holding
period will begin on that date. With respect to restricted stock awards, such
awards do not constitute taxable income under existing federal tax law until
such time as restrictions lapse with respect to the total award or any
installment of such award. When any installment of securities are released from
restriction, the market value of such shares on the date of the lapse
constitutes income to the recipient in that year and is taxable at ordinary
income tax rates, and Newco will have a corresponding deductible expense in an
amount equal to that reported by the recipient as ordinary income in the same
year.
The Code permits a recipient of a restricted stock award to elect to have
the award treated as taxable income in the year of the award and to be subject
to tax at ordinary income tax rates on the fair market value of all of the
shares awarded, based on the price of the shares on the date the recipient
receives a beneficial interest in such shares. The election must be made
promptly within time limits prescribed by the Code and the regulations
thereunder. Any appreciation in value thereafter would be taxed at capital gain
rates when the restrictions lapse and the stock is subsequently sold. However,
should the market value of the stock at the time the restrictions lapse and the
stock is sold, be lower than at the date the award was
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acquired, the recipient would have a capital loss, to the extent of the
difference. In addition, if after electing to pay tax on the award in the year
the award was received the recipient subsequently forfeits the award for any
reason, the tax previously paid is not recoverable.
Since the lapse of restrictions on restricted stock awards is accelerated in
the event of a change of control of Newco, such an acceleration may result in an
excess parachute payment, as defined in Section 280 (G) of the Code. In such
event, Newco's deduction with respect to such payment is denied and the
recipient is subject to a nondeductible 20% excise tax on such excess parachute
payment.
ADJUSTMENTS IN THE EVENT OF CAPITAL CHANGES. The Management Review
Committee may make appropriate adjustments to the number of shares available for
awards and the terms of outstanding awards under the Newco Equity Incentive Plan
to reflect any change in capital stock of Newco, the issuance of any targeted
stock, split-up, stock dividend, exercisability of stock purchase rights,
special distribution to shareholders, combinations or reclassifications with
respect to any outstanding series or class of stock, or consolidation, merger or
sale of all or substantially all of the assets of Newco.
DURATION AND AMENDMENT OF THE NEWCO EQUITY INCENTIVE PLAN. No options,
Restricted Stock, SARs, Performance Units or Performance Shares will be awarded
under the Newco Equity Incentive Plan following the tenth anniversary of
approval of such plan. The Management Review Committee may terminate, amend or
modify the Newco Equity Incentive Plan with the approval of the Board of
Directors.
NONQUALIFIED COMPENSATION PLANS
Upon the Effective Date, Newco will assume sponsorship of the 1998
Nonqualified Profit Sharing Plan and the Management Incentive Plan
(collectively, the "NONQUALIFIED COMPENSATION PLANS"). Eligible employees of
Newco and its subsidiaries may receive a cash payment under the 1998
Nonqualified Profit Sharing Plan (the "PROFIT SHARING PLAN") based on Newco's
profitability as well as the profitability and customer satisfaction of the
employee's business unit or regional area, measured against targets set at the
beginning of the year (and adjusted as of the Effective Date). To be eligible to
receive a Profit Sharing Plan payment for the year, an employee must be employed
at the beginning of the year and remain employed through the date benefits are
paid (generally March of the following year), unless the termination is due to
retirement, death or disability. Payments can be up to 21% of the employee's
base pay, with an employee able to earn up to 7% of base pay based on Newco's
profitability, 7% of base pay based on the profitability of the employee's
business unit or regional area, and 7% of base pay based on the employee's
business unit or regional area achieving certain customer satisfaction
objectives. Generally, no payment will be made based on business unit or
regional area profitability or customer satisfaction if no payment is made based
on Newco's profitability.
Newco's executive officers and certain other employees also are eligible to
receive an annual performance bonus under the Management Incentive Plan. To be
eligible to receive a Management Incentive Plan bonus, the executive officer
must be employed at the beginning of the year and remain employed through the
date benefits are paid (by April 1 of the following year), unless the
termination is due to retirement, death or disability. The percentage of base
earnings paid is based on achievement of various performance levels and is
established separately for each executive officer. Payment under the Management
Incentive Plan is based one-third on achievement of business unit or regional
area financial results and two-thirds on achievement of individual or local area
performance objectives. Generally, no payment will be made under the Management
Incentive Plan if no payment is made under the Profit Sharing Plan.
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RETIREMENT PLANS
On the Effective Date, Newco will assume sponsorship (with BCBSUW) of the
UWSI/BCBSUW Salaried Pension Plan, the UWSI/BCBSUW Hourly Pension Plan, the
UWSI/BCBSUW 401(k) Plan and the UWSI/BCBSUW Union Employees' 401(k) Plan
(collectively, the "RETIREMENT PLANS"). Participants in the UWSI/BCBSUW 401(k)
Plan will be permitted to hold shares of UWS Common Stock, as an investment
option, through the 1999 plan year. For purposes of eligibility, vesting,
benefit accruals and other matters, participants in the Retirement Plans prior
to the Effective Date will be credited with the compensation and term of service
credited to such participants as of the Effective Date as if the service had
been rendered to Newco. Participants in the Retirement Plans will have the same
accrued benefit following the Effective Date as was accrued under the Retirement
Plans as of the Effective Date.
Employees of Newco who are not covered under a collective bargaining
agreement will participate in the UWSI/BCBSUW 401(k) Plan after completing one
year of service. Contributions are based on compensation up to $160,000 (in
1998). Participants may make salary reduction contributions between 2% and 16%
of compensation up to a maximum, in 1998, of $10,000 per year. A matching
contribution of 50% of the first 5% of compensation is made by Newco. The salary
reduction contributions and matching contributions of highly compensated
employees may be reduced to comply with certain discrimination requirements of
the Code. The matching contribution will be made in shares of Newco Common
Stock. The salary reduction contributions will be invested, at the discretion of
the participant, in mutual funds, collective funds or in shares of Newco Common
Stock. Salary reduction contributions are fully vested when made, while matching
contributions are vested ratably over a five-year period.
Bargaining unit employees of Newco will participate in the UWSI/BCBSUW Union
Employees 401(k) Plan after completing one year of service. Participants may
make salary reduction contributions between 1% and 16% of compensation up to a
maximum, in 1998, of $10,000 per year. A matching contribution of 50% of the
first 5% of compensation is made by Newco. Contributions will be invested, at
the discretion of the participant, in mutual funds and collective funds. Salary
reduction contributions are fully vested when made while matching contributions
are vested over a six-year period.
Salaried employees of Newco will participate in the UWSI/BCBSUW Salaried
Pension Plan after completing one year of service. The benefit payable under
this plan is based on the participant's cash balance account. The cash balance
account was credited with an initial balance based on the participant's accrued
benefit as of December 31, 1996. The initial cash balance is increased by (i) an
annual credit of 4% of the participant's earnings up to $160,000 (in 1998); (ii)
an annual interest credit based on the interest rate on ten-year treasury
securities; and (iii) an annual transition credit equal to 4% of the
participant's earnings up to $160,000 (in 1998) with such annual transition
credit payable with respect to the cash balance account of any participant for
the lesser of 15 years or the participant's years of service as of December 31,
1996. A participant is not vested in his retirement benefits until he completes
five years of service, at which time the participant becomes fully vested. A
participant's retirement benefit is the actuarial equivalent of his cash balance
account and is generally paid in the form of a life annuity if the participant
is single or in the form of a joint and survivor annuity if the participant is
married. The retirement benefit also may be paid in other actuarial equivalent
forms, including a single sum.
SUPPLEMENTAL RETIREMENT PLAN
Upon the Effective Date, Newco will assume sponsorship of the SERP and all
liabilities with respect thereto. Participants in the SERP prior to the
Effective Date will be credited with the compensation and term of service
credited to such participants as of the Effective Date as if the service had
been rendered to Newco.
Executive officers of Newco may become participants in the SERP if they are
employed as a vice president or officer of Newco or its subsidiaries and are
designated as a participant by Newco's Employee Benefits Committee. A
participant who has completed five years of service with Newco or its
subsidiaries is
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eligible for a retirement benefit at age 65 equal to 2% of the participant's
final average earnings multiplied by the participant's years of service, less
both the participant's social security benefit and benefit under the UWSI/BCBSUW
Salary and Hourly Pension Plans. Benefits are paid in the form of a life annuity
to a single participant with ten years certain at 70%, and in the form of an
actuarial equivalent joint and 50% survivor annuity for a married participant. A
reduced benefit is payable at any age.
DEFERRED COMPENSATION PLANS
Upon the Effective Date, Newco will create new deferred compensation plans
which will assume all liabilities (except liabilities relating to Mr. Miller)
with respect the United Wisconsin Services, Inc. Voluntary Deferred Compensation
Plan and the UWSI Deferred Compensation Plan for Directors (the "DEFERRED
COMPENSATION PLANS"). All assets in the Deferred Compensation Trust (other than
assets attributable to Mr. Miller's deferred compensation) will be transferred
to a new trust established by Newco.
Selected executive officers and directors of Newco may participate in the
Deferred Compensation Plan. Participants may elect in December of each year to
defer compensation earned in the following year. Amounts deferred will be
credited to an account. Upon termination of employment or termination of service
as a director, the participant will receive a distribution of the amount
credited such account in the form of a lump sum of installments.
OTHER BENEFIT PLANS
Pursuant to the Employee Benefits Agreement, Newco will create plans for
management and other employees of Newco that generally are comparable to the
existing UWS benefit plans covering the expected employees of Newco.
AGREEMENTS BETWEEN AMSG AND NEWCO
For purposes of governing certain of the ongoing relationships between AMSG
and Newco after the Distribution and to provide for an orderly transition on the
Effective Date to the status of two separate, independent companies, AMSG and
Newco are entering into the various agreements described below. The discussion
below is a summary of the principal provisions of the Distribution and Indemnity
Agreement, the Employee Benefits Agreement, the Tax Allocation Agreement, the
AMSG Service Agreement and the Reinsurance Agreements. This summary does not
purport to be complete. Reference is made to the complete provisions of, and
such summary is qualified in its entirety by reference to, the forms of such
agreements, copies of which are filed as exhibits to the Registration Statement
of which this Information Statement forms a part.
DISTRIBUTION AGREEMENT
UWS and Newco will enter into the Distribution Agreement as of the Effective
Date providing for, among other things, the principal corporate transactions
required to effect the Distribution, the allocation between UWS and Newco of
assets and liabilities and certain other agreements governing the relationship
between UWS and Newco with respect to or in consequence of the Distribution.
THE REORGANIZATION. The Distribution Agreement will effect the following
transactions as of the Effective Date: (i) the contribution by UWS to Newco of
the outstanding shares of the Managed Care Companies; (ii) the contribution by
UWS to Newco of all assets utilized by UWS in its management and operations of
the Managed Care Companies; (iii) the contribution by UWS to Newco of working
capital to support the Management Business; (iv) the issuance by Newco to UWS of
16,573,102 shares of Newco Common Stock; (v) the assumption by Newco of certain
employee benefit plan liabilities associated with the operation of such
contributed businesses; (vi) the assumption by Newco of $70.0 million in a note
obligation of UWS to BCBSUW; and (vii) the assumption by Newco of certain
accrued liabilities of UWS.
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The items described in (v)--(vii) above are herein referred to as "NEWCO
LIABILITIES". On the Effective Date, UWS will deliver to the Distribution Agent
the 16,573,202 shares of Newco Common Stock, for distribution on the
Distribution Date.
The Distribution Agreement provides that Newco will hire all employees of
UWS and its subsidiaries (other than AMS and its subsidiaries). UWS will have no
further responsibility or liability with respect to the employment relationship
of such employees on and after the Effective Date.
ASSUMPTION OF LIABILITIES AND INDEMNIFICATION. UWS and Newco will each be
responsible for all claims and liabilities relating to their respective
businesses, whether or not such claims and liabilities are asserted prior to the
Effective Date. All liabilities of the Managed Care Companies will be
transferred to Newco by operation of law. All liabilities of UWS, other than the
Newco Liabilities, will remain exclusively the liabilities of UWS, except as set
forth in the Tax Allocation Agreement, the Employee Benefits Agreement, the AMSG
Service Agreement or the Intellectual Property Agreement.
