<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1998
REGISTRATION NO. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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UNITED WISCONSIN SERVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
WISCONSIN 39-1931212
(State of incorporation) (I.R.S. Employer
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)
THOMAS R. HEFTY, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
UNITED WISCONSIN SERVICES, INC.
401 WEST MICHIGAN STREET
MILWAUKEE, WISCONSIN 53203-2896
(414) 226-6900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPY TO:
GEOFFREY R. MORGAN
MICHAEL, BEST & FRIEDRICH
100 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202-4108
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO AGGREGATE PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT* PRICE* REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value....................... 800,000 $8.625 $6,900,000 $1,918
</TABLE>
* CALCULATED SOLELY FOR THE PURPOSE OF THIS OFFERING UNDER RULE 457(C) OF THE
SECURITIES ACT OF 1933 ON THE BASIS OF THE AVERAGE OF THE HIGH AND LOW SELLING
PRICES PER SHARE OF THE COMMON STOCK OF REGISTRANT ON NOVEMBER 20, AS REPORTED
BY THE NEW YORK STOCK EXCHANGE. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION
STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE
UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES
THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT
TO SECTION 8(A), MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION DATED NOVEMBER 25, 1998
PROSPECTUS
UNITED WISCONSIN SERVICES, INC.
DIVIDEND REINVESTMENT AND DIRECT STOCK PURCHASE PLAN
800,000 SHARES OF COMMON STOCK
------------------
The Dividend Reinvestment and Direct Stock Purchase Plan (the "Plan") of
United Wisconsin Services, Inc. (the "Company") provides you with a convenient
and economical way of purchasing additional shares of Common Stock of the
Company through the automatic reinvestment of cash dividends and/or through
optional cash payments. Any record owner or beneficial owner (as those terms are
defined in the Plan) of shares of Common Stock is eligible to participate. If
you participate in the Plan, you will pay no brokerage commissions or other
expenses in connection with the purchase of shares of common stock under the
Plan.
You may participate in the following ways:
- You may reinvest automatically your cash dividends and invest additional
amounts by making cash payments of at least $100 per calendar quarter, or
- You may reinvest automatically a portion of your cash dividends while
continuing to receive the remainder and invest limited additional amounts
by making cash payments of at least $100 per calendar quarter, or
- You may invest by making optional cash payments of at least $100 per
calendar quarter, or
- If you are not a record owner or beneficial owner you may become a full
participant in the Plan through the Plan's direct stock purchase feature
by making a cash payment of at least $100.
Shares purchased will generally be issued by the Company, either through
original issuance or out of treasury shares held by the Company. However, the
Company may also purchase shares for the Plan on the open market. The purchase
price of shares of Common Stock purchased from the Company will equal the
average of the high and low sale prices for the Common Stock on the Reinvestment
Date (as defined in the Plan).
If you do not wish to participate in the Plan, you will receive cash
dividends, as declared, in the usual manner.
The outstanding shares of Common Stock are, and the additional shares
offered hereby will be, listed on the New York Stock Exchange under the symbol
"UWZ."
The Company will receive all of the net proceeds from the sale of the Common
Stock purchased from the Company and none of the proceeds from the sale of
Common Stock purchased in the open market.
------------------------
Neither the Securities and Exchange Commission nor any state securities
regulators has determined if this prospectus is adequate or accurate. Any
representation to the contrary is a criminal offense.
------------------------
You should rely only on the information contained in this document or other
document to which we have referred you. We have not authorized anyone to provide
you with information that is different.
YOU SHOULD CONSIDER CAREFULLY THE FACTORS UNDER THE CAPTION "RISK FACTORS"
PRIOR TO MAKING ANY INVESTMENT IN COMMON STOCK.
The date of this Prospectus is November , 1998.
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GENERAL
On September 11, 1998, the corporation formerly known as "United Wisconsin
Services, Inc." ("Old UWS" or "AMSG") transferred its managed care and specialty
products business to the Company which was renamed "United Wisconsin Services,
Inc." on that date (the "Distribution"). Simultaneously, Old UWS was renamed
"American Medical Security Group, Inc."
FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward looking statements with respect to
the financial condition, results of operation and business of the Company. Such
forward looking statements are subject to inherent risks and uncertainties that
may cause actual results or events to differ materially from those contemplated
by such forward looking statements. Forward-looking statements may include, but
are not limited to, projections of revenues, income or losses, capital
expenditures, plans for future operations, financing needs or plans, compliance
with financial covenants in loan agreements, plans relating to products or
services of the Company, assessments of materiality, predictions of future
events, the ability to obtain additional financing, the Company's ability to
meet obligations as they become due, as well as assumptions relating to the
foregoing. In addition, when used in this discussion, the words "anticipates,"
"believes," "estimates," "expects," "intends," "plans" and similar expressions
are intended to identify forward-looking statements. Factors that may cause
actual results to differ materially from those contemplated by such forward
looking statements include, among others, rising health care costs, economic and
business conditions and competition in the managed care industry, development of
claims reserves, developments in health care reform and other regulatory issues.
RISK FACTORS
You should carefully consider and evaluate all of the following factors,
before you decide to purchase shares of Common Stock under the Plan.
OPERATING HISTORY AND FUTURE PROSPECTS
The Company does not have an operating history as an independent public
company, but now owns and conducts the operations of the managed care companies
and the management business of Old UWS. On an historical basis, in each of the
three years ended December 31, 1997, the Company's businesses were profitable.
There can be no assurance, however, that the Company'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 THE COMPANY
The historical combined financial information may not necessarily reflect
the results of operations, financial position and cash flows of the Company in
the future or the results of operations, financial position and cash flows had
the Company 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 funding or operations of the Company as a result of the
Distribution.
HEALTH CARE COSTS AND HEALTH CARE INDUSTRY
The Company's profitability will depend in part on accurately predicting
health care costs and controlling future health care costs. Changes in factors
affecting health care costs may adversely affect the Company's financial
condition or results of operations.
A large portion of the revenue received by the Company is, in turn, spent by
the Company to pay the costs of health care services or supplies delivered to
its members. The total health care costs incurred by
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the Company are affected by the number and scope of individual services rendered
and the cost of each service. Much of the Company's premium revenue is agreed to
before the actual delivery of services, usually on a prospective annual basis.
While the Company 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, regulations and other circumstances may limit the Company's ability
to fully base premiums on estimated costs. In addition, actual health care costs
may exceed the estimated costs.
In addition to the challenge of controlling health care costs, the Company
faces competitive pressure to contain premium prices. While managed health plans
compete on the basis of many factors, the Company 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. The Company's
financial condition or results of operations would be adversely affected by
significant premium decreases by any of its major competitors or by any
limitation on the Company's ability to increase or maintain its premium levels.
The Company, 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, the Company 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 the Company's financial condition
or results of operations.
The managed care industry is labor intensive, and its profit margin is low.
Hence, it is especially 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 the Company.
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.
These cyclical patterns could adversely affect the Company in the future.
DEPENDENCE UPON HEALTH CARE PROVIDERS AND EMPLOYER GROUPS
The Company regularly contracts with physicians, hospitals and other
providers to manage health care costs. In any particular market, providers could
refuse to contract with the Company, 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, have
significant market positions or even monopolies. Many of these providers may
compete directly with the Company which could affect the Company's
profitability.
The Company's contracts with its health care providers and employer groups
are renewable periodically. The Company's profitability and ability to expand
will be dependent upon its ability to continue to contract with these parties on
favorable terms. For the year ended December 31, 1997, four medical groups and
hospitals accounted for 23.9% of claims and capitation expense.
The Company's managed care 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 the Company's total earned premiums in 1997 and 14.4%
of the Company's 1997 net income were attributable to the business sold through
the Company's wholly owned subsidiaries,
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Valley Health Plan, Inc. ("Valley") and Unity Health Plans Insurance Corporation
("Unity"). The Company's provider arrangement relating to Valley was renewed
through January 1, 2000, and can be renewed for up to an additional three-year
term, and the Company's provider arrangement relating to Unity terminates on
November 1, 2004. The continued success of Valley and Unity will depend to a
significant degree on the mutuality of interest between the Company and its
provider partners. The termination or a material modification of the Company's
current provider relationships or changes in the business of its provider
arrangements could adversely affect the Company's profitability.
One of the Company'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, the Company would
thereafter have no ongoing interest in Valley, and would lose all of the earned
premiums associated with Valley. One of the Company's providers, Community
Health Systems, LLC ("CHS"), has the right to repurchase a portion of the Unity
business and the Unity legal entity for its book value on either November 1,
1999 or November 1, 2004. If CHS exercises this repurchase option, the Company
will 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
its book value 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 the Company 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 the Company.
PHARMACEUTICAL COSTS
The costs of pharmaceutical products and services generally are increasing
faster than the costs of other medical products and services. Thus, the
Company's managed care operations face ever higher pharmaceutical expenses. The
Company tries to keep pharmaceutical costs low, but may be unable to do so in
the face of rapidly rising prices. Also, statutory and regulatory changes may
significantly alter the Company's ability to manage pharmaceutical costs.
GOVERNMENT PROGRAMS AND REGULATION
The Company's business is subject to extensive federal and state laws and
regulations which change frequently. These laws and rules are intended primarily
to protect policyholders rather than investors. Although such regulations have
not significantly impeded the growth of the Company's business to date, there
can be no assurance that the Company 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 the Company's business. Delays in
obtaining or failure to obtain or maintain such approvals could adversely affect
the Company's revenue or the number of its members or could increase costs.
A portion of the Company'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 result of marketing to individuals as
opposed to groups. Changes to such government programs in the future may also
affect the Company'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 the Company's other
businesses. In addition, risk-based capital formulas, which are currently in
effect or may be adopted, affect the Company's statutory capital and surplus
requirements. In order to maintain its recent rate of growth in premium revenue,
the Company
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may have to obtain additional statutory capital or utilize reinsurance
agreements to cede a greater percentage of premium revenue.
HEALTH CARE REFORM LAWS
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. The Company is unable to predict
when or whether any of these proposals will be enacted or what impact they could
have on the Company.
COMPETITION
The Company competes with a number of other entities in its geographic and
product markets. Certain of the Company's customers may decide to perform
themselves functions or services formerly provided by the Company, which could
decrease the Company's revenues. Certain of the Company's providers could decide
to market products and services to the Company customers in competition with the
Company. In addition, significant merger and acquisition activity has occurred
in the industry in which the Company operates as well as in industries which act
as suppliers to the Company. This activity may create stronger competitors
and/or result in higher health care costs. To the extent that there is strong
competition or that competition intensifies in any market, the Company's ability
to retain or increase customers, its revenue growth, its pricing flexibility,
its control over medical cost trends and its marketing expenses could be
adversely affected.
The Company faces competition from other regional and national managed
health care companies, including Humana, Inc. and United HealthCare Corp. in
Southeastern Wisconsin, and Dean Health Plan, Inc. in the Madison, Wisconsin
area, many of which have significantly greater financial and other resources
than the Company. If competition were to further increase in any of its markets,
the Company's financial condition or results of operations could be materially
adversely affected.
ADMINISTRATION AND MANAGEMENT
The level of administrative expenses affects the Company's profitability.
While the Company attempts to effectively manage such expenses, increases in
administrative expenses may occur from time to time. Expense increases are not
clearly predictable and could adversely affect the Company's profitability.
The future success of the Company is dependent on a number of key management
employees. Competition for highly skilled people with extensive experience in
the health care industry is intense. The Company will be dependent on the
continued services and management experience of its executive officers and other
personnel. The Company does not have key man life insurance covering any of its
executive officers, nor does it have employment agreements with any of its
executive officers.
CONTROL BY CERTAIN SHAREHOLDERS; EFFECTS OF BLUE CROSS & BLUE SHIELD UNITED OF
WISCONSIN INTENDED PURCHASES; DEFENSIVE MEASURES; POTENTIAL CONFLICTS OF
INTEREST
Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") and executive
officers and directors of the Company own approximately 38.5% of the outstanding
shares of the Common Stock and, thus, have significant influence over all
matters requiring a shareholder vote. Furthermore, BCBSUW intends to purchase
additional shares of the Common Stock to bring its direct and indirect ownership
of the Company to approximately 51%. At and after this time, BCBSUW will have
the power to 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 the Company and could adversely affect the market price of
the shares of Common Stock.
5
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The Company's Articles of Incorporation ("Articles of Incorporation") and
By-Laws ("By-Laws") and certain sections of the Wisconsin Business Corporation
Law ("WBCL") may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by the 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. These provisions also could discourage or
make more difficult a merger, tender offer or proxy contest. These 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 a change of control of the Company.
The Company and certain of its subsidiaries and BCBSUW have entered into
service agreements (the "Service Agreements") that provide for 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 the Company and BCBSUW believe approximates cost. The Company 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. Pursuant to Wisconsin statutory and regulatory
requirements, these reinsurance agreements and the Service Agreements are
required to be filed with the Wisconsin Office of the Commissioner of Insurance
("OCI") for its review to determine whether the "transactions are fair and
reasonable." In addition, BCBSUW's sales force markets and sells some of the
Company's products. Also, certain of the Company's products may compete with
managed health care products offered by BCBSUW in Wisconsin. Three of the nine
directors of the Company also are directors of BCBSUW.
6
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THE PLAN
The following questions and answers constitute a summary of the Plan.
PURPOSE
1. WHAT IS THE 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. See question 4 for a definition of "Record Owner" and "Beneficial
Owner."
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. WHAT ARE SOME OF THE 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 Question 4 for information on who is eligible to participate.)
Participants in the Plan will pay the Market Price (as defined in Question
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.
ADMINISTRATION
3. WHO ADMINISTERS THE PLAN FOR PARTICIPANTS?
The Reinvestment Agent administers the Plan for Participants. The present
Reinvestment Agent is Firstar Bank Milwaukee, N.A. ("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 (800)
637-7549 or by mail addressed to:
Firstar Bank Milwaukee, N.A.
1555 N. RiverCenter Drive, Suite 301
Milwaukee, Wisconsin 53212
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PARTICIPATION
4. WHO IS ELIGIBLE TO PARTICIPATE 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 DOES AN ELIGIBLE SHAREHOLDER OR INVESTOR 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 any shareholder by written or oral request to the
Reinvestment Agent (see Question 3). Telephone requests or general inquiries may
also be made by calling the Reinvestment Agent at (800) 637-7549 (see Question
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 Question 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 Question 12.
An Authorization Card will be mailed to all new Record Owners 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.
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., joint tenants, trustees, etc.), all registered
holders must sign the Authorization Card exactly as their names appear on the
Company's stock transfer records.