Subject to certain exceptions, the Distribution Agreement also provides for
certain indemnification by the parties. UWS has agreed to indemnify Newco
against any liabilities assumed or retained by UWS pursuant to the Distribution
Agreement and liabilities relating to (i) any breach by UWS or any of its
subsidiaries of the Distribution Agreement or any other agreement referred to
therein (the "ANCILLARY AGREEMENTS"); (ii) the operation of the businesses
conducted, or to be conducted, by UWS and its subsidiaries or the ownership of
its assets (other than businesses and assets to be contributed to Newco) both
prior to and following the Effective Date; (iii) with respect to employee
benefit plans sponsored by UWS, the failure of UWS to comply with provisions of
ERISA or of the Code; and (iv) any violations of the Code, or of federal or
state securities laws, in connection with the Distribution or with any filings
made with governmental agencies with respect thereto, or in connection with
operations of UWS's business after the Effective Date, to the extent that such
violations, or allegations of violations, result from, or are related to, the
disclosure, or failure to disclose, information to Newco's corporate staff by
officers, directors, employees, agents, consultants and representatives of UWS.
Newco has agreed to indemnify UWS against any liabilities assumed by Newco
or its subsidiaries pursuant to the Distribution Agreement, and liabilities
relating to (i) any breach by Newco or any of its subsidiaries of the
Distribution Agreement or any Ancillary Agreement, (ii) the operation of the
business conducted, or to be conducted, by Newco or its subsidiaries or the
ownership of its assets both prior to and after the Effective Date, (iii) with
respect to employee benefit plans sponsored by Newco, the failure of Newco to
comply with the provisions of ERISA or the Code, and (iv) any violations, or
allegations of violations, of the Code or federal or state securities laws in
connection with the Distribution or with any filings made with governmental
agencies with respect thereto, to the extent that such violations, or
allegations of violations, result from, or are related to, the disclosure, or
failure to disclose, information to UWS's corporate staff by officers,
directors, employees, agents, consultants and representatives of Newco.
The indemnities described above will be limited to the amount of the loss,
less insurance proceeds, net of deductibles and allocated paid loss
retro-premiums received by the indemnified party. The Distribution Agreement
also includes procedures for notice and payment of indemnification claims and
provides that the indemnifying party may assume the defense of a claim or suit
brought by a third party.
NONSOLICITATION. The Distribution Agreement provides that, for a period of
twelve months following the Distribution, UWS and its subsidiaries will not
employ or attempt to employ any Newco employee or attempt to induce any Newco
employee to leave his or her employment, and Newco and its subsidiaries will not
employ or attempt to employ any UWS employee or attempt to induce any UWS
employee to leave his or her employment.
ADDITIONAL COVENANTS. The Distribution Agreement provides that each of UWS
and Newco will be granted access to certain records and information in the
possession of the other party and requires retention for a period of seven years
following the Distribution of all such information in its possession,
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and thereafter requires that each party give the other party prior notice of the
intention to dispose of such information. From and after the Effective Date,
both Newco and UWS will promptly transfer to the other, from time to time, any
property received that is an asset of the other. Funds received by one upon the
payment of accounts receivable that belong to the other will be transferred to
the other by wire transfer not more than five business days after receipt of
such payment.
Except as stated in the Distribution Agreement, no party to such agreements
or any other agreement or document contemplated by the Distribution Agreement
has or shall be deemed to have made any representation or warranty as to: (i)
the assets, businesses or liabilities retained, transferred or assumed as
contemplated thereby; (ii) any consents or approvals required in connection with
the transfer or assumption by such party of any asset or liability contemplated
by the Distribution Agreement; (iii) the value or freedom from any lien, claim,
equity or other encumbrance of, or any other matter concerning, any assets of
such party; or (iv) the absence of any defenses or right of set off or freedom
from counterclaim with respect to any claim or other asset of any party. Except
as may expressly be set forth in the Distribution Agreement, all such assets
were, or are being, transferred, or are being retained, on an "as is," "where
is" basis and the respective transferees will bear the economic and legal risks
that any conveyance will prove to be insufficient to vest in the transferee a
title that is free and clear of any lien, claim, equity or other encumbrance.
Any disputes arising from or in connection with the Distribution Agreement
must be resolved in accordance with the dispute resolution procedures set forth
in the Distribution Agreement.
UWS has agreed to use its best efforts to maintain directors' and officers'
liability insurance coverage at least equal to the amount of UWS's current
directors' and officers' liability insurance coverage for a period of five years
with respect to the directors and officers of UWS who will become directors and
officers of Newco as of the Effective Date for acts as directors and officers of
UWS or one of its affiliates during periods prior to the Effective Date.
EMPLOYEE BENEFITS AGREEMENT
UWS and Newco have entered into the Employee Benefits Agreement providing
for the treatment of employee benefit matters and other compensation
arrangements in connection with the Distribution. On or prior to the
Distribution, Newco will offer to employ each active and inactive employee
employed by UWS (parent company only) immediately prior to the Effective Date,
including all employees laid off, disabled or on leave of absence, unless such
employment has been terminated by UWS prior to the Effective Date. Employees at
UWS's subsidiaries will remain employed at such subsidiary. Generally, except as
noted herein, as of the Effective Date, Newco will assume sponsorship of, and
all liabilities under, all benefit plans, and all other plans, programs,
policies and arrangements sponsored by UWS (or jointly sponsored by UWS and
BCBSUW) and in effect prior to the Effective Date, and UWS will cease to have
any liability or obligation to individuals who become employees of Newco or one
of its subsidiaries ("NEWCO EMPLOYEES") under any UWS benefit plans, programs or
practices. All benefit plans sponsored by UWS's subsidiaries will remain
sponsored by such subsidiaries after the Effective Date. Newco will assume
liability for employment-related claims (including harassment and
discrimination) regardless of when filed with respect to all Newco Employees,
regardless of whether the claimant was, prior to the Effective Date, a UWS
employee.
Subject to local laws or regulations, UWS and Newco have agreed that, with
respect to individuals who, in connection with the Distribution, cease to be
employees of UWS or one of its subsidiaries and become Newco Employees, such
cessation will not be deemed a severance of employment for purposes of any plan
providing for the payment of severance or salary continuation, and UWS and Newco
will, in connection with the Distribution, if and to the extent appropriate,
obtain waivers from individuals against any such assertion.
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The Employee Benefits Agreement provides that Newco will assume sponsorship
(in some cases with BCBSUW) of the following benefit plans of UWS: (i) the
Nonqualified Compensation Plan; (ii) the Retirement Plans; (iii) the SERP; (iv)
the Deferred Compensation Plans; (v) all welfare plans which provide medical,
health, disability, accident, life insurance, death, dental or other welfare
benefits, including any post-employment benefits or retiree medical, life
insurance or other such benefits; and (vi) any other benefit plan. Newco will be
responsible for the payment of all liabilities for the benefits due and payable
under such plans, except that liabilities relating to Mr. Samuel V. Miller will
be retained by AMSG. See "Newco Benefit Plans Following the Distribution."
Pursuant to the Employee Benefits Agreement, Newco will establish the Newco
Equity Incentive Plan which will be substantially similar to the UWS Equity
Incentive Plans in place prior to the Distribution, except that directors of
Newco will be eligible for awards under the plan. All outstanding UWS Options
and SARs relating to shares of UWS Common Stock to be converted into options and
SARs relating to shares of Newco Common Stock will be assumed by Newco under the
Newco Equity Incentive Plan. Generally, all options and SARs held by persons who
will become Newco Employees or directors of Newco will be converted into options
and SARs relating to shares of Newco Common Stock and adjusted by increasing the
number of shares of Newco Common Stock subject to each option and decreasing the
exercise price per share for each option and SAR to provide equivalent value;
provided, however, that options held by Messrs. Hefty and Mordy and Ms. Hanson
will be converted into options to purchase an equal number of shares of AMSG
Common Stock and Newco Common Stock, and adjusted by decreasing the exercise
price per share for each option to provide equivalent value. For options held by
employees, former employees and directors of UWS who will remain with UWS after
the Distribution, all options generally will be converted into options to
purchase shares of AMSG Common Stock and adjusted by increasing the number of
shares of AMSG Common Stock subject to each option and decreasing the exercise
price per share for each option to provide equivalent value; provided, however,
that options held by Messrs. Hilliard, Weyers and Miller will be either
converted into options to purchase an equal number of shares of Newco Common
Stock and AMSG Common Stock and adjusted by decreasing the exercise price per
share for each option to provide equivalent value, or converted into options to
purchase shares of AMSG Common Stock and adjusted by increasing the number of
shares of AMSG Common Stock subject to each option and decreasing the exercise
price of each option to provide equivalent value. See "Newco Benefit Plans
Following the Distribution" and "Management of Newco--Treatment of UWS Options
and SARs as a Result of the Distribution."
In general, the Employee Benefits Agreement provides that for purposes of
eligibility, vesting and benefit accruals, participants in UWS's benefit plans
prior to the Effective Date will be credited with the compensation and term of
service credited to such participants as of the Effective Date as if the service
had been rendered to Newco. In addition, for any benefits accrued under any UWS
benefit plan prior to the Distribution, such participants will have the same
accrued benefit following the Effective Date.
TAX ALLOCATION AGREEMENT
Prior to the Distribution, an agreement will be entered into that reflects
each of Newco's and UWS's rights and obligations with respect to deficiencies
and refunds of federal, state or other income taxes relating to the business of
UWS that are attributable to periods ending prior to or on the Distribution
Date. The Tax Allocation Agreement also expresses each party's intention with
respect to certain tax attributes of UWS after the Distribution. The Tax
Allocation Agreement provides that Newco shall only be responsible for taxes
(including federal, state and local income taxes) attributable to members of the
Newco Group and UWLIC for periods up to and including the Distribution Date,
except to the extent any such taxes relate to the Small Group Business (in which
case such taxes shall be the sole responsibility of UWS). The Tax Allocation
Agreement provides for payments between the two companies for certain audit
adjustments made after the Distribution that cover pre-Distribution tax
liabilities. Other provisions cover the handling of audits, settlements, stock
options, elections, accounting methods, and return filings in cases
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where both companies have an interest in the results of these activities. In
addition, the Tax Allocation Agreement requires UWS and Newco to cooperate in
preparing those filings that cover overlapping taxable periods that include the
Effective Date.
Pursuant to the Tax Allocation Agreement, Newco and UWS will agree to
refrain from engaging in certain transactions for two years following the
Distribution Date unless the party proposing to engage in such transaction
obtains prior written consent from the other party, or, if such consent is not
provided, an IRS letter ruling or a written opinion of tax counsel selected by
the party proposing to engage in such transaction that the transaction will not
cause the Distribution to be a taxable transaction to UWS, Newco, or the
shareholders of UWS. Transactions subject to these restrictions will include,
among other things, the liquidation, merger, or consolidation with another
company, the redemption of shares of UWS Common Stock or Newco Common Stock, the
sale, distribution or other disposition of assets out of the ordinary course of
business, and the discontinuation of certain businesses. Newco and UWS will each
agree to indemnify the other from liabilities arising as a result of the breach
by Newco or UWS, as the case may be, of the Tax Allocation Agreement. In
addition, Newco and UWS have each agreed that neither party will take any action
inconsistent with the information furnished to the IRS in connection with the
Tax Ruling, and will indemnify each of them with respect to any tax liability
resulting from their respective failures to comply with such provisions.
In addition, the Tax Ruling also is based on the accuracy of two covenants
agreed to by Newco in the Tax Allocation Agreement: within one year after the
Distribution, (i) licenses for use of the Blue Service Marks shall be obtained
by Compcare, and (ii) the Managed Care Companies shall have entered into a joint
venture with an unrelated third party.
AMSG SERVICE AGREEMENT
Newco may provide certain services to AMSG, at AMSG's option, pursuant to
the AMSG Service Agreement. Services that AMSG may utilize pursuant to the AMSG
Service Agreement include investment management, investment accounting, risk
management, accounting and financial audit and corporate communications. Fees
under the AMSG Service Agreement for investment management and investment
accounting will be based on a percentage of the portfolio plus a flat rate for
each company held by AMSG whose investments are being handled by Newco. Fees for
risk management will be based on a percent of the annual premiums for such risk
management insurance. Fees for accounting and financial audit and corporate
communications will be based on an hourly rate. The AMSG Service Agreement will
terminate on December 31, 1999, unless terminated earlier upon appropriate
notice. The AMSG Service Agreement was submitted to OCI for its review and lack
of disapproval.
REINSURANCE AGREEMENTS
AMSG and Newco will enter into various quota share reinsurance agreements
pursuant to which each company will cede to the other certain risks related to
life insurance, health insurance, dental insurance, point-of-service and other
insurance plans. In addition, each company acting as the reinsurer will provide
administrative services to the other company acting as the ceding company. As
consideration for such reinsurance, the ceding company shall receive a ceding
commission of approximately 0.5% of the gross premiums reinsured under each
applicable agreement.
INTELLECTUAL PROPERTY AGREEMENT
UWS and Newco will enter into the Intellectual Property Agreement pursuant
to which UWS will assign to Newco or one or more of its subsidiaries all of
UWS's rights in certain trademarks, trade secrets and other intellectual
property associated with the Managed Care Companies and the Management Business
(the "INTELLECTUAL PROPERTY"). The Intellectual Property Agreement will provide
that UWS will transfer to Newco, without charge, title to the Intellectual
Property used solely or primarily in the business
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of Newco, effective on the Effective Date. UWS will retain title to any of the
Intellectual Property it uses solely or primarily in connection with the Small
Group Business. UWS and Newco will agree to cooperate with each other after the
Effective Date to effect the purposes of the Intellectual Property Agreement.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
SERVICE AGREEMENTS WITH BCBSUW
Newco and various of its subsidiaries purchase services from, or provide
services to, BCBSUW through the Service Agreements. Services covered by these
agreements include marketing, information systems, legal, investment, actuarial,
accounting, underwriting and other administrative and management services. Fees
under the Service Agreements are calculated on a cost basis. Costs directly
attributable to a particular company are paid by such company. Costs that are
not specific to any particular company are allocated based on utilization and
allocation methods agreed to by the parties to the agreements. If the recipient
can obtain any of the services under more favorable terms by performing the
services itself or by procuring them from a third party, it is not obligated to
renew the Service Agreement for those services if the provider is unwilling to
substantially match such terms. The Service Agreements automatically renew
annually unless otherwise terminated. In addition, pursuant to Wisconsin law,
OCI reviews the Service Agreements to ensure that the agreements are reasonable
and fair to the interests of the insurance companies that are parties to the
agreements. For the year ended December 31, 1997, Newco paid approximately $14.6
million for such services, and received approximately $9.3 millon from BCBSUW
for the provision of such services.
AMSG SERVICE AGREEMENT
Newco may provide certain services to AMSG, at AMSG's option, pursuant to
the AMSG Service Agreement. Services that AMSG may utilize pursuant to the AMSG
Service Agreement include investment management, investment accounting, risk
management, accounting and financial audit and corporate communications. Fees
under the AMSG Service Agreement for investment management and investment
accounting will be based on a percentage of the portfolio plus a flat rate for
each company held by AMSG whose investments are being handled by Newco. Fees for
risk management will be based on a percent of the annual premiums for such risk
management insurance. Fees for accounting and financial audit and corporate
communications will be based on an hourly rate. The AMSG Service Agreement will
terminate on December 31, 1999 unless terminated earlier upon appropriate
notice. The AMSG Service Agreement will be submitted to OCI for its review and
lack of disapproval.
SUPPLEMENTAL COMPENSATION AGREEMENT
In September 1997, Newco entered into a Supplemental Compensation Agreement
with Thomas R. Hefty, President, Chairman and Chief Executive Officer of UWS, as
incentive for continued employment, and to reward Mr. Hefty for activities
resulting in an increase in shareholder value as a result of Newco's interest in
AMS. The Distribution is not a specific triggering event under the Supplemental
Compensation Agreement, and the parties have agreed that the Supplemental
Compensation Agreement shall terminate upon completion of the Distribution.
BCBSUW LOAN
In connection with the Distribution, Newco will assume a debt obligation of
UWS to BCBSUW in the principal amount of $70.0 million. On October 30, 1996, UWS
borrowed $70.0 million from BCBSUW to fund the cash portion of the merger
consideration in connection with the merger of American Medical Security Group,
Inc. into UWS. UWS pledged the common stock of certain of its subsidiaries as
collateral for the loan. Interest only is payable quarterly at a rate equal to
LIBOR plus 125 basis points, adjusted quarterly. The entire principal balance is
due October 30, 1999.
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BCBSUW INTENDED PURCHASE OF ADDITIONAL SHARES OF NEWCO COMMON STOCK
Upon completion of the Distribution, BCBSUW will own 38.1% of the issued and
outstanding shares of UWS Common Stock and 38.1% of the issued and outstanding
shares of Newco Common Stock. One of the primary reasons for effectuating the
Distribution is so that the Managed Care Companies can use the Blue Service
Marks in connection with their products and services. In order to use the Blue
Service Marks, one of the requirements is that a Blue Plan must "control" the
company (meaning that a Blue Plan must directly or indirectly own more than 50%
of the stock of the company and must have operational control over the company).
Therefore, within a year after the Distribution Date, BCBSUW intends to purchase
additional shares of Newco Common Stock to bring its overall direct and indirect
ownership of Newco to approximately 51%. The purchase price for the shares of
Newco Common Stock to be purchased directly from Newco will be based on the
market price of the shares of Newco Common Stock and an independent third party
valuation, and will be paid through the cancellation of a corresponding portion
or all of the $70.0 million Newco indebtedness to BCBSUW or in cash. BCBSUW may
purchase some of the shares of Newco Common Stock in the open market. The
intended purchases are subject to the receipt of OCI approval and may be subject
to the receipt of Newco shareholder approval as a result of certain NYSE rules.
The rules of the NYSE require that the shareholders of Newco approve the sale of
shares of Newco Common Stock to BCBSUW (the "BCBSUW SALE") if either (i) Newco
sells a number of shares (the "APPROVAL AMOUNT") of Newco Common Stock in one or
a series of transactions which equals or exceeds 20% of the number of shares of
Newco Common Stock outstanding prior to such sale(s), or (ii) the sale of shares
of Newco Common Stock results in a "change of control" of Newco. UWS believes
that, prior to the BCBSUW Sale, BCBSUW will directly or indirectly own a number
of shares of Newco Common Stock such that the BCBSUW Sale will involve the sale
of a number of shares of Newco Common Stock which is fewer than the Approval
Amount. If, however, as a result of changed facts and circumstances at the time
of the BCBSUW Sale, Newco is required to sell a number of shares of Newco Common
Stock to BCBSUW which exceeds the Approval Amount, Newco will be required to
obtain shareholder approval to consummate the BCBSUW Sale. Whether a "change in
control" results from the BCBSUW Sale will depend upon the facts and
circumstances in existence at the time of the BCBSUW Sale and the treatment of
the BCBSUW Sale by the staff of the NYSE.
SETTLEMENT AGREEMENT; CERTAIN REGISTRATION RIGHTS AND VOTING AGREEMENTS RELATING
TO NEWCO COMMON STOCK
In April 1998, UWS, Newco and Messrs. Hilliard and Weyers entered into a
Settlement Agreement ("SETTLEMENT AGREEMENT") relating to matters arising out of
UWS's acquisition of American Medical Security Group, Inc. in December 1996.
Under the terms of the acquisition agreement, $8.0 million of the purchase price
was deposited into escrow as security for indemnification payments to be made to
UWS for breaches of certain representations, warranties, covenants and other
agreements contained in the acquisition agreement. In the Settlement Agreement,
the parties agreed to settle all claims against the escrow for $500,000, and
release the remaining escrow amount to the shareholders of American Medical
Security Group, Inc., and agreed to amend the employment agreements of Messrs.
Hilliard and Weyers. The Settlement Agreement also contained provisions relating
to the treatment of options to purchase shares of UWS Common Stock held by
Messrs. Hilliard and Weyers in connection with the Distribution. In addition, in
connection with the acquisition by UWS of American Medical Security Group, Inc.
in December 1996, UWS entered into an agreement with two of that corporation's
shareholders, Messrs. Hilliard and Weyers, providing for registration rights for
the shares of UWS Common Stock they received in that transaction and containing
certain voting and standstill agreements (the "REGISTRATION AGREEMENT"). In the
Settlement Agreement, UWS and Messrs. Hilliard and Weyers agreed to extend those
terms to the shares of Newco Common Stock they will receive in the Distribution
as follows:
(i) Messrs. Hilliard and Weyers will be entitled to make up to two
requests that Newco register at least 50% of the then outstanding shares of
Newco Common Stock held by them, which Newco is
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obligated to use its best efforts to do unless (a) the request comes during
the period 45 days prior to the estimated date of filing and 180 days
following the effective date of Newco's own registration of shares of Newco
Common Stock pertaining to an underwritten public offering; (b) Newco has
already effected two such registrations pursuant to Messrs. Hilliard's and
Weyers' requests; (c) the filing of the registration statement could
jeopardize or delay a material transaction contemplated by Newco or would
require the disclosure of material information that Newco needs to preserve
as confidential; or (d) Newco is unable to comply with the requirements of
the SEC; and
(ii) Messrs. Hilliard and Weyers will be entitled to make up to two
requests that Newco include Messrs. Hilliard's and Weyers' shares of Newco
Common Stock in an offering of shares of Newco Common Stock otherwise being
registered upon being notified by Newco that Newco is registering shares of
Newco Common Stock in connection with a public offering for cash on a form
that also would permit the registration of Messrs. Hilliard's and Weyers'
shares of Newco Common Stock (which notice Newco is obligated to give).
These registration rights expire upon the earlier of April 1, 2001 or upon
the date on which Messrs. Hilliard and Weyers in the aggregate own less than
three percent of the outstanding shares of UWS Common Stock.
Pursuant to the Settlement Agreement, Messrs. Hilliard and Weyers agreed
that, until December 3, 2006, they will not acquire, or propose to acquire (i)
any Newco securities (other than pursuant to the exercise of stock options) with
the power to vote for the election of directors of Newco (the "VOTING
SECURITIES"), or (ii) any rights or options to acquire any Voting Securities, if
any of such acquisitions would require regulatory approval, application or
notification other than as required by the Exchange Act. In addition, Messrs.
Hilliard and Weyers agreed that, until December 3, 1999, they will not (i) make
or participate in any solicitation of proxies (within the meaning of Rule 14a-1
of the Exchange Act) or initiate any shareholder proposals with respect to
Newco; (ii) make any proposals with respect to a merger or other business
combination, sale or transfer of assets, liquidation or other extraordinary
corporate transaction of Newco; or (iii) form, join or participate in a "group"
(within the meaning of Section 13(d)(3) of the Exchange Act) with respect to
Newco securities or seek to exercise control or influence over management, the
Newco Board of Directors, or the corporate policies of Newco. Finally, Messrs.
Hilliard and Weyers agreed that, until December 3, 2006, they will vote their
shares of Newco Common Stock in accordance with BCBSUW directions on matters
submitted to a Newco shareholder vote which pertain to, or are a result of,
BlueCross and BlueShield Association rules, regulations or marketing issues.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the expected beneficial ownership of shares
of Newco Common Stock by each shareholder expected to own beneficially more than
5% of the shares of Newco Common Stock (as disclosed in certain reports
regarding such ownership filed with UWS and the SEC in accordance with Sections
13(d) and 13(g) of the Exchange Act), by each director of Newco, each of the
executive officers of Newco who appear in the Summary Compensation Table, and
all directors and officers of Newco as a group, based upon the beneficial
ownership of such shareholders of UWS Common Stock as of June 30, 1998 (except
as noted otherwise below), including shares that such shareholder has the right
to acquire ownership. Unless otherwise indicated, each shareholder listed below
has sole voting and dispositive power with respect to the shares beneficially
owned.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF
NAME OWNED(3) CLASS
- -------------------------------------------------------------------------------- -------------------- -------------
<S> <C> <C>
Blue Cross & Blue Shield United of Wisconsin(1)................................. 6,309,525 37.5%
Wallace J. Hilliard(2).......................................................... 1,401,601 8.3
Ronald A. Weyers(2)............................................................. 1,197,659 7.1
Heartland Advisors, Inc.(2)..................................................... 1,103,150 6.6
Thomas R. Hefty(4)(5)........................................................... 95,859 *
Roger A. Formisano(4)(5)........................................................ 39,038 *
C. Edward Mordy(5).............................................................. 54,572 *
Mark H. Granoff(5).............................................................. 28,485 *
Penny J. Siewert(5)............................................................. 13,446 *
Richard A. Abdoo................................................................ 2,800 *
Michael D. Dunham............................................................... 1,000 *
James L. Forbes................................................................. 3,500 *
James C. Hickman................................................................ 2,200 *
William R. Johnson.............................................................. 6,500 *
Eugene A. Menden................................................................ 3,500 *
William C. Rupp, M.D............................................................ 1,000 *
Carol N. Skornicka.............................................................. 1,300 *
All directors and executive officers as a group (19 persons)(4)................. 311,903 1.9%
</TABLE>
- ------------------------
* Amount represents less than 1% of the total shares of Newco Common Stock
expected to be issued and outstanding.