6. WHAT DOES THE AUTHORIZATION CARD PROVIDE?
The Authorization Card provides for the purchase by any entity, whether or
not a record holder of Common Stock, of additional shares of Common Stock
through the following investment options offered under the Plan:
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- 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 B & N 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 will
be furnished at any time upon request to the Reinvestment Agent (see Question
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 Questions 5 and 6).
The Reinvestment Agent will make purchases for the Plan once a month on the
first business day of each month ("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. IS PARTIAL PARTICIPATION POSSIBLE UNDER THE PLAN?
Yes, a shareholder who desires the dividends on only some certificated
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. MAY A PARTICIPANT CHANGE HIS/HER METHOD OF PARTICIPATION IN THE PLAN AFTER
ENROLLMENT?
Yes, 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 Question 3. A change in dividend reinvestment will be effective
with the next Dividend Payment Date (as defined in Question 10), if the request
for change is received at least two weeks before that Date.
10. WHEN MAY A SHAREHOLDER OR INVESTOR 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 December each year
("Dividend Payment Date").
9
<PAGE>
Record Owners and Beneficial Owners wishing to make additional optional cash
payments through the Plan or investors not owning 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. WHO IS 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 first contribution in any quarter
must equal or exceed $100. The maximum aggregate amount of optional cash
payments under the Plan may not exceed $100,000 in any calendar year.
12. HOW ARE INITIAL DIRECT PURCHASE AND OPTIONAL CASH PAYMENTS MADE?
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 Bank Milwaukee, N.A., 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 Bank
Milwaukee, N.A. and should be accompanied by a properly completed Authorization
Card. Checks and cards should be mailed to Firstar Bank Milwaukee, N.A. (see
Question 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 Question 16).
Optional cash payments received by the 25th day of the month 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
Question 16).
COSTS
13. ARE THERE ANY EXPENSES TO PARTICIPANTS IN CONNECTION WITH PURCHASES UNDER
THE PLAN?
No. 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 Questions 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.
10
<PAGE>
PURCHASES
14. HOW MANY 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 Question
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. HOW WILL THE PURCHASE PRICE OF SHARES BE DETERMINED?
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.
16. WHEN WILL DIVIDENDS AND/OR INITIAL DIRECT PURCHASES OR OPTIONAL CASH
PAYMENTS BE INVESTED?
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. MUST ALL DIVIDENDS ON SHARES CREDITED TO A PARTICIPANT'S NONCERTIFICATED
SHARE ACCOUNT UNDER THE PLAN BE REINVESTED?
Yes. 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. WILL CERTIFICATES BE ISSUED 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 Question 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
Question 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
11
<PAGE>
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.
19. HOW MAY A PARTICIPANT 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, banker 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 Question 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 Questions 24-27 for information on
termination of participation.)
20. MAY COMMON STOCK HELD IN CERTIFICATE FORM BE DEPOSITED IN A PARTICIPANT'S
NONCERTIFICATED SHARE ACCOUNT?
Yes. 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 Question 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. Such deposits must be accompanied by a completed
Authorization Card. 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. WHAT TYPE OF REPORTS WILL BE 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 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. IN WHOSE NAME WILL ACCOUNTS 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.
12
<PAGE>
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. HOW DOES A PARTICIPANT MODIFY 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 Question 3 for address).
Beneficial Owners must use the B&N Form to change their participation. Notices
to change dividend reinvestments must be received by the Reinvestment Agent at
least two weeks before any Dividend Payment Date to be effective as of that
date.
24. HOW DOES A PARTICIPANT TERMINATE 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. Notices received less
than two weeks prior to the Dividend Payment Date will take effect after the
dividend has been posted to the Participant's account. 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.
25. CAN THE SHARES HELD IN THE PLAN BE SOLD 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 Question 3 for address).
26. WHAT HAPPENS TO THE 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 Question 18 for information on share certificates and
Question 19 for information on the cash payment for fractional shares in the
Noncertificated Share Account.)
13
<PAGE>
27. MAY A PARTICIPANT RECEIVE CASH IN LIEU OF FULL SHARE CERTIFICATES UPON
TERMINATION OF PARTICIPATION?
Yes. 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. MAY A PARTICIPANT SELL HIS OR HER RECORD SHARES AND STILL REMAIN 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 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. WHAT HAPPENS IF A PARTICIPANT SELLS OR TRANSFERS 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. MAY A PARTICIPANT STOP REINVESTING THE DIVIDENDS FROM HIS OR HER RECORD
SHARES AND RECEIVE THEM IN CASH AND STILL REMAIN IN THE PLAN?
Yes. 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. WHEN MAY A SHAREHOLDER RE-ENROLL 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. WHAT ARE THE DIVIDEND PAYMENT DATES?
Dividend Payment Dates are anticipated to be in December each year.
33. HOW WILL A PARTICIPANT'S SHARES BE VOTED 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.
14
<PAGE>
34. WHAT HAPPENS IF THE COMPANY ISSUES A STOCK DIVIDEND, DECLARES A STOCK SPLIT
OR HAS 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. CAN A PARTICIPANT PLEDGE SHARES CREDITED TO HIS OR HER ACCOUNT?
No. 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. WHAT IS THE 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, banker or other nominee.
Participant's should notify the Reinvestment Agent promptly in writing of any
change in address.
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 will not be
reduced or eliminated.
37. MAY THE PLAN BE MODIFIED, SUSPENDED OR TERMINATED?
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.
15
<PAGE>
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. WHAT IS THE 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 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. WHAT IS THE TAX TREATMENT OF SERVICE CHARGES AND BROKERAGE COMMISSIONS, IF
ANY, AS WELL AS 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. WHAT PROVISION IS MADE 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 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,
16
<PAGE>
(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. WHAT IS THE 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. WHAT ARE THE 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.
USE OF PROCEEDS
The net proceeds from the sale of authorized but unissued stock purchased
from the Company will be used for general corporate purposes.
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<PAGE>
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
The pro forma consolidated condensed statements of income for the year ended
December 31, 1997 and the nine months ended September 30, 1998 reflect interest
expense of $4.9 million for the year ended December 31, 1997, and $3.7 million
for the nine months ended September 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 the Company. The pro forma consolidated condensed
statements of income should be read in conjunction with the financial data
presented elsewhere in this Prospectus. The pro forma financial data are
presented for informational purposes only and may not reflect the future results
of operations of the Company.
UNITED WISCONSIN SERVICES, INC.
PRO FORMA CONSOLIDATED 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 CONSOLIDATED 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 Old 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 Company effective tax rate of
37.4% to the adjustment made pursuant to Note (a).
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<PAGE>
UNITED WISCONSIN SERVICES, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Premium revenue........................................................... $ 452,340 $ 452,340
Other revenue............................................................. 22,153 22,153
Investment results........................................................ 13,540 13,540
---------- -----------
Total revenues........................................................ 488,033 488,033
EXPENSES:
Medical and other benefits................................................ 385,902 385,902
Selling, general and administrative expenses.............................. 75,929 75,929
Interest expense.......................................................... 254 $ 3,409(a) 3,663
-----------
Provider profit sharing................................................... 2,087 2,087
Amortization of goodwill and other intangibles............................ 327 327
---------- -----------
Total expenses........................................................ 464,499 3,409 467,908
---------- ----------- -----------
Income before income tax expense.......................................... 23,534 (3,409) 20,125
Income tax expense........................................................ 9,028 (1,194)(b) 7,834
---------- ----------- -----------
Net income.................................................................. $ 14,506 $ (2,215) $ 12,291
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
(a) Reflects interest expense of $3.4 million for the nine months ended
September 30, 1998, associated with the $70.0 million of affiliated debt Old
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%, 6.96% and
6.97% for the first, second and third quarters of 1998, respectively. A
1/8% variance in the interest rate would cause an increase/decrease in net
income of approximately $42,700.
(b) Reflects the application of an effective tax rate of 35% to the adjustment
made pursuant to Note (a).
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected consolidated financial information
with respect to the Company. 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 consolidated
financial statements and notes thereto of the Company. 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 nine months ended September
30, 1998 and 1997 have been derived from unaudited financial statements which,
in the opinion of the Company'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 consolidated
financial statements of the Company do not necessarily reflect the results of
operations or financial position that would have resulted had the Company 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 the Company's
consolidated 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 prospectus.
<TABLE>
<CAPTION>
AS OF AND FOR THE
PRO FORMA NINE MONTHS ENDED PRO FORMA
AS OF AND FOR THE YEARS ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------- ------------- -------------------- -------------
1993 1994 1995(4) 1996(4) 1997 1997 1997 1998 1998
--------- --------- --------- --------- --------- ------------- --------- --------- -------------
(IN THOUSANDS, EXCEPT OPERATING STATISTICS)
STATEMENT OF INCOME DATA: (UNAUDITED) (UNAUDITED)
-------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Premium revenue........ $ 310,503 $ 355,025 $ 466,929 $ 493,092 $ 560,825 $ 560,825 $ 414,887 $ 452,340 $ 452,340
Other revenue.......... 7,515 15,997 24,222 27,632 26,046 26,046 20,044 22,153 22,153
Investment results..... 10,697 12,050 9,665 19,040 22,238 22,238 17,331 13,540 13,540
--------- --------- --------- --------- --------- ------------- --------- --------- -------------
Total revenues..... 328,715 383,072 500,816 539,764 609,109 609,109 452,262 488,033 488,033
--------- --------- --------- --------- --------- ------------- --------- --------- -------------
Expenses:
Medical and other
benefits............. 265,446 306,056 416,167 425,258 485,735 485,735 359,539 385,902 385,902
Selling, general and
administrative
expenses............. 43,578 58,026 72,576 83,839 93,959 93,959 70,656 75,929 75,929
Interest expense....... -- -- -- -- -- 4,892(2) -- 254 3,663
Provider profit
sharing............ 960 1,516 2,734 2,868 3,380 3,380 2,261 2,087 2,087
Amortization of
goodwill and other
intangibles........ 80 195 678 841 818 818 967 327 327
--------- --------- --------- --------- --------- ------------- --------- --------- -------------
Total expenses..... 310,064 365,793 492,155 512,806 583,892 588,784 433,423 464,499 467,908
--------- --------- --------- --------- --------- ------------- --------- --------- -------------
Income before income
tax expense........ 18,651 17,279 8,661 26,958 25,217 20,325 18,839 23,534 20,125
Income tax expense..... 5,900 5,072 3,277 10,617 9,433 7,603(3) 7,093 9,028 7,834
--------- --------- --------- --------- --------- ------------- --------- --------- -------------
Net income............... $ 12,751 $ 12,207 $ 5,384 $ 16,341 $ 15,784 $ 12,722 $ 11,746 $ 14,506 $ 12,291
--------- --------- --------- --------- --------- ------------- --------- --------- -------------
--------- --------- --------- --------- --------- ------------- --------- --------- -------------
BALANCE SHEET DATA:
Cash and investments... $ 162,421 $ 154,201 $ 178,926 $ 182,431 $ 176,579 $ 193,976 $ 183,341
Total assets........... 197,294 216,954 261,523 269,478 266,256 271,274 289,714
Long-term debt......... -- -- -- -- -- -- 70,000
Total shareholders'
equity............... 124,536 101,465 120,277 123,882 123,616 126,506 58,688
OPERATING STATISTICS:
Medical loss
ratio(1)............. 85.8% 86.2% 89.1% 86.2% 86.6% 86.6% 86.7% 85.3% 85.3%
Selling, general and
administrative
expense ratio(1)..... 10.9% 11.8% 11.0% 11.1% 11.2% 11.2% 11.2% 11.4% 11.4%
</TABLE>
20
<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, $51,721,000 and $46,352,000 for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 and the nine months ended
September 30, 1997 and 1998, respectively.
(2) Reflects pro forma adjustments for interest expense on assumed debt. See
"Pro Forma Consolidated Condensed Financial Information of the Company."
(3) Reflects pro forma adjustments for the tax effect of the adjustment
described in (2), above. See "Pro Forma Consolidated Condensed Financial
Information."
(4) Commencing October 1, 1994, the Company'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 the Company's
total premium revenue and $112,000 and $1,062,000 of the Company's net
income, respectively.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading provider of managed health care services and
employee benefit products, primarily in Wisconsin. The Company'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 SEPTEMBER 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Membership at end of period:
HMO products:
Compcare..................................... 161,372 149,636 173,241 172,606 174,027
Valley....................................... 27,476 33,434 37,906 37,730 40,752
Unity........................................ 66,623 79,147 85,117 83,481 86,604
---------- ---------- ---------- ---------- ----------
Total HMO products membership.............. 255,471 262,217 296,264 293,817 301,383
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Specialty managed care products and
services:
Life/AD&D.................................... 118,812 116,390 129,406 125,501 150,811
Dental HMO................................... 167,592 169,063 169,823 169,271 168,528
Behavioral health............................ 645,883 826,153 863,538 857,898 969,892
Workers' compensation........................ 55,845 53,574 54,928 55,747 53,365
Disability and other......................... 68,233 81,462 97,727 91,999 118,887
---------- ---------- ---------- ---------- ----------
Total specialty managed care products and
services membership...................... 1,056,315 1,246,642 1,315,422 1,300,416 1,461,483
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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% 85.8% 85.4%
Specialty managed care products and services................. 14.4 15.0 14.7 14.6 15.1
Intercompany eliminations.................................... (0.6) (0.4) (0.4) (0.4) (0.5)
--------- --------- --------- --------- ---------
Total...................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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% 90.1% 88.7%
Selling, general and administrative expense ratio(2)........... 9.2 9.3 9.2 9.2 9.3
Specialty managed care products and services:
Loss ratio(1).................................................. 77.1 69.8 74.1 71.3 70.7
Combined:
Loss ratio(1).................................................. 89.1 86.8 87.3 86.7 85.3
Net income margin(3)........................................... 1.1 3.0 2.6 2.6 3.0
</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.
The Company's revenues are derived primarily from premiums, while medical
benefits constitute the majority of expenses. Profitability is directly affected
by many factors including, among others, premium rate adequacy, estimates of
medical benefits, health care utilization, effective administration of benefit
payments, operating efficiency, investment returns and federal and state laws
and regulations.
RESULTS OF OPERATIONS
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.