(1) BCBSUW's address is 1515 North River Center Drive, Milwaukee, Wisconsin
53212. Within one year after the Distribution Date, BCBSUW intends to
purchase additional shares of Newco Common Stock such that its direct and
indirect ownership of Newco is approximately 51%.
(2) Based on Amendments to Schedules 13G filed with UWS pursuant to the Exchange
Act by such beneficial owner on the following dates: Hilliard--February 12,
1998; Weyers--February 12, 1998; and Heartland Advisors--February 6, 1998.
Mr. Hilliard's address is P.O. Box 12146, Green Bay, Wisconsin 54307-2146;
Mr. Weyer's address is 500 AMS Court, Green Bay, Wisconsin 54313; and
Heartland Advisors, Inc.'s address is 790 North Milwaukee Street, Milwaukee,
Wisconsin 53202.
(3) Includes the following number of shares of UWS Common Stock which the named
individuals and certain executive officers have the right to acquire within
60 days of June 30, 1998: Mr. Hefty, 79,293; Mr. Formisano, 34,524; Mr.
Mordy, 37,316; Mr. Granoff, 24,524; Ms. Siewert, 11,000; Mr. Abdoo, 2,000;
Mr. Dunham, 1,000; Mr. Forbes, 2,000; Mr. Hickman, 2,000; Mr. Johnson,
2,000; Mr. Menden, 2,000; Ms. Skornicka, 1,000; and all directors and
officers as a group, 245,931.
(4) Includes the following shares owned jointly with such person's spouse, with
respect to which such person shares voting power and dispositive power: Mr.
Hefty, 2,000 shares; and Mr. Formisano, 3,750 shares.
(5) Includes the following shares held under UWS's 401(k) plan, as to which such
person has dispositive power: Mr. Hefty, 2,816; Mr. Formisano, 764; Mr.
Mordy, 3,156; Mr. Granoff, 1,251; Ms. Siewert, 1,796; and all directors and
officers as a group, 15,509.
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DESCRIPTION OF CAPITAL STOCK OF NEWCO
The authorized capital stock of Newco consists of 50,000,000 shares of Newco
Common Stock, no par value per share, and 1,000,000 shares of Preferred Stock,
no par value per share, issuable in series. Based on the number of shares of UWS
Common Stock currently outstanding, 16,573,202 shares of Newco Common Stock will
be issued to shareholders of UWS in the Distribution. No shares of Preferred
Stock will be issued in connection with the Distribution. The following summary
description of the capital stock of Newco is qualified in its entirety by
reference to the Articles of Incorporation and By-Laws.
COMMON STOCK
Holders of shares of Newco Common Stock are entitled to one vote for each
share held on all matters submitted to a vote of shareholders. Holders of shares
of Newco Common Stock do not have cumulative voting rights in the election of
directors and have no preemptive, subscription or redemption rights. After the
Distribution, all outstanding shares of Newco Common Stock will be validly
issued, fully paid and non-assessable, except for certain statutory liabilities
which may be imposed by Section 180.0622 of the WBCL for unpaid employee wages.
Section 180.0622 of the WBCL provides that no par value shares held by
shareholders of corporations incorporated in Wisconsin may be assessed up to the
full amount paid by the original subscriber to satisfy obligations to employees
for services rendered, but not exceeding six months' service in the case of any
individual employee. Holders of shares of Newco Common Stock are entitled to
such dividends as may be declared by the Board of Directors out of funds legally
available therefor. Upon liquidation, dissolution or winding up of Newco, the
assets legally available for distribution to shareholders are distributable
ratably among the holders of shares of Newco Common Stock at that time
outstanding subject to prior distribution rights of creditors of Newco.
PREFERRED STOCK
The Articles of Incorporation provide that the Board of Directors of Newco
is authorized, subject to certain limitations prescribed by law, without further
shareholder approval, to issue from time to time up to an aggregate of 1,000,000
shares of Preferred Stock in one or more series and to fix or alter the
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of shares
of Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of Newco. The rights, preferences and privileges of holders of
shares of Newco Common Stock are subject to, and may be adversely affected by,
the rights of the holders of shares of any series of Preferred Stock which Newco
may designate and issue in the future. Newco has no present plans to issue any
shares of Preferred Stock.
CERTAIN ARTICLES OF INCORPORATION AND BY-LAWS PROVISIONS OF NEWCO
Certain provisions of the Articles of Incorporation and By-Laws could have
anti-takeover effects and may delay, defer or prevent a takeover attempt that a
shareholder might consider in the shareholder's best interest. These provisions
are intended to enhance the likelihood of continuity and stability in the
composition of and in the policies formulated by the Board of Directors of
Newco. In addition, these provisions also are intended to ensure that the Board
of Directors will have sufficient time to act in what the Board of Directors
believes to be the best interests of Newco and its shareholders.
CLASSIFIED BOARD OF DIRECTORS. The Articles of Incorporation provide for a
Board of Directors divided into three classes of directors serving staggered
three-year terms. The classification of directors has the effect of making it
more difficult for shareholders to change the composition of the Board of
Directors in a short period of time. At least two annual meetings of
shareholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors.
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<PAGE>
NUMBER OF DIRECTORS; FILLING VACANCIES; REMOVAL. The Articles of
Incorporation and By-Laws provide that the Board of Directors will consist of
nine members. The By-Laws provide that the Board of Directors, acting by
majority vote of the directors then in office, may fill any newly created
directorship or vacancies on the Board of Directors. The By-Laws provide that a
director may be removed upon the affirmative vote of a majority of the
outstanding shares entitled to vote for the election of such directors.
SHAREHOLDER NOTICE REQUIREMENTS. The By-Laws provide that for nominations
for the Board of Directors or for other business to be properly brought by a
shareholder before an annual meeting of shareholders, the shareholder must first
have given adequate notice thereof in writing to the Secretary of Newco. To be
adequate, a shareholder's notice generally must be delivered not later than 90
days nor more than 120 days in advance of the date of the meeting. The notice
must contain, among other things, certain information about the shareholder
delivering the notice and, as applicable, background information about each
nominee or a description of the proposed business to be brought before the
meeting.
CERTAIN WBCL PROVISIONS
RESTRICTIONS ON BUSINESS COMBINATIONS. Sections 180.1130 to 180.1134 of the
WBCL provide generally that in addition to the vote otherwise required by law or
the articles of incorporation of a "resident domestic corporation," such as
Newco, certain business combinations not meeting certain fair price standards
specified in the statute must be approved by the affirmative vote of at least
(i) 80% of the votes entitled to be cast by the outstanding voting shares of the
corporation, and (ii) two-thirds of the votes entitled to be cast by the holders
of voting shares other than voting shares beneficially owned by a "significant
shareholder" or an affiliate or associate thereof who is a party to the
transaction. The term "business combination" is defined to include, subject to
certain exceptions, a merger or share exchange of the issuing public corporation
(or any subsidiary thereof) with, or the sale or other disposition of
substantially all of the property and assets of the issuing public corporation
to, any significant shareholder or affiliate thereof. "Significant shareholder"
is defined generally to mean a person that is the beneficial owner of 10% or
more of the voting power of the outstanding voting shares of the issuing public
corporation. These statute sections also restrict the repurchase of shares and
the sale of corporate assets by an issuing public corporation in response to a
takeover offer.
Sections 180.1140 to 180.1144 of the WBCL prohibit certain "business
combinations" between a "resident domestic corporation," such as Newco, and a
person beneficially owning 10% or more of the voting power of the outstanding
voting stock of such corporation (an "interested shareholder") within three
years after the date such person became a 10% beneficial owner, unless the
business combination or the acquisition of such stock has been approved before
the stock acquisition date by the corporation's board of directors. After such
three-year period, a business combination with the interested shareholder may be
consummated only with the approval of the holders of a majority of the voting
stock not beneficially owned by the interested shareholder at a meeting called
for that purpose, unless the business combination satisfies certain
adequacy-of-price standards intended to provide a fair price for shares held by
disinterested shareholders. BCBSUW will be an interested shareholder of Newco
due to its expected ownership of 38.1% of the outstanding shares of Newco Common
Stock following the Distribution. The acquisition of shares of Newco Common
Stock by BCBSUW was approved by Newco's Board of Directors prior to such
acquisition, and therefore, the three-year restriction on business combinations
with an interested shareholder will not apply to BCBSUW.
CONTROL SHARE VOTING RESTRICTIONS. Under Section 180.1150(2) of the WBCL,
the voting power of shares of a "resident domestic corporation," such as Newco,
which are held by any person in excess of 20% of the voting power in the
election of directors shall be limited (in voting on any matter) to 10% of the
full voting power of such excess shares, unless otherwise provided in the
articles of incorporation or unless full voting rights have been restored at a
special meeting of the shareholders called for that purpose. This statute is a
"scaled voting rights/control share acquisition" statute and is designed to
protect corporations against uninvited takeover bids by reducing to one-tenth of
their normal voting power all shares in excess
83
<PAGE>
of twenty percent owned by an acquiring person. Shares held or acquired under
certain circumstances are excluded from the application of Section 180.1150(2),
including (among others) shares acquired directly from Newco and shares acquired
in a merger or share exchange to which Newco is a party. The Articles of
Incorporation provide that shares of Newco Common Stock held by BCBSUW are not
subject to the voting power restrictions provided by Section 180.1150(2) of the
WBCL.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Newco Common Stock will be Firstar
Trust Company.
NUMBER OF DIRECTORS; FILLING VACANCIES; REMOVAL
The Articles of Incorporation provide that, subject to any rights of holders
of shares of Preferred Stock to elect additional directors under specified
circumstances, the number of directors will be fixed from time to time
exclusively pursuant to a resolution adopted by the Board of Directors. In
addition, the By-Laws provide that vacancies, including those created by an
increase in the number of directors, may be filled by the remaining directors
then in office. Accordingly, the Board of Directors could prevent any
shareholder from enlarging the Board and filling the new directorships with such
shareholder's own nominees.
Under the WBCL, shareholders may remove one or more directors with or
without cause unless the Articles or By-Laws provide that a director may be
removed only for cause. The By-Laws provide that directors may be removed with
or without cause and only upon the affirmative vote of holders of at least a
majority of the voting power of all the then outstanding shares of stock
entitles to vote generally in the election of directors ("VOTING STOCK"), voting
together as a single class.
SHAREHOLDER ACTION BY WRITTEN CONSENT
The Articles of Incorporation and By-Laws provide that any action required
or permitted to be taken at a meeting of Newco's shareholders may be taken
without a meeting by shareholders holding the minimum number of votes necessary
to authorize or take such action at a meeting at which all shares entitled to
vote were present and voted. Any action so taken must be done by written consent
signed by the number of shareholders necessary to take such action. Newco will
give notice of such action to shareholders who were entitled to vote on such
action and whose shares were not represented on the written consent within ten
days of the action. These provisions allow the holders of a majority of the
Voting Stock to unilaterally use the written consent procedure to take
shareholder action.
SPECIAL MEETINGS
The By-Laws provide that special meetings of shareholders may be called by
the Chairman of the Board of Directors, a majority of the Board of Directors or
holders of at least 10% of all the votes entitled to be cast on any issue
proposed to be considered at the proposed special meeting. The business
permitted to be conducted at any special meeting of shareholders is limited to
the business brought before the meeting pursuant to the notice of meeting given
by Newco.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS
The By-Laws establish an advance notice procedure for shareholders to make
nominations of candidates for election as directors, or bring other business
before an annual or special meeting of shareholders of Newco (the "SHAREHOLDER
NOTICE PROCEDURE").
The Shareholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the Board, or by a shareholder who has
given adequate written notice to the Secretary of Newco prior to the meeting at
which directors are to be elected, will be eligible for election as directors of
84
<PAGE>
Newco. The Shareholder Notice Procedure provides that at an annual or special
meeting only such business may be conducted as has been brought before the
meeting by, or at the direction of, the Board or by a shareholder who has given
adequate written notice to the Secretary of Newco of such shareholder's
intention to bring such business before such meeting. Under the Shareholder
Notice Procedure, for notice of shareholder nominations or other business
proposals to be made at an annual meeting to be adequate, such notice must be
received by Newco not less than 90 days nor more than 120 days prior to the last
Tuesday in May; provided, however, than in the event the annual meeting is
changed by more than 30 days from the last Tuesday in May, notice by a
shareholder, to be adequate, must be received not earlier than the 120th day
prior to such meeting and not later than the close of business of the later of
(x) the 90th day prior to such annual meeting, or (y) the tenth day after public
announcement of the date of such annual meeting is first made. In connection
with a special meeting of shareholders, in order for a notice of shareholder
nominations or other business proposals to be adequate, notice by such
shareholder must be received not earlier than the 90th day prior to such meeting
and not later than the close of business of the later of (x) the 60th day prior
to such special meeting, or (y) the tenth day after public announcement of the
date of such special meeting is first made.
Under the Shareholder Notice Procedure, a shareholder's notice to Newco
proposing to nominate a person for election as a director must contain certain
information, including: the name and address of the nominating shareholder and
the beneficial owners on whose behalf the nomination or proposal is made; the
class and number of shares of Newco beneficially owned by such shareholder or
beneficial owners; a representation that such shareholder is a holder of record
of shares of Newco entitled to vote at such meeting and that such shareholder
intends to appear in person or by proxy at the meeting to make the nomination
specified in the notice; the name, age and residence address of such nominee; a
description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nominations are to be made by the shareholder; the
principal occupation or employment of the nominee, the class and number of
shares of Newco which are beneficially owned by the nominee, and any other
information regarding the proposed nominee that would be required to be included
in a proxy statement soliciting proxies for the proposed nominee; and a written
consent of each nominee to be named in a proxy statement and to serve as a
director if so elected.
Under the Shareholder Notice Procedure, a shareholder's notice relating to
the conduct of business other than the nomination of directors must contain
certain information about such business and about the proposing shareholder,
including, without limitation: the name and address of the nominating
shareholder and the beneficial owners on whose behalf the nomination or proposal
is made; the class and number of shares of stock of Newco beneficially owned by
such shareholder; a representation that such shareholder is a holder of record
of shares of Newco entitled to vote at such meeting and that such shareholder
intends to appear in person or by proxy at the meeting to introduce the other
business specified in the notice; a brief description of the business the
shareholder proposes to bring before the meeting, and, if the business includes
a proposal to amend the By-Laws, the language of the proposed amendment; the
reasons for conducting such business at such meeting; any material interest of
such shareholder in the business so proposed; and any other information required
to be provided by the shareholder pursuant to Regulation 14A under the Exchange
Act in his capacity as a proponent to a shareholder proposal. If the chairman of
the meeting determines that a person was not nominated, or other business was
not brought before the meeting, in accordance with the Shareholder Notice
Procedure, such person will not be eligible for election as a director, or such
business will not be conducted at such meeting, as the case may be.
By requiring advance notice of nominations by shareholders, the Shareholder
Notice Procedure will afford the Board an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the Board, to inform shareholders about such qualifications. By
requiring advance notice of other proposed business, the Shareholder Notice
Procedure also will provide a more orderly procedure for conducting annual
meetings of shareholders and, to the extent deemed
85
<PAGE>
necessary or desirable by the Board, will provide the Board with an opportunity
to inform shareholders, prior to such meetings, of any business proposed to be
conducted at such meetings, together with any recommendations as to the Board's
position regarding action to be taken with respect to such business, so that
shareholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.
Although the By-Laws do not give the Board any power to approve or
disapprove shareholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election of
directors or the consideration of shareholder proposals if the proper procedures
are not followed, and of discouraging or deterring a third party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
own proposal, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to Newco and its shareholders.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of Newco authorized at the time of the
Distribution will have any preemptive right to subscribe for or purchase any
kind or class of securities of Newco.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF NEWCO
Under the By-Laws and the WBCL, directors and officers of Newco are entitled
to mandatory indemnification from Newco against certain liabilities and expenses
(a) to the extent such officers or directors are successful in the defense of a
proceeding, and (b) in proceedings in which the director or officer is not
successful in the defense thereof, unless it is determined the director or
officer breached or failed to perform such person's duties to Newco and such
breach or failure constituted: (i) a willful failure to deal fairly with Newco
or its shareholders in connection with a matter in which the director or officer
had a material conflict of interest; (ii) a violation of criminal law, unless
the director or officer had reasonable cause to believe his or her conduct was
lawful or had no reasonable cause to believe his or her conduct was unlawful;
(iii) a transaction from which the director or officer derived an improper
personal profit; or (iv) willful misconduct. The WBCL specifically states that
it is the public policy of Wisconsin to require or permit indemnification,
allowance of expenses and insurance in connection with a proceeding involving
securities regulation, as described therein, to the extent required or permitted
as described above.
Under the WBCL, unless the Articles of Incorporation provide otherwise,
directors of Newco are not subject to personal liability to Newco, its
shareholders, or any person asserting rights on behalf thereof for certain
breaches or failures to perform any duty resulting solely from their status as
directors, unless the person asserting liability proves that the breach or
failure constituted: (i) a willful failure to deal fairly with the corporation
or its shareholders in connection with a matter in which the director had a
material conflict of interest, (ii) a violation of criminal law, unless the
director had reasonable cause to believe his or her conduct was lawful or no
reasonable cause to believe that his or her conduct was unlawful, or (iii) a
transaction from which the director derived an improper personal profit, or (iv)
willful misconduct. The Articles of Incorporation do not limit a director's
immunity provided by the WBCL. The above provisions pertain only to breaches of
duty by directors as directors and not in any other corporate capacity, such as
officers. As a result of such provisions, shareholders may be unable to recover
monetary damages against directors for actions taken by them which constitute
negligence or gross negligence or which are in violation of their fiduciary
duties, although it may be possible to obtain injunctive or other equitable
relief with respect to such actions. If equitable remedies are found not to be
available to shareholders in any particular case, shareholders may not have any
effective remedy against the challenged conduct.
86
<PAGE>
SHAREHOLDER PROPOSALS
Article II of the By-Laws provides that shareholders desiring to nominate
candidates for directors or to present a proposal or bring other business before
a Newco shareholders' meeting must give advance written notice not less than 90
days nor more than 120 days prior to the meeting. In each case the notice must
be given to the Secretary of Newco, Mr. Steven E. Bablitch, 401 West Michigan
Street, Milwaukee, Wisconsin 53203-2896. The 1999 Annual Meeting of Shareholders
of Newco is expected to be held on May 25, 1999. To be considered, notice of any
such nomination or proposal must be received by February 25, 1999 and no earlier
than January 26, 1999. To be included in Newco's proxy statement and form of
proxy for that meeting, any such proposal also must comply in all respects with
the rules and regulations of the SEC.
INDEPENDENT AUDITORS
Ernst & Young LLP has audited the combined balance sheets of Newco as of
December 31, 1996 and 1997 and the related combined statements of income,
changes in shareholder's equity and comprehensive income and cash flows for each
of the three years in the period ended December 31, 1997, included in this
Information Statement, and the Board of Directors of Newco has appointed Ernst &
Young LLP as Newco's auditors for the year ending December 31, 1998.
87
<PAGE>
NEWCO/UWS, INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors............................................................................. F-2
Combined Balance Sheets at December 31, 1997 and 1996 and June 30, 1998 (unaudited)........................ F-3
Combined Statements of Income for the years ended December 31, 1997, 1996 and 1995 and the six months ended
June 30, 1998 and 1997 (unaudited)....................................................................... F-4
Combined Statements of Changes in Shareholder's Equity and Comprehensive Income for the years ended
December 31, 1997, 1996 and 1995 and the six months ended June 30, 1998 (unaudited)...................... F-5
Combined Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 and the six months
ended June 30, 1998 and 1997 (unaudited)................................................................. F-6
Notes to Combined Financial Statements..................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
United Wisconsin Services, Inc. and
The Board of Directors of Newco/UWS, Inc.
We have audited the accompanying combined balance sheets of Newco/UWS, Inc.
(the Company) (see Note 1 to the combined financial statements) as of December
31, 1996 and 1997, and the related combined statements of income, changes in
shareholder's equity and comprehensive income and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Company as of
December 31, 1996 and 1997, and the combined results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Milwaukee, Wisconsin
May 29, 1998
F-2
<PAGE>
NEWCO/UWS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ---------- JUNE 30,
------------------------
1998 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
(PRO FORMA)
<S> <C> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................... $ 19,147 $ 17,033 $ 14,750 $ 14,750
Investments--available for sale............................. 156,392 151,653 154,365 154,365
Due from affiliates......................................... 10,235 3,667 201 201
Other receivables........................................... 47,027 53,753 52,910 52,910
Prepaid and other current assets............................ 3,391 3,950 7,864 7,864
---------- ---------- ----------- -----------
Total current assets.................................... 236,192 230,056 230,090 230,090
Investments--held to maturity................................. 6,892 7,893 7,856 7,856
Property and equipment, net................................... 7,091 6,978 8,086 8,086
Goodwill and other intangibles, net........................... 2,966 5,005 4,715 4,715
Other noncurrent assets....................................... 16,337 16,324 16,767 16,767
---------- ---------- ----------- -----------
Total assets............................................ $ 269,478 $ 266,256 $ 267,514 $ 267,514
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Medical and other benefits payable.......................... $ 54,724 $ 60,724 $ 55,537 $ 55,537
Deferred premium credits.................................... 6,879 6,641 5,524 5,524
Advance premiums............................................ 26,043 24,060 29,765 29,765
Due to affiliates........................................... 3,738 3,867 4,472 4,472
Payables and accrued expenses............................... 25,427 20,926 16,869 16,869
Other current liabilities................................... 3,546 1,104 2,758 2,758
---------- ---------- ----------- -----------
Total current liabilities............................... 120,357 117,322 114,925 114,925
Medical and other benefits payable--noncurrent................ 20,417 20,918 20,099 20,099
Minority interest in subsidiary............................... 800 -- -- --
Other noncurrent liabilities.................................. 4,022 4,400 6,296 6,296
Notes payable................................................. -- -- -- 70,000
---------- ---------- ----------- -----------
Total liabilities....................................... 145,596 142,640 141,320 211,320
Shareholder's equity:
Investments by and advances from United Wisconsin
Services.................................................. 119,923 120,405 124,947 54,947
Unrealized gains on investments............................. 3,959 3,211 1,247 1,247
---------- ---------- ----------- -----------
Total shareholder's equity.............................. 123,882 123,616 126,194 56,194
---------- ---------- ----------- -----------
Total liabilities and shareholder's equity.............. $ 269,478 $ 266,256 $ 267,514 $ 267,514
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
NEWCO/UWS, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Health services revenues:
Premium revenue.................................. $ 466,929 $ 493,092 $ 560,825 $ 273,760 $ 298,602
Other revenue.................................... 24,222 27,632 26,046 13,351 14,378
Investment results................................. 9,665 19,040 22,238 10,672 9,960
---------- ---------- ---------- ---------- ----------
Total revenues................................. 500,816 539,764 609,109 297,783 322,940
Expenses:
Medical and other benefits......................... 416,167 425,258 485,735 235,763 253,708
Selling, general and administrative expenses:
Other............................................ 67,077 78,105 88,224 44,491 47,728
Allocations to related party..................... (4,368) (7,474) (9,278) (4,770) (4,406)
Allocations from related party................... 10,028 13,315 14,564 7,205 7,352
---------- ---------- ---------- ---------- ----------
Total selling, general and administrative
expenses......................................... 72,737 83,946 93,510 46,926 50,674
Provider profit sharing............................ 2,734 2,868 3,380 1,188 1,413
Minority interest in net earnings of combined
subsidiary....................................... (161) (107) 449 277 --
Amortization of goodwill and other intangibles..... 678 841 818 881 215
---------- ---------- ---------- ---------- ----------
Total expenses................................. 492,155 512,806 583,892 285,035 306,010
---------- ---------- ---------- ---------- ----------
Income before income tax expense..................... 8,661 26,958 25,217 12,748 16,930
Income tax expense................................... 3,277 10,617 9,433 4,861 6,515
---------- ---------- ---------- ---------- ----------
Net income........................................... $ 5,384 $ 16,341 $ 15,784 $ 7,887 $ 10,415
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pro forma earnings per common share:
Basic.............................................. $0.96 $0.63
---------- ----------
---------- ----------
Diluted............................................ $0.95 $0.62
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
NEWCO/UWS, INC.