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1997
The Company is a leading provider of managed health care services and
employee benefit products, primarily in Wisconsin. The Company has two primary
product lines: (i) Health Maintenance Organization ("HMO") products, including
Compcare Health Services Insurance Corporation ("Compcare"), Valley Health Plan,
Inc. ("Valley"), Unity Health Plans Insurance Corporation ("Unity") and certain
point-of-service ("POS") and other related products managed by Compcare, Valley
and Unity, and (ii) specialty managed care products and services, including
dental, life, disability and workers' compensation products, managed care
consulting, electronic claim submission, pharmaceutical management and managed
behavioral health services.
On May 27, 1998, the Board of Directors of American Medical Security Group,
Inc. ("AMSG") (formerly United Wisconsin Services, Inc.) approved a formal plan
to spin off its managed care companies and specialty business to its
shareholders. The spin off involved the creation of a new corporation originally
named Newco/UWS, Inc. subsequently renamed United Wisconsin Services, Inc., and
the distribution of one share of common stock of the Company on September 25,
1998 for each share of AMSG common stock held as of September 11, 1998 (Record
Date). AMSG has received a private letter ruling from the Internal Revenue
Service that the spin off is tax free to AMSG, the Company and their
shareholders.
23
<PAGE>
TOTAL REVENUES
Total revenues for the three months ended September 30, 1998 increased 6.9%
to $165.1 million from $154.5 million for the three months ended September 30,
1997. On a year-to-date basis, total revenues increased 7.9% to $488.0 million
from $452.3 million for the nine months ended September 30, 1997. These
increases were due primarily to increased membership in a majority of the
product lines and general premium increases.
HEALTH SERVICES REVENUES--HMO health services revenues for the three months
ended September 30, 1998 increased 8.8% to $131.7 million from $121.0 million
for the three months ended September 30, 1997. Average HMO medical premium per
member for the three months ended September 30, 1998 increased 5.9% from the
same period in the prior year. The average number of HMO medical members for the
three months ended September 30, 1998 increased 2.3% to 299,130 from 292,343 for
the three months ended September 30, 1997.
HMO health services revenues for the nine months ended September 30, 1998
increased 8.6% to $386.4 million from $355.8 million for the same period in the
prior year. Average HMO medical premium per member for the nine months ended
September 30, 1998 increased 4.2% from the same period in the prior year,
primarily due to general premium increases. The average number of HMO medical
members for the nine months ended September 30, 1998 increased 4.0% to 295,981
from 284,658 for the same period in the prior year.
Health services revenues for specialty managed care products and services
for the three months ended September 30, 1998 increased 13.0% to $34.9 million
from $30.9 million for the three months ended September 30, 1997. Health
services revenues for specialty managed care products and services for the nine
months ended September 30, 1998 increased 10.9% to $101.1 million from $91.1
million for the nine months ended September 30, 1997. This increase was due
primarily to an increase in general membership in both periods.
NET INVESTMENT RESULTS--Investment results include investment income and
realized gains on investments. Investment results for the three months ended
September 30, 1998 decreased 46.2% to $3.6 million from $6.7 million for the
three months ended September 30, 1997. On a year-to-date basis, investment
results decreased 21.9% to $13.5 million from $17.3 million for the same period
in the prior year. Average annual investment yields, excluding net realized
gains, were 5.3% for the three months ended September 30, 1998 and 6.0% for the
three months ended September 30, 1997. On a year-to-date basis, average
investment yields, excluding net realized gains, were 5.5% and 5.7% for 1998 and
1997, respectively. Average invested assets for the three months ended September
30, 1998 decreased 3.4% to $181.3 million from $187.7 million for the three
months ended September 30, 1997. On a year-to-date basis, average invested
assets decreased 0.1% to $181.4 million compared to $183.2 million for the same
period in 1997.
Investment gains are realized in the normal investment process in response
to market opportunities. Realized gains for the three months ended September 30,
1998 were $1.3 million compared to $3.9 million for the three months ended
September 30, 1997. On a year to date basis, realized gains were $6.3 million in
1998 compared to $10.1 million in 1997.
EXPENSE RATIOS
LOSS RATIO--The consolidated loss ratio represents the ratio of medical and
other benefits to premium revenue on a consolidated basis, and is therefore a
blended ratio for medical, life, dental, disability and other product lines. The
consolidated loss ratio was 86.0% for the third quarter of 1998 compared with
87.7% for the third quarter of 1997. On a year-to-date basis, the consolidated
loss ratio was 85.3% for the first nine months of 1998, compared with 86.7% for
the first nine months of 1997. The consolidated loss ratio is influenced by the
component loss ratio for each of the Company's primary product lines, as
discussed below.
24
<PAGE>
The medical loss ratio for HMO products for the three months ended September
30, 1998 was 89.4%, compared with 91.3% for the three months ended September 30,
1997. On a year-to-date basis, the medical loss ratio for HMO products was
88.7%, compared with 90.1% for the same period in 1997. The decrease in the
medical loss ratio in 1998 for HMO products is due primarily to provider
recontracting with a continuing shift toward capitation in the southeastern
Wisconsin HMO market. For the nine months ended September 30, 1998,
approximately 55.7% of the medical benefits were provided under capitated
arrangements compared to 48.6% during the comparable period in 1997.
The loss ratio for the risk products within specialty managed care products
and services for the three months ended September 30, 1998 was 71.3%, which was
consistent with the three months ended September 30, 1997. On a year-to-date
basis, the loss ratio for risk products within specialty managed care products
and services was 70.7% compared with 71.3% for the same period in the prior
year. The decrease is primarily attributable to improved results in the United
Heartland worker's compensation block of business.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE RATIO--The selling, general and
administrative ("SGA") expense ratio includes commissions, administrative
expenses, and premium taxes and other assessments. The SGA expense ratio for HMO
products for the third quarter of 1998 was 9.0%, compared with 8.8% for the
third quarter of 1997. On a year-to-date basis, the SGA expense ratio for HMO
products was slightly higher for 1998 at 9.3% compared to 9.2% for the same
period in 1997.
SGA expense ratio related to the risk products within specialty managed care
products and services for the third quarter of 1998 was 25.0%, compared with
24.0% for the third quarter of 1997. On a year-to-date basis, SGA expense ratio
for the risk products was 25.4% for 1998 compared with 23.4% for the same period
in 1997. This increase was due to higher investments in improved system
capabilities and enhancements and related system conversion and training costs,
in addition to loss adjustment expenses recorded on the workers' compensation
business which was transferred from the TPA unit.
The operating expense ratio related to the service products within specialty
managed care products and services for the third quarter of 1998 was 91.2%,
compared with 97.7% for the third quarter of 1997. On a year-to-date basis, the
operating expense ratio for the service products was 91.5% for the nine months
ended September 30, 1998 compared with 98.0% for the same period in 1997. Those
reductions in 1998 are primarily related to a transfer of loss adjustment
expenses previously recorded by the workers' compensation TPA unit to the
workers' compensation risk products business.
OTHER EXPENSES
Profit sharing on joint ventures was $0.7 million for the three months ended
September 30, 1998 compared with $1.1 million for the three months ended
September 30, 1997. On a year-to-date basis, profit sharing on provider
arrangements was $2.1 million for the nine months ended September 30, 1998 and
$2.3 million for the same period in 1997. These balances represent profit
sharing expenses related to the Unity and Valley provider arrangements.
Amortization of goodwill and other intangibles remained consistent at $0.1
million for the three months ended September 30, 1998 and 1997. On a
year-to-date basis, amortization of goodwill and other intangibles totaled $0.3
million for 1998 compared with $1.0 million of amortization expense for the same
period in 1997. The reduction is due to full amortization of certain
intangibles.
NET INCOME FROM OPERATIONS
Net income from operations for the three months ended September 30, 1998
increased 6.0% to $4.1 million from $3.9 million for the three months ended
September 30, 1997. Net income from operations for the nine months ended
September 30, 1998 increased 23.5% to $14.5 million from $11.7 million for the
nine months ended September 30, 1997.
25
<PAGE>
The Company's effective tax rate was 38.1% for the three months ended
September 30, 1998 compared with 36.6% for the three months ended September 30,
1997. On a year-to-date basis, the Company's effective tax rate was 38.4% for
the nine months ended September 30, 1998, compared with 37.7% for the nine
months ended September 30, 1997. The Company's effective tax rate fluctuates
based upon the relative profitability of the Company's two product lines and the
differing effective tax rate for each of those product lines.
SUMMARY OF OPERATING RESULTS AND STATISTICS
Operating results and statistics for the two primary product groups are
presented below for the periods indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Membership at end of period:
HMO products by business unit:
Compcare............................................................................ 174,027 172,606
Valley.............................................................................. 40,752 37,730
Unity............................................................................... 86,604 83,481
---------- ----------
Total HMO products membership..................................................... 301,383 293,817
---------- ----------
---------- ----------
Specialty managed care products and services:
UWG Life/AD&D....................................................................... 150,811 125,501
Dental--HMO......................................................................... 168,528 169,271
UWG Dental.......................................................................... 12,160 13,133
Disability.......................................................................... 106,727 78,866
Behavioral Health................................................................... 969,892 857,898
Workers' Compensation............................................................... 53,365 55,747
---------- ----------
Total Specialty managed care products and services membership..................... 1,461,483 1,300,416
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Health services revenues (as a percentage of the total):
HMO products...................................................... 81.6% 81.9% 81.4% 81.8%
Specialty managed care products and services
Service Products................................................ 7.0% 6.7% 6.8% 6.8%
Risk Products................................................... 14.6% 14.1% 14.5% 14.1%
Intercompany eliminations......................................... (3.2%) (2.7%) (2.7%) (2.7%)
--------- --------- --------- ---------
Total....................................................... 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating statistics:
HMO products:
Medical loss ratio (1).......................................... 89.4% 91.3% 88.7% 90.1%
Selling, general, & administrative expense ratio (2)............ 9.0% 8.8% 9.3% 9.2%
Combined loss and expense ratio................................. 98.4% 100.1% 98.0% 99.3%
Specialty managed care products and services:
Service products:
Operating expense ratio*........................................ 91.2% 97.7% 91.5% 98.0%
Risk products:
Loss ratio (1).................................................. 71.3% 71.3% 70.7% 71.3%
Selling, general, & administrative expense ratio (2)............ 25.0% 24.0% 25.4% 23.4%
Combined loss and expense ratio................................. 96.3% 95.3% 96.1% 94.7%
Consolidated:
Loss ratio (1).................................................. 86.0% 87.7% 85.3% 86.7%
Net income margin (3)........................................... 2.5% 2.5% 3.0% 2.6%
</TABLE>
- ------------------------
(1) Medical and other benefits as a percentage of premium revenue.
(2) Selling, general and administrative expenses as a percentage of premium
revenue.
(3) Net income as a percentage of total revenues.
* This business does not have insurance related risk associated with it.
The Company's revenues are derived primarily from premiums, while medical
benefits constitute the majority of expenses. Profitability is directly affected
by many factors including, among others, premium rate adequacy, estimates of
medical benefits, health care utilization, effective administration of benefit
payments, operating efficiency, investment returns and federal and state laws
and regulations.
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
27
<PAGE>
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, the Company 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 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.
28
<PAGE>
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.
The Company'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 the Company's three product lines and the differing
effective tax rates for each of those product lines.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of health services
revenues and investment income. The primary uses of cash include medical and
other benefits and operating expense payments. Positive cash flows are invested
pending future payments of medical and other benefits and other operating
expenses. The Company's investment policies are designed to maximize yield,
preserve principal and provide liquidity to meet anticipated payment
obligations.
On a historical basis, the Company has generated positive cash flow from
operations. For the nine months ended September 30, 1998, net cash provided by
operating activities amounted to $11.4 million, compared with $9.9 million for
the nine months ended September 30, 1997. The increase in cash flows from
operations in 1998 compared to 1997 was due primarily to an increase in
earnings, medical and other benefits payable and premium advances. Due to
periodic cash flow requirements of certain subsidiaries, the Company made
borrowings under its bank line of credit ranging up to $10.0 million during the
first nine months of 1998 and $8.5 million during the first nine months of 1997
to meet short-term cash needs. No balance was outstanding at September 30, 1998
or at December 31, 1997.
The Company's investment portfolio consists primarily of investment grade
bonds, Government securities and has a limited exposure to equity securities. At
September 30, 1998, $126.4 million or 81.0% of the Company's total investment
portfolio was invested in bonds compared with $127.8 million or 80.1% at
December 31, 1997. The bond portfolio had an average quality rating by Moody's
Investor Service of A1 and Aa3 at September 30, 1998 and December 31, 1997,
respectively. The majority of the bond portfolio was classified as available for
sale. The market value of the total investment portfolio, which includes stocks
and bonds, exceeded amortized cost by $0.6 million and $4.8 million at September
30, 1998 and
29
<PAGE>
December 31, 1997, respectively. The Company has no investments in mortgage
loans, non-publicly traded securities (except for principal only strips of U. S.
Government securities), real estate held for investment or financial
derivatives.
From time to time, capital contributions are made to the subsidiaries to
assist them in maintaining appropriate levels of capital and surplus for
regulatory and rating purposes. Insurance subsidiaries are required to maintain
certain levels of statutory capital and surplus. In Wisconsin, where a large
percentage of the Company's premium is written, these levels are based upon the
amount and type of premiums written and are calculated separately for each
subsidiary. As of the balance sheet dates presented, statutory capital and
surplus for each of these insurance subsidiaries exceeded required levels.
The amount of dividends which may be paid to the Company 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, the Company 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. The Company recognizes that its debt to equity ratio is high,
primarily as a result of its assumption of the $70.0 million loan from BCBSUW to
Old UWS. However, the Company believes that this ratio should improve as a
result of BCBSUW's intended purchases of shares of Common Stock to bring its
direct and indirect ownership of from 38.1% to approximately 51%. The purchase
price for the shares of the Company's 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 Common Stock in the open market.
The Company is party to certain provider arrangements in conjunction with
Unity.
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, which continues to be Valley's primary health care provider.
Under the terms of the purchase and sale agreement, Midelfort 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.
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
30
<PAGE>
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, the Company 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 the Company 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 the Company's liquidity and capital resources.
Management believes that 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.
INFLATION
Health care costs have been rising and are expected to continue to rise at a
rate that exceeds the consumer price index. The Company'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, the Company 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 the Company's efforts will fully offset the impact of inflation
or that premium revenue increases will equal or exceed increasing health care
costs.