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
INVESTMENTS BY AND
ADVANCES FROM (TO) UNREALIZED GAINS TOTAL
UNITED WISCONSIN (LOSSES) ON COMPREHENSIVE SHAREHOLDER'S
SERVICES INVESTMENTS INCOME EQUITY
------------------------ ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994........... $ 107,839 $ (6,374) $ 101,465
Net income........................... 5,384 -- $ 5,384 5,384
Net investments by and advances from
(to) United Wisconsin Services..... 3,543 -- -- 3,543
Change in unrealized gains (losses)
on investments..................... -- 9,885 9,885 9,885
-------
Comprehensive Income -- -- $ 15,269 --
-------- ------- ------- -------------
-------
Balance at December 31, 1995........... 116,766 3,511 120,277
Net income........................... 16,341 -- $ 16,341 16,341
Net investments by and advances from
(to) United Wisconsin Services..... (13,184) -- -- (13,184)
Change in unrealized gains (losses)
on investments..................... -- 448 448 448
-------
Comprehensive Income -- -- $ 16,789 --
-------- ------- ------- -------------
-------
Balance at December 31, 1996........... 119,923 3,959 123,882
Net income........................... 15,784 -- $ 15,784 15,784
Net investments by and advances from
(to) United Wisconsin Services..... (15,302) -- -- (15,302)
Change in unrealized gains (losses)
on investments..................... -- (748) (748) (748)
-------
Comprehensive Income -- -- $ 15,036 --
-------- ------- ------- -------------
-------
Balance at December 31, 1997........... 120,405 3,211 123,616
(1998 AMOUNTS UNAUDITED)
Net income........................... 10,415 -- $ 10,415 10,415
Net investments by and advances from
(to) United Wisconsin Services..... (5,873) -- -- (5,873)
Change in unrealized gains (losses)
on investments..................... -- (1,964) (1,964) (1,964)
-------
Comprehensive Income -- -- $ 8,451 --
-------- ------- ------- -------------
-------
Balance at June 30, 1998............... $ 124,947 $ 1,247 $ 126,194
-------- ------- -------------
-------- ------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
NEWCO/UWS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------- ----------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income............................................. $ 5,384 $ 16,341 $ 15,784 $ 7,887 $ 10,415
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 1,550 2,341 1,964 1,723 1,278
Realized investment gains............................ (1,094) (8,381) (11,921) (5,545) (5,023)
Deferred income tax expense (benefit)................ 190 (901) (1,023) 739 116
Changes in other operating accounts:
Other receivables.................................. (26,969) 2,802 (5,584) (698) 910
Medical and other benefits payable................. 20,882 1,415 6,501 (2,676) (6,006)
Advance premiums................................... (365) 4,062 (1,983) 3,493 5,705
Due to/from affiliates............................. 10,247 (10,327) 7,782 17,158 717
Other, net......................................... 1,575 (763) (8,701) (13,902) (5,973)
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) operating activities.... 11,400 6,589 2,819 8,179 2,139
INVESTING ACTIVITIES
Purchases of available for sale investments............ (351,731) (413,648) (452,906) (103,149) (102,367)
Proceeds from sale of available for sale investments... 314,529 364,321 433,012 107,592 98,291
Proceeds from maturity of available for sale
investments.......................................... 41,292 43,031 34,252 2,985 5,575
Purchases of held to maturity investments.............. (3,112) (2,573) (2,894) (211) (313)
Proceeds from maturity of held to maturity
investments.......................................... 2,266 2,171 3,567 340 265
Purchase of minority interest in subsidiary............ -- -- (2,218) -- --
Other, net............................................. (1,344) 1,528 (1,244) -- --
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) investing activities.... 1,900 (5,170) 11,569 7,557 1,451
FINANCING ACTIVITIES
Repayment of debt...................................... -- -- (1,200) -- --
Increase (decrease) in investments by and advances from
(to) United Wisconsin Services....................... 3,543 (15,352) (15,302) (6,704) (5,873)
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) financing activities.... 3,543 (15,352) (16,502) (6,704) (5,873)
----------- ----------- ----------- ---------- ----------
Cash and cash equivalents:
Increase (decrease) during year...................... 16,843 (13,933) (2,114) 9,032 (2,283)
Balance at beginning of year......................... 16,237 33,080 19,147 19,147 17,033
----------- ----------- ----------- ---------- ----------
Balance at end of year............................... $ 33,080 $ 19,147 $ 17,033 $ 28,179 $ 14,750
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS
UNAUDITED)
1. STRUCTURE AND PLAN OF DISTRIBUTION
United Wisconsin Services, Inc. ("UWS") has previously announced its
intention to contribute its Health Maintenance Organization, ("HMO") and
specialty managed care products and services businesses and management business
to a wholly owned subsidiary, Newco/UWS, Inc. which was formed on May 26, 1998.
The common stock of Newco/UWS, Inc. will be distributed on a share for share
basis to UWS common shareholders. Completion of the contribution and
distribution is subject to final approval by UWS's Board of Directors and
various third parties and government agencies. In June, 1998, a private letter
ruling was received from the Internal Revenue Service that the distribution will
be tax free to UWS, Newco/UWS, Inc. and UWS shareholders.
The accompanying combined financial statements of Newco/UWS, Inc.
essentially comprise the HMO and specialty managed care products and services
business operations of UWS including dental, life, disability, workers'
compensation, managed care consulting, electronic claims processing,
pharmaceutical services and managed mental health services. The following UWS
wholly owned subsidiaries will be contributed to Newco/UWS, Inc. in conjunction
with the spin-off and are included in the combined financial statements of
Newco/UWS, Inc.: Compcare Health Services Insurance Corporation; Valley Health
Plan, Inc.; HMO-W, Inc.; Hometown Insurance Service, Inc.; United Wisconsin
Insurance Company ("UWIC"); United Heartland Life Insurance Company ("UHLIC");
Meridian Resource Corporation; Meridian Managed Care, Inc.; Meridian Marketing
Services, Inc.; United Wisconsin Proservices, Inc.; United Heartland, Inc.; CNR
Health, Inc.; Unity Health Plans Insurance Corporation; and Heartland Dental
Plan, Inc. The above businesses included in these combined financial statements
are herein collectively referred to as the "Company."
The Company's HMO products are sold primarily in Wisconsin and the specialty
managed care products and services are sold throughout the United States.
The authorized capital stock of Newco/UWS, Inc. consists of 1,000,000 shares
of no par value preferred stock and 50,000,000 shares of no par value common
stock of which 100 shares are issued and outstanding at May 28, 1998.
Certain officers and directors of the Company are also officers and
directors of UWS.
The Company is affiliated with Blue Cross & Blue Shield United of Wisconsin,
"BCBSUW," through certain common officers and directors. At December 31, 1997,
BCBSUW owned approximately 38% of the issued and outstanding UWS common stock.
The combined financial statements included herein include all costs of doing
business. However, the combined financial statements may not necessarily be
indicative of the results of operations, financial position and cash flows of
the Company in the future (See Note 7). The combined financial statements
included herein do not reflect any changes that may occur in the financing and
operations of the Company as a result of the distribution.
F-7
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The accompanying combined financial statements have been prepared in
accordance with generally accepted accounting principles, "GAAP." The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
combined financial statements and accompanying notes. Actual results could
differ from those estimates.
PRINCIPLES OF COMBINATION
The Company combines majority owned subsidiaries that are controlled by the
Company. Investments in companies over which the Company has influence but does
not have a controlling interest are accounted for using the equity method. All
material intercompany transactions have been eliminated. For those subsidiaries
for which repurchase options exist (see Note 4), the Company combines those
subsidiaries when control is deemed to be other than temporary. Management
believes that control of Unity and Valley is not temporary as exercise of the
repurchase options is not probable as exercise would not provide a substantial
economic benefit to the option holders and would require regulatory approval
pursuant to change of control regulations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include operating cash and short-term investments
with original maturities of three months or less. These amounts are recorded at
cost, which approximates market.
INVESTMENTS
Investments are classified as either held to maturity or available for sale.
Investments which the Company has the intent and ability to hold to maturity are
designated as held to maturity and are stated at amortized cost. All other
investments are classified as available for sale and are stated at fair value
based on quoted market prices, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholder's equity, net of
income tax effects. Realized gains and losses from the sale of available for
sale debt securities and equity securities are based on the first-in, first-out
basis.
OTHER RECEIVABLES
Receivables are stated at net realizable value, net of allowances of
$284,000 and $394,000 at December 31, 1996 and 1997, respectively, based upon
historical collection trends and management's judgment of the ultimate
collectibility.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of cost over the fair market value of net
assets acquired. Goodwill and other intangible assets are being amortized on a
straight-line basis over a period of 15 years or less with a weighted average
original amortization period of 13 years. Accumulated amortization was
$1,670,000 and $1,447,000 at December 31, 1996 and 1997, respectively.
The Company periodically evaluates whether events and circumstances have
occurred which may affect the estimated useful life or the recoverability of the
remaining balance of its intangibles. At
F-8
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 31, 1997, the Company's management believed that no material impairment
of goodwill or other intangible assets existed.
REVENUE RECOGNITION
Health services premiums and managed behavioral health fees are recognized
as revenue in the period in which enrollees are entitled to care. Managed care
consulting revenues are generally recognized when services are rendered.
MEDICAL AND OTHER BENEFITS
Medical and other benefits expense consists principally of capitation
expenses, health and disability claims and life insurance benefits. In addition
to actual paid claims and capitation, these expenses include the change in
estimates of reported and unreported claims and accrued capitation fees and
adjustments, which are unpaid as of the balance sheet date. The estimates of
reported and unreported claims and accrued capitation fees and adjustments,
which are unpaid as of the balance sheet date are based on historical payment
patterns using actuarial techniques. Processing costs are accrued as operating
expenses based on an estimate of the costs necessary to process these claims.
The Company's year-end claim liabilities are substantially satisfied through
claim payments in the subsequent year. Any adjustments to prior period estimates
are reflected in the current period. Capitation represents monthly fees to
participating physicians and other medical specialists as compensation for
providing comprehensive health or dental care services. In addition, certain
subsidiaries have risk-sharing, stop-loss, and bonus arrangements with certain
providers. Accruals relating to these arrangements are developed based on
historical payment patterns using actuarial techniques. The noncurrent portion
of medical and other benefits payable pertaining to long-term disability,
workers' compensation and certain life insurance products is $20,417,000 and
$20,918,000 at December 31, 1996 and 1997, respectively. The long-term portion
of long-term disability, worker's compensation and certain life insurance
products is estimated using actuarial techniques based on historical patterns.
Amounts estimated to be paid more than one year from the balance sheet date are
considered non-current.
REINSURANCE
Certain premiums and benefits are assumed from and ceded to other insurance
companies under various reinsurance agreements. The ceded reinsurance agreements
provide the Company with increased capacity to write larger risks and maintain
its exposure to loss within its capital resources. The ceding company is
contingently liable on reinsurance ceded in the event that the reinsurers do not
meet their contractual obligations. Premiums ceded totaled $44,366,000,
$46,549,000 and $49,522,000 in 1995, 1996 and 1997, respectively. Ceded benefits
totaled $28,532,000, $32,073,000 and $42,003,000 in 1995, 1996 and 1997,
respectively. Premiums assumed totaled $24,168,000, $31,098,000, and $38,071,000
in 1995, 1996, and 1997, respectively. Assumed benefits totaled $19,154,000,
$21,722,000, and $28,213,000 1995, 1996 and 1997, respectively.
In addition, the Company is a party to a profit sharing arrangement on its
workers' compensation business whereby profit sharing income totaled $20,000,
$134,000 and $580,000 in 1995, 1996 and 1997, respectively.
F-9
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives,
which are 20 to 30 years for land improvements, 10 to 40 years for buildings and
building improvements, 3 to 5 years for computer equipment and software and 3 to
10 years for furniture and other equipment.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. A valuation allowance is
recorded on deferred tax assets that more likely than not will not be realized.
PRO FORMA EARNINGS PER COMMON SHARE
Pro forma earnings per share, "EPS," are based on the pro forma weighted
average number of shares of outstanding Company common stock and dilutive common
equivalent shares from stock options, giving effect to the planned distribution
of one share of the Company's common stock for each share of UWS common stock.