YEAR 2000 ISSUES
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has identified required modifications or replacements of its
software and certain hardware so that those systems will properly utilize dates
beyond December 31, 1999. The Company presently believes that with these
modifications or replacements of existing software and certain hardware, the
Year 2000 Issue can be mitigated and will not pose significant operational
problems. However, if such modifications and conversions are not made or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all systems that could be
significantly affected by the Year 2000 Issue. The completed assessment
indicated that most of the Company's significant information technology systems
could be affected, particularly the general ledger, billing and processing of
medical claims. That assessment also indicated that software and hardware
(embedded chips) used in building operations and office equipment (hereafter
also referred to
31
<PAGE>
as non-IT systems) also are at risk. The Company does not believe that the Year
2000 Issue presents a material exposure as it relates to the Company's non-IT
systems.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR
COMPLETION OF EACH REMAINING PHASE
As of September 30, 1998, the Company is approximately 70% complete on the
remediation phase for its information technology exposures. The Company also
expects to complete software reprogramming and replacement no later than
December 31, 1998. Once software is reprogrammed or replaced for a system, the
Company will begin testing and implementation. These phases are expected to run
concurrently for different systems. For all systems where the Company has
completed the remediation phase, the Company has also completed the testing and
implementation phases. For those systems where remediation is still underway,
the Company expects to complete remediation, testing and implementation by March
1, 1999.
The remediation phase of non-IT systems is nearly complete. Testing of
remediated non-IT systems is approximately 65% complete. Once testing is
complete, the non-IT systems are expected to be ready for immediate use. The
Company expects to complete its remediation efforts, testing and implementation
of affected non-IT systems by March 31, 1999.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR
2000
The Company outsources and relies extensively on third party systems to
process selected payroll, membership and claims processing functions, among
others. The Company is in the process of working with third party vendors to
ensure that their systems are Year 2000 ready. The Company is currently
completing a claims system conversion for one of its units, which is expected to
be completed by December 31, 1998. Upgrades and testing of the membership system
for that same unit is expected by March 1, 1999. Based on discussions with these
key vendors, the Company is of the understanding that the vendor systems
utilized by the Company are or will be year 2000 ready.
The Company has initiated formal communications with its systems processing
vendors, government agencies and all large customers and providers using
electronic interfaces to determine the extent to which the Company's interface
systems are vulnerable to the failure of third parties to remediate Year 2000
Issues. The Company is not aware of any significant interface issues.
The Company has surveyed its significant suppliers and subcontractors
(external agents) that do not share information systems with the Company. To
date, the Company is not aware of any external agent with a Year 2000 issue that
would materially impact the Company's results of operations, liquidity, or
capital resources. However, the Company has no means of ensuring that external
agents will be Year 2000 ready. The inability of external agents to complete
their Year 2000 resolution process in a timely fashion could materially impact
the Company. The effect of non-compliance by external agents is not
determinable.
COST OF THE YEAR 2000 PROJECT
The Company has utilized both internal and external resources to reprogram
or replace, test and implement the software and non-IT systems for the Year 2000
modifications. The total cost of the Year 2000 project is estimated at $0.7
million and is being funded through operating cash flows. To date, the Company
has incurred $0.5 million of identifiable costs related to all phases of the
Year 2000 project. Remaining costs, to be incurred to complete the Year 2000
project, are estimated to approximate $0.2 million. An additional $6.1 million
of costs were incurred to replace systems primarily the result of a service
agreement expiration and to provide additional functionality. These replacements
also included Year 2000 readiness but were not the result of acceleration due to
Year 2000 Issues. In addition, the Company has capitalized $0.9 million and will
capitalize an additional $0.2 million related to other functionality enhancing
system upgrades which also provide Year 2000 readiness. A number of other
32
<PAGE>
repairs to current systems are covered by existing maintenance agreements and by
normal upgrades and do not present incremental additional expense.
Costs related to maintenance of existing computer hardware and software are
expensed as incurred. Purchases of new hardware or software in replacement of
non-compliant hardware or software and reprogramming costs are being capitalized
in accordance with the Company's standard accounting practices.
RISKS ASSOCIATED WITH YEAR 2000
The Company Management believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Company is unable to complete the remaining phases, the Company would
selectively be unable to bill and collect premiums, adjudicate medical and other
claims, manage the utilization of medical services or perform actuarial
determinations. In addition, disruptions in the economy generally resulting from
Year 2000 issues could also materially adversely affect the Company. The Company
could be subject to litigation on a loss of business in the event it failed to
complete certain of the remaining remediation and implementation steps. The
amount of any potential liability and lost revenue cannot be reasonably
estimated at this time. No provision for any such liability or lost revenue has
been recorded.
CONTINGENCY PLANS
The Company is developing contingency plans for certain critical
applications and is working on such plans with major data center vendors. These
contingency plans are being developed in the event the system conversions and
their functionality or the readiness of Year 2000 are not completed on a timely
basis. These contingency plans involve, among other actions, manual workarounds,
reducing claim inventories prior to December 31, 1999, and adjusting staffing
strategies.
33
<PAGE>
BUSINESS
AVAILABLE INFORMATION
The Company is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Information as of particular dates concerning
directors and officers, their remuneration and any material interest of such
persons in transactions with the Company will be disclosed in reports, proxy
statements and other information distributed to shareholders of the Company and
filed with the Commission. Such reports, proxy statements and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain
Regional Offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048, and at Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material can be obtained in
person from the Public Reference Section of the Commission at its principal
office located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 25049, at prescribed rates. The Common Stock is listed on the
New York Stock Exchange (the "NYSE"), and such reports, proxy statements and
other information also may be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005. The Commission also maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants such as the Company that file
electronically with the Commission.
This Prospectus constitutes a part of a registration statement on Form S-1
(herein, together with all exhibits and schedules thereto, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Reference is hereby made to the Registration
Statement for further information with respect to the Company and the securities
offered hereby. Copies of the Registration Statement are on file at the offices
of the Commission and may be obtained upon payment of the prescribed fee or may
be examined without charge at the public reference facilities of the Commission
described above. Statements contained herein concerning the provisions of
documents are necessarily summaries of such documents, and each statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission.
GENERAL
The Company is a leading managed care and employee benefits company
primarily in Wisconsin, but also serves markets in 38 other states. The products
and services offered by the Company 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. The Company also offers 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 the Company 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 the Company effective October 1, 1994. Community Physicians'
Network, Inc.
34
<PAGE>
("CPN") and the University of Wisconsin-Madison Medical Center, constitute the
provider networks for Unity.
The Company'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 the
Company's various lines of business for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
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 $ 355,797 $ 386,423
Specialty managed care products and services and
other revenue...................................... 97,138 113,277 123,859 91,129 101,076
Eliminations....................................... (8,341) (13,801) (16,170) (11,995) (13,006)
---------- ---------- ---------- ---------- ----------
Total earned premiums and other
revenue........................................ $ 491,151 $ 520,724 $ 586,871 $ 434,931 $ 474,493
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
THE COMPANY'S STRATEGY
The Company 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. The Company also believes there are
significant niches offering opportunities for companies that are responsive to
consumer demand for affordable health care. The Company 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. The Company also believes there are opportunities to develop or
enhance specialty managed care products and services which will leverage the
Company's expertise in the health care market. To take advantage of market
opportunities, the Company has developed the following business strategy:
- EMPHASIZE COST-EFFECTIVE ACCESS TO QUALITY HEALTH CARE OPTIONS. The
Company believes that rising health care costs continue to cause buyers to
seek cost-effective quality health care options for employees. The Company
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. The Company 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. The Company 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, the Company 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. The
Company also recently completed the acquisition of the remaining interest
in CNR. Further, the Company believes that additional strategic alliances
will enable the Company to provide additional products and services in its
existing markets.
- EXPAND GEOGRAPHICALLY. The Company intends to continue to expand its
activities outside of its traditional areas of operation both inside and
outside of Wisconsin. Compcare has continued to
35
<PAGE>
increase its market share in southeastern Wisconsin by expanding its
provider networks in counties surrounding Milwaukee. The Company 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. The Company 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 the Company seeks additional opportunities to expand the workers'
compensation business through acquisitions or strategic joint ventures. In
addition, the Company 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 the Company to approximately 51%, Compcare intends
to license and use the Blue Cross and Blue Shield service marks with its
products. The Company 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, the Company has access to
BCBSUW's extensive database of health care claims information. The Company
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 the Company, 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 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.
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<PAGE>
MARKETING AND CUSTOMERS
Marketing HMO products generally is a two-step process. Presentations are
made first to employers. Once selected by an employer, the Company then directly
solicits members from the employee base. During periodic "open enrollments,"
when employees are permitted to change health care programs, the Company 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, the Company 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 September 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........................................... 104,331 37,849 31,841 174,027
Valley............................................. 24,246 12,496 4,010 40,752
Unity.............................................. 65,618 15,815 5,171 86,604
--------- --------- ----------- ---------
194,195 66,160 41,028 301,383
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
Trends in membership over the last several years have shown that there is
strong growth in the Company's POS and Medicaid products, with slower growth in
HMO membership.
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, the Company 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. The Company 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.
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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. The Company believes that health care will continue to be an important
negotiating issue with organized labor groups and the reputation of the
Company's HMOs are advantageous to its future marketing efforts.
Through one of the Service Agreements, the Company 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. The Company 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
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
the Company 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. The Company considers its relationships
38
<PAGE>
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. The Company 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 nine months ended September 30, 1998, approximately 45.8%,
23.1% and 95.0% 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, the Company 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 the
Company. 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.
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 $1.0
million for the nine months ended September 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, the Company would have no ongoing
interest in Valley.
39
<PAGE>
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 $1.6 million for the nine months ended September 30,
1998. CHS and UHC have options to repurchase the businesses originally sold to
the Company 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, the Company
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, the Company 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 the Company'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.
The Company 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, the Company 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 the Company's dental HMO
operations (formerly known as Dentacare). Heartland Dental was established as a
separate entity to facilitate growth of prepaid dental business outside of
Wisconsin. Prepaid dental services were provided to 168,500 members as of
September 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. The
Company 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
40
<PAGE>
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
The Company 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. The Company'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 September 30, 1998, the
Company had a total of 257,500 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. The Company
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"), the Company applies
managed care techniques to the workers' compensation market in Wisconsin. 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 nine months of 1998, the Company 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.
The Company 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 the Company for
United Heartland clients; and (iii) access to the hospital bill audit and
41
<PAGE>
medical staff of the Company as needed in claims handling. The Company 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"), the Company 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. The Company 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.
The Company'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. 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 969,900 lives as of September
30, 1998, while its revenues for the year ended December 31, 1997 were $18.8
million.
42
<PAGE>
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. The Company 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 the Company is a leading provider of managed care services in
Wisconsin, the Company may experience increased competition in the future. The
Company 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 the Company's
competitors are larger, have considerably greater financial resources and
distribution capabilities and offer more diversified types of insurance coverage
than the Company.
REINSURANCE
The Company manages the risk it retains through the use of reinsurance. The
Company 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. The Company's
quota share reinsurance treaties allocate the total amount of business subject
to the treaties between the Company 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 the Company's workers' compensation business is
ceded to an independent reinsurer. Excess of loss reinsurance is used to cap the
amount of loss retained by the Company on individual claims or a series of
claims. Excess of loss reinsurance is utilized by the Company'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, the Company limits its
retention per claim to $75,000. For workers' compensation claims, the Company
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 the Company, all reinsurers with which the Company
contracts are rated "A-" "(Excellent)" or better by Best.
SERVICE AGREEMENTS
The Company 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 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, the Company paid approximately $9.3 million for such
services, and received approximately $14.6 million from BCBSUW for the provision
of such services.
The Company 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
43
<PAGE>
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 the Company. 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
was submitted to OCI for its review and lack of disapproval.
INVESTMENTS
The Company attempts to minimize its business risk through conservative
investment policies. Investment guidelines set quality, concentration and return
parameters. The Company'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 the
Company'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. The Company invests in securities
authorized by applicable state laws and regulations and follows investment
policies designed to maximize yield, preserve principal and provide liquidity.
The Company'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 the Company'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 the Company, which
may be amended from time to time.
Securities which may be sold prior to maturity to support the Company'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 the Company 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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<PAGE>
The table below reflects investment results for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $ 189,204 $ 179,960
Net investment income(2)............................. 8,571 10,659 10,317 7,197 7,200
Average yield........................................ 5.15% 5.90% 5.75% 5.51% 5.33%
Net realized gain (losses)........................... 1,094 8,381 11,921 10,134 6,340
Net unrealized gains (losses) on stocks & bonds...... 3,511 3,959 3,211 4,039 (90)
</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 the Company'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. The
Company 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 the Company 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 the Company's compliance or
otherwise affect the Company's operations, products, profitability or business
prospects.
The Company 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 the Company 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. The Company 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. The Company 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 the Company'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.
45
<PAGE>
The Company is unable to predict what reforms, if any, may be enacted or how
these reforms would affect the Company's operations.
HMOS. Wisconsin and the other states in which the Company 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 the Company'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.
The Company's other HMOs are only subject to state regulation because they are
not federally qualified HMOs.
The Company'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 the Company's
operations.
Several of the Company'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. The Company's health plans which have contracted with FEHBP are subject
to such audits and may be requested to make such refunds.
INSURANCE REGULATION. The Company'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. The Company'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. The Company
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 the
Company's capital requirements.
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<PAGE>
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 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 the Company'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. The Company 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 the Company, 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 the Company'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
the Company'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.
The Company 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 the Company'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 the Company's
liability exposure under state law-
47
<PAGE>
based suits relating to employee health benefits offered by the Company's health
plans and specialty businesses and may permit greater state regulation of other
aspects of those businesses' operations.
EMPLOYEES
As of September 30, 1998, the Company had 1,226 full-time and 54 part-time
employees, of whom 208 were managerial and supervisory personnel. Of these
employees, 61 were represented by a union. The Company considers its relations
with its employees to be good.
TRADEMARKS
"Compcare" is a federally registered service mark of the Company. The
Company has filed for and maintains various other trademarks and trade names at
the federal level and in the State of Wisconsin. Although the Company considers
its registered service marks, trademarks and trade names important in the
operation, of its business, the business of the Company is not dependent on any
individual service mark, trademark or trade name.
PROPERTIES
The Company occupies common facilities with BCBSUW and is charged a
proportionate share of the cost of such facilities under the Service Agreements.
The Company's corporate headquarters are located in Milwaukee, Wisconsin in a
235,000 square foot building leased by BCBSUW. The Company 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, the Company'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
The Company 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, the Company believes
that the ultimate resolution of these proceedings will not have a material
adverse effect on its financial condition or results of operations.
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and low sales prices for the Common
Stock on the New York Stock Exchange Composite Tape or reported by The Wall
Street Journal for the periods indicated. The Company has not paid any
dividends.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Third Quarter 1998............................. $ 7.19 $ 5.81
Fourth Quarter 1998 (Through December )...... -- --
</TABLE>
As of December , 1998, the Company had shareholders of record.
48
<PAGE>
MANAGEMENT
DIRECTORS
The Company'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. 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 November 15, 1998, class of directorship and business
background of each of the persons who serve as directors are set forth below.
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- --------------------------------------------------------------------------------------
<S> <C>
CLASS I DIRECTORS
Michael D. Dunham Director of Old UWS from 1997 to 1998; Director of BCBSUW from 1996 to 1997; Chief
Age: 53 Executive Officer and 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 Old UWS from 1991 to 1998; Director of BCBSUW since 1974; President and
Age: 66 Chief 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 Old 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>
49
<PAGE>
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- --------------------------------------------------------------------------------------
<S> <C>
CLASS II DIRECTORS
Richard A. Abdoo Director of Old UWS from 1991 to 1998; Director of BCBSUW from 1991 to 1997; Chairman
Age: 54 of 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 Old UWS since 1993; Chairman of Johansen Capital Investment and Financial
Age: 72 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 Old UWS since 1991; Director of BCBSUW from 1987 to 1992. Prior to his
Age: 68 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 Old UWS from 1983 to 1998; President of Old UWS from 1986 to 1998 and
Age: 51 Chairman of the Board and Chief Executive Officer of Old 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 Old 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 Old 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>
50
<PAGE>
DIRECTORS' MEETINGS AND COMMITTEES
The Board of Directors holds four regularly scheduled meetings per year and
will hold such special meetings as it deems advisable to review significant
matters affecting the Company and to act upon matters requiring Board approval.
The Board of Directors has standing Executive, Finance, Management Review and
Audit Committees.
The Executive Committee discharges 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 has the
authority to approve long range corporate and strategic plans, advise and
consult with management on corporate policies, approve the Company'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 are Messrs. Forbes (Chairman), Abdoo
and Hickman.
The Finance Committee approves investment policies and plans and approves
the investment of funds of Newco, consults with management regarding real
estate, accounts receivable and other assets, determines the amounts and types
of insurance carried by Newco, advises and consults with management regarding
selection of insurance carriers and corporate tax policies and discharges
certain other responsibilities of the Board of Directors when so instructed by
the Board. The members of the Finance Committee are Messrs. Hefty (Chair), Rupp
and Johnson and Ms. Skornicka.
The Management Review Committee evaluates the performance of Newco's
executive officers, approves executive officer development programs, determines
the compensation of the executive officers and reviews management's
recommendations as to the compensation of other key personnel, acts as the
nominating committee for officers and directors and makes recommendations to the
Board of Directors regarding the types, methods and levels of director
compensation, administers the compensation plans for the officers, directors and
key employees, and discharges 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 are Messrs. Forbes (Chair), Abdoo,
Dunham and Hickman.
The Audit Committee reviews the scope and timing of the audit of the
Company's financial statements by the Company's independent public accountants
and review with these accountants the Company's management policies and
procedures with respect to auditing and accounting controls. The Audit Committee
also reviews with the independent accountants the financial statements for the
Company and the auditors' reports and management letter. The Audit Committee
selects and engages the Company's accountants and reviews and approves all
related party transactions. In addition, it reviews and evaluates conflict of
interest statements and discharges certain other responsibilities of the Board
of Directors when so instructed by the Board. The members of the Audit Committee
are Messrs. Menden (Chair), Abdoo, Dunham and Hickman.
COMPENSATION OF DIRECTORS
Directors who are officers or employees of the Company 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 the
Company receives a fee of $1,100 for each Board or Committee meeting attended,
and a monthly retainer of $750. In addition, each Committee Chairman receives a
monthly fee of $250.
The Company also maintains a Deferred Compensation Plan for Directors under
which members of the Board of Directors may elect to defer receipt of all or a
portion of their directors' fees. Under such plan, the Company is be obligated
to repay the deferred fees, in either a lump sum or installments as
51
<PAGE>
elected by 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 Board of Directors.
EXECUTIVE OFFICERS
The name, age, title and business background of each of the executive
officers are set forth below. The individuals named below previously were
officers of Old UWS and various of its subsidiaries, but resigned from all
positions held at Old 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 the Company. Mr. Hefty was elected President of Old UWS in 1986 and
Chairman of the Board and Chief Executive Officer of Old UWS in 1991. Since
1987, he has served in various capacities with the Company'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 is Vice President, General Counsel and Secretary of the
Company. Mr. Bablitch joined Old 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. He has also served in various capacities the
Company's subsidiaries since 1996. Prior to joining Old UWS and BCBSUW, Mr.
Bablitch was an attorney with Dewitt, Ross and Stevens, Madison, Wisconsin from
1991 to 1996.
DEVON W. BARRIX is Vice President of the Company. He was elected a Vice
President of Old UWS in 1994 following the Company'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 is Executive Vice President and Chief Operating Officer
of the Company. Mr. Formisano was elected Executive Vice President and Chief
Operating Officer of Old UWS in 1995. He had been a Vice President of Old UWS
from 1992 to 1998. 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
Old UWS's subsidiaries, and is a
52
<PAGE>
director of Integrity Mutual Insurance Company and Wisconsin Sports Authority,
Inc., both privately held companies.
MARK H. GRANOFF is Vice President of the Company. Mr. Granoff was elected a
Vice President of Old UWS in 1991 and was elected President of UWIC in 1991 and
UHLIC in 1997. He has served in various capacities with some of Old 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 is Vice President and Treasurer of the Company. Ms. Hanson
was Treasurer of Old UWS since 1987 and was elected a Vice President in 1996.
She has served in various capacities with Old 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 is Chief Financial Officer of the Company. Mr. Mordy was a
Vice President and the Chief Financial Officer of Old UWS since 1987. He has
served in various capacities with Old UWS's subsidiaries since 1987. Mr. Mordy
has been a Vice President and Corporate Controller of BCBSUW since 1986.
EMIL E. PFENNINGER is Vice President of the Company. Mr. Pfenninger was
elected a Vice President of Old 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 is Vice President of Regional Services of the Company. Ms.
Siewert was elected Vice President of Regional Services of Old 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 is Vice President of the Company. Ms. Traver was a Vice
President of Old UWS since 1988. Ms. Traver was Vice President and General
Counsel of Old UWS from 1988 to 1996 and Secretary from 1992 to 1996. She has
served in various capacities with some of Old 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.
53
<PAGE>
EXECUTIVE COMPENSATION
The Company was formed in 1998 and its executive officers did not begin
receiving any compensation, stock options or other benefits from the Company
until September 1998. As the Company has not yet completed a fiscal year, no
information exists regarding compensation or other benefits paid to executive
officers of the Company for any completed fiscal year or portion thereof.
54
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
SERVICE AGREEMENTS WITH BCBSUW
The Company 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, the
Company paid approximately $14.6 million for such services, and received
approximately $9.3 million from BCBSUW for the provision of such services.
BCBSUW LOAN
In connection with the Distribution, the Company assumed a debt obligation
of Old UWS to BCBSUW in the principal amount of $70.0 million. On October 30,
1996, Old 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 Old UWS. Old 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.
BCBSUW INTENDED PURCHASE OF ADDITIONAL SHARES OF COMMON STOCK
BCBSUW owns 38.1% of the issued and outstanding shares of Old UWS Common
Stock and 38.1% of the issued and outstanding shares of Common Stock. One of the
primary reasons for effectuating the Distribution is so that the managed care
business can use the Blue Cross and Blue Shield service marks in connection with
its products and services. In order to use the service marks, one of the
requirements is that a Blue Cross plan must "control" the company (meaning that
the plan must directly or indirectly own more than 50% of the stock of the
company and must have operational control over the company). Therefore, BCBSUW
intends to purchase additional shares of Common Stock to bring its overall
direct and indirect ownership of the Company to approximately 51%. The purchase
price for the shares of Common Stock to be purchased directly from the Company
will be based on the market price of the shares of 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 Company indebtedness to
BCBSUW or in cash. BCBSUW may purchase some of the shares of 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 the Company shareholder approval as a
result of certain NYSE rules. The rules of the NYSE require that the
shareholders of the Company approve the sale of shares of Common Stock to BCBSUW
(the "BCBSUW Sale") if either (i) the Company sells a number of shares (the
"Approval Amount") of Common Stock in one or a series of transactions which
equals or exceeds 20% of the number of shares of Common Stock outstanding prior
to such sale(s), or (ii) the sale of shares of Common Stock results in a "change
of control" of the Company. The Company believes that, prior to the BCBSUW Sale,
BCBSUW will directly or indirectly own a number of shares of Common Stock such
that the BCBSUW Sale will involve the sale of a number of shares of 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, the Company is required
to sell a number of shares of Common Stock to BCBSUW which exceeds the Approval
Amount, the Company will be required to obtain shareholder
55
<PAGE>
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.
Pursuant to an agreement with the Company, Messrs. Wallace J. Hilliard and
Ronald A. Weyers have the following rights:
(i) Messrs. Hilliard and Weyers are entitled to make up to two requests
that the Company register at least 50% of the then outstanding shares of
Common Stock held by them, which the Company is 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
the Company's own registration of shares of Common Stock pertaining to an
underwritten public offering; (b) the Company 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 the Company or would require the disclosure of
material information that the Company needs to preserve as confidential; or
(d) the Company is unable to comply with the requirements of the SEC; and
(ii) Messrs. Hilliard and Weyers are entitled to make up to two requests
that the Company include Messrs. Hilliard's and Weyers' shares of Common
Stock in an offering of shares of Common Stock otherwise being registered
upon being notified by the Company that the Company is registering shares of
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 Common Stock.
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 Common Stock.
Messrs. Hilliard and Weyers have also agreed that, until December 3, 2006,
they will not acquire, or propose to acquire (i) any Company securities (other
than pursuant to the exercise of stock options) with the power to vote for the
election of directors (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 the Company; (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 the Company; or
(iii) form, join or participate in a "group" (within the meaning of Section
13(d)(3) of the Exchange Act) with respect to Company securities or seek to
exercise control or influence over management, the Board of Directors, or the
corporate policies of the Company. Finally, Messrs. Hilliard and Weyers agreed
that, until December 3, 2006, they will vote their shares of Common Stock in
accordance with BCBSUW directions on matters submitted to a shareholder vote
which pertain to, or are a result of, BlueCross and BlueShield Association
rules, regulations or marketing issues.
56
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of Common
Stock by each shareholder who owns beneficially more than 5% of the shares of
Common Stock (as disclosed in certain reports regarding such ownership filed
with Old UWS and the SEC in accordance with Sections 13(d) and 13(g) of the
Exchange Act), by each director of the Company, each of the five most highly
compensated executive officers of the Company, and all directors and officers of
the Company as a group, based upon the beneficial ownership of such shareholders
of Common Stock as of September 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 38.1%
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)........................................................... 339,295 2.0%
Roger A. Formisano(4)(5)........................................................ 251,949 1.5%
C. Edward Mordy(5).............................................................. 143,084 0.9%
Mark H. Granoff(5).............................................................. 95,027 0.6%
Penny J. Siewert(5)............................................................. 158,363 1.0%
Richard A. Abdoo................................................................ 8,426 *
Michael D. Dunham............................................................... 6,626 *
James L. Forbes................................................................. 8,126 *
James C. Hickman................................................................ 6,826 *
William R. Johnson.............................................................. 11,126 *
Eugene A. Menden................................................................ 8,126 *
William C. Rupp, M.D............................................................ 2,000 *
Carol N. Skornicka.............................................................. 6,926 *
All directors and executive officers as a group (19 persons)(4)................. 1,059,791 6.4%
</TABLE>
- ------------------------
* Amount represents less than 1% of the total shares of 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 Common Stock such that its direct and indirect
ownership of the Company is approximately 51%.
(2) Based on Amendments to Schedules 13G filed with Old 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 Common Stock which the named
individuals and certain executive officers have the right to acquire within
60 days of September 30, 1998: Mr. Hefty, 318,743; Mr. Formisano, 246,534;
Mr. Mordy, 125,816; Mr. Granoff, 90,979; Ms. Siewert, 155,373; Mr. Abdoo,
6,626; Mr. Dunham, 6,626; Mr. Forbes, 6,626; Mr. Hickman, 6,626; Mr.
Johnson, 6,626; Mr. Menden, 6,626; Ms. Skornicka, 6,626; and all directors
and officers as a group, 983,827.
(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 the Company's 401(k) plan, as to
which such person has dispositive power: Mr. Hefty, 2,802; Mr. Formisano,
765; Mr. Mordy, 3,168; Mr. Granoff, 1,348; Ms. Siewert, 1,840; and all
directors and officers as a group, 15,911.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, no par value per share, of which 16,573,202 shares are issued and
outstanding as of September 30, 1998 and 1,000,000 shares of Preferred Stock, no
par value per share, issuable in series of which none is issued and outstanding.
The following summary description of the capital stock of the Company is
qualified in its entirety by reference to the Articles of Incorporation and
By-Laws.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held on all matters submitted to a vote of shareholders. Holders of shares of
Common Stock do not have cumulative voting rights in the election of directors
and have no preemptive, subscription or redemption rights. Holders of shares of
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 the Company, the assets legally available for distribution to
shareholders are distributable ratably among the holders of shares of Common
Stock at that time outstanding subject to prior distribution rights of creditors
of the Company.
PREFERRED STOCK
The Articles of Incorporation provide that the Board of Directors 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 the Company. The rights, preferences and privileges of
holders of shares of 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
the Company may designate and issue in the future. The Company has no present
plans to issue any shares of Preferred Stock.
CERTAIN ARTICLES OF INCORPORATION AND BY-LAWS PROVISIONS OF THE COMPANY
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. 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 the Company 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.
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.
58
<PAGE>
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 the Company.
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 the
Company, 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 the Company,
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 the Company due to its expected ownership of 38.1% of
the outstanding shares of Common Stock following the Distribution. The
acquisition of shares of Common Stock by BCBSUW was approved by the Company'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 the
Company, 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 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 the Company and shares acquired in a merger or
share exchange to which the Company is a party. The Articles of Incorporation
provide that shares of the Company Common Stock
59
<PAGE>
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 Common Stock is Firstar Bank
Milwaukee, N.A..
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 the Company'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. The Company
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 the Company.