Pro forma dilutive common equivalent shares from stock options are stated at the
historical UWS dilutive common equivalent share level. The Company cannot
currently determine the number of shares of its common stock that will be
subject to substitute awards after the distribution (See Note 11).
The following table sets forth the pro forma computation of basic and
diluted EPS:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1997 JUNE 30, 1998
-------------- ---------------
(IN THOUSANDS,
<S> <C> <C>
EXCEPT SHARE AND PER SHARE
DATA)
Numerator:
Net income allocable to common
shareholders........................... $ 15,784 $ 10,415
-------------- ---------------
-------------- ---------------
Denominator:
Denominator for basic EPS--weighted
average shares......................... 16,423,270 16,531,108
Effect of dilutive securities--employee
stock options.......................... 147,710 173,671
-------------- ---------------
Denominator for diluted EPS................ 16,570,980 16,704,779
-------------- ---------------
-------------- ---------------
Pro forma basic EPS........................ $0.96 $0.63
Pro forma diluted EPS...................... $0.95 $0.62
</TABLE>
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) 130, "Reporting Comprehensive Income." SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the Company's net
income or shareholder's equity. SFAS 130 requires unrealized gains or losses on
the Company's available for sale securities, which prior to adoption were
reported separately in shareholder's equity, to be included in other
comprehensive income. During the years ended December 31, 1995, 1996
F-10
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and 1997, and the six months ended June 30, 1997 and 1998, total comprehensive
income amounted to $15,269,000, $16,789,000, $15,036,000, $7,700,000 and
$8,451,000, respectively.
INTERIM FINANCIAL DATA
The interim financial data presented is unaudited. In management's opinion,
the interim financial data includes all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation of the interim periods.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with GAAP have been omitted. The Company
believes that disclosures made are adequate to make the interim information
presented not misleading. Interim results are not necessarily indicative of
fiscal year performance because of the impact of seasonal variations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information" has been issued effective for fiscal years beginning after December
15, 1997. Management is reviewing SFAS 131 and may report additional segment
information in the future.
Statement of Position 97-3, "Accounting by Insurance and Other Enterprises
for Insurance-Related Assessments" has been issued effective for fiscal years
beginning after December 15, 1998. The Company has historically accrued
assessments. Management anticipates no impact on the financial statements from
adoption of this standard.
3. PRO FORMA INFORMATION (UNAUDITED)
The pro forma combined balance sheet at June 30, 1998 gives effect to
$70,000,000 of affiliated debt UWS borrowed from BCBSUW on October 31, 1996, as
if such debt was recorded on the books of the Company. The Company will assume
the note obligation as part of the distribution.
4. PROVIDER ARRANGEMENTS
The Company is party to certain provider arrangements in conjunction with
Unity Health Plans Insurance Corporation ("Unity") and Valley Health Plan, Inc.
("Valley"), wholly owned HMO subsidiaries included in the Company's combined
financial statements, which include profit-sharing payments to certain providers
and repurchase provisions.
Effective January 1, 1992, the Company acquired all of the outstanding
capital stock of Valley for cash approximating $2,800,000, representing the net
book value of Valley plus $400,000 as negotiated by the Company. Valley, a
health maintenance organization located in Eau Claire, Wisconsin, was purchased
from Midelfort Clinic, Ltd., a Mayo Regional Practice ("Midelfort Clinic"),
which continues to be Valley's primary health care provider. Under the terms of
the purchase and sale agreement, Midelfort Clinic retained an option to
repurchase all of the capital stock of Valley, at a price determined by the
formula used in computing the purchase price paid by the Company, at any time
until December 31, 1996. The option to repurchase was subsequently amended to
permit repurchase at December 31, 1999. The acquisition was accounted for under
the purchase method of accounting. The accompanying combined financial
statements include the results of operations of Valley.
F-11
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. PROVIDER ARRANGEMENTS (CONTINUED)
Effective October 1, 1994, the Company acquired all of the outstanding
common stock of HMO-W, Inc. for cash approximating $7,482,000 representing the
net book value of HMO-W, Inc. as negotiated by the Company. HMO-W, Inc. owned
all of the outstanding common stock of HMO of Wisconsin Insurance Corporation
("HMOW").
Effective October 1, 1994, the Company also acquired all of the assets of
U-Care HMO, Inc. ("U-Care") and certain assets from an affiliate of U-Care for
cash approximating $3,772,000, representing net book value plus $500,000 as
negotiated by the Company.
Pursuant to the HMO-W, Inc. and U-Care purchase agreements, options to
repurchase the net assets of HMO-W, Inc. and U-Care were issued to the
respective primary provider groups, at price determined by the formula used in
computing the purchase price paid by the Company, effective on November 1, 1999
or 2004. The U-Care and HMO-W, Inc. acquisitions were accounted for under the
purchase method of accounting. The accompanying combined financial statements
include the results of operations of U-Care and HMOW which have been merged to
form Unity.
Total revenues subject to repurchase options, pursuant to the various
acquisition agreements, totaled $160,003,000, $191,342,000 and $191,688,000 for
1995, 1996 and 1997, respectively. Profit sharing expense related to these
provider arrangements is calculated based on the profitability of the HMO
subsidiary and totaled $2,754,000, $3,002,000 and $3,960,000, in 1995, 1996 and
1997, respectively. Total net income subject to repurchase options, pursuant to
the various acquisition agreements, totaled $2,591,000, $2,629,000 and
$2,395,000 for 1995, 1996 and 1997, respectively. Total assets and total net
assets subject to repurchase options were $56,281,000 and $22,475,000,
respectively, at December 31, 1996 and $49,802,000 and $20,632,000,
respectively, at December 31, 1997.
5. INVESTMENTS
Investment results comprise the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest on bonds............................................ $ 7,290 $ 10,097 $ 9,075
Dividends on equity securities............................... 628 636 1,103
Realized gains............................................... 1,609 13,463 15,317
Realized losses.............................................. (515) (5,082) (3,396)
Interest on cash equivalents and other investment income..... 747 922 473
--------- --------- ---------
Gross investment results..................................... 9,759 20,036 22,572
Investment expenses.......................................... (233) (467) (424)
Other interest income (expense).............................. 139 (529) 90
--------- --------- ---------
$ 9,665 $ 19,040 $ 22,238
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-12
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for debt securities or cost for equity securities.
A summary of the net increase (decrease) in unrealized gains, less deferred
income taxes, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt securities.............................................. $ 9,774 $ (2,884) $ 1,582
Equity securities............................................ 2,125 3,542 (3,134)
Provision for deferred income taxes.......................... (2,014) (210) 804
--------- --------- ---------
$ 9,885 $ 448 $ (748)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-13
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair values of investments are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1997:
Available for sale:
U.S. Treasury securities................. $ 30,618 $ 330 $ (2) $ 30,946
State and municipal securities........... 2,487 67 -- 2,554
Foreign government securities............ 7,337 113 (111) 7,339
Corporate debt securities................ 56,017 1,314 (59) 57,272
Government agency mortgage-backed
securities............................. 21,466 376 (25) 21,817
Equity securities........................ 29,033 3,716 (1,024) 31,725
---------- ----------- ----------- ----------
146,958 5,916 (1,221) 151,653
Held to maturity--U.S. Treasury securities... 7,893 109 (9) 7,993
---------- ----------- ----------- ----------
$ 154,851 $ 6,025 $ (1,230) $ 159,646
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
At December 31, 1996:
Available for sale:
U.S. Treasury securities................. $ 24,944 $ 251 $ (231) $ 24,964
State and municipal securities........... 4,613 43 (14) 4,642
Foreign government securities............ 5,225 114 (69) 5,270
Corporate debt securities................ 53,621 766 (311) 54,076
Government agency mortgage-backed
securities............................. 27,451 189 (317) 27,323
Equity securities........................ 34,291 6,418 (592) 40,117
---------- ----------- ----------- ----------
150,145 7,781 (1,534) 156,392
Held to maturity:
U.S. Treasury securities................. 6,692 35 (10) 6,717
Corporate debt securities................ 200 -- -- 200
---------- ----------- ----------- ----------
6,892 35 (10) 6,917
---------- ----------- ----------- ----------
$ 157,037 $ 7,816 $ (1,544) $ 163,309
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
F-14
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair values of debt securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Available for sale:
Due in one year or less............................................. $ 1,524 $ 1,526
Due after one through five years.................................... 43,555 44,092
Due after five through ten years.................................... 39,259 40,011
Due after ten years................................................. 12,121 12,482
---------- ----------
96,459 98,111
Government agency mortgage-backed securities........................ 21,466 21,817
---------- ----------
$ 117,925 $ 119,928
---------- ----------
---------- ----------
Held to maturity:
Due in one year or less............................................. $ 405 $ 404
Due after one through five years.................................... 7,488 7,589
---------- ----------
$ 7,893 $ 7,993
---------- ----------
---------- ----------
</TABLE>
At December 31, 1997, the insurance subsidiaries had debt securities and
cash equivalents on deposit with various state insurance departments with
carrying values of approximately $7,844,000, which are included in investments
held to maturity on the balance sheet.
6. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements.............................................. $ 394 $ 394
Building and building improvements...................................... 3,594 3,611
Computer equipment and software......................................... 5,369 6,259
Furniture and other equipment........................................... 4,183 4,484
--------- ---------
13,540 14,748
Less accumulated depreciation........................................... (6,449) (7,770)
--------- ---------
$ 7,091 $ 6,978
--------- ---------
--------- ---------
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company provides marketing, underwriting, actuarial and certain
administrative services for BCBSUW. In addition, BCBSUW provides health
insurance to the employees of the Company and provides office space to the
Company. These activities are reimbursed at amounts approximating cost,
F-15
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
which resulted in allocations to the Company of $10,028,000, $13,315,000 and
$14,564,000 in 1995, 1996 and 1997, respectively, and allocations to BCBSUW of
$4,368,000, $7,474,000 and $9,278,000 in 1995, 1996 and 1997, respectively.
These amounts are included in selling, general and administrative expenses.
Certain subsidiaries of the Company provide health, life and other insurance
benefits to the employees of BCBSUW. Premium revenue received from BCBSUW
totalled $4,568,000, $4,370,000 and $4,537,000 in 1995, 1996 and 1997,
respectively.
The Company has an agreement with a subsidiary of UWS not included in these
combined financial statements, United Wisconsin Life Insurance Company
("UWLIC"), whereby UWIC underwrites certain small group health care products and
life, dental, drug and disability products in Minnesota as UWLIC products have
not yet been approved for sale in Minnesota. The Company ceded to UWLIC 100% of
the premium revenue of these products sold in Minnesota. The ceded premium
revenue approximated $20,430,000, $24,739,000 and $27,014,000 in 1995, 1996 and
1997, respectively.
The Company also has agreements with UWLIC whereby UWLIC underwrites certain
healthcare, life, dental, drug and disability products on behalf of United
Heartland Life Insurance Company, Compcare Health Services Insurance
Corporation, Heartland Dental Plan, Inc., and CNR Health, Inc. The Company
assumes 100% of the premium revenues on these products from UWLIC. The assumed
premium revenue approximated $23,389,000, $30,573,000, and $36,177,000 in 1995,
1996, and 1997, respectively.
Management believes the above-stated related party activity was entered into
on a reasonable basis and include all costs of doing business; however, it is
not necessarily indicative of future expenses or income.
The Company's operations have been financed through its operating cash flows
and investments by and advances from UWS.
Amounts due from/to affiliates are related primarily to operating expenses
and reinsurance arrangements. The amounts due from/to affiliates are generally
settled on a monthly basis for operating expenses and are settled in accordance
with industry practice for reinsurance agreements. The amounts due from/to
affiliates is typically less than $10,000,000 at any point in time during the
fiscal year.
8. INCOME TAXES
Income tax expense has been calculated as if the Company filed separate
federal income tax returns. Except as noted below, the Company has been included
in the consolidated federal income tax return filed by UWS. UHLIC has filed
separate federal income tax returns due to specific provisions of the Internal
Revenue Code of 1986, as amended related to consolidation of life insurance
entities. The entities included in these combined financial statements file
separate state franchise, income and premium tax returns as applicable.
The Company had a net federal income tax receivable of $337,000 and $436,000
included in other current assets at December 31, 1996 and 1997, respectively.
Federal and state income tax payments, net of refunds, totaled $477,000,
$1,545,000 and $3,243,000 in 1995, 1996 and 1997, respectively.