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 the Company (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 the Company prior to the
meeting at which directors are to be elected, will be eligible for election as
directors of the Company. 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 the
Company of such
60
<PAGE>
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 the Company 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 the
Company 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 the Company beneficially owned by
such shareholder or beneficial owners; a representation that such shareholder is
a holder of record of shares of the Company 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 the Company 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 the Company beneficially
owned by such shareholder; a representation that such shareholder is a holder of
record of shares of the Company 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 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
61
<PAGE>
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 the Company and its shareholders.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of the Company authorized at the time of the
Distribution will have any preemptive right to subscribe for or purchase any
kind or class of securities of the Company.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY
Under the By-Laws and the WBCL, directors and officers of the Company are
entitled to mandatory indemnification from the Company 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 the Company and such breach or failure constituted: (i) a willful
failure to deal fairly with the Company 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 the Company are not subject to personal liability to the Company,
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.
62
<PAGE>
LEGAL MATTERS
The validity of the Common Stock to be issued pursuant to the Plan will be
passed upon by Michael Best & Friedrich, LLP Milwaukee, Wisconsin.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997,
appearing in this Registration Statement have been audited by Ernst & Young,
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
63
<PAGE>
UNITED WISCONSIN SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ANNUAL FINANCIAL STATEMENTS
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets at December 31, 1997 and 1996.................................................. F-3
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995..................... F-4
Consolidated Statements of Changes in Shareholder's Equity and Comprehensive Income for the years ended
December 31, 1997, 1996 and 1995......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets at December 31, 1997 and September 30, 1998 (Unaudited)........................ F-23
Consolidated Statements of Income for the three months and nine months ended September 30, 1998 and 1997
(Unaudited).............................................................................................. F-24
Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 (Unaudited).... F-25
Notes to Interim Consolidated Financial Statements......................................................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
United Wisconsin Services, Inc. and
We have audited the accompanying consolidated balance sheets of United
Wisconsin Services, Inc. (the Company) (see Note 1 to the consolidated financial
statements) as of December 31, 1996 and 1997, and the related consolidated
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 consolidated financial position of the Company as
of December 31, 1996 and 1997, and the consolidated 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
except for Note 12, as to which the date is
September 25, 1998
F-2
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 19,147 $ 17,033
Investments--available for sale......................................................... 156,392 151,653
Due from affiliates..................................................................... 10,235 3,667
Other receivables....................................................................... 47,027 53,753
Prepaid and other current assets........................................................ 3,391 3,950
---------- ----------
Total current assets................................................................ 236,192 230,056
Investments--held to maturity............................................................. 6,892 7,893
Property and equipment, net............................................................... 7,091 6,978
Goodwill and other intangibles, net....................................................... 2,966 5,005
Other noncurrent assets................................................................... 16,337 16,324
---------- ----------
Total assets........................................................................ $ 269,478 $ 266,256
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Medical and other benefits payable...................................................... $ 54,724 $ 60,724
Deferred premium credits................................................................ 6,879 6,641
Advance premiums........................................................................ 26,043 24,060
Due to affiliates....................................................................... 3,738 3,867
Payables and accrued expenses........................................................... 25,427 20,926
Other current liabilities............................................................... 3,546 1,104
---------- ----------
Total current liabilities........................................................... 120,357 117,322
Medical and other benefits payable--noncurrent............................................ 20,417 20,918
Minority interest in subsidiary........................................................... 800 --
Other noncurrent liabilities.............................................................. 4,022 4,400
---------- ----------
Total liabilities......................................................................... 145,596 142,640
Shareholder's equity:
Investments by and advances from AMSG................................................... 119,923 120,405
Unrealized gains on investments......................................................... 3,959 3,211
---------- ----------
Total shareholder's equity.......................................................... 123,882 123,616
---------- ----------
Total liabilities and shareholder's equity.......................................... $ 269,478 $ 266,256
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Revenues:
Health services revenues:
Premium revenue.......................................................... $ 466,929 $ 493,092 $ 560,825
Other revenue............................................................ 24,222 27,632 26,046
Investment results......................................................... 9,665 19,040 22,238
---------- ---------- ----------
Total revenues......................................................... 500,816 539,764 609,109
Expenses:
Medical and other benefits................................................. 416,167 425,258 485,735
Selling, general and administrative expenses:
Other.................................................................... 67,077 78,105 88,224
Allocations to related party............................................. (4,368) (7,474) (9,278)
Allocations from related party........................................... 10,028 13,315 14,564
---------- ---------- ----------
Total selling, general and administrative expenses......................... 72,737 83,946 93,510
Provider profit sharing.................................................... 2,734 2,868 3,380
Minority interest in net earnings of combined subsidiary................... (161) (107) 449
Amortization of goodwill and other intangibles............................. 678 841 818
---------- ---------- ----------
Total expenses......................................................... 492,155 512,806 583,892
---------- ---------- ----------
Income before income tax expense............................................. 8,661 26,958 25,217
Income tax expense........................................................... 3,277 10,617 9,433
---------- ---------- ----------
Net income................................................................... $ 5,384 $ 16,341 $ 15,784
---------- ---------- ----------
---------- ---------- ----------
Pro forma earnings per common share:
Basic...................................................................... $0.96
----------
----------
Diluted.................................................................... $0.95
----------
----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY AND COMPREHENSIVE
INCOME
<TABLE>
<CAPTION>
INVESTMENTS BY UNREALIZED GAINS TOTAL
AND ADVANCES (LOSSES) ON COMPREHENSIVE SHAREHOLDER'S
FROM (TO) AMSG 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)
AMSG....................................... 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)
AMSG....................................... (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)
AMSG....................................... (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
--------------- ------- -------------
--------------- ------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................................... $ 5,384 $ 16,341 $ 15,784
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................... 1,550 2,341 1,964
Realized investment gains................................................... (1,094) (8,381) (11,921)
Deferred income tax expense (benefit)....................................... 190 (901) (1,023)
Changes in other operating accounts:
Other receivables......................................................... (26,969) 2,802 (5,584)
Medical and other benefits payable........................................ 20,882 1,415 6,501
Advance premiums.......................................................... (365) 4,062 (1,983)
Due to/from affiliates.................................................... 10,247 (10,327) 7,782
Other, net................................................................ 1,575 (763) (8,701)
----------- ----------- -----------
Net cash provided by (used in) operating activities........................... 11,400 6,589 2,819
INVESTING ACTIVITIES
Purchases of available for sale investments................................... (351,731) (413,648) (452,906)
Proceeds from sale of available for sale investments.......................... 314,529 364,321 433,012
Proceeds from maturity of available for sale investments...................... 41,292 43,031 34,252
Purchases of held to maturity investments..................................... (3,112) (2,573) (2,894)
Proceeds from maturity of held to maturity investments........................ 2,266 2,171 3,567
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
FINANCING ACTIVITIES
Repayment of debt............................................................. -- -- (1,200)
Increase (decrease) in investments by and advances from (to) AMSG............. 3,543 (15,352) (15,302)
----------- ----------- -----------
Net cash provided by (used in) financing activities........................... 3,543 (15,352) (16,502)
----------- ----------- -----------
Cash and cash equivalents:
Increase (decrease) during year............................................. 16,843 (13,933) (2,114)
Balance at beginning of year................................................ 16,237 33,080 19,147
----------- ----------- -----------
Balance at end of year...................................................... $ 33,080 $ 19,147 $ 17,033
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1. STRUCTURE AND PLAN OF DISTRIBUTION
American Medical Security Group ("AMSG"), known as United Wisconsin
Services, Inc. prior to September 25, 1998, 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, United Wisconsin Services, Inc. (the "Company"). The Company was
known as Newco/UWS, Inc. prior to September 25, 1998, and was formed on May 26,
1998. The common stock of the Company will be distributed on a share for share
basis to AMSG common shareholders. Completion of the contribution and
distribution is subject to final approval by AMSG'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 AMSG, United Wisconsin Services, Inc., and AMSG shareholders (see
Note 12).
The accompanying consolidated financial statements of the Company
essentially comprise the HMO and specialty managed care products and services
business operations of AMSG including dental, life, disability, workers'
compensation, managed care consulting, electronic claims processing,
pharmaceutical services and managed mental health services. The following AMSG
wholly owned subsidiaries will be contributed to the Company in conjunction with
the spin-off and are included in the consolidated financial statements of the
Company: 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 consolidated 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 the Company 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 were also officers and
directors of AMSG during 1995, 1996 and 1997.
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 AMSG common stock.
The consolidated financial statements included herein include all costs of
doing business. However, the consolidated 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 6). The consolidated 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>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The accompanying consolidated 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
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The Company consolidates 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 3), the Company
consolidates 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>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED 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>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED 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 AMSG common stock.
Pro forma dilutive common equivalent shares from stock options are stated at the
historical AMSG 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 10).
The following table sets forth the pro forma computation of basic and
diluted EPS:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
<S> <C>
Numerator:
Net income allocable to common shareholders.............................. $ 15,784
-----------------
-----------------
Denominator:
Denominator for basic EPS--weighted average shares....................... 16,423,270
Effect of dilutive securities--employee stock options.................... 147,710
-----------------
Denominator for diluted EPS................................................ 16,570,980
-----------------
-----------------
Pro forma basic EPS........................................................ $0.96
Pro forma diluted EPS...................................................... $0.95
</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 and 1997,
total comprehensive income amounted to $15,269,000, $16,789,000 and $15,036,000,
respectively.
F-10
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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 consolidated 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
F-11
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROVIDER ARRANGEMENTS (CONTINUED)
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.
4. 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>
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-12
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. 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-13
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. 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.
5. 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>
6. 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
F-14
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
provides office space to the Company. These activities are reimbursed at amounts
approximating cost, 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 AMSG not included in these
consolidated 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 AMSG.
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.
7. 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 AMSG. 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 consolidated 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-15
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. 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-16
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. 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.
8. 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 consolidated 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-17
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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 consolidated 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.
10. EMPLOYEE BENEFIT PLANS
PENSION BENEFITS
Certain of the entities included in these consolidated 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-18
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes the combined funding status of the defined
benefit pension plans and the amounts recorded in the consolidated 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-19
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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 consolidated 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
The Company 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 AMSG
stock-based compensation plans. Also, certain individuals hold AMSG stock
options related to an acquisition. At December 31, 1997, there were outstanding
options to purchase approximately 2,217,307 shares of AMSG common stock of which
1,369,842 were exercisable. Immediately following the distribution, options to
purchase 257,322 shares of AMSG 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 the Company. The number of options and exercise prices will be
adjusted to provide equivalent value. In addition, options to purchase 1,386,378
shares of AMSG 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 the Company and AMSG 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 the
Company that will be subject to equivalent awards after the distribution.
In 1992, certain executive officers of AMSG were awarded stock appreciation
rights ("SARs") in AMSG. At December 31, 1997 67,500 SARs are outstanding at
$9.67 per share. Immediately following the distribution, the AMSG SARs will be
assumed by the Company and converted into SARs of the Company 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 AMSG 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 AMSG 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-20
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The fair values of AMSG 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 AMSG:
<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 AMSG 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 AMSG, (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 AMSG
assumptions used.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 1996 and
1997:
<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
</TABLE>
F-21
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS
On September 25, 1998, the Company became a publicly owned company via a
tax-free distribution of its common stock to the shareholders of its former
parent, AMSG. A description of the spin-off and certain transactions with AMSG
is included in Notes 1, 6 and 10. In conjunction with the distribution of assets
pursuant to the spin-off, the Company assumed a $70,000,000 note obligation to
BCBSUW. Immediately following the distribution, certain AMSG stock options to
purchase shares of AMSG common stock were converted into 2,232,334 options to
purchase shares of common stock with a weighted average exercise price of $15.01
per share.
F-22
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
(000'S OMITTED,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 27,679 $ 17,033
Investments--available for sale................................................... 147,879 151,653
Due from affiliates............................................................... 5,470 313
Other receivables................................................................. 59,608 53,753
Prepaid and other current assets.................................................. 10,608 7,304
------------- -------------
Total Current Assets........................................................ 251,244 230,056
Investments--held to maturity....................................................... 7,783 7,893
Property and equipment, net......................................................... 8,658 6,978
Goodwill and other intangible assets, net........................................... 5,301 5,005
Other noncurrent assets............................................................. 16,728 16,324
------------- -------------
Total Assets........................................................................ $ 289,714 $ 266,256
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Medical and other benefits payable................................................ $ 69,327 $ 60,724
Advance premiums.................................................................. 31,021 24,060
Due to affiliates................................................................. 4,933 3,867
Payables and accrued expenses..................................................... 19,333 20,926
Other current liabilities......................................................... 10,133 7,745
------------- -------------
Total Current Liabilities..................................................... 134,747 117,322
Long-term debt--Affiliates.......................................................... 70,000 --
Other noncurrent liabilities........................................................ 26,279 25,318
------------- -------------
Total Liabilities............................................................. 231,026 142,640
Shareholders' Equity:
Preferred stock (no par value, 1,000,000 shares authorized)....................... -- --
Common stock (no par value, no stated value, 50,000,000 shares authorized,
16,573,202 and 16,509,578 issued and outstanding at September 30, 1998 and
December 31, 1997, respectively) -- --
Investments by and advances from AMSG............................................. -- 120,405
Paid-in capital................................................................... 11,423 --
Retained earnings................................................................. 47,355 --
Unrealized gain (loss) on investments available for sale.......................... (90) 3,211
------------- -------------
Total Shareholders' Equity.................................................... 58,688 123,616
------------- -------------
Total Liabilities and Shareholders' Equity.......................................... $ 289,714 $ 266,256
------------- -------------
------------- -------------
</TABLE>
See Notes to Interim Consolidated Financial Statements.
F-23
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums............................................. $ 153,738 $ 141,127 $ 452,340 $ 414,887
Net investment results......................................... 3,580 6,659 13,540 17,331
Other revenue.................................................. 7,775 6,693 22,153 20,044
---------- ---------- ---------- ----------
Total Revenues............................................. 165,093 154,479 488,033 452,262
Expenses:
Medical and other benefits..................................... 132,194 123,776 385,902 359,539
Selling, general and administrative expenses................... 25,255 23,453 75,929 70,656
Profit sharing on provider arrangements........................ 674 1,073 2,087 2,261
Interest expense............................................... 254 -- 254 --
Amortization of goodwill and intangibles....................... 112 86 327 967
---------- ---------- ---------- ----------
Total Expenses............................................. 158,489 148,388 464,499 433,423
---------- ---------- ---------- ----------
Income before Income Taxes....................................... 6,604 6,091 23,534 18,839
Income Tax Expense............................................... 2,513 2,232 9,028 7,093
---------- ---------- ---------- ----------
Net Income....................................................... $ 4,091 $ 3,859 $ 14,506 $ 11,746
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See Notes to Interim Consolidated Financial Statements.
F-24
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
(000'S OMITTED)
<S> <C> <C>
Cash Flows--Operating Activities:
Net Income from operations.............................................................. $ 14,506 $ 11,746
Adjustments to reconcile net income from operations to net cash provided by operating
activities:
Depreciation and amortization....................................................... 1,848 2,183
Realized investment gains........................................................... (6,340) (10,134)
Deferred income tax expense (benefit)............................................... 149 (899)
Changes in operating accounts: Other receivables................................ (5,358) 4,016
Medical and other benefits payable.............................................. 7,174 517
Advance premiums................................................................ 6,961 2,766
Due to/from affiliates.......................................................... (4,091) 10,707
Other, net...................................................................... (3,487) (10,960)
---------- ----------
Net Cash Provided by Operating Activities................................... 11,362 9,942
Cash Flows--Investing Activities:
Purchases of available for sale investments............................................. (164,753) (153,126)
Proceeds from sale of available for sale investments.................................... 164,573 151,982
Proceeds from maturity of available for sale investments................................ 5,575 7,535
Purchases of held to maturity investments............................................... (313) (417)
Proceeds from maturity of held to maturity investments.................................. 335 513
---------- ----------
Net Cash Provided By Investing Activities................................... 5,417 6,487
Cash Flows--Financing Activities:
Decrease in investments by and advances from AMSG....................................... (6,133) (10,405)
---------- ----------
Net Cash Used in Financing Activities....................................... (6,133) (10,405)
---------- ----------
Cash and Cash Equivalents:
Increase during period.................................................................. 10,646 6,024
Balance at beginning of year............................................................ 17,033 19,147
---------- ----------
Balance at End of Period.................................................... $ 27,679 $ 25,171
---------- ----------
---------- ----------
</TABLE>
See Notes to Interim Consolidated Financial Statements.
F-25
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
NOTE A. CREATION AND BASIS OF PRESENTATION
On May 27, 1998, the Board of Directors of American Medical Security Group,
Inc. ("AMSG") (formerly United Wisconsin Services, Inc.) approved a formal plan
to spin off its managed care companies and specialty business to its
shareholders. The spin off involved the creation of a new corporation originally
named Newco/UWS, Inc. and subsequently renamed United Wisconsin Services, Inc.
(the "Company") and the distribution of one share of common stock of UWS on
September 25, 1998 ("Distribution Date") for each share of AMSG common stock
held as of September 11, 1998 ("Record Date"). AMSG has received a private
letter ruling from the Internal Revenue Service that the spin off is tax free to
AMSG, the Company and their shareholders.
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three-and nine-month
periods ended September 30, 1998 and 1997 are not necessarily indicative of the
results that may be expected for the years ending December 31, 1998 and 1997.
These interim consolidated financial statements should be read in conjunction
with the audited combined financial statements for the year ended December 31,
1997 and footnotes thereto included in the Newco/UWS, Inc. Form 10 Registration
Statement, as amended.
Certain estimates, assumptions and allocations were made in preparing the
interim consolidated financial statements in order to provide the results of
operations, financial positions or cash flows that would have existed had the
Company been a separate, independent company.
NOTE B. NET INCOME PER SHARE
Historical earnings per share ("EPS") have been omitted since the Company
was not an independent, publicly owned company with a capital structure of its
own for any of the fiscal periods presented in the accompanying Consolidated
Statement of Income.
NOTE C. PRO FORMA FINANCIAL INFORMATION
The Company became an independent, publicly owned company on September 25,
1998 as a result of the spin off from AMSG. In conjunction with the Distribution
of assets pursuant to the spin off, the Company assumed a $70 million note
obligation to Blue Cross & Blue Shield United of Wisconsin ("BCBSUW"). The
assumption of debt was effective September 11, 1998. The following unaudited pro
F-26
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE C. PRO FORMA FINANCIAL INFORMATION (CONTINUED)
forma information presents a summary of the effect on net income as if the spin
off had occurred at the beginning of the respective periods:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income as reported................................... $ 4,091 $ 3,859 $ 14,506 $ 11,746
Pro forma adjustment--interest expense, net.............. 634 773 2,215 2,290
------------ ------------ ------------ ------------
Pro forma net income..................................... $ 3,457 $ 3,086 $ 12,291 $ 9,456
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pro forma basic weighted average common shares(1)........ 16,571,502 16,448,225 16,544,721 16,403,129
Pro forma dilutive weighted average common shares(2)..... 16,571,502 16,448,225 16,544,721 16,403,129
EPS as reported--basic and diluted(3).................... $ 0.25 $ 0.23 $ 0.88 $ 0.72
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pro forma EPS--basic and diluted(4)...................... $ 0.21 $ 0.19 $ 0.74 $ 0.58
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
- ------------------------
(1) Pro forma EPS, are based on the pro forma weighted average number of shares
of outstanding Company common stock and dilutive common equivalent share
from stock options, giving effect to the planned distribution of one share
of the Company stock for each share of AMSG common stock. Pro forma dilutive
common equivalent shares from stock options are stated at the historical the
Company dilutive common equivalent share level.
(2) Pro forma calculations for dilutive securities assume that the price of the
stock and the strike price of the options is the same for all periods as the
values on the date of the spin off (September 25, 1998).
(3) Basic EPS, as reported, are computed by dividing net income as reported, by
the pro forma weighted average number of common shares outstanding; as noted
above, there is no dilutive effect on securities (2).
(4) Pro forma diluted EPS are computed by dividing pro forma net income by the
pro forma weighted average number of common shares outstanding; as noted
above, there is no dilutive effect on securities (2).
Options to purchase 2,232,356 shares as of September 30, 1998, were not
included in the computation of earnings per diluted common share since the
options' exercise prices were greater than the average market price of the
outstanding common shares.
These unaudited pro forma results have been prepared for informational
purposes only and include the adjustment to historical results, based on
additional interest expense for the period from January 1, 1998 through
September 11, 1998 and the nine months ended September 30, 1997, net of related
income tax.
The unaudited pro forma financial information presented above does not
purport to be indicative of the results of operations which actually would have
resulted had the transactions occurred at the beginning of the periods presented
or of the future results of operations.
F-27
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE D. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, UWS adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), issued by
the Financial Accounting Standards Board (FASB) in June 1997. Comprehensive
income is defined therein as all changes in equity during the period except
those resulting from shareholder equity contributions and distributions.
Comprehensive income from operations is stated below:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Net income per Statement of Income...................................... $ 4,091 $ 3,859 $ 14,506 $ 11,746
Unrealized gain (loss) on investments................................... (1,337) 557 (3,301) 80
--------- --------- --------- ---------
Comprehensive income.................................................... $ 2,754 $ 4,416 $ 11,205 $ 11,826
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Accumulated effect of comprehensive income was $(0.1) million and $3.2
million for the nine months ended September 30, 1998 and for the year ended
December 31, 1997, respectively.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the reporting of operating segment information in both annual
financial reports and interim financial reports issued to shareholders.
Operating segments are components of an entity for which separate financial
information is available and is evaluated regularly by the entity's chief
operating management. SFAS 131 is effective for fiscal years beginning after
December 15, 1997 and is not required to be adopted in interim financial reports
during the first year of adoption. Adoption of this statement is not expected to
have a material impact on the Company.
NOTE E. RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for 1997 to conform with the 1998 presentation.
F-28
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information.................................................................
Incorporation of Certain Documents by Reference.......................................
Risk Factors.......................................................................... 2
The Plan.............................................................................. 7
Purpose............................................................................. 7
Advantages.......................................................................... 7
Administration...................................................................... 7
Participation....................................................................... 8
Initial Direct Purchase and Optional Cash Payments.................................. 10
Costs............................................................................... 11
Purchases........................................................................... 11
Share Certificates.................................................................. 12
Participants' Records & Accounts.................................................... 12
Modification or Termination by a Participant........................................ 13
Other Information................................................................... 15
Federal Income Tax Consequences..................................................... 16
Use of Proceeds....................................................................... 17
Legal Matters......................................................................... 63
Dividend Policy.......................................................................
</TABLE>
November , 1998
This Prospectus does not constitute an offer or solicitation by anyone in
any jurisdiction in which said offer or solicitation is not qualified or in
which the person making such offer or solicitation is not qualified to do so or
to anyone to whom it is unlawful to make such offer or solicitation.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration Fee --
Securities and Exchange Commission...................................... $ 1,918
NYSE Listing Fee...................................................... 3,500
Printing and Engraving Expenses........................................... 25,000
Accounting Fees........................................................... 25,000
Reinvestment Agent Fees................................................... 5,000
Legal Fees and Expenses................................................... 40,000
Miscellaneous............................................................. 4,582
Total................................................................... $ 105,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is incorporated under the Wisconsin Business Corporation Law
("WBCL"). Under Section 180.0851(1) of the WBCL, the Company is required to
indemnify a director or officer, to the extent such person is successful on the
merits or otherwise in the defense of a proceeding, for all reasonable expenses
incurred in the proceeding if such person was a party because he or she was a
director or officer of the Company. In all other cases, the Company is required
by Section 180.0851(2) of the WBCL to indemnify a director or officer against
liability incurred in a proceeding to which such a person was a party because he
or she was a director or officer of the Company, unless it is determined that he
or she breached or failed to perform a duty owed to the Company and the breach
or failure to perform constitutes: (i) a willful failure to deal fairly with the
Company or its shareholders in connection with a matter in which the director or
officer has 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 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. Section 180.0858(1) of the
WBCL provides that, subject to certain limitations, the mandatory
indemnification provisions do not preclude any additional right to
indemnification or allowance of expenses that a director or officer may have
under a corporation's articles of incorporation, bylaws, a written agreement or
a resolution of the board of directors or shareholders.
Section 180.0859 of the WBCL provides that it is the public policy of the
state of Wisconsin to require or permit indemnification, allowance of expenses
and insurance to the extent required to be permitted under Sections 180.0850 to
180.0858 of the WCBL, for any liability incurred in connection with a proceeding
involving a federal or state statute, rule or regulation regulating the offer,
sale or purchase of securities.
Section 180.0828 of the WBCL provides that, with certain exceptions, a
director is not liable to a corporation, its shareholders, or any person
asserting rights on behalf of the corporation or its shareholders, for damages,
settlements, fees, fines, penalties or other monetary liabilities arising from a
breach of, or failure to perform, any duty resulting solely from his or her
status as a director, unless the person asserting liability proves that the
breach or failure to perform constitutes any of the four exceptions to mandatory
indemnification under Section 180.0851(2) referred to above.
Under Article VI of the Company's Bylaws, directors and officers are
indemnified against liability, in both derivative and nonderivative suits, which
may incur in their capacities as such, subject to certain determinations by the
Board of Directors, independent legal counsel or the shareholders that the
applicable standards of conduct have been met. The scope of such indemnification
is substantially the same as permitted and described in Sections 180.0850 to
180.0858 of the WBCL.
II-1
<PAGE>
Under Section 180.0833 of the WBCL, directors of the Company against whom
claims are asserted with respect to the declaration of improper dividends or
distributions to shareholders or certain other improper acts which they approved
are entitled to contribution from other directors who approved such actions and
from shareholders who knowingly accepted an improper dividend or distribution,
as provided therein.
The directors and officers of the Company and its subsidiaries are included
in the directors' and officers' liability insurance policy applicable to BCBSUW.
The Company has not obtained substitute directors' and officers' liability
coverage; the officers and directors of the Company and its subsidiaries will
continue to be included in BCBSUW's policy. BCBSUW's insurance policy provides
that, subject to the applicable liability limits and retention amounts, the
insurer will reimburse directors and officers of BCBSUW and its subsidiaries,
including the Company, for a "loss" (as defined in the policy) made against them
for a "wrongful act" (as defined in the policy), except for such a loss against
which BCBSUW or its subsidiaries, including the Company, indemnifies (or is
required or permitted to indemnify) the director or officer. The policy also
provides that, subject to the applicable liability limits and retention amounts,
the insurer will reimburse BCBSUW and its subsidiaries, including the Company,
for a loss for which BCBSUW or its subsidiaries, including the Company, has
lawfully indemnified (or is required or permitted by law to indemnify) a
director or officer resulting from any such claim. Subject to certain exclusions
set forth in the policy, "Wrongful act" is defined in the policy to mean any
negligent act, error, omission, misstatement, misleading statement, or breach of
duty by BCBSUW or its subsidiaries, including the Company's directors or
officers in the discharge of their duties solely in their capacities as such
directors or officers.
ITEM 16. EXHIBITS
See Exhibit Index attached.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (a)(i) and (a)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-2
<PAGE>
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in said act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a directors, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in said act and will be governed by the final adjudication
of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Milwaukee, and the State
of Wisconsin, on the 23rd day of November, 1998.
UNITED WISCONSIN SERVICES, INC.
By: /s/ THOMAS R. HEFTY
-----------------------------------------
Thomas R. Hefty
Chairman of the Board and President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas R. Hefty and C. Edward Mordy, or either of
them, his or her true and lawful attorneys-in-fact and agents, for him or her
and in his or her name, place and stead in any and all capabilities, to sign any
and all amendments (including pre- and post-effective amendments) to this
Registration Statement, and to file all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission and any state
of the United States, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents may lawfully do or cause
to be done by virtue thereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------------- ----------------------
<S> <C> <C>
/s/ THOMAS R. HEFTY
--------------------------------- Chairman of the Board (Principal Executive November 23, 1998
Thomas R. Hefty Officer), President & Director
/s/ C. EDWARD MORDY
--------------------------------- Vice President (Principal Financial and November 23, 1998
C. Edward Mordy Accounting Officer)
/s/ RICHARD A. ABDOO
--------------------------------- Director November 23, 1998
Richard A. Abdoo
</TABLE>
II-4
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ MICHAEL D. DUNHAM
- ------------------------------ Director November 23, 1998
Michael D. Dunham
/s/ JAMES L. FORBES
- ------------------------------ Director November 23, 1998
James L. Forbes
/s/ JAMES C. HICKMAN
- ------------------------------ Director November 23, 1998
James C. Hickman
/s/ WILLIAM R. JOHNSON
- ------------------------------ Director November 23, 1998
William R. Johnson
/s/ EUGENE A. MENDEN
- ------------------------------ Director November 23, 1998
Eugene A. Menden
/s/ WILLIAM C. RUPP
- ------------------------------ Director November 23, 1998
William C. Rupp
/s/ CAROL N. SKORNICKA
- ------------------------------ Director November 23, 1998
Carol N. Skornicka
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- ------------------------------------------------------------
<C> <S>
2.1 Form of Distribution and Indemnity Agreement (as
amended).(1)
3.1 Articles of Incorporation of Registrant.(1)
3.2 By-Laws of Registrant.(1)
4.1 Specimen Common Stock Certificate.(1)
4.2 Registrant's United Wisconsin Services, Inc.'s Dividend
Reinvestment and Direct Stock Purchase Plan: Terms and
Conditions.