F-16
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal..................................................... $ 2,771 $ 9,642 $ 8,870
State....................................................... 316 1,876 1,586
--------- --------- ---------
3,087 11,518 10,456
--------- --------- ---------
Deferred:
Federal..................................................... 50 (222) (651)
State....................................................... 140 (679) (372)
--------- --------- ---------
190 (901) (1,023)
--------- --------- ---------
$ 3,277 $ 10,617 $ 9,433
--------- --------- ---------
--------- --------- ---------
</TABLE>
The differences between taxes computed at the federal statutory rate and
recorded income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at federal statutory rate................................. $ 3,031 $ 9,435 $ 8,826
Nondeductible expenses........................................ 283 254 154
Tax-exempt interest and dividends received deduction.......... (256) (246) (230)
State income and franchise taxes, net of federal benefit...... 324 820 827
Other, net.................................................... (105) 354 (144)
--------- --------- ---------
$ 3,277 $ 10,617 $ 9,433
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of deferred income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Reserve discounting.............................................. $ -- $ (1,050) $ --
Employee benefits................................................ -- 434 --
Depreciation and amortization.................................... 269 81 (1,299)
Net operating loss carryforwards................................. -- (482) --
Other, net....................................................... (79) 116 276
--------- --------- ---------
$ 190 $ (901) $ (1,023)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-17
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's federal and state deferred tax
liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
DECEMBER 31, 1997
-------------------- --------------------
FEDERAL STATE FEDERAL STATE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Depreciation........................................ $ (728) $ (6) $ (721) $ (512)
Claims-based receivables............................ (1,482) (13) (1,331) (945)
Intangibles......................................... (1,162) (10) -- --
Pension accrual..................................... (1,835) (16) (2,158) (1,532)
Unrealized gains on investments..................... (1,521) (13) (1,367) (970)
Other, net.......................................... (709) (6) (825) (586)
--------- --- --------- ---------
(7,437) (64) (6,402) (4,545)
Deferred tax assets:
Postretirement benefits other than pensions......... 1,294 16 1,387 1,138
Advance premium discounting......................... 1,101 13 1,080 886
Deferred compensation............................... 1,373 17 1,387 1,138
Medical and other benefits payable discounting...... 1,804 22 1,142 937
Business loss carryforwards......................... -- -- 509 --
Other, net.......................................... 655 8 435 774
--------- --- --------- ---------
6,227 76 5,940 4,873
--------- --- --------- ---------
Net deferred tax assets (liabilities)................. $ (1,210) $ 12 $ (462) $ 328
--------- --- --------- ---------
--------- --- --------- ---------
</TABLE>
The federal deferred benefit arising from the deductibility of state
deferred tax is included as a component of other federal deferred taxes. The net
deferred tax assets and liabilities are included in other current or other
noncurrent assets and liabilities, as applicable.
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions occurring in the normal
course of its business. In the opinion of management, adequate provision has
been made for losses which may result from these actions and, accordingly, the
outcome of these proceedings is not expected to have a material adverse effect
on the combined financial statements.
The Company participates with BCBSUW in a bank line of credit, which permits
aggregate borrowings to $30,000,000. Periodic borrowings have been made on this
line of credit. The outstanding line of credit balance was $1,200,000 at
December 31, 1996 and is included in other current liabilities. There was no
balance outstanding at December 31, 1997.
F-18
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDER'S EQUITY
STATUTORY FINANCIAL INFORMATION
Insurance companies are subject to regulation by the Office of the
Commissioner of Insurance of the State of Wisconsin and certain other state
insurance regulators. These regulations require, among other matters, the filing
of financial statements prepared in accordance with statutory accounting
practices prescribed or permitted for insurance companies. The combined
statutory surplus of insurance subsidiaries at December 31, 1996 and 1997 was
$106,205,000 and $95,356,000, respectively. The combined statutory net income of
insurance subsidiaries was $1,293,000, $24,159,000 and $17,380,000 in 1995, 1996
and 1997, respectively.
State insurance regulations also require the maintenance of a minimum
compulsory surplus based on a percentage of premiums written. At December 31,
1997, the Company's insurance subsidiaries were in compliance with these
compulsory regulatory requirements.
RESTRICTIONS ON DIVIDENDS FROM SUBSIDIARIES
Dividends paid by insurance companies are limited by state insurance
regulations. The insurance regulator in the state of domicile may disapprove any
dividend which, together with other dividends paid by an insurance company in
the prior twelve months, exceeds the regulatory maximum as computed for the
insurance company based on its statutory surplus and net income.
Based upon the financial statements of the insurance entities included in
these combined financial statements as of December 31, 1997, as filed with the
insurance regulators, the aggregate amount available for dividends in 1998
without regulatory approval is $4,209,000.
11. EMPLOYEE BENEFIT PLANS
PENSION BENEFITS
Certain of the entities included in these combined financial statements
participate with BCBSUW in two multiple-employer defined benefit pension plans.
The salaried plan, covering salaried employees, provides benefits based on
compensation, years of service, year of birth and date of retirement. The hourly
plan, covering hourly employees, provides for benefit payments of stated
amounts, based on number of hours worked and years of credited service. Since
both plans were overfunded, no contributions were made in 1995, 1996 or 1997,
and a pension credit was recorded in each year.
Effective January 1, 1997, the salaried pension plan and the hourly pension
plan with respect to non-union participants were amended to include expansion of
the lump-sum payment provisions and changes in the methods and formulae used for
the calculation of benefit accruals (a cash balance formula). The resulting
reduction in the projected benefit obligation is included in the funded status
of the pension plans at December 31, 1996 and 1997, and was also considered in
the calculation of the 1996 pension credit.
F-19
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes the combined funding status of the defined
benefit pension plans and the amounts recorded in the combined balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits..................................................... $ (12,806) $ (15,644)
Nonvested benefits.................................................. (2,923) (1,870)
---------- ----------
Total accumulated benefit obligations................................. (15,729) (17,514)
Adjustment for projected benefit obligations.......................... (52) (54)
---------- ----------
Projected benefit obligations......................................... (15,781) (17,568)
Assets, at fair market value.......................................... 29,309 36,082
---------- ----------
Excess of assets over projected benefit obligations................... 13,528 18,514
Unrecognized net gains................................................ (122) (5,151)
Unrecognized net asset................................................ (1,326) (1,051)
Unrecognized prior service credit..................................... (6,836) (6,146)
---------- ----------
Prepaid pension expense in combined balance sheets.................... $ 5,244 $ 6,166
---------- ----------
---------- ----------
</TABLE>
The pension plans' assets consist primarily of debt, equity and other
marketable securities.
Assumptions used in developing the projected benefit obligation are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Discount rate................................................................ 8.00% 8.00%
Rate of increase in compensation............................................. 4.75 4.75
Rate of return on plan assets................................................ 9.00 9.00
</TABLE>
The unrecognized net asset is being amortized over the remaining estimated
service lives of participating employees at January 1, 1986: 15.4 years for
salaried employees and 16.9 years for hourly employees.
The components of the pension credit, which is included in selling, general
and administrative expenses, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period............... $ 1,117 $ 829 $ 1,335
Interest cost on benefit obligations.......................... 1,116 1,034 1,259
Actual return on plan assets.................................. (4,136) (2,866) (7,475)
Net amortization and deferrals................................ 1,503 (432) 3,958
--------- --------- ---------
$ (400) $ (1,435) $ (923)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
After giving effect to all administrative expense allocations between the
Company and BCBSUW, the pension credit was $435,000, $1,288,000 and $945,000 in
1995, 1996 and 1997, respectively.
DEFINED CONTRIBUTION AND BONUS PLANS
Certain of the entities included in these combined financial statements
participate in defined contribution plans whereby the employer contributes a
percentage of participants' qualifying compensation up to certain limits, as
defined by the plans. The entities also participate with BCBSUW in various other
profit sharing and bonus programs. Expenses related to all of these plans, after
giving effect to all administrative expense allocations between the Company and
BCBSUW, totaled $1,838,000, $2,932,000 and $1,978,000 in 1995, 1996 and 1997,
respectively. Included in these Company plans is a supplemental executive
retirement plan (SERP) for which there is no liability on the Company's balance
sheet at December 31, 1996 and 1997, respectively. BCBSUW is liable for
obligations under the SERP and has allocated a portion of the SERP costs to the
Company in the amounts of $146,000, $142,000 and $225,000 in 1995, 1996 and
1997, respectively.
STOCK-BASED COMPENSATION
Newco/UWS, Inc. intends to establish a stock-based compensation plan that
will allow for granting of options for up to 4,500,000 shares of common stock as
incentive or nonqualified stock options. Certain executive officers,
non-employee directors and employees were granted stock options under UWS stock-
based compensation plans. Also, certain individuals hold UWS stock options
related to an acquisition. At December 31, 1997, there were outstanding options
to purchase approximately 2,217,307 shares of UWS common stock of which
1,369,842 were exercisable. Immediately following the distribution, options to
purchase 257,322 shares of UWS common stock with a weighted average exercise
price of $26.09 per share will be converted into options to purchase shares of
common stock of Newco/UWS, Inc. The number of options and exercise prices will
be adjusted to provide equivalent value. In addition, options to purchase
1,386,378 shares of UWS common stock with a weighted average exercise price of
$30.87 per share will be converted, on a share for share basis, into options to
purchase shares of Newco/UWS, Inc. and UWS common stock. The exercise prices
will be adjusted to provide equivalent value of the respective companies'
shares. The Company cannot currently determine the number of shares of common
stock of Newco/UWS, Inc. that will be subject to equivalent awards after the
distribution.
In 1992, certain executive officers of UWS were awarded stock appreciation
rights (SARs) in UWS. At December 31, 1997 67,500 SARs are outstanding at $9.67
per share. Immediately following the distribution, the UWS SARs will be assumed
by Newco/UWS, Inc. and converted into SARs of Newco/ UWS, Inc. to provide
equivalent value.
The Company follows Accounting Principles Board Opinion No. 25 under which
no compensation expense is recorded when the number of shares is fixed and the
exercise price of UWS stock option grants to Company employees equals the market
price of the underlying stock on the date of grant. If the Company had measured
compensation cost for the UWS stock options granted to Company employees in 1996
and 1997 under the fair value based method prescribed by Statement of Financial
Accounting Standards No. 123, the pro forma net income would have been
$16,732,000 and $16,208,000 in 1996 and 1997, respectively.
F-21
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The fair values of UWS stock options granted to Company employees used to
compute pro forma net income disclosures were estimated on the date of grant
using the Black-Scholes option-pricing model based on the following
weighted-average assumptions used by UWS:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Risk free interest rate........................... 5.68% 5.71%
Expected life..................................... 6.22 years 6.04 years
Expected volatility............................... 0.34 0.38
Expected dividend yield........................... 2.09% 1.77%
</TABLE>
The weighted-average fair value of UWS stock options granted to Company
employees during 1996 and 1997 was $8.11 and $10.79, respectively.
The pro forma amounts above are not necessarily representative of the
effects of stock-based awards on future pro forma net income because (1) future
grants of employee stock options by Company management may not be comparable to
awards made to employees while the Company was a part of UWS, (2) the
assumptions used to compute the fair value of any stock option awards will be
specific to the Company and therefore may not be comparable to the UWS
assumptions used.
F-22
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 1996 and
1997 and the six months ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
QUARTER
----------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996
Total revenues................... $ 133,056 $ 134,190 $ 134,145 $ 138,373 $ 539,764
Income before income tax
expense........................ 6,053 7,116 6,780 7,009 26,958
Net income....................... 3,559 4,472 4,120 4,190 16,341
1997
Total revenues................... $ 146,993 $ 150,790 $ 154,479 $ 156,847 $ 609,109
Income before income tax
expense........................ 6,607 6,141 6,091 6,378 25,217
Net income....................... 3,998 3,889 3,859 4,038 15,784
Pro forma earnings
per common share:
Basic $ 0.24 $ 0.24 $ 0.23 $ 0.25 $ 0.96
Diluted $ 0.24 $ 0.23 $ 0.23 $ 0.25 $ 0.95
1998
Total revenues................... $ 159,158 $ 163,782
Income before income tax
expense........................ 8,005 8,925
Net income....................... 4,963 5,452
Pro forma earnings
per common share:
Basic $ 0.30 $ 0.33
Diluted $ 0.29 $ 0.33
</TABLE>
F-23