5 Opinion of Michael, Best & Friedrich, LLP
10.1 Form of Employee Benefits Agreement (as amended).(1)
10.2 Form of Tax Allocation Agreement (as amended).(1)
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.(1)
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.(1)
10.5 Comprehensive Tax Allocation Agreement dated July 1, 1994
among BCBSUW, UWS and various subsidiaries thereof.(1)
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.(1)
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.(1)
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.(1)
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.(1)
10.10 Amended and Restated Joint Venture Agreement by and among
BCBSUW, UWS (assigned to the Registrant), Valley and
Midelfort Clinic, Ltd., effective January 1, 1997.(1)
10.11 Intercompany Service Agreement between BCBSUW, UWS (assigned
to the Registrant) and UWIC, effective January 1, 1998.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- ------------------------------------------------------------
<C> <S>
10.12 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and UWIC, effective January 1, 1998.(1)
10.13 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and UHI, effective January 1, 1998.(1)
10.14 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MMC, effective January 1, 1998.(1)
10.15 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant), MMC and Compcare on behalf of its
Pharmacy Services department, effective January 1,
1998.(1)
10.16 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant), MMC and Compcare on behalf of its
RxCel department, effective January 1, 1998.(1)
10.17 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant), MMC and Compcare, effective January 1,
1998.(1)
10.18 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MRC on behalf of its Investigation
and Recovery Services department, effective January 1,
1998.(1)
10.19 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MRC on behalf of its Consulting
Services department, effective January 1, 1998.(1)
10.20 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MRC on behalf of its Audit Services
department, effective January 1, 1998.(1)
10.21 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and UWPS, effective January 1, 1998.(1)
10.22 Service Agreement between BCBSUW and Valley, effective
January 1, 1993.(1)
10.23 Service Agreement between UWS (assigned to the Registrant)
and Community Health Systems, LLC, dated November 1,
1994.(1)
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.).(1)
10.25 Amended and Restated Joint Venture Agreement among BCBSUW,
UWS (assigned to the Registrant), University Health Care,
Inc. ("UHC" ), U-Care HMO, Inc. ("U-CARE") and Health
Professionals, Inc. ("HPI") dated October 31, 1994.(1)
10.26 Agreement of Merger and Joint Venture by and among UWS
(assigned to the Registrant), UWS Acquisition Corporation,
BCBSUW, HMO-W, Inc. and HMOW dated October 11, 1994.(1)
10.27 Service Agreement between UWS (assigned to the Registrant)
and HPI dated November 1, 1994.(1)
10.28 License Agreement between UWS (assigned to the Registrant)
and U-Care dated November 1, 1994.(1)
10.29 Joint Venture Agreement among UWS (assigned to the
Registrant), BCBSUW, Compcare and Northwoods Health Care,
LLC dated July 1, 1996, as amended October 24, 1996.(1)
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.(1)
10.31 Form of Trademark Assignment Agreement by and among UWS, the
Registrant and UWLIC.(1)
10.32 Registrant's Equity Incentive Plan as revised.(2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- ------------------------------------------------------------
<C> <S>
10.33 1998 Management Incentive Plan.(1)
10.34 Registrant's Deferred Compensation Plan for Directors.(1)
10.35 Registrant/BCBSUW 401(k) Plan.(1)
10.36 Registrant/BCBSUW Union Employees 401(k) Plan.(1)
10.37 Unity Health Plans Insurance Corp. 1998 Profit Sharing
Plan.(1)
10.38 Registrant's and BCBSUW's 1998 Profit Sharing Plan.(1)
10.39 Registrant Voluntary Deferred Compensation Plan.(1)
10.40 Registrant Deferred Compensation Trust.(1)
10.41 Registrant/BCBSUW Hourly Pension Plan.(1)
10.42 Registrant/BCBSUW Salaried Pension Plan.(1)
10.43 Registrant/BCBSUW Supplemental Executive Retirement Plan.(1)
10.44 Registrant Stock Appreciation Rights Plan.(1)
10.45 Note and Pledge Agreement dated October 30, 1996, between
BCBSUW and United Wisconsin Services, Inc. (assumed by and
assigned to the Registrant).(1)
10.46 Administrative Services Agreement between UWSI and HMO of
Wisconsin Insurance Corporation, effective November 1,
1994.(1)
10.47 Amendment to Employee Benefits Agreement between the Company
and American Medical Security Group, Inc. effective
September 21, 1998.(2)
11 Statement regarding computation of per share earnings. (See
Note 2 of Notes to Combined Financial Statements).(1)
21 Subsidiaries of the Registrant.(1)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Michael, Best & Friedrich LLP (included in
exhibit 5).
27 Financial Data Schedule.(1)
</TABLE>
- ------------------------
(1) Incorporated by reference to Registrant's Registration Statement on Form 10
declared effective September 11, 1998.
(2) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1998.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
UNDER THE SECURITIES EXCHANGE ACT OF 1934
------------------------
UNITED WISCONSIN SERVICES, INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 4.2
TERMS AND CONDITIONS
OF THE
DIVIDEND REINVESTMENT AND DIRECT STOCK PURCHASE PLAN
THE PLAN
The following questions and answers constitute a summary of the Plan.
PURPOSE
1. WHAT IS THE 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. See question 4 for a definition of "Record Owner" and "Beneficial
Owner."
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. WHAT ARE SOME OF THE 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 Question 4 for information on who is eligible to participate.)
Participants in the Plan will pay the Market Price (as defined in Question
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.
ADMINISTRATION
3. WHO ADMINISTERS THE PLAN FOR PARTICIPANTS?
The Reinvestment Agent administers the Plan for Participants. The present
Reinvestment Agent is Firstar Bank Milwaukee, N.A. ("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 (800)
637-7549 or by mail addressed to:
Firstar Trust Company
Milwaukee, Wisconsin 53202
Firstar Bank Milwaukee, N.A.
1555 N. RiverCenter Drive, Suite 301
Milwaukee, Wisconsin 53212
<PAGE>
PARTICIPATION
4. WHO IS ELIGIBLE TO PARTICIPATE 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 DOES AN ELIGIBLE SHAREHOLDER OR INVESTOR 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 any shareholder by written or oral request to the
Reinvestment Agent (see Question 3). Telephone requests or general inquiries may
also be made by calling the Reinvestment Agent at (800) 637-7549 (see Question
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 Question 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 Question 12.
An Authorization Card will be mailed to all new Record Owners 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.
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., joint tenants, trustees, etc.), all registered
holders must sign the Authorization Card exactly as their names appear on the
Company's stock transfer records.
6. WHAT DOES THE AUTHORIZATION CARD PROVIDE?
The Authorization Card provides for the purchase by any entity, whether or
not a record holder of Common Stock, of additional shares of Common Stock
through the following investment options offered under the Plan:
<PAGE>
- 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 B & N 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 will
be furnished at any time upon request to the Reinvestment Agent (see Question
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 Questions 5 and 6).
The Reinvestment Agent will make purchases for the Plan once a month on the
first business day of each month ("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. IS PARTIAL PARTICIPATION POSSIBLE UNDER THE PLAN?
Yes, a shareholder who desires the dividends on only some certificated
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. MAY A PARTICIPANT CHANGE HIS/HER METHOD OF PARTICIPATION IN THE PLAN AFTER
ENROLLMENT?
Yes, 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 Question 3. A change in dividend reinvestment will be effective
with the next Dividend Payment Date (as defined in Question 10), if the request
for change is received at least two weeks before that Date.
10. WHEN MAY A SHAREHOLDER OR INVESTOR 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 December each year
("Dividend Payment Date").
<PAGE>
Record Owners and Beneficial Owners wishing to make additional optional cash
payments through the Plan or investors not owning 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. WHO IS 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 first contribution in any quarter
must equal or exceed $100. The maximum aggregate amount of optional cash
payments under the Plan may not exceed $100,000 in any calendar year.
12. HOW ARE INITIAL DIRECT PURCHASE AND OPTIONAL CASH PAYMENTS MADE?
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 Bank Milwaukee, N.A., 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 Bank
Milwaukee, N.A. and should be accompanied by a properly completed Authorization
Card. Checks and cards should be mailed to Firstar Bank Milwaukee, N.A. (see
Question 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 Question 16).
Optional cash payments received by the 25th day of the month 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
Question 16).
COSTS
13. ARE THERE ANY EXPENSES TO PARTICIPANTS IN CONNECTION WITH PURCHASES UNDER
THE PLAN?
No. 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 Questions 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.
<PAGE>
PURCHASES
14. HOW MANY 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 Question
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. HOW WILL THE PURCHASE PRICE OF SHARES BE DETERMINED?
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.
16. WHEN WILL DIVIDENDS AND/OR INITIAL DIRECT PURCHASES OR OPTIONAL CASH
PAYMENTS BE INVESTED?
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. MUST ALL DIVIDENDS ON SHARES CREDITED TO A PARTICIPANT'S NONCERTIFICATED
SHARE ACCOUNT UNDER THE PLAN BE REINVESTED?
Yes. 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. WILL CERTIFICATES BE ISSUED 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 Question 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 Question 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
<PAGE>
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.
19. HOW MAY A PARTICIPANT 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, banker 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 Question 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 Questions 24-27 for information on
termination of participation.)
20. MAY COMMON STOCK HELD IN CERTIFICATE FORM BE DEPOSITED IN A PARTICIPANT'S
NONCERTIFICATED SHARE ACCOUNT?
Yes. 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 Question 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. Such deposits must be accompanied by a completed
Authorization Card. 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. WHAT TYPE OF REPORTS WILL BE 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 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. IN WHOSE NAME WILL ACCOUNTS 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.
<PAGE>
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. HOW DOES A PARTICIPANT MODIFY 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 Question 3 for address).
Beneficial Owners must use the B&N Form to change their participation. Notices
to change dividend reinvestments must be received by the Reinvestment Agent at
least two weeks before any Dividend Payment Date to be effective as of that
date.
24. HOW DOES A PARTICIPANT TERMINATE 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. Notices received less
than two weeks prior to the Dividend Payment Date will take effect after the
dividend has been posted to the Participant's account. 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.
25. CAN THE SHARES HELD IN THE PLAN BE SOLD 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 Question 3 for address).
26. WHAT HAPPENS TO THE 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 Question 18 for information on share certificates
and Question 19 for information on the cash payment for fractional shares in
the Noncertificated Share Account.)
<PAGE>
27. MAY A PARTICIPANT RECEIVE CASH IN LIEU OF FULL SHARE CERTIFICATES UPON
TERMINATION OF PARTICIPATION?
Yes. 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. MAY A PARTICIPANT SELL HIS OR HER RECORD SHARES AND STILL REMAIN 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 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. WHAT HAPPENS IF A PARTICIPANT SELLS OR TRANSFERS 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. MAY A PARTICIPANT STOP REINVESTING THE DIVIDENDS FROM HIS OR HER RECORD
SHARES AND RECEIVE THEM IN CASH AND STILL REMAIN IN THE PLAN?
Yes. 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. WHEN MAY A SHAREHOLDER RE-ENROLL 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. WHAT ARE THE DIVIDEND PAYMENT DATES?
Dividend Payment Dates are anticipated to be in December each year.
33. HOW WILL A PARTICIPANT'S SHARES BE VOTED 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.
<PAGE>
34. WHAT HAPPENS IF THE COMPANY ISSUES A STOCK DIVIDEND, DECLARES A STOCK SPLIT
OR HAS 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. CAN A PARTICIPANT PLEDGE SHARES CREDITED TO HIS OR HER ACCOUNT?
No. 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. WHAT IS THE 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, banker or other nominee.
Participant's should notify the Reinvestment Agent promptly in writing of any
change in address.
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 will not be
reduced or eliminated.
37. MAY THE PLAN BE MODIFIED, SUSPENDED OR TERMINATED?
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.
<PAGE>
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. WHAT IS THE 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 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. WHAT IS THE TAX TREATMENT OF SERVICE CHARGES AND BROKERAGE COMMISSIONS, IF
ANY, AS WELL AS 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. WHAT PROVISION IS MADE 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 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,
<PAGE>
(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. WHAT IS THE 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. WHAT ARE THE 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.
<PAGE>
Exhibit 5
Opinion of Legal Experts
Geoffrey R. Morgan
(414) 225-2752
November 18, 1998
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53203
Gentlemen:
We have served as your counsel in connection with the filing by you of a
Registration Statement on Form S-1 with the Securities and Exchange
Commission pursuant to the provisions of the Securities Exchange Act of 1933,
as amended (the "Act"), covering the registration of 800,000 Shares (the
"Shares") of Common Stock of United Wisconsin Services, Inc. (the "Company").
As your counsel, we have reviewed the corporate proceedings ("Corporate
Proceedings") taken and to be taken to authorize the issuance and sale of the
Shares by the Company.
We have examined and are familiar with the Articles of Incorporation of
the Company and its By-laws, both as amended and/or restated. We have also
examined the form of certificates representing the Shares and such other
documents, records and certificates of the Company as we consider necessary
for the purpose of this opinion. Based upon such examination and
consideration, it is our opinion that:
1. The Company is validly organized and existing under the laws of
the State of Wisconsin and has the corporate power to carry on its
present business.
2. Upon completion of the Corporate Proceedings, the Shares, when
executed, manually or in facsimile, by the proper officers of the
Company and upon receipt of consideration therefor in accordance
with the Corporate Proceedings, will be validly issued, fully paid
and non-assessable subject to Section 180.0622(2)(b) of the
Wisconsin Business Corporation Law.
<PAGE>
We hereby consent to the use of our name under the heading "Legal
Matters" in the prospectus constituting part of the Registration Statement.
Sincerely,
MICHAEL BEST & FRIEDRICH LLP
Geoffrey R. Morgan
GRM/djb
<PAGE>
Exhibit 23.1
Consent of E&YLLP
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 29, 1998 (except Note 12, as to which the
date is September 25, 1998) in the Registration Statement on Form S-1 of
United Wisconsin Services, Inc. for the registration of 800,000 shares of its
common stock.
Milwaukee, Wisconsin
November 23, 1998 Ernest & Young, LLP
